Equity allocationThe human mind is wired to stay away from things that it does not understand. Words like ‘equity, ‘stock market’ and ‘shares’ are not understood by many, including educated youngsters. Those who have some idea are not comfortable with the un-fixed nature of returns. Un-fixed is the lack of guarantee when it comes to returns in the stock market.

Brought up in a fixed-deposit culture, stock markets even to this day are equated with gambling by many. In such a scenario, when reports of frauds, auditing problems in companies and crash in mid and small stocks happen, it is extremely convenient for young investors to become cautious. The only problem with being ‘too cautious’ is that you start seeing risk everywhere. Once you are in such a mode, you will let opportunities pass as you are scared.

Too much, too little

You may not have noticed but fixed income/debt asset is already a lot in your life. You may not realise it but look around.

The money you keep in your savings bank account is a form of fixed income (earning 3.5-4% per annum).

The money in your EPF (Employees’ Provident Fund) is mostly into debt/fixed income; just 15% of the incremental corpus received by EPFO is invested in equities/stock market.

The cash in your wallet earns you nothing. It is not equity. When you keep spare cash in a debt fund or liquid fund, you are again exposed to debt/fixed income.

Your parents have kept a lot of their life savings (legacy for you) also in bank and post office deposits.

The insurance policies bought from LIC, and the endowment/buyback/money back plans sold to you by bank branch staff are mostly debt/fixed income based.

Many young people these days keep some money for an emergency as well and that too is kept in debt/fixed income. We understand why you keep that emergency money in debt/fixed income. But, this just goes on to show how much of your personal funds are in this one asset class.

What about real estate

Many youngsters have a bigger allocation to real estate/property than they realise. When you take a home loan at a young age, you are virtually betting a lot of your money on real estate. A Rs 50-75 lakh loan in other cities and Rs 1-1.25 crore loan in Mumbai is par for the course.

So, for such youngsters, your home is your biggest investment. Many will argue that they do not look at their home as an investment. But that does not change the nature of the asset-property.

If you are one of those who let out home for rent, that rental income bears striking resemblance to fixed income. Rental income is kind of fixed, just like the interest in a bank FD is. Also, rental income has little risk involved during the 11-month rent lease period (because you have deposit/security money for 3-4 months).

A big mistake

Not just young people, even slightly older ones who earn about a lakh per month stay away from equity exposure. When you ask them about investments, they will give you a list of fixed deposits, post-office monthly income scheme (POMIS), endowment insurance plans and gold.

Equity/stocks get a little plan in their portfolio. Whatever be your goal, equity/stocks can help you achieve it faster than any other asset. This is because when you take that extra risk in equity/stocks, you also get the extra reward.

How big is that reward? Let us talk about equity mutual funds here. Direct equity/stock market returns vary greatly depending on the stock. An equity MF is a better place given the uniformity of returns. In the last 10 years i.e. July 11 of 2010 to July 11 of 2019 period, equity funds have given good returns

For instance, large-cap equity mutual funds have given an average 12% CAGR – which means Rs 1 lakh invested 10 years ago have become Rs 3.11 lakh. This is over Rs 60,000 more than the Rs 2.2 lakh you would have got if you kept money in a bank FD giving 8% annual return. (Moreover, the income on FD gets added on to your income as per tax slab, while equity has only 10% tax over and above Rs 1 lakh in gains redeemed from equity.)

Can bank FDs not generate Rs 3.11 lakh if you invest Rs 1 lakh? Yes, they can but they will need more than 10 years. In fact, you will need 15 years that is 50% extra time. So, when you do not have equity asset in your portfolio, you are missing the potential to make that extra edge.

Keep in mind for future

1. If you have long-term investments, always take a high exposure to equity.

2. Investing in fixed income for the long term cannot compromise your returns, but inflation can eat away precious capital. There is a cost attached to fixed/guaranteed returns. The real value of your principal come down commensurate with inflation.

3. Do not invest lump sum amounts in equity/stock market. Adopt a regular and systematic approach when it comes to equity investments. Use the SIP way.

Author
Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. He can be contacted on contact@rupeeiq.com