When you begin investing for the first time, you will hear a lot of people recommending equity investments. Equity investments essentially mean investing in the stock market by buying shares of different companies. You can do this either directly or by investing in mutual funds and exchange-traded funds. Whichever way you choose, having equity investments in your portfolio is advantageous. Here’s why.
1. Allow you to earn capital gains
Say you invest in the stock of a company when its stock price was Rs 100. If the company has strong financial fundamentals, it will grow over time and its stock price will also increase. So, if over time the stock price rises to Rs 150, you will earn capital gains of Rs 50 on each stock of that company that you own if you decide to sell the stock. Capital gains help you generate wealth over the long term. Along with capital gains, you can also earn dividend income from your equity investments.
2. Help earn inflation-beating returns
Inflation tends to decrease thepurchasing power of your money over time. What you can buy with Rs 1,000 today will cost you a lot more money to buy 10 years from now. Hence, when investing, it’s essential to invest in insecurities that have returns higher than the rate of inflation. And this is why a lot of people invest in equity funds. Most equity funds’ long-term returns are between 12% and 15%. So, if the rate of inflation is 7%, and your returns on equity fund investments are 12%, you are preserving the value of your money over time while also earning real returns of 5%.
3. Offer liquidity when required
One of the biggest benefits of equity investments like equity funds is that they offer liquidity. There is no lock-in period unless you invest in Equity-Linked Savings Scheme (ELSS) funds, which are tax-saving equity funds. You can sell your equity investments whenever you would like or are in need of money. There are several sellers and buyers for stocks at any given time in the market and hence equity investments are liquid in nature. The only thing you need to remember is that if the market price of a stock is lower than what it was when you bought it, you would have to bear a capital loss when selling it. Capital losses can be avoided by having a long investment horizon and by diversifying your investments through equity mutual funds.
Throughout history, equity investments are how most investors have built wealth and met long-term financial goals. Equity investments are market-linked and hence have the potential to earn high returns. They also come with the benefit of compounding, which further helps your money grow. Hence, when you are starting out with investing, it’s beneficial to add equity investments to your portfolio. Do note that the proportion of equity investments in your portfolio should depend on your risk tolerance, age, investment horizon, and financial goals.