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What does “good equity investing” mean in 2020 and beyond?

What is more important for investors like us amidst all this news is knowing what constitutes “good equity investing” now? What will get us to where we want to reach given the money we earn and have?

For investors like you and I, 2019 was a year filled mostly with what most experts agree is bad economic news. We had the lending industry reeling under an onslaught of negative discoveries as the ILFS and DHFL credit crises unfolded. Many debt funds had their reputations questioned and thanks to the PMC bank fiasco, even FDs and savings bank accounts were no more viewed as beyond reproach. 

To top it all off, GDP growth slowed to 5% and manufacturing is facing pressures as evidenced by the auto industry specifically which was sitting on unsold inventory. Even FMCG was not untouched by the slowdown as sales moved downward.

Interestingly, the stock market, apart from a few hiccups managed to reach new highs and stay there. This ended up confusing many experts who wrote a lot on how could markets keep rising despite the spate of negative news.

What is more important for investors like us amidst all this is knowing what constitutes “good equity investing” now? What will get us to where we want to reach given the money we earn and have?

Markets, reality, and the news

Equity markets are made up of a huge number of parties buying and selling stocks of companies and other instruments derived from them. While most of it was done by humans once, now technology plays a key role in the execution as well as strategy part of it. What this means is that markets have become more complex and thanks to machines executing buy or sell trades in microseconds more than ever, more sensitive to news and trends. 

This might reflect itself in the form of higher volatility. This is generally, historically speaking, a short-term phenomenon. But the bigger question is that have the risks gone up? 

There is always an element of "risk" or the chance that you will lose a portion of your capital when you invest in equity as an asset class. 

This chance is on the other hand countered by the inflation beating growth of equity which no other asset class manages to beat consistently. Even if they do well occasionally as gold has done in 2019.

This inflation beating nature hasn’t changed so far if we look at the historical growth of both the benchmark indices i.e., Nifty and the Sensex. The three-year growth rate for Nifty 50 stands at 15.6%. This period, though, is short considering the typical investment horizon which works for equity.

So, what constitutes good equity investing now?

The only really effective way to invest well is to invest with some definite objective in mind. This decides the growth rate you need based on the time you have. If I don’t know when I will need the money, I am unlikely to choose the most appropriate investment. 

You have very little control on growth rates and chasing the “highest return” usually tends to backfire because this years highest rated fund  or most recommended stock might be the laggard of tomorrow. The only practical thing to do is to invest in a way which allows the most leeway for uncertainty and takes into consideration what you really want to achieve with what you have available and most importantly, when.

This means keeping a goal in mind, keeping track of assumptions and to invest, within equity, in the companies that are most well equipped to grow themselves and in turn grow your wealth.

The easiest and most reasonable way to do the above, since the 1990s in India, has been to invest in good quality equity mutual funds, especially those which invest across market capitalisations. We, as individual investors, don’t know which companies are likely to be still around two decades from now much less those which are likely to grow your capital in a way that beats inflation. 

Why equity is still the best way

The easiest and most reasonable way to do the above, since the 1990s in India, has been to invest in good quality equity mutual funds, especially those which invest across market capitalisations. We, as individual investors, don’t know which companies are likely to be still around two decades from now much less those which are likely to grow your capital in a way that beats inflation. 

But we do know that there will be companies that will do this and the easiest way to be in a position to be part of the wave is to invest and stay invested in good quality equity. 

Global and domestic economic challenges will arise and subside, new technologies will come into play and everyday will bring new news that will become the topic of the day on news channels. Irrespective of all this, real wealth will still be created over many years rather than instantaneously and by companies that are listed (and are yet to list) on the stock markets whose shares, institutions and individuals are interested to own.

Takeaway

You as an investor can only do one reasonable thing. Invest for the long term in mutual funds that select the best companies of today, and the future, for you. This was true decades back, and it stands true today.


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