Indians have some special attraction in buying, holding and wearing golden ornaments. There is a traditional connection for us with the Gold since ages. Anyone who possesses it more is somewhere or the other considered to be “rich”. Under the same stereotype, there is one more common asset class known as the FD or Fixed Deposit. We have seen from our childhood, mediocre income people heavily investing in these two asset classes.
Maybe it’s a general mentality or perception of the common man. But is it a good investment option to generate excellent returns over time?
Why is Equity taken to be the best among the asset classes in most of the cases?
What extra edge does Equity Investment possess?
In this article, we will focus on the “Five Vital Benefits” that equity has over the other asset classes like gold, fixed deposit and other small scale investments performed by retail investors.
Let’s get started:
Inflation balanced returns
One main factor where the non-equity asset classes lag is in fighting the inflation factor. This rate is incremental over the years. With the rising prices of goods and materials, it has become a bit tough for a common man to suffice his daily needs. The ruling government too part a role in the soaring inflation numbers.
Fixed deposits may provide one with returns max to 8-8.5%. Inflation has to look upon while making long term investments. As per the latest statistical reports, the current annual consumer inflation in India is around 3.69%. This was more than 4% till last year and is expected to reach the same level soon. Let me add a bit oil to the fire at this point by mentioning that inflation is just one of the many factors that affect your overall returns from investments. So you still think it is safer? If yes then think again. If no then you have probably evolved into the smarter version of yourself.
Compared to FD, Equity gives returns after adjusting the inflation factor. You need not worry about inflation here. Over the years of investment, your money too grows way ahead than the then inflation rate. You may argue saying Gold is all-time inflation proof. For you, here is the Reuters report which proves the else to be more valid.
Market risk is reduced in the long run
Markets are highly volatile. Agreed. But it affects your investment only if your vision range for the investment is smaller.
Every trading day, Market reacts to certain sensitive news/events. Then it discounts or uplifts itself depending upon the sentiment of the event. This is true only if you are a trader and not an investor.
If you belong to the latter category, you must be least worried about where the market is heading now/later. The market impact over the stock seems to fade in the years of investment.
The Only thing which needs diligence and effort is in researching about the business in which you wish to have your long term holdings. Because if the flaws are with the Company itself, then no force on this planet can help your money get out of the stock quickly again in case of its bankruptcy.
A Relatively Higher rate of returns
As mentioned earlier the gains from a Fixed Deposit may range from 7% to 8.5% which are relatively lower returns. Gold’s return depends on the price at which you purchase and sell it. And it is pretty subjective on that matter. Even when you to go to sell your gold at any gold shop, the person makes many deductions for multiple factors considering its age, color, weight and the current day market value. Even after all the deductions and if you are still in profit then don’t jump of joy, here you just simply got lucky!
In the case of equity, the returns have no bounds or limits. It’s up to you on how much profits you wish to earn from the stock market.
Warren Buffet and Jeff Bezos both as you know are the wealthiest people on this world. They accumulated that much wealth with the help of the Stock market. The former invested in stocks while the later listed his Company on the stock market.
Tax-free dividends and capital gain from long term investment
Taxes have to be paid on the interest you generate from investing in a fixed deposit. In Equity, there is no need for paying taxes on the dividend amount that a shareholder receives over time from the Company. As per new changes in the latest finance budget announced by Hon. Finance Minister Arun Jaitley, the gains obtained from investments in equity shares of a Company exceeding for a term of more than a year would be exempted from taxes. Earlier we had to pay taxes on the profit we earned from a long term equity holding.
Flexible on the Liquidity front
From the Equity market, invested money can be withdrawn at any point you wish to exit the position. Your money is under your control. At any moment, investors can easily convert shares into hard cash.
This is not the case with the other asset classes taken here for comparison, especially the fixed deposits.
As you know the FD is drafted for a particular period and only after which the money can be availed. The time scale may vary ranging from three months to even ten years. In between the duration, if you run out of money, he cannot avail the cash from the fixed deposit at any cost.
Thanks for reading!
Feel free to comment if you have more points to add-in or any suggestion/appreciation. We do read and respond to them all.