Wealth Special: Rs 1 lakh to Rs 50 lakh in 25 years

Capitalism in the western world is collapsing. With the sliding crude prices, it looks like the market, in the short-term, will be affected more by sentiments and the reduced flow of capital.

In such situations, you could be wondering if you should ever invest in equities and go through this uncertainty from time-to-time. Tell you what, yes, you need to invest in equities. Long-term equity investing as an asset class continues to beat all other investment avenues like real estate, gold,bonds or fixed deposits etc.

That is, equities in India have grown by an average of 17 per cent per year since the last 25 years. There have been ups and downs in these 25 years but the market always discounts the bad news, re-adjusts, consolidates and, eventually, moves up. The average return from all other asset classes (bonds, real estate, gold etc.) remains between 6 and 10 per cent range for the same time period.

Returns of 6 to 10 per cent - Big deal?

Oh yeah, it is a big deal because of the magic of long-term compounding.

If you had invested Rs 100,000 (1 lakh) in equities 25 years ago and left it untouched, the value of this investment, today, will be Rs 50,65,782 (over Rs 50 lakh).

On the other hand, Rs 100,000 compounded at 10 per cent (the next best asset class) the value of the same would be Rs 10,83,470 (over Rs 10 lakh).

The difference = Rs 39,82,312 (over Rs 39 lakh).

This difference emphasises that equity should form a part of your asset allocation. 'How much' is still a matter of debate but you could use this rule.

Thumbrule

While there is no one-size-fits-all allocation for equity, a reasonable thumbrule can be 100 less your age. The result is the percentage of your savings you should allocate towards equity. As you grow, you should revisit and adjust this asset allocation.

To conclude..

All bad things must come to an end. So, here's a mantra for you:

In a newspaper article written by Aditya Puri, Managing Director of HDFC Bank, he says, "Stay focused on the fundamentals (of your stock holdings). Every financial crisis is different but they all end. As this phase of extreme pessimism abates a bit, global investors are likely to reward India for the robustness of our systems."

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