How Equity Can Help You Retire Rich?

9th September 2021 - 03:09 pm

When you talk of equities, you normally hear the stories of how stocks like Wipro or Havells have created wealth over the years. For example, an investment of Rs. 1,000 in Wipro in 1980 would be worth nearly Rs.60 crore today. Similarly, and investment of Rs.1 lakh in Havells in 1997 would be worth Rs.32 crore today. There are scores of other similar stocks like Eicher Motors, Escorts, TVS Motors, TTK Prestige, Symphony etc which have multiplied anywhere between 50 times to 200 times over time. But, let us first shift to the core idea of why we are discussing all these stocks when we talk about retirement.

The 3 considerations in retirement

Irrespective of when you plan to retire, it is always better to start planning early. That is what retirement planning is all about. Here are the 3 key considerations.

You need to take a long term approach towards planning your retirement because that is when the power of compounding works in your favour. The longer you hold on to quality investments, the more the returns compound and increase wealth.
Retirement is all about making small money work hard. That is only possible through equities. For example, an equity fund can give returns of around 13-15% on an annualized basis. You can’t plan your retirement with a 6% liquid fund.
For planning your retirement, risk is as important as returns. You can argue that equity is high risk but if you look at quality portfolios of equities, they tend to almost negate downside risk if equities are held for a period of more than 7-10 years.

But, how can equities help us compound retirement corpus?

It is hard to fathom the power of compounding but we can grasp that better with a hypothetical illustration. Let us look at how yields and time make a huge difference to your retirement corpus creation. Since lump sum investments are not practical for most people, let us assume that the investor does a monthly SIP of Rs. 5,000 under different options.

Investment	SIP Period	Annual Yield	Total Outlay	Final Value	Wealth Ratio
Liquid Fund – 1	10 years	6%	Rs.6 lakh	Rs.8.24 lakh	1.37 times
Liquid Fund – 2	20 years	6%	Rs.12 lakhs	Rs.23.22 lakh	1.94 times
Equity Fund - 1	10 years	14%	Rs.6 lakh	Rs.13.11 lakh	2.19 times
Equity Fund - 2	20 years	14%	Rs.12 lakhs	Rs.65.82 lakh	5.49 times

Two things are evident from the above table. Firstly, the liquid fund with similar monthly contribution over 20 year has a lower wealth ratio compared to equity funds over 10 years. That means higher yield matters and that is only available in equities. Secondly, the equity fund creates a higher wealth ratio over 20 years than over 10 years and that underscores the importance of long term holding. Therefore, retirement plan must focus on a diversified equity portfolio held over the long term.

Equity versus equity funds; why not both?

Quite often investors get confused whether they should opt for equity funds or direct equities for their retirement plan. Equities can give you multi baggers but selecting multi baggers is not a cakewalk. That is where equity mutual funds can offer a trade-off. But the best way is to combine the power of direct equities and equity funds. Here is how!

Equity funds should be used for retirement hygiene factors; that means you need to run your home and your regular expenses post retirement and it has to be predictable. Here equity funds can play a much bigger and meaningful role.
How about the add-ons post retirement. For example, you may plan a vacation or may want to pursue other aspirations or may want to extensively travel. These are add-ons which you can plan with direct equity investments. Do your research and stick to quality stocks for the long term.

The fact is that retirement planning must be a lot more nuanced. Either ways, being a long term goal, your focus must be on the power of equities. Nothing gels with long term retirement goals better than equity investments.