Understand Why Equity Investment Is A Must For First-Time Investors

How to make your relationship with equity investments work - The Economic  Times

Stock market investments arguably have the most potential for growth.  But at the same time, there is a higher risk involved as well. To negate this, investors should keep a close eye on how the market is performing and make changes to their portfolios when required. But for someone who is just a beginner, this may sound overwhelming. But mutual funds are here to help. In the case of a mutual fund, a qualified fund manager will take care of your money, and your responsibility is limited to investing according to your risk appetite. Let us learn more about equity fund investments and see why they are a must for first-time investors. 

It tends to beat inflation.

Inflation is a phenomenon that decreases the value of money you have. If we take a simple example, if the money you have right now could buy you ten bananas, it may only be able to buy you 8 in the next year. Like in this case, inflation reduces the purchasing power of your money.

Now, safeguarding your savings and investments from inflation is of utmost importance. Imagine you have saved up enough cash to build a home and parked it somewhere with lesser than inflation profit/returns. After a few years, you might realise that your corpus now is unable to buy you the house you had in your dreams. 

But how different it will be if you had invested in equities. 

Let us take the example of Nifty and Sensex to understand this. These are indexes that track the performance of the top companies in India. Hence, they are said to show the reflection of the whole stock market. 

Here, both indexes have risen more than 65% in the last five years, as of July 1st, 2022. This number manages to beat inflation.

Hence, had you parked your money in an equity investment, you could have garnered a profit more than inflation. 

It gives your investment the magic of compounding

Compounding is a magic element that helps your equity investment tremendously. The idea here is to reinvest the returns which have earned back to the corpus itself so that the compounded corpus can earn returns.

For instance, if your corpus is Rs. 1 lakh and your earnings are Rs.10,000, from the next day, your corpus will start to earn from Rs.1.1 lakh and not Rs.1 lakh. 

In the long term, this can positively impact your corpus growth.

Dividend payouts

Another reason why equity investments are better for a first-timer is that the companies you have invested in could give you dividends. A dividend is a distribution of profit to the shareholders. A company could give its shareholders a dividend every quarter or annually. This dividend payout could act as additional growth for your corpus. In most cases, the dividend is reinvested into the fund itself, helping compounding do its job. Such a factor is exclusively only available in equity investments.

Highly liquid

Stocks are considered to be highly liquid. With millions of investors and traders selling and buying stocks every day in the stock market, there is rarely a case of lesser demand. This could come in handy if you have to redeem your investments in a time of emergency. If there are no buyers, it could delay the process of redemption. Stock investments rarely encounter that situation. 

Equity investments are a beneficial option for not only first-time but all investors in mutual funds. But there is risk involved as well. Hence, make sure you do your homework and figure out how much risk you can stomach before investing. 

Amanda Peterson: Amanda is an economist turned blogger who provides readers with an in-depth look at macroeconomic trends and their impact on businesses.