Think of equity as your 3rd child(3 min read)
If you are a parent you will better understand this. For children’s education and their upbringing parents are ready to do anything. They give out their heart to make sure their children get the best and be the best. Parents are compromising their need for the sake of children’s bright future. There is a hope that children will take care of them when they are financially inactive. I don’t know whether a child will take care or not, but I would advise if you want to be self-sufficient when you are retired, count one additional child in your life.
Most families have two children. If you have two, Then you should count it as three. This third one is Equity. You must be thinking that when two is not affordable how can we take care additional third one? Think that you have three children.
Parents are spending enough money on their child’s education, extra curricular activities, wedding etc. This takes around 25 years. If you have two kids think you have three kids. Put the same amount each month into an equity fund that you spend on one child. Do that for the same 25 years. After 25 years, whether your real children look after you or not, this 3rd child will look after you very well for the rest of your life.
You must be thinking why equity? Why is equity known as low-risk high returns investment avenue? It is good if you raise this question. It is good to understand equity thoroughly before you jump into it.
Let’s understand with a simple question. Generally, what are your regular source of income? If you are salaried you will get monthly income through salary. Other income through your investment or rent income if you have property and it’s rented. If you run a business, you earn out if it.
Now another question, who earns more money? Salaried or businessman? Of course! Businessmen. If you check the list of world’s richest people you won’t find any salaried person in the list. How these businessmen earn profits? Think about it. To run a business you need to pay a salary of your employee, pay rent for the office, repay loans, pay electricity and other expenses. After overcoming all these obstacles what businessmen gains is a profit. Moreover, this profit keeps on fluctuates every month. Some months are good some are bad, but if you take out an average business earns you more money.
The point is business will help you to create wealth. Equity is nothing but a business. Equity fund is a collection of such companies running businesses. Equity also has ups and downs same like the business. Sometimes you lose money in equity funds same as you lose money in your business.
It’s ok if you don’t do business but, Invest your money in equity funds which run a business and earns you profit. Equity funds earn you higher returns than fix deposit.
Let’s take an example if you start earning at the age of 25 and you will get retire at let say 65. You have 40 years to save for your retirement. Let’s assume you are saving ₹ 1 every year in fix deposits which give you 7.2% interest. It will take 10 years to double your money. So at the end of 40 years, you will have ₹ 16. On the other hand, if you put same ₹ 1 into equity which gives you 14.4% returns, your money will get double in 5 years. So at the end of 40 years, you will have ₹ 256. Huge difference!!
This simple maths will make you think about where to invest. So treat your third baby equally, groom it, nurture it, take care of it and it will take care of you. After all money can buy happiness and freedom.