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Equity as an asset class – Part III

Welcome to Part III of this series.  You can read the Part I here and Part II here.

Immediately it struck Ajay – Does this mean, this is the perfect asset class? Should I go in for that PMS investment straight away? Hari cautioned him against the same. For a beginner is best to invest in equity on a periodic basis rather than going for lump sum investments. Plus a PMS scheme may not be the optimal investment mechanism.

This brought smile to Ram’s face. He said, he was now convinced about equity and would start investing based on the trading tips he gets. Again Hari, counseled him about the dangers in direct investing based on rumors.

With a smug look, Bharat turned around to Ajay and Ram – see, I was on the right track all along, right Hari? Hari complimented Bharat on investing his money periodically in equity over the past ten years. He has reaped tremendous returns. Investing via mutual funds is the most efficient way for busy professionals. But if Bharat had continued to invest throughout instead of stopping in 2009 when the market was at a low, his returns would have been even better. Plus it is not a good idea to put all his money in equities.  Proper asset allocation based on your needs and goals is vital. You should then plan the amount you invest in equities.

Hari had some quick closing suggestions for his friends:

  • Equities will give excellent returns in the long run. But they will have high volatility in the short run
  • Investing in diversified equity mutual funds via the Systematic Investment Plan (SIP) route is the best way to proceed and take advantage of the price volatility
  • Over long periods of time, the so-called volatility associated with equity investing gets evened out and you stand to make returns which not only inflation beating but really adds up to your capital

As there are more than a 500 equity funds, his final advice was to find a good financial planner and plan your investments. Once they understand your needs and goals, the planner will help to determine the optimal asset allocation.  They can then determine the right mutual funds to invest in.  But this list should be reviewed on a periodic basis.

On that note the friends parted company and they resolved to be in touch and see how they make progress. Happy Investing!!

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