Understanding The Importance Of Equity

Financial Planning

Understanding The Importance Of Equity

One of the most misunderstood asset classes by common people is equity and equity related investing; the tags such as volatile, fluctuating, uncertain, risky etc. are common for equity. One tagline which supersedes these terminologies is “opportunity” because despite being volatile, uncertain and risky equity is a place of opportunities.

Not being able to understand or manage equities doesn’t mean that it is risky; all we need is filling up the blanks. Knowledge is the gap between risk and opportunity which needs to be filled. If equity market was risky how one can explain the investment value of Infosys stock which is Rs.9.50 crore on an investment of Rs.9500 between 1993 and 2020; the annual return on investment is about 40%.

Equity as an asset class was designed to offer wealth creation across the strata of people without the discrimination of gender or demography. Anyone can invest and seek wealth creating opportunities.

Each asset has different capabilities which can be observed through this statistics: between 1995 and 2020 (25 years) the value of Rs.100 across these aspects are recorded like this: Value of Rs.100 would have become Rs.19 (annual inflation at 7%); Value of fixed deposit would have become Rs.684 (at 8% annual growth); Value of gold would have become Rs.1083 (at 10% annual growth); Value of Sensex as an index would have become Rs.1213 (at 10.50% annual growth); investing in bluechip stocks the value would have become Rs.9500 (at 20% annual growth) and investing in a diversified equity mutual fund the value would have become Rs.6000 (at 17.50% annual growth).

The differences can be clearly observed from the valuations across all asset classes. At the same time investing in equity such as individual stocks is not easy because we have to identify good stocks and also buy at right prices; it definitely requires learning about fundamental analysis. Alternate to investing directly in stocks is taking the mutual fund route, which too requires understanding of how to choose the right funds. So, knowledge is the key.

For long term investing Sterlite Technologies can be considered which is trading at Rs.164; the company is into telecom related infrastructure and is a well-managed company. The key financial parameters looks good expect for the high debt to equity ratio. The operating profit margins, return on equity and return on capital employed are very robust.

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