WHY IS STOCK MARKET THE BEST INVESTMENT TOOL?
The people like to stay away from the stock market because they think that it is a risky investment option. But the real reason behind it is our attitude, greed & fear, financial illiteracy, and the decisions that we make are influenced by the emotions. Hence, it leads us to the loss-making traps. However, it is a wrong belief.
Building the portfolio according to the risk appetite and thinking before investing is the key ways to earn returns from the stock market, even if you are a beginner. Here, in this article, we help you to evaluate the reasons why the stock market is the best investment tool.
#1 HELPS YOU FETCH HIGH RETURNS
Investing in equity through the mutual funds or directly through the shares can help you to leverage the power of compounding. Though the equity investments are volatile in nature it is best suited for achieving the long-term objectives. Equity asset class offers the best inflation-adjusted returns over a long period of time. Here’s a chart showing the kind of returns offered by Bank FD, Debt Mutual Fund, and Equity Mutual Fund.
#2 BENEFITS OF DIVERSIFICATION
A major benefit of investing in equity is disciplined diversification. Even if one bank stock falls or does not perform well, there will be another stock that can rise up and compensate for the loss. However, the investor needs to select the right portfolio or take the help of an expert advisor. To diversify your portfolio, you need to spread your eggs in the different basket to reduce the overall investment risk. These should include the mix of growth stocks (investments that offer high returns but have high-risk level too) and defensive stocks (they are affected less by the volatile market conditions and offers low returns).
#3 BEATING THE INFLATION
As said earlier; the conventional mode of investments doesn’t help us to battle against the inflation rate. Conventional modes meaning Bank Deposits, FDs, Bonds or Gold. It nullifies the growth of wealth. That’s why it is important to factor the inflation rate. When compared to the stock market, FD’s don’t offer high returns. They are just a decent mode of investment that offers security.
In case of stock, you buy it at a lower rate and sell it at a higher value. For instance, if the inflation is up by 5% and the real economy grows by 5%, then stocks can match the returns as a whole of 10%.
#4 BENEFITS AFTER RETIREMENT
Retirement brings in a lot of physical, mental and financial challenges. Though the investments in FD and post office is foolproof and will offer you a guaranteed return in the future, there are a few schemes that can offer you good returns one among them was Senior Citizen saving scheme, but the stock market offers different kind of mutual funds with nil tax liability. Here’s an example for the same.
#5 ALTERNATIVE FORM OF INCOME
One of best benefit of investing in the stock is apart from the regular returns, the investor will get regular dividends on the stocks. This can be a good alternate source of income and the best part of it is it is not taxable. In general, the blue-chip companies offer dividends which perform better than rest of others.
The benefit of the stock market is you can withdraw the money anytime you wish. Good investors’ research before investing and allocate the amount according to the current market trends. Moreover, the mutual funds help you to invest regularly and automatically with a fixed amount every month, and you can even save tax under the section 80C by investing up to Rs 1.5 lakh in the equity mutual funds.
In the end, we would like to conclude that investment in the stock market is worthwhile, provided you look into the size of the opportunity that company is addressing, growth the company is referring to and the ability to generate cash flow and return on equity. While the investments in FD offer certain advantages like guaranteed returns, low risk, and tax benefits but it doesn’t have the power to beat the inflation rate, low liquidity and FD’s are not completely non-taxable.
Taken all these reasons together we can safely say that stock market trumps other conventional forms of investment in terms of growing your investment and securing your future.