Be proactive while investing in equities

It is conventional for us to look at investments in equity and/or related instruments whenever we think about higher returns.

What we generally forget is the eighth wonder of the world allegedly coined by Einstein, the compounding effect.

This is particularly attractive when the return is consistent over a long period of time than volatile higher returns.

And the other way we judge investments is on the average returns we get on an annual basis.

When an average return of 12 per cent seems great on the face of it, say over five year period what actually transpires is that one needs to go through -30 per cent, +20 per cent, 5 per cent, -15 per cent, 13 per cent and how many would be interested in these set of results if they were told in advance.

When we talk about equity investments we do accept that there would be volatility and when one fills the risk profiler questionnaire, there would be questions on how would one respond when the market falls by 20 per cent with usual choices range from top-up, continue, divest, etc. and a follow-up question which again contests one's conviction by asking if the market further drops by another 20 per cent and with same choices to pick.

But when the drawdown happens in the actual market then it would be difficult to control our instincts and forget about continue to invest but it would be not easy to stay invested.

In the last five years, Nifty has delivered this sequence of returns 31.4 per cent, -4.1 per cent, 3.0 per cent, 28.6 per cent and 3.2 per cent respectively from 2014 through 2018.

If we consider an investment of 100,000 at the beginning of 2014 then 172,255, the average annualised return would be close to 11.5 per cent but check the rather uneventful years in between and higher returns in a single year are dispersed. These returns are on volatile and are on a riskier level where there is an erosion of capital in one year.

Forget not, there will be serious drawdowns in between the year but the calculation only considers the end return of the index each year. Now, let's check the Sukanya Samrudhi Scheme launched by the central government in 2015.

Though, this is eligible only for parents investing on a girl child with a maturity at the age of 21 with contribution restricted till age 15, I had considered this investment as this remains the highest interest paid by any of the government scheme.

The current fund value for this on an investment of 100,000 would have been 150,820 though excluded the minimum deposit restriction of Rs250 per annum to keep the account active.

The interest rates in the past five years are 9.2 per cent, 8.55 per cent, 8.28 per cent, 8.3 per cent and 8.5 per cent. This comes with a sovereign guarantee and though fluctuating interest (rates are fixed by the government each year) there is no drawdown on the investment amount at any point of time.

The average thus translates to a tad over 8.5 per cent on average per year.

Now, the fund part comes when someone infuses 100,000 each year at the beginning to the corpus.

So, the investment of 100,000 in equity with the same amount being added each year at beginning would end up with a corpus of Rs676,340 while that of the same in SSS would derive a corpus of Rs642,196 by the end of fiveyears. The difference is mere Rs34,144 which is about 5.3 per cent.

No, I am not trying to de-sell investment in equities here but would like to showcase the importance of getting carried away with average returns, especially in the context of equity investments.

So, it is important to check other parameters while investing in equity funds other than their past performance alone.

The other factor is to stick to discipline while investing and also being pro-active in equity investments like topping-up during falling years so that higher corpus would benefit during a high-performance year.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at [email protected])