Importance of Equity as an Asset Class | ApnaCourse
Generally, the word ‘Equity’ is closely associated with ‘Risk’ and it is rightly so. However, as a part of Asset Allocation and Portfolio Diversification, it is important to have Equity component in the portfolio.
Following are the benefits of having ‘Equity’ in a portfolio:
- Helps in beating inflation
- Assists in portfolio diversification
- Excellent Return on Investment in the Long-Term
- Regular Income by way of “Dividends”
Methods of Investing in Indian Equity Market:
- Mutual Funds – Investing in Mutual funds is a passive investment strategy where there is an expert who manages the entire fund. The investment can be by way of Lumpsum or Systematic Investments. By Systematic investments, I mean investing a fixed amount at regular intervals over a period of time. Historically, this has given reasonable Return on Investments provided the investment is made in a good fund. This type of investment is best suited for individuals who are beginners or individuals who would want to manage their investments passively. One important aspect for a Lumpsum investment is the timing of the investment. Since the investment is made at one go, timing of investment becomes very crucial. Hence, most prefer the SIP route.
- Shares – One may invest in Listed Companies through his/ her DEMAT account. Detailed analysis before initiating the investment becomes very crucial. You may choose to invest in ‘Bluechip’ Stocks, i.e. the Large Companies that form part of the major indices. On the other hand, one may follow a ‘Value Investing’ approach where stocks that are under-priced compared to its intrinsic value are bought and held for a reasonable period to make substantial gains. One who has strong research capabilities couples with good Money Management technique has made attractive returns in the Indian Equity Market. Another variant/ extension of Shares would be Derivatives that are predominantly used for Hedging. This would facilitate reduction of Loss in case of adverse situations. Individuals who enjoy ‘Analysis’ (be it Fundamental or Technical) prefer investing in shares and make a good buck out of their investment.
Things to keep in mind while investing in Equity:
- Have an investment plan
- Make a thorough analysis
- Follow proper money management techniques
- Hedge portfolio wherever necessary
- Monitor portfolio at ‘frequent’ intervals
- Rebalance entire portfolio to maintain ‘desired’ Asset Allocation
Overall, Equity as an Asset Class is a must for any portfolio!