To be or not to be in equity

Are You a Lender

A study revealed that only 47% of Indian households had bank account. In addition every 3 out of 4 households had a quarterly bank balance of only Rs.5000. With the recent savings bank account de-regulation many banks have raised their interest rate by 1%. But households would not benefit much, as banks could charge increased transaction fees to offset increased cost, and also the additional interest income from savings account is negligible.

A further study has revealed many other interesting facts. Most Indians prefer to be lenders and not owners that have enterprise. We tend to play safe and prefer to be lenders by investing in fixed deposits and debentures of banks and companies. Investing in fixed deposit or debentures gives us a fixed interest. The bank in turn lends money to others for interest and makes a profit on the difference between the borrowing rate and lending rate.

Do you want to be an owner?

You can be a lender by investing in fixed deposits of SBI. Also you can be a part owner of SBI by investing in its shares.

As a part owner you would not get a fixed return in the form of interest. Since you own the company partly, you would share in profits or losses. You would get a part of the profits in proportion of the shares owned by you. Owning means risk-taking with the chance to get higher returns than lending to the bank or companies by making fixed deposit with them.

Suppose, Tomorrow Tata motors comes out with 12%interest paying debenture, what will be the response? There will be a huge response. It will definitely be oversubscribed. All investors will not get the allotment.

For a moment, just think. If TATA motors was to pay 12% interest to debenture holders, then it need make more than 12% with the borrowed money. Will you benefit more by being a lender (debentureholder) or part owner (Shareholder) of TATA Motors?

Lending or owning?

We as Indians should be proud to be a part of a developing country. Owning would give us an opportunity for long term capital appreciation and growth. However it is best to understand that the may fluctuate, but an increase is definite over a period of time.

In the last 10 years, sensex gas grown at 17.79% CAGR. That means, if someone could have invested Rs. 1 lac 10 years back, it could have grown to 5.14 lacs. In the last 10 years one third of diversified equity mutual funds have delivered a CAGR of more than 25%. That means if someone could have invested 10 years back in these mutual funds Rs.1lac, it could have grown to Rs.9.31 Lacs.

So the coming decade post 2011 is the golden period for owning. This period would help the so called middle-class people to build wealth. With the middleclass aspiring for quality education for children , quality healthcare for their family and a decent lifestyledream retirement, owning equity is the only time-tested means to get a decent nflation adjusted returns. So we need to get our long term perspective right and start owning equities.

Asset allocation:

Owning and investing in shares means creating wealth with a long term perspective. But balancing the way we invest matters. First, we need to allocate some amount of money for risk coverage. This could include money set aside for Insurance, medical insurance and critical illness, coverage. Next we all need to set aside money in liquid sources as savings accounts / bank deposit / liquid funds that would come handy in contingencies like loss of job and sudden illness. Then money required for short and medium term needs has to be set aside in debt investments.

Once this is done you are free to buy equities and build wealth. Equities can beat out all other investment categories in the long run. Equity is one of the few investments which can give you a positive return after adjusting for inflation.

Last but most important, feeling motivated that you are an owner would make a significant impact on the way you multiply your wealth. It would also give you the positive spirit and affirmation to stand by your decisions during the downs of the economic market.

To take the right investment decisions during the market down and up, we need to have very clear guidelines for making financial decisions. To have very clear financial guidelines, one should have a sound financial plan. To create a sound financial plan.

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