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Investing In India

Monday, April 07, 2014
By Raghu Kumar

Raghu Kumar is Cofounder of RKSV

Intelligently Keeping The Long Term Picture In Mind

Here is a staggering statistic that many might find hard to believe: out of India’s 1.2 billion population, only 1.5% of the population is participating in the stock markets in some way or form. In the US, that figure is closer to 40%.

Indians have been known to be risk averse when it comes to investing. But that does not explain why there is such a glaring lack of investor awareness. Simply put, most of us are not aware of the fact that investing in the stock market is one of the best ways to build wealth in the long run in a relatively conservative way.

Why is it that less than 2% of the population invests in the stock market? We are constantly bombarded with banks encouraging us to participate in fixed deposit schemes- they tend to produce anywhere between 7-9% annually. Surely that’s a better decision than to invest in the stock markets, right?

The answer is that, sadly, a combination of misinformation, high brokerage rates, and a lack of investor awareness has led to the dismal statistic. The reality is that if one were to invest in the stock markets, probability dictates that he/she would fare better than through virtually any other low-risk investment.

Keep the Long Term in Mind
If you have watched the movie Guru, you would know that the movie is loosely based on the depiction of the rise of Reliance Industries  and its founder, Dhirubhai Ambani. If one had purchased Reliance Industries shares in 2000, those same shares would have appreciated 475% through 2014. In return, if one had placed their funds in an FD and earned 8% during the same time period, they would have earned just 194% return on investment.

Keep in mind, companies in India generally pay dividends as well to investors. Although this can adversely affect the share price of the stock (which is why certain companies like Berkshire Hathaway and Google in the US do not pay dividends), this is an increase in returns. Generally speaking, when a company issues a dividend, the overall return is calculated as:

Return on investment = [ (end price - begin price) + dividends received ] / begin price.

Simply put, it is generally a good idea to invest in the stock market versus a fixed deposit scheme or other types of investment schemes since, in the long run, fundamentally sound firms will outperform schemes such as Fixed Deposit and Recurring Deposit schemes.

How to Get Started
One of the best ways to get started with investing is to ensure that you are paying little to no brokerage and unnecessary fees to your broker. Brokers in India generally do not have much of an incentive to lure investors since they generate little brokerage (investors do not place many trades, while active traders do); that is why investor awareness is lacking. If a broker does happen to promote investing, there is a good chance that their brokerage fees will be high; this, in turn, discourages the investor after a few months due to the brokerage fees wiping out any profits he would have otherwise made.

Secondly, it is important to begin with the basics. Starting with fundamentally sound, blue-chip companies that have stood the test of time is a great way to begin investing. Learning the basics of risk management and starting out slowly in a structured, systematic fashion provides many benefits: it is less risky (versus investing in mid-cap or small-cap companies), it gives you more time on your hands, and it saves capital. Due diligence, practice, and discipline is built over time.

There is the famous saying “Rome was not built in one day”, which alludes to the idea that patience is required to achieve success. That being said, the Romans built the Colosseum, one of the greatest monumental structures in the history of time. They built the Colosseum in less than 10 years using the most efficient and advanced techniques of their time.

The same, exact analogy can be applied to investing.

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