Do I need to be rich to invest in equity?

Equity investing implies taking a certain amount of risk. This also means you must have money to put at risk. Does this mean that only the rich should invest in equity?

It’s a misconception to think that equity investing can be started only after you have accumulated wealth. On the contrary starting your equity investments early is what will help you accumulate wealth.

Equity needs time

It is true that stock prices can move up or down, especially if you look at the change in a few weeks or months. Market price of equity stocks is driven largely by sentiment in the short term. However, when you remain invested for longer periods of 5-7 years, it is the quality of earnings of the underlying company which matter most.

Hence, we see veteran investors and fund managers always talk about long term investing. In other words, price volatility risk (the risk that comes from prices going up or down erratically due to market dynamics) in equity investing smoothens out when you remain invested for long periods.

This also means that you needn’t be afraid to start investing in equity; the earlier you begin the more time you have to remain invested and hence, lower the risk of not achieving your expected return. Moreover, with equity mutual funds, you can start investing in an equity portfolio with as little as Rs 500 a month in systematic investment plans or Rs 5000 if you are making a lump sum investment. Even though the amount is small, it will get invested proportionately in the fund, giving you the benefit of long-term wealth creation.

Mutual fund managers are qualified professionals with years of experience in equity investing. Your job then is to look for a fund manager who has consistently been able to deliver long term return which is above the fund’s stated benchmark.

Equity needs selection

However, if you pick a poor-quality equity stock, you can still lose a lot of money. Of course, if you already have a lot of accumulated savings to begin with, this may not be such a worry. However, when you begin with your monthly savings, you can’t afford to be careless in your stock selection. Here too, mutual funds can help you avoid the risk of wrong selection.

Mutual fund managers are qualified professionals with years of experience in equity investing. Your job then is to look for a fund manager who has consistently been able to deliver long term return which is above the fund’s stated benchmark.

The benchmark of a fund is usually a market index that sets the minimum expectation of return from an equity portfolio. If you are unable to filter through the numerous equity fund managers to find good quality performance, rely on an established advisor to help you. The advisor will also help you build behaviour towards long term investing.

With the help of mutual funds and advisors, you can access good quality equity investing even with no accumulated savings and with small amounts to begin with. The earlier you start and longer you stay invested the more likely you are to achieve your goals.