With a decline in China’s population growth, India has emerged as the most populous country recently. However, the accurate depiction will only become apparent following the completion of the Census. As the population continues to grow, there is a corresponding rise in the number of individuals/ investors seeking various investment options for their funds.
Today, we are fortunate to have access to a wide range of financial advice curated by financial experts, thanks to the internet. The downside to this is that these recommendations create confusion for investors. The aim of this write-up is to assist these investors in their investing journey, enabling them to attain financial freedom.
Given the unpredictable fluctuations in stock markets, it is commonly recommended that new investors explore the option of investing in debt instruments. The popular instruments in this category include Public Provident Fund, Kisan Vikas Patra, and National Savings Certificates. Their understanding, whatsoever, must not be called into question, regardless of the situation. The returns from these instruments are pre-determined and immune to market volatility or external influences. In fact, interest rates were maintained at a steady rate of 12 percent for a considerable period before the year 2000. The prevailing lower inflation rates during that time further served as an added advantage. Hence, to this day, the effects of tirelessly pursuing these tools continue to be felt.
The present circumstances, however, have experienced a shift. To give an example, the interest rate on the PPF, which is widely preferred by small investors, has consistently decreased and currently stands at 7.1 percent, remaining unchanged for the past few years. The interest rates on other instruments are also nearly the same. A significant number of investors perceive this risk-free interest rate in isolation and thus maintain their investments in these instruments. However, it is wise to consider the Real rate of return, which takes into account the relevant price indices, making it a practical approach. If we consider this argument to be valid, we can see that retail inflation in India stays around 5 to 7 percent. Given a conservative assumption of retail inflation at 5 percent, a simple calculation should yield an approximate real rate of return of 2 percent.
With such low returns, it will be very challenging to reach pre-determined financial goals or attain financial freedom. We do not promote a complete abstinence from utilizing these instruments. Investors find these instruments attractive because of stereotypical arguments like asset diversification and risk-free nature. Despite this, the risk of low returns persists, thus necessitating the exploration of alternative investment avenues.
In the light of this, it is worth considering for investors to explore the option of investing in companies through the stock market, as it presents the possibility of generating higher returns comparable to debt assets. For example, the Nifty 50 index has historically achieved an average annual return of about 15 percent since its inception, far exceeding the returns from the conventional debt investments. This is widely acknowledged and, as a result, it is appealing to the new generation of investors today.
A lot of investors, especially those who are new, often misinterpret the narrative and end up getting involved in trading instead of investing. It is crucial to understand that trading, which involves speculating on price movements, increases the likelihood of losing money. Price movements in stocks may be appropriate for traders, but certainly not for investors.. Following their losses, the investors who turned speculators opt to exit the stock market for good and caution others to steer clear of it.
There is a separate category of investors who abstain from trading and instead opt to invest in stocks with a longer-term perspective. Paradoxically, they are also indirectly taking part in speculation and hence the lack of expertise in stock selection often leads to financial losses. As with the case of speculating co-investors mentioned earlier, they too lose enthusiasm for the stock market and ultimately prefer to invest in debt instruments.
Both categories of investors share a common flaw–speculation. Both investor types show impatience and employ an unexperienced method of stock selection. Let us look into it a little more closely. It is crucial to understand that the stock market should not be regarded as a shortcut to wealth or a winning lottery ticket. By acquiring a stock, one becomes an indirect participant in the business, necessitating patience for post-investment growth. Hence, it is advisable not to squander precious time by constantly fixating the attention on the computer screen and comparing prices. The act of buying stocks either with no research or based on any random recommendation and/or tip is likely to undermine its potential of turning into an appreciating asset.
So, how can one successfully navigate the realm of stock investing to fulfill their financial goals? The recommendation proposed is to allocate funds towards mutual funds. The management of the invested funds is entrusted to professionals. It is, however, also necessary to explore various aspects of mutual funds, including their types, structures, and market capitalization. Seeking professional help from Sebi registered investment advisors is another option for those looking for a more direct route to investing in stocks. The stock selections made by professional advisers have a stronger advantage over those made by inexperienced investors. By comprehending these fundamental concepts, one can effectively achieve their financial goals smartly.
