A few days ago, I had an interesting conversation with my friend, Jaya. She was confused about which route to go with when investing in the stock market.
Jaya had three options before her. Should she invest directly, by buying shares of various companies? Should she go the smallcase way? Or should she invest via mutual funds?
It’s likely that many of us have pondered over the very same questions. We know that investing in the stock market for the long term bears greater fruits than any other investment avenue. But with the plethora of options available to enter the markets, it is only natural that we might find it overwhelming. Must one invest in shares as well as mutual funds? Is it necessary to add a smallcase to our portfolio? And what is a smallcase anyway?
Let’s find out.
Why invest in the Stock Market
Before getting to the how, let’s first understand the why. Stock market investing is synonymous with equity investing. And whenever you compare the long-term return on your investments, history proves that equity beats all other asset classes hands down. This is the reason that the interest we earn on a five-year fixed deposit pales in comparison to the return we get on an equity mutual fund over the same period. While FD interest rates hover between 3-6%, equity investments generate 15-20% returns over the long term.
The average annual inflation rate in India is around 6%. Whereas savings account interest rates are a measly 2-3%. With such rates, letting our money lie in our savings bank account is one of the worst financial mistakes to make. We all want our money to work for us. And that will only happen when we choose our investment avenues wisely.
Numbers don’t lie
The last two years have shown that retail investors, especially those of us in our 20’s and 30’s, are gravitating towards equity a lot more than before. It’s no surprise then that the number of active demat accounts in India has gone up from 4.02 crore in February, 2020 to 6.9 crore by the end of June, 2021. Mutual Fund SIP (systematic investment plan) inflows have also been rising steadily. The pandemic, that caused job losses and financial insecurities, has led to people developing a keen interest in the stock market, even if only to make quick money. Technology and the internet have aided this rapid growth.
Having said that, many of us might still be hesitant to venture into the unknown, especially those that consider the markets to be risky business. Or, as was the case with my friend, Jaya, there is a choice overload. How does one decide which route to take for equity investing?
The 3 Routes to Equity Investing
Bottom-line
In the long run, say 7-10 years and more, it really does not make a difference whether we invest directly in shares, or smallcases, or mutual funds. What matters is that we invest in equity, by any one or all of those routes. Of course, the choice will also depend on where we are in our investment journey. It’s best to begin with mutual funds, and then slowly progress to smallcases and direct equity. However, that progression is only if one has the time and inclination to learn about the markets in greater detail. Return-wise, it will not matter. The key is to start early, and stay invested for the long-term. That’s our wish for you.
Until next time, wishing you and your loved ones a Merry Christmas!
PS: In the spirit of Christmas, here’s a book recommendation that is sure to add to the cheer – It’s A Magical World: A Calvin and Hobbes Collection. 🙂
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