Investment in Equities

Why invest in Equities?

When compared to all other asset class, investing in equity is riskier. However as a well known saying goes "higher the risk, higher are the returns". Investing in equities world over has been far more rewarding than one can imagine. Across the world and in India equity investments have outperformed almost every other asset class in the long run.

What investing in Equities means:

As an equity investor of  a company is becoming a shareholder of the company i.e. as an equity investor you are kind of part owner of the company. Thus as a shareholder you can partake in the growth opportunities of your company and reap the benefits in long run. Good companies with good management offers superior returns by tapping growth opportunities and overcoming any hindrances and making company grow many times over in the long term . Being a shareholder in such companies gets your investment in equity provide as many times returns. For equity investment in basket of good companies provide around 15-18% CAGR growth for holding over 10+ years, besides providing good returns annually/regularly in form of profit distribution.

How to select right companies to invest in?

Identifying right company involves bit  of efforts on part of investor in form of its valuation parameters. Valuation parameters includes understanding past track record of the company in term of growth in sales, profitability, return on equity etc. This parameter should indicate if company has been growing consistently and profitably and providing superior returns on such value parameter (ideally 20+ %). Having identified and invested in such companies let the power of compounding work for you. Ideal investment time frame should be 10+ years or at least five years. As famous adage goes Time is money, thus there's always a waiting period before the returns start getting reflected on your equity holding. In short term 6 month to 1 year returns may look lumpy either on positive side or on negative side. Since in short term equity markets are largely driven by factors like liquidity, sentiments etc. However in longer run fundamental do catch and adequate return starts getting reflected.

Some of the instruments available to take exposure to equity

• Direct Equity Investment
• Equity Mutual Funds
• Equity Linked Saving Schemes
  
• Exchange Traded Fund
• Portfolio Management Services

There are lots of myth about investment in equities, I will spend some time later in detailing those myths and fact on equities in my future blogs.