At Zerodha, we were keen to find out the reasons why people still hesitate to trade and invest in the markets. What really bothered us was the fact that, a vast majority of Indian families are still hesitant to accept equities as a source of serious long term investment. This is despite the fact that the Indian equity markets have generated the best returns viz- a-viz any asset class over a rolling 10 year window basis. In our quest to gain an insight into the people’s mental framework, especially while making investment decisions, we decided to conduct a survey.
The survey was targeted at people who had not explored the markets yet. Needless to say, a large number of people participated in it. Post the survey we tabulated the results to find out the top three reasons that prevent people from participating in markets, and they are –
1) People expect an assured return from the market
2) They believe they lack the required knowledge to invest/trade in the markets
3) Most people believe they do not have a sizable corpus to invest. Here are some of my thoughts with respect to the above three points.
Expecting an assured return from market is as good as expecting Rahul Dravid to smash continuous sixes in a T20 match. We know Rahul Dravid would not smash sixes, but we also know Rahul Dravid is a steady performer!
Likewise markets in the short run may not give assured returns, however if you give it time, the short term volatility outbursts can be digested and a certain amount of return can be
‘expected’. In fact if you are a savvy trader, you can convert the short term market volatility into highly profitable opportunities.
Lack of knowledge is understandable and it is easily solvable. If one wants to invest today and reap its benefits tomorrow, one has to do at least a bit of hard work today. Thanks to the internet, there is abundant information available online that will give you sufficient knowledge to get started.
Lastly, the argument of not having enough corpus/funds is perhaps the biggest mistake people do. Let me illustrate why.
Assume a young 24 year old guy, has just started earning. His job pays him Rs.20, 000/- per month after all taxes. He is a lavish spender and spends all the money he earns. Looking at his lifestyle a good friend of his advices him to save some money for the future. Not wanting to save much, reluctantly he decides to set aside just Rs.75/- per day for his future needs. Further, considering his good friend’s advice, he decides to save Rs.75/- everyday for the next 20 years. They decide that the money is best invested in an equity mutual fund since historically a good equity mutual fund has generated an annual return of 15% upwards.
Now here is my question to you – Can you take a guess how much Rs.75/- invested at 15%
annually could grow to at the end of 20 years?
In fact I asked this question to a colleague of mine and he made a simple calculation which goes like this:
“The guy saves Rs.75/- per day or Rs.2250/- per month. He invests for the next 20 years, which means he invests close to Rs.540, 000/-“i.e. Rs.2250 per month x 12 months x 20 years. After considering the 15% return he simply declared “At the most his money would have grown to Rs.900, 000/- definitely not more than that.”
The reason I asked this question to my colleague was to observe how he would treat the
15% annual return number. He easily missed the point that the money is ‘compounding’ at the rate of 15%.
If you are wondering how much Rs.75/- per day would grow to when invested at 15% per annum for the next 20 years, then hold your breath – it would grow to a whopping Rs.33,68,789/-!
Can you imagine that? At just Rs.75/- per day, which, by the way is less than a movie ticket at a multiplex you can amass wealth close to Rs.34 lacs! How easy is that? This is what compounding does to your money, it starts growing exponentially!
So dear friends, you ought to believe in the power of compounding and start investing today, no matter how big or small. There are many of you who can afford to save more than Rs.75/- per day, so I would suggest you to take the plunge towards long term wealth creation. Investing is not just good for you but for people dependent on you.
Vice President – Research & Education Services, Zerodha