Marilyn Luis
The recent situation with the multistate cooperative bank PMC, threw a number of its customers into a tizzy when a cap was levied on how much they could withdraw in a month.
Never in their wildest dreams, would these fixed deposit holders have imagined that their life-savings be insecure and uncertain in the bank. Those are features reserved for equity investments, the outcome of which is never certain.
Equity is not a traditional investment as it is considered unpredictable and therefore deemed to be a way of “gambling” with one’s fortunes. If chaos is described as having zero predictability or control over inputs and outcomes, then Equity fits the bill quite well. That being said, where there is chaos, there is discomfort and where there is discomfort, there is growth to be had. Without complexity in our lives, (which is nothing but changed order) we continually do things the same way, closing the door to growth and development.
Just as chaos in life forces us to come up with creative solutions, engaging every faculty of ours to survive the said complexity, Order stifles independent thought and action and curbs development.
Using this analogy, we may liken fixed deposits and similar products to having the nature of ‘order’, wherein returns are predictable and safe. As such, the potential for exponential growth is non-existent. Growth will be within predefined limits. Equity, on the other hand, adorning the nature of a complex, often chaotic product, offers the budding chance to earn aggressive gains that beat inflation and tax rates hands down.
Granted, the excess returns or outperformance of equity as an asset class are not normally distributed over time i.e. it may be negative in one year, zero in another and 45% in yet another year. However, if you invest in staggered amounts regularly over a good length of time, the returns at the end of such term ‘normalize’ themselves, surprising you with handsome results.
Tip: If you are unsure about which stocks or mutual funds to choose, you are better off just replicating the index in your investment portfolio either by directly buying stocks or indirectly by ploughing savings in index funds.
A study by a research company in asset management revealed that over a one year period, 33% of investors could lose their money while investing in actively managed mutual funds. That percentage was reduced to zero when the length of time was increased to five years.
If you take a look at the Sensex, you will see that the markets only went up, and every five years this was almost guaranteed. So it begs the question, if markets only move up why are returns not guaranteed?
Well like I said before, equity is not ordered but
complex with its volatility extreme over short periods of time and tempered over long periods. So the best way to ride the wagon all the way to the bank is to sit tight through the ups and downs of the market until you reach your time goal, five years tops.
ï®Since we are all wired to be partial to the things of old (old is gold) and naturally gravitate towards traditional investments like fixed deposits, why don’t we take a different spin on equity investments by viewing them as fixed deposits, not to be touched till the five-year time period is up? You certainly wouldn’t touch your fixed deposit, for fear of losing out on interest and a possible penalty charge, so why should you do it for equity investments? This way you can remain immune to the tumultuous ride of the markets while capitalizing on all the gains to be had in the interim and then at the end of the term, reap all the profits so accumulated.
