arvindmalhan
June 17th, 2005, 01:36 PM
I have noticed that most people invest in stocks because they want to make quick money. They see their relatives and friends investing in stocks and getting rich over time and want to follow suit.
But then there are other ways of making money too. Ways that seem much safer than investing in the stock market. Like bonds, gold, real estate, Public Provident Fund, monthly savings scheme, etc. So why run the risk of losing money by investing in stocks where the risk is higher? Well, read on.
Gold is a good hedge against inflation. Today, 100 gm of gold can purchase the same amount of goods and services as it could purchase 400 years ago. By investing in gold, one can preserve one's purchasing power, but one cannot increase it. But what else can you expect from the safest investment instrument?
In India, bonds have given annual return of about 10%-11% in the last 30 years. This return marginally beats inflation and investors could preserve all of their money if they invested in government securities or bonds floated by fundamentally sound companies.
By investing in bonds, investor can improve their purchasing power over a period of time.
Real estate investments have given a compounded annual return of about 12-15% over the last 30 years. But actual returns could vary depending upon the location of the property and the timing of the purchase.
For example, land or a flat purchased in Mumbai about 30 years ago would have given much higher returns compared to land/flat bought in smaller cities. But a flat or land purchased in smaller cities about four years ago would have given much higher return compared to Mumbai!
Stocks, however, have given a compounded annual return of about 20 per cent in last 30 years, including dividend. Bluechip stocks like HLL, Reliance, Infosys, Wipro, Bajaj Auto have outperformed the Sensex by a great extent due to growth momentum maintained by the companies over the years.
From the above it is clear that stocks outperform all other class of investments over long period of time, but then the next question is: Should one strive to earn that extra 5%-10% by taking higher risks.
On the face of it, look you may think it is not worth taking a bigger risk to earn just that 5%-10% extra. However, although it may not matter in the short term, it definitely matters in long term as shown in the table at the bottom.
From the table you can see that during the initial years, low returns did not really matter much, when the original capital was safe and the risk taken was very low.
But after 30 years, a person earning 20% return from stocks will have 13 times more money than the guy who earned just 10% from bonds!
If a person earned 25% by investing in well-managed mutual funds, he will have 46 times more money than an investor who earned 10% by investing in bonds!
And if a person earned 30% by investing in well-managed mutual funds through Systematic Investment Plans (SIPs) and booking profits when the markets were overvalued, he would have 150 times more money than the investor who earned just 10% by investing in bonds!
Read my previous article Everyone ought to and can be rich on very simple methods to earn 30% returns in the stock market by applying simple and systematic methods of investing in well managed diversified mutual funds.
Some of the well-managed mutual funds like Franklin India Bluechip, Franklin India Prima Plus, Franklin India Prima have given compounded annual return between 25%-30% for last 12 years through SIPs.
Suppose, Investor A invests just Rs 5,000 every month systematically through SIPs in top performing diversified mutual funds for 30 years; and Investor B invests a huge amount of Rs 100,000 every month in bonds for 30 years.
Despite this, Investor A will be able to accumulate more wealth than Investor B due to higher compounding over the years.
From the above calculations, it is clear that over a longer period of time, bond investors are taking a much higher risk than equity investors. This risk is not about losing money, but the risk of losing a golden opportunity to make big money for a comfortable retirement without taking undue risks and without making any extra effort.
