This article will solve many of the doubts of investors planning to invest in stock market or even the current investors.
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- Stock Market Investments always grow in Long Term
- Power of Compounding
- Why you should start investing early ?
- When to invest in Stock Market ?
(A) Stock Market Investments always grow in Long Term
This is SENSEX chart showing level of BSE SENSEX at each year end since its inception. The growth of SENSEX is 310 times from 128 points in 1980 to 38,599 points in October 2019.
Equity investing is not for short duration. Patience plays a very important role in equities.
Investing decisions are not based on daily market fluctuations. But, long term investing decisions are based on in-depth fundamental research of companies.
Thus, this requires long term commitment of the investors for huge wealth generation.
(B) Power of Compounding
Compounding is the most useful factor of long term investing. Equity investments always compound at a much higher rate in long term as compared to other investments. Equity Investments can be in direct equity or via mutual funds.
On an average, equity investments grow at CAGR (compounded annual growth rate) of 15% (on lower side) over long term horizon, if a portfolio is managed well.
(i) What is ‘long term’ in Equity Investing ?
This is the most frequently asked question of beginners in investing. Although there is no defined time horizon. But, One has to remain invested for minimum 5 to 10 years for huge value addition to invested funds.
That is why there a term in investing – ‘Disciplined Investing’ or ‘Patience Investing’.
One cannot expect the returns in 6 months or even a year. Patience is the most important virtue in investing. And the same is not followed by many investors.
(ii) What difference does compounding makes while investing in Stock Market ?
If we are comparing Equities with any other instrument, compounding brings a vast difference in the maturity value.
Maturity Value can increase by Rs. 2.5 crore, with a mere difference of 8% of return. See the example below: (Click to enlarge the image)
The above chart shows how money invested in equity compounds at a better rate. Thus, a huge difference arises in the maturity value.
(iii) Why ELSS a better option than PPF ?
Majority of the population invest in Public Provident Fund (PPF) for tax saving. The lock-in of PPF is 15 years. But, investors do not keep such patience in Equities. Where, if one remains invested for long term, can get huge returns over invested funds.
3 Most Important Features of Equity Linked Saving Scheme (ELSS) one cannot miss
- Equity Compounds over Long Term
- Lock-in of just 3 years against 15 years in PPF (Though remaining invested for long term is suggested for huge wealth creation)
- Liquidity is available post 3 years against PPF, where only partial liquidity is allowed after 5 years.
- Lastly Equity always pay higher return in long term. The amount compounds at a higher rate. Thus, the huge wealth creation.
Illustration for estimating what difference in maturity occurs in Equity in long term against PPF
Click to enlarge the image
(C) Start Investing Early
The best way to get the highest benefit of compounding is to start investing early. An inspiring quote by Warren Buffett in this context:
Benefit of starting investments in equity early, explained with the following illustration: (Click to enlarge the image)
(D) When to invest in Stock Market ?
This is the essence if value investing. This is where the equity research and analysis plays its part. Finding quality stocks and evaluating the right time to enter the company.
If something is bought at a price already higher that its value, then no much value addition can be expected.
Our Equity Research and Analysis is focused on finding the quality stock picks and evaluating the right time & price to invest. Study of fundamentals of the companies is never ending process.
Ideas are around us all the time, but the right time to clinch that idea depends on our presence of mind & experience of analyzing !!
To know about our investment advisory services and to place your enquiries: Drop us a mail at – email@example.com or Visit pawealthadvisors.com
Disclaimer: The report only represents personal opinions and views of the author. No part of the report should be considered as recommendation for buying/selling any stock. The report & references mentioned are only for the information of the readers about the topic stated.