The ongoing volatility in stock markets is making investors rethink their investment plans in equity funds. Many of these entered the stock markets in the recent past and hence this is the maiden meaningful correction for them. No wonder, falling stocks trigger ‘butterflies in the stomach’, but the past informs us that this can be an investment opportunity for a long-term investor.
Traditionally, investments in equities have been rewarding in the long term. For example, in the past 20 years ended on January 31, 2025, Nifty 50 TRI has given 14.4% returns. Put simply, the money has multiplied 14.6 times. Over the same period, Nifty500 TRI has given 14.7% returns, which has ensured that the money multiplies 15.5 times.
The compounding of money in stocks in the long term is possible because the underlying businesses of companies tend to benefit when the economy grows. Companies with pricing power tend to efficiently grow their profits and generate cash pools for shareholders. Along with growing profits, valuation multiples also expand and in turn reward shareholders. Hence, stocks have the potential to offer returns over the rate of inflation in the economy.
However, this long-term compounding in financial markets comes with caveats. Returns are not linear, as the economy in general, and business, in particular, go through phases of recession and boom. As the growth rate of corporate profits and investors’ sentiment keep changing from time to time, there can be periods of muted returns as well as boom phases. Second, not everything that is labelled as a stock does well in the long term. Some stocks go to zero, but some stocks emerge as multi-baggers. A basket approach hence should offer better risk-adjusted returns for investors.
Another aspect of equity investing, which makes it a challenging task, is the inherently volatile nature of the stock markets. Corrections, though short-lived, are inevitable. For example, since 1980, almost nine out of ten times, the Sensex has fallen 10% or more in a calendar year. Despite this, in three out of four calendar years, the Sensex has given positive returns.
Importantly, over this extended period, the Sensex has seen one or two falls of more than 30% in each decade. These include crashes caused by the Covid-19 pandemic, global financial crisis, dot-com bubble, and eurozone debt crisis. Going by this data, to make money investors must own professionally crafted baskets of stocks which need to be monitored and nurtured over a prolonged period.
Many investors do not have the time, skill, or willingness to identify, buy, and monitor their equity investments. Hence, crafting a diversified portfolio of stocks is a challenge for most investors. Such investors hence should look for professional assistance to manage their equity investments. Mutual funds can be one such regulated, low-cost, and convenient avenue for most investors.
Another benefit mutual funds bring to the table is that investors can take a piecemeal approach to their investments without compromising on the quality of the portfolio they get to invest in. Since stocks are volatile and most investors do not know the relative attractiveness of the stocks, they are better off investing in a staggered manner using systematic investment plans (SIP).
SIP helps investors buy more units in a falling market and as the economy and financial markets bounce back, investors see positive returns. Many of the best days to invest occur during a crisis. Investors must hold on to their investments in such testing times and let the situation improve and see their investments deliver for them.
Many investors wonder if a simple tool such as SIP can create wealth for them. Some numbers can offer clarity. To accumulate `10 crore at the age of 60 years one has to invest `15,000 per month, at the rate of return on investment of 12%, if she starts at the age of 25. But if she starts at 30 and 40 years of age, then the SIP amount needs to be hiked to `28,000 and `1,00,000.
To sum up, equities can compound money and build large wealth pools. For most investors, SIP in a diversified equity fund can be a ticket to wealth creation. So, start investing now and keep increasing your contribution to the SIP to achieve all financial goals such as a long foreign vacation, a child’s education, as well as retirement.
The author is Radhika Gupta, MD & CEO, Edelweiss Asset Management Limited.Views are personal
