Viraj Khatavkar
Why Should You Invest in Equities

"Investing in stocks is gambling" - a common reaction of 80% of the people I meet. But is it really? In their defense, I used to think the same way when I had no idea about stock markets. However, they are not entirely wrong. If you get involved in day trading, buying and selling stocks just because they are increasing in price, or trade using leverage without understanding the system, that is definitely gambling.

How I Invest for Long Term

Let us understand about Nifty first. Nifty is an index of the top 50 Indian companies listed on the stock market. Companies like Nestle, Reliance, Bajaj Auto, HDFC are included in this index. These are some of the biggest companies in India, and we use their services daily. Rather than guess which company would do better and buy individual stocks, I think it is better to buy India's top 50 companies. Now you don't need to go and buy every stock. You can simply invest in index funds that track the index. It is like any other mutual fund with just one difference that it will invest in all those companies, and we don't need to go and buy every stock individually. You can even do a SIP in this mutual fund for as low as 1000 rupees.

I invest in the following three index funds:

  • Nifty 50: top 50 companies in India
  • Nifty Next 50: next top 50 companies in India
  • Nasdaq 100 - Top 100 companies in the US

This basically eases my investing process, and I intend to do a SIP in this way for the next 25 years. I am basically participating in the economic growth of the Indian & US economy for the next 25 years. For example, if Indian GDP grows by 10 times in the next 25 years, we can expect a similar return from our Nifty index funds investment.

Nifty 50 Returns for The Last Twenty years

Let us understand how Nifty has performed for the last 20 years. This calculation includes dividends:

As you can see, the average returns for the last 20 years are 15%, but it was a bumpy ride. Some years your investment was down while in others it was up. But over the long-term, you get decent returns. These returns coincide with the average Indian economic growth over the last 20 years. Further, they are higher than the typical FD rates that you might get in a decent bank.

Taxation

Returns are not the only reason to invest in equities. When you invest in the stock market for the long term, you even have to pay less tax on your gains. Suppose you make an FD and make the same 15% average returns over 20 years. In that case, you have to pay your standard income tax slab rate on the gains. It can be 20% or 30% or even 42% if you are in the higher slab.

However, on equities, you just pay 10% flat on your total gains.

Conclusion

If you want to grow your money and create wealth, investing in equities is one of the best options for people like you and me. It is cheap to invest and participate in the growth of our economy to create wealth.

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