Equity from an Informed Investor: 2

The notes here are aimed at long term investing & not trading.

In the process of defining the investor in you, the understanding would evolve.

Direct equity investment would mean investing into equity market, unlike Mutual Fund equity exposure, which is through an Asset Manager.

What are the attributes that will decide whether one would have direct equity investment or the MF route.

Firstly, it is important to define the traits of equity investment. Someone would opt for equity investment when he expects returns that would be more than fixed deposit rates and also inflation rates. It’s fair to say that the returns, a reasonable/realistic equity investor should expect be >15 % (collective portfolio). Hence, firstly let it be clear for a long term investor that it is not an investment option that should be looked like a Lotto lottery, the expectation should be defined that is fairly consistent & continual. Anything more than that is bonus for average equity investor. Kindly try calculating, even Tax free 14-15% CAGR earned in white collar clean fashion is a good figure.

Most investors would be aware that the single most differentiating aspect of equity class when compared to investments in other asset classes, is the potential loss of capital in equity. The second peculiarity of returns in equity is - the returns are not predictable over a short period, however it is collectively predictable over a longer period say 2-3 years of time. For example, take single stock, Godrej Consumer with CMP Rs 830 and expected growth of 18% - the price would be around Rs 970 after 1 year approximately. When will it increase within this 1 year (short term movement) is unpredictable - no one can tell. It could increase to Rs 960 within 2 months and then be range bound for the whole period or it could be range bound around Rs 830 for 9 months & then move in bunches. Understanding this is critical. More importantly, if you substitute single stock Godrej Consumer example with Portfolio returns, your perception will change.   

We have defined market expectations; in due course we will define investor traits.

Good Day,   

'This and That'