3 fundamentals of investing which can make you way richer than a friend of yours who earns same as you do, but does not invest the way you do.
The 3 fundamentals are:
- Start early
- Invest regularly
- Choose the right investment vehicle.
Let us take an example to see how long term investing can work:
Investing in Share Market
Had you invested Rs. 10,000 to buy 100 stocks of WIPRO in 1980, it would have made you immensely rich, see how:
Today WIPRO’s stock price is 288.60 (as of 15 Dec 2017). So, your holding today would amount to around Rs. 556 crores with a CAGR of 42.94%.
Now, we are not tempting to by WIPRO. This example is like the hen giving golden eggs. We don’t know if any company can give you such returns now. But what we want to stress is long term investing can deliver excellent results.
Private players stepped into the mutual fund industry in 1993. So, MF history is not that old like stocks to quote and example here, but there are funds which have given above 20% CAGR since inception. Now, if the magic MF investing can show in the long term can overpower this WIPRO example or no, is what only time can tell.
Investing in Mutual Funds
Mr. A invests Rs. 1.5 lacs in PPF each year for 35 years. PPF average rate assumed 7.5% p.a.
Corpus created 2.55 crore.
Mr. B invests Rs. 1.5 lacs in small and mid cap funds, giving returns of 15% p.a. for 35 years.
Corpus created 18.57 crore. And some good small and mid cap funds have given returns way above 15% of returns p.a. since inception. So, just imagine the kind of corpus which can be generated
Investing in Mutual Funds or Investing in Equity
According to the report (till 2017 data) by Economic Times, it revealed that only about 4.5% of the total market capitalization in India is held through mutual funds. But, direct stock holding by individuals is nearly 22% of the market capitalization. This shows that the practice of directly investing in stocks is more favorable to a select group of Indians with strong purchasing power.
Choosing between the two kinds of investments depends on a person’s risk taking ability. It also depends upon return expectations and the ability to manage a share portfolio. The recent years have seen a lot of investors move from direct stocks. An increasing percentage of the average Indian population is turning towards mutual funds.
So make sure that you make the right choice between investing in Mutual Funds or Equity.
So invest regularly and see that you invest in the right kind of vehicle. Now, when investment horizon is more than 10 years away, you should invest in small and mid cap funds which have potential to deliver highest returns. Once, category is finalised, choose the best fund on all qualitative and quantitative parameters.