Why One Should Invest In Equity Market for Wealth Creation?

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Raghav is a conservative investor who has been regularly investing in bank FD’s since he started his career over 37 years ago. The value of his total savings on retirement was approximately 20 lakh rupees.On the other hand his son, Shivansh who started his career in 2012 has managed to save over 21 lakh rupees in just 6 years due to aggressive investments in equity market and the huge bull run between 2012 to 2018. While it took 37 years for Raghav to accumulate 24 lakhs, his son managed to save a higher amount in just 6 years due to higher returns generated by his invest in equity market.

There are multiple ways to save money, but for wealth creation it is best to invest in equity market.

Data source: Moneycontrol.com. Alternate investments include gold, precious metals and gems

According to a global survey, as compared to people in developed countries, Indians are more inclined towards saving their money. But most Indians prefer traditional saving instruments and don’t like to invest in equity market.

The below table reveals a detailed picture of % wise investments chosen by investors in FY 18.

When it comes to distribution of wealth, there is a huge gap between the different classes in India. While some people are born into luxury and some into poverty, the middle class which comprises a major chunk of the population does stand a strong chance to move up the economic ladder. But there are 2 reasons why they fail.

Buying liabilities first rather than assets

According to Robert Kiyosaki, the author of the best seller ‘Rich Dad, Poor Dad’ the biggest financial mistake that middle class people make is to spend their money buying liabilities which offer an aspirational value but depreciate with time such as cars, electronic items etc. instead of assets like investing in equity markets.

The rich however prefer to invest in equity and assets which generate income and appreciate with time. For example when you invest in equity you get dividend income apart from appreciation of share prices.

Investment in traditional assets rather than invest in equity markets

As discussed earlier, a major portion of investments done by Indians is in traditional investment options which give low returns which are not adequate to beat the rising inflation. As compared to investing in equity, traditional investments come with low risk but the as you know lower the risk, lower the rewards. Hence they are not sufficient for wealth creation. On the other hand investment in equity has consistently beaten the returns generated by every other asset classes right from inception.

Sensex which was at 100 points in the year 1979 touched 39000 on 1st April 2019 generating a return of a 390 times. An investment of Rs 1 lakh in 1979 in Sensex stocks, would have grown to a decent sum of Rs 3.90 crores. The same amount invested in gold would have turned to Rs 30 lakhs and fixed deposit assuming an average interest rate of 8% would have returned Rs 21.70 lakh.

So it’s quite evident that if you want to create wealth, you should invest in equity market.

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