The following table shows Rs 1,000 investment growing at different annual returns:
The following table shows Rs 1,000 investment growing at different annual returns:
Year 5% Annual Return 10% Annual Return 15% Annual Return 20% Annual Return 25% Annual Return 30% Annual Return
0 1000.00 1000.00 1000.00 1000.00 1000.00 1000.00
1 1050.00 1100.00 1150.00 1200.00 1250.00 1300.00
2 1102.50 1210.00 1322.50 1440.00 1562.50 1690.00
3 1157.63 1331.00 1520.88 1728.00 1953.13 2197.00
4 1215.51 1464.10 1749.01 2073.60 2441.41 2856.10
5 1276.28 1610.51 2011.36 2488.32 3051.76 3712.93
6 1340.10 1771.56 2313.06 2985.98 3814.70 4826.81
7 1407.10 1948.72 2660.02 3583.18 4768.37 6274.85
8 1477.46 2143.59 3059.02 4299.82 5960.46 8157.31
9 1551.33 2357.95 3517.88 5159.78 7450.58 10604.50
10 1628.89 2593.74 4045.56 6191.74 9313.23 13785.85
11 1710.34 2853.12 4652.39 7430.08 11641.53 17921.60
12 1795.86 3138.43 5350.25 8916.10 14551.92 23298.09
13 1885.65 3452.27 6152.79 10699.32 18189.89 30287.51
14 1979.93 3797.50 7075.71 12839.18 22737.37 39373.76
15 2078.93 4177.25 8137.06 15407.02 28421.71 51185.89
16 2182.87 4594.97 9357.62 18488.43 35527.14 66541.66
17 2292.02 5054.47 10761.26 22186.11 44408.92 86504.16
18 2406.62 5559.92 12375.45 26623.33 55511.15 112455.41
19 2526.95 6115.91 14231.77 31948.00 69388.94 146192.03
20 2653.30 6727.50 16366.54 38337.60 86736.17 190049.64
21 2785.96 7400.25 18821.52 46005.12 108420.22 247064.53
22 2925.26 8140.27 21644.75 55206.14 135525.27 321183.89
23 3071.52 8954.30 24891.46 66247.37 169406.59 417539.05
24 3225.10 9849.73 28625.18 79496.85 211758.24 542800.77
25 3386.35 10834.71 32918.95 95396.22 264697.80 705641.00
26 3555.67 11918.18 37856.80 114475.46 330872.25 917333.30
27 3733.46 13109.99 43535.31 137370.55 413590.31 1192533.29
28 3920.13 14420.99 50065.61 164844.66 516987.88 1550293.28
29 4116.14 15863.09 57575.45 197813.59 646234.85 2015381.26
30 4321.94 17449.40 66211.77 237376.31 807793.57 2619995.64
The author works with a software company in Bangalore. The opinions expressed here are personal.
what do u think.............? express urs views
But then there are other ways of making money too. Ways that seem much safer than investing in the stock market. Like bonds, gold, real estate, Public Provident Fund, monthly savings scheme, etc. So why run the risk of losing money by investing in stocks where the risk is higher? Well, read on.
Gold is a good hedge against inflation. Today, 100 gm of gold can purchase the same amount of goods and services as it could purchase 400 years ago. By investing in gold, one can preserve one's purchasing power, but one cannot increase it. But what else can you expect from the safest investment instrument?
In India, bonds have given annual return of about 10%-11% in the last 30 years. This return marginally beats inflation and investors could preserve all of their money if they invested in government securities or bonds floated by fundamentally sound companies.
By investing in bonds, investor can improve their purchasing power over a period of time.
Real estate investments have given a compounded annual return of about 12-15% over the last 30 years. But actual returns could vary depending upon the location of the property and the timing of the purchase.
For example, land or a flat purchased in Mumbai about 30 years ago would have given much higher returns compared to land/flat bought in smaller cities. But a flat or land purchased in smaller cities about four years ago would have given much higher return compared to Mumbai!
Stocks, however, have given a compounded annual return of about 20 per cent in last 30 years, including dividend. Bluechip stocks like HLL, Reliance, Infosys, Wipro, Bajaj Auto have outperformed the Sensex by a great extent due to growth momentum maintained by the companies over the years.
From the above it is clear that stocks outperform all other class of investments over long period of time, but then the next question is: Should one strive to earn that extra 5%-10% by taking higher risks.
On the face of it, look you may think it is not worth taking a bigger risk to earn just that 5%-10% extra. However, although it may not matter in the short term, it definitely matters in long term as shown in the table at the bottom.
From the table you can see that during the initial years, low returns did not really matter much, when the original capital was safe and the risk taken was very low.
But after 30 years, a person earning 20% return from stocks will have 13 times more money than the guy who earned just 10% from bonds!
