A few client-interactions recently prompted me to think about this and investigate the phenomenon more intimately. Let’s get into it.
Often, one is tempted to compare equity investments to fixed deposits and expect continuous appreciation from the former. It is unrealistic to compare Equity & Fixed deposits. The fact of the matter is, the two asset classes behave very differently. Prudent and fruitful investing strategy demands that one is prepared for and appreciates this distinction.
If you invest in Equity, it’s vital to sit on the downsides and learn how to tame them to benefit from the inevitable recoveries. Indeed, fixed return investments offer certain benefits that Equity never can or will. Still, it has been proven time and again that Equity as an investment class delivers faithfully over the long term. Here is a piece that backs this assertion: The monthly investment in an equity fund for 7-10 years has always performed.
It can be too taxing to invest hundreds of lakhs of rupees and not see reliable returns quickly. The greatest challenge is to keep the faith when confronted by volatility, capital erosion, and temporary passages of negative returns. Only a long-term investing strategy, though, allows the market cycle upward to kick back in and overcome the negative impact of the down years. That’s why the lean years are a time to continue investing, rather than withdraw.
Equity funds or Stocks may offer a modest return in a year, the negative return in the next year, stupendous returns the year after that. Years of bull markets may be followed by long years of bear markets. That is why Equity is considered risky and volatile in the short term. However, Equity has the potential to offer superior returns than other asset classes over a long period. That is why equity mutual funds are recommended to achieve long-term financial goals like retirement.
Staying disciplined and avoiding the noise of the game is the road to successfully investing in Equity. To expect linear, year-on-year returns is not to experience what equity investing really gives. It is also what makes it different from Fixed deposits, where returns visibility is sure, but a fixed rate of interest limits growth.
To conclude, I would like to quote Joseph Joubert, “Equity is the truth in action”.