Why Equities Are A Major Part Of Financial Freedom Planning

Despite its skyrocketing popularity and proven wealth creation record, investing in stocks, for some, still seems a challenging activity. The risk inherent in stock market investing unfortunately deters people from diversifying their portfolios beyond fixed deposits, gold and real estate. This fear is grossly unjustified because equities are extremely well-regulated by authorities and mutual funds offer a safe way to invest with zero hassles. For medium- (3-5 years) and long-term planning (5, 10 years beyond), there is no financial asset like stocks/equities that can give a solid boost to your hard-earned money. By effectively managing your risk tolerance, investing in stocks can be vital in maximizing your investments and aid in driving your financial freedom plan towards its goals. 

Higher long-term returns 

The stock market, be it in India and internationally, has given robust returns for investors over time. For instance, stock market barometer Sensex from just 750 points in 1989 has grew rapidly to cross 61,750 points in 2022. That’s a gain of 61,000 points in 33 years or 14% compounded annual growth rate (CAGR). In the same period, Dow 30 index, the benchmark of US equities, has produced an 8% CAGR. For many individual stocks, CAGR has been 20-30% during the same time, which shows the wealth creation of equities. When you take long-term exposure to stocks through mutual funds, you set yourself up for tremendous wealth creation opportunity if you are patient. Even considering setbacks like the 2008 recession and the 2020 pandemic, these stock indices have continued to grow exponentially. Though the prices of individual stocks ebb and flow daily, the overall stock market tends to grow in value over long term. India is destined to grow big as the economy expands, and so making equities a core of your financial plan is crucial for success.  

Diversification benefit, liquidity 

The stock market offers a plethora of choices. The investible universe in Indian stocks is said to be about 2000-3000, but mutual funds narrow it down to 1/4th size with strict filters and guard rails. The wide range of sectors, industries, size of companies and their respective growth stages allows you to invest in, as per your risk appetite and financial goals. Thus, investing in distinct types of equities acts as a natural hedge. For instance, if rupee depreciates, export-driven sectors such as IT, pharma tends to do well. When rupee appreciates, importers benefit. 

When the economy grows fast, mid and small-cap stocks perform and when slow down hits, large-caps provide shelter and stability. Also, stocks offer one of the best-in-class liquidity. Open 5 days a typical week for about six hours, you can buy and sell equities in India with just a few clicks. Similar is the case if you wish to invest in mutual funds. Exposure to equities through an equity mutual fund will mean professional fund managers will take care of every nitty gritty. Stocks are highly liquid assets with minimal impact and transaction cost. The same cannot be said for other assets like real estate or long-term debt instruments. 

Best hedge against inflation 

Your money is not moving forward, it's falling back, and this is thanks to inflation. Right from the ubiquitous toothpaste, milk, vegetables, shoes, clothes, apartment, car to even holiday travel, you can see the effect of inflation everywhere. The Rs 500 note in your pocket in 20 years will be worth Rs 150 at about 6 per cent inflation each year. Rs 350 of its value will erode slowly and you may not even realise, until one day. This is what inflation does to the purchasing power of your hard-earned money and portfolio. Here, equities can act as a hedge against rising inflation in this economy. Historically, the returns on stocks beat inflation rates over medium and long term and this is no magic. Rising prices lead to more profit for companies, which in turn boosts share prices. Typically, growth stocks outperform the overall market and supply a solid hedge against inflation. Your long-term financial plans will need an inflation-buster and equities are the best way to achieve this.  

To summarise, make equities a core part of your financial plan and use the mutual fund route to achieve your dreams small, or big. 

Happy investing!