Most investors want to grow their money, but not all fully recognise how investing in stocks or equity-based investments is the only way forward
20-Jul-2020 •Research Desk
For anyone who is good at running a business, the best investment they can make is in their own business. Fortunately, because of the existence of stock markets, any one of us can become owners (or rather, part-owners) in a business. We can reap the financial advantages of being owners without the challenges that the management would face.
When you boil it down to the basics, you can only do two things with your money: 1) you can store it for safe-keeping; and 2) you can make it grow. If you choose to just store it, even this may be done foolishly or wisely. You might store it in a way that it loses a lot of its value because of inflation, or you could store it in a way that it doesn't lose value, even if it doesn't grow. By storage of money, we mean all kinds of deposits, right from bank deposits to post office or government deposits like National Savings Certificates or the Public Provident Fund and others. It could even mean just holding your money in cash. Of course, this poses limitations and it doesn't make sense to keep more than a very small amount in cash. But the others do have their place. Even then, storing money this way makes sense only if you are going to need the amount in a short period of time - anywhere from a few days to a couple of years. In this case, it does make sense to go with a stable, low-risk instrument.
For anything else, the only sensible thing to do is to try and make the money grow as much as it can. And investing for growth inevitably means investing in equity. This could mean buying shares, but for beginners it generally means investing in equity-based mutual funds. If you want returns that can beat inflation over the long-term, then equity really is the only option.
To understand this, you need to understand the source of equity profits. The ultimate source of profits in equity is the general growth of the economy. On the whole, stocks grow at a rate that is at least equivalent to the growth of the economy. Since the inflation rate is built into the growth of the economy, equity in general is not negatively affected by inflation. For instance, if inflation is 5 per cent and the real economy grows at 5 per cent, then stocks on the whole will at least match 10 per cent.
And that's just the average. On top of that, as an investor, if you are able to select stocks that are better than the average (through a good equity mutual fund, for example), then you can beat the general rate of economic growth by a larger margin.
Beating the average isn't easy, but if you keep a few simple rules in mind and go about things systematically, then it isn't difficult either.
On the other hand, fixed-income investing (the storage option) is inherently linked to the inflation rate in the economy. Bear in mind though that these gains are a mean and average that all equity delivers. There are variations across individual investments and variations in time. Also, to get the gains, you have to hold on for a minimum of three years and preferably longer. But what is definitely not up for debate is that as an investor looking to grow your money, you cannot afford to ignore equity-based investments.