If a person earned 25% by investing in well-managed mutual funds, he will have 46 times more money than an investor who earned 10% by investing in bonds!
And if a person earned 30% by investing in well-managed mutual funds through Systematic Investment Plans (SIPs) and booking profits when the markets were overvalued, he would have 150 times more money than the investor who earned just 10% by investing in bonds!
Read my previous article Everyone ought to and can be rich on very simple methods to earn 30% returns in the stock market by applying simple and systematic methods of investing in well managed diversified mutual funds.
Some of the well-managed mutual funds like Franklin India Bluechip, Franklin India Prima Plus, Franklin India Prima have given compounded annual return between 25%-30% for last 12 years through SIPs.
Suppose, Investor A invests just Rs 5,000 every month systematically through SIPs in top performing diversified mutual funds for 30 years; and Investor B invests a huge amount of Rs 100,000 every month in bonds for 30 years.
Despite this, Investor A will be able to accumulate more wealth than Investor B due to higher compounding over the years.
From the above calculations, it is clear that over a longer period of time, bond investors are taking a much higher risk than equity investors. This risk is not about losing money, but the risk of losing a golden opportunity to make big money for a comfortable retirement without taking undue risks and without making any extra effort.
The following table shows Rs 1,000 investment growing at different annual returns:
The following table shows Rs 1,000 investment growing at different annual returns:
Year 5% Annual Return 10% Annual Return 15% Annual Return 20% Annual Return 25% Annual Return 30% Annual Return
0 1000.00 1000.00 1000.00 1000.00 1000.00 1000.00
1 1050.00 1100.00 1150.00 1200.00 1250.00 1300.00
2 1102.50 1210.00 1322.50 1440.00 1562.50 1690.00
3 1157.63 1331.00 1520.88 1728.00 1953.13 2197.00
4 1215.51 1464.10 1749.01 2073.60 2441.41 2856.10
5 1276.28 1610.51 2011.36 2488.32 3051.76 3712.93
6 1340.10 1771.56 2313.06 2985.98 3814.70 4826.81
7 1407.10 1948.72 2660.02 3583.18 4768.37 6274.85
8 1477.46 2143.59 3059.02 4299.82 5960.46 8157.31
9 1551.33 2357.95 3517.88 5159.78 7450.58 10604.50
10 1628.89 2593.74 4045.56 6191.74 9313.23 13785.85
11 1710.34 2853.12 4652.39 7430.08 11641.53 17921.60
12 1795.86 3138.43 5350.25 8916.10 14551.92 23298.09
13 1885.65 3452.27 6152.79 10699.32 18189.89 30287.51
14 1979.93 3797.50 7075.71 12839.18 22737.37 39373.76
15 2078.93 4177.25 8137.06 15407.02 28421.71 51185.89
16 2182.87 4594.97 9357.62 18488.43 35527.14 66541.66
17 2292.02 5054.47 10761.26 22186.11 44408.92 86504.16
18 2406.62 5559.92 12375.45 26623.33 55511.15 112455.41
19 2526.95 6115.91 14231.77 31948.00 69388.94 146192.03
20 2653.30 6727.50 16366.54 38337.60 86736.17 190049.64
21 2785.96 7400.25 18821.52 46005.12 108420.22 247064.53
22 2925.26 8140.27 21644.75 55206.14 135525.27 321183.89
23 3071.52 8954.30 24891.46 66247.37 169406.59 417539.05
24 3225.10 9849.73 28625.18 79496.85 211758.24 542800.77
25 3386.35 10834.71 32918.95 95396.22 264697.80 705641.00
26 3555.67 11918.18 37856.80 114475.46 330872.25 917333.30
27 3733.46 13109.99 43535.31 137370.55 413590.31 1192533.29
28 3920.13 14420.99 50065.61 164844.66 516987.88 1550293.28
29 4116.14 15863.09 57575.45 197813.59 646234.85 2015381.26
30 4321.94 17449.40 66211.77 237376.31 807793.57 2619995.64
The author works with a software company in Bangalore. The opinions expressed here are personal.
what do u think.............? express urs views