Investing in FDs, NSCs and PPF is everyone's default choice. Typically, the returns that you get range from 6% to 8%. Generally speaking, that is the level of inflation in India. In fact, in last 1 or 2 years, inflation has risen to double digit figures. So, generally speaking, the debt instruments simply cannot give you returns that can make you feel smart about yourself over the long term. They can simply "protect your money from inflation" so that you get roughly the same amount of "purchasing power" even after 20 years from your buck.
So, if you want to have non linear returns from your money, shares aka stocks is the only long term way that has delivered returns to WISE investors over the years. The term wise is very important here, as the difference between returns received by the best and the worst investors are as different as the sky and the earth. Here are some points to ponder:
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.
3. Picking winