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Equity Investing And Return On Net Worth

 One of the biggest advantages of listed equity investing, either through mutual fund route or buying stocks directly - can be done in small ticket size.

Is it? Or is this flexibility resulting in sub optimal investor net worth growth? In good many equity mutual funds, one can start dabbling in stocks for just INR 500 a month. And mostly it remains at such piddling amounts.

Ok, maybe i am exaggerating. Say this goes by 20 times and monthly investment rises to INR 10k per month in due course. Rarely equity investment amount would be pegged to monthly earning capacity and exceptionally to overall savings (net worth?). No surprises by the end of the investment period, equity investing did not make much difference to overall net worth as return on total wealth did not go up by much as compared to fixed rate investments.

A quick example: Say you have INR 25 Lacs to invest for 20 years. Assuming equity investment delivers 12% while fixed rate investment delivers 6% annualized ROI. Closing corpus after 20 years:

-       With 10% equity allocation: Approx INR 90 Lacs. But the real issue here – while equity gives high returns of 12%, your over portfolio ROI will be just 6.60%. A small equity allocation didn’t make much difference in portfolio return

 

-       With 25% equity allocation: Approx  INR 106 Lacs. Overall portfolio ROI rises to 7.50%.

 

-       With 50% equity allocation: Approx INR 140 Lacs. A 40% increase in equity allocation jacks up closing corpus by more than 56% and overall portfolio ROI goes up to 9%. This rate of return on overall portfolio will mostly beat inflation hands down and then some

 

My opinion – peg equity allocation to your overall liquid net worth and give your wealth a fair chance to grow at reasonable rate of return. 

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