Pros And Cons Of Stocks And FDs
Every retail investor wants to put his hard earned money to work to maximum potential. Investing in debt instruments, like fixed deposits or NSCs is what everyone knows about. But the problem is, no debt instruments can give you rock star returns. Inflation, aka "Rising costs" eat up most of the interest benefits that you get from these investments. Typically, interest rates on FDs, NSCs and other schemes are 6 to 8% and same is the rate of inflation.
The returns from debt, can at best give you the same (or a little better) purchasing power, after 10-15 years. They can never give you AWESOME returns that can make you feel great about yourself. The only way where you can expect really AWESOME returns is the Equity markets.
1. Sensex has given around 16% per anum returns in last 10 years. So if you had invested 100,000 Rs. in Sensex companies when Sensex was 4000 (around 1998-2002) and sold now when it is around 18000 (2009-2010), you would have received a healthy sum of Rs. 4.5 Lakhs. The same amount, if invested in a 7% FD, would have given you only Rs. 1.90 Lakhs.
Of course, this is only "capital gain". It doesn't include the bonus that you get from "dividends". Some companies offer a great "dividend yield", sometimes as high as 3%. Most good quality stocks can give you dividends in the range of 0.2% to 0.5% on your stock price.
Of course, what matters is "Choice". If you could pick an Infosys or a Bharti Airtel 10-15 years ago, you would be filthy rich even by investing smaller amounts in these scrips.
But, if you buy overvalued stocks at the peek of the bull cycle, you are bound to doom! e.g. Suzlon, which is quite a good company, was trading at around Rs. 400 levels (after adjusting for splits) and now (2010) languishes around Rs. 60 level.
For most people, mutual funds are a safer route. They generally can't give you muti-bagger returns, but can outperform the basic index (Sensex or Nifty) over the long term. But, even in MFs, there are winners and losers.
The truth is, whatever the marketers may tell you, that a lot of people make wrong decisions in markets, and lose money. Only a handful of companies become "blue chips" over the long term, and the choice of what you buy matters a lot.
If you prefer doing your own research, and are investing for long term, try to go through annual reports of the company, rather than relying on brokerage reports. If you want to make your own decision, I would say, only invest in the sectors that you understand. E.g. it is very difficult for a commoner to understand pharma companies. Their businesses typically rely critically on law suits and patents, which is a high risk proposition. So invest in them only if you understand the industry as a whole.
If you are looking to invest in mutual funds, research their historical returns. Also try to have different kinds of funds in your portfolio. Just like stocks, mutual funds that hold these stocks carry similar risks and rewards.
Article Source: FxTradingStock.com
About the Author
Moneyvidya.com is an Indian website that helps you choose the best stocks to buy. It is done by tracking the performance of all the stock tips on several parameters like profits and consistency.
by: Sumedh Inamdar
Total views: 39
Word Count: 530
Date: Mon, 5 Jul 2010
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