Stock Market = Casino ???

I just happened to luckily spot Era’s post on her preferring Sleep over stocks and most comments on that post too were about people avoiding stocks and being skeptical.

A lot of people are weary and some people even think stock markets = casino’s !!!!

Not really ! seriously they are not as bad a place as they are being perceived.

Lets get a few things straight. Investment and Trading should not be confused. Most people who try to trade end up losing money as they are speculating way too much instead of sticking to fundamentals and investing. In the short term sentiments, rumours, triggers work way too much, however, in the long run the fundamentally good investments will at most times give you returns. Before investing in stocks learn to keep things simple and straight.

More often than not it is not the way of investment that is looked upon as the mistake at but the place where money was invested in is looked at. A lot of people lose money because at the time of investment they did not exercise enough discretion.

Most people say they invest in Fixed Deposits. Every one should, but understand one thing, that while FD’s are a good and necessary part of our investment portfolio the interest they generate are Taxable. So when an individual who is in 30% Income Tax Slab does an FD at 9.50% he actually gets post tax returns of only 6.35%. Now in a day and age where inflation hovers in double figures, what your FD basically does is de-grow your hard earned money.

Don’t for one minute think that I am saying you should never do an FD. But just ponder on what I just said. FD’s are a completely necessary part of an Investment portfolio. However putting all your investments in such a low return yielding and taxable instrument is not the most prudent thing to do.

Secondly Public Providend Fund (PPF) – people invest blindly in it. Agreed, I also advise all my business class clients to invest blindly in PPF and secure the maximum permissible limit of Rs 1,00,000/- as PPF is one of the safest investments you can get. Safer than an FD, understand FD’s over Rs. 1lac are not secured as are normally perceived, however Nationalised and Private Indian Banks so far in their history have never defaulted.

The reason business class people should always invest in PPF is apart from giving tax free interest PPF is an investment not even the judicial court can touch. Incase a business man goes bankrupt and is in full debt, his family can still have the PPF money and not even the court can force him to pay his debts from PPF !

However, when it comes to a job going person, who is regularly having a PF deducted and also contributed by his employer he can always look at other options. Consider this, even if a job going person loses his entire wealth in stocks or somewhere else he can rest assured that next month his salary will come and take care of his basic needs. So in short a salaried person should have a greater risk appetite than say a business class person.

To evaluate your risk you could use this interesting piece I recently saw in Mint (fast becoming my favourite newspaper)

Now just hear these couple of stories :

Example 1. Investing in a good quality A Category Stock for a long term

When I first started trading somewhere in 2001-2002 a share of Reliance Industries Limited (RIL) would cost around Rs. 200/-. From them to till date RIL gave free shares of Rcom, Rnrl, Rel and Rcap when they split companies. Also they have declared a bonus of 1 share and so if you had invested say around Rs. 200 in one share of Reliance then you would have 2 Reliance shares now. Today price of one reliance share is over 800.

So effectively if you add 2 shares its 1600 + other free shares+dividends declared gives you a grand total of easily over Rs 2100/-. Fathom that, investing 200 and in 10 years get 10 times money ! πŸ˜€ πŸ™‚ πŸ˜€ πŸ™‚Β 


*This is just a rough calculation, actual return might be higher, this is just from my memory.

Example 2. A simple monthly Systematic Investment Plan (SIP) in an equity large cap Mutual Fund.

Had you invested Rs. 1000/- on the the 2nd of every month in HDFC Top 200 starting from 2nd Feb 2002 by now you would have invested Rs. 1,21,000/- and the value of your investment on 16th Feb 2012 would be Rs. 4,75,032.04/- !!!!!

Example 3. A Corpus parked in an Equity Mutual fund and regular monthly income withdrawn.Β 

Parking 9 lac and withdrawing 8% annually (8% of 9 lac is 72000 and hence we decided to withdraw monthly 6000)

Had you invested Rs. 9,00,000/- in ICICI Dynamic Plan (a mutual fund) on 17th Feb 2003 and made a monthly withdrawal of Rs. 6000/- each month. by now you would have withdrawn Rs.6,48,000/- and yet the remaining corpus in ICICI Dynamic plan on 16th February would be valued at Rs. 70,31,463.12/-

Cannot believe it ???

Go to MutualFundsIndia.com there is an SWP calculator and try to do that with ANY equity scheme more than 10 years old the results will amaze you. πŸ™‚

Now folks if you can show me any other place which has given higher returns with such a miniscule investment amount do let me know. Also these instruments are quite liquid.

However, folks do understand one thing very clearly, these things happened in the past are no guarantee to be repeated in future. But to get something you must be prepared to risk something.

If invested in wisely and smartly without getting carried by emotions and factoring riskΒ  Equity markets are a place to invest in ! πŸ˜€ πŸ˜€

Don’t just be weary and never tread the water, unless you step in the water you will never know how to swim. πŸ™‚ πŸ™‚

x-x

DISCLAIMERΒ  :

** Inflation at the time of writing the article has come down to below 7%

** Data taken from mutualfundsindia.com

** I am a Association of Mutual Funds of India certified Mutual Fund Advisor.

** I have also lost money many times in stocks, but I think I have become wiser after that πŸ™‚ πŸ™‚ :mrgreen: atleast I think so ! πŸ˜€

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9 thoughts on “Stock Market = Casino ???

  1. Ashwathy says:

    There are just too many numbers here to take in at one go. I need to discuss some of these plans with you at length !! My jaw dropped reading that ICICI Dynamic Plan 😯

    I had invested in some plans myself….and they give long term dividends…but I had no idea that there is a plan like corpus parked in an equity mutual fund (whatever that is)….where u can keep withdrawing and still get money at the end!

  2. My era says:

    Thank you for this post Hitchy.
    Ever since you guided me, I have been trying to educate myself on investments non-stop, thanks to you I could actually get atleast 90% of the post in my allergic to money maths brain , which in my belief is quite an achievement πŸ˜€
    As I requested earlier, please continue these financial posts, they are a great source of education for many of us πŸ˜€ πŸ˜€ πŸ˜€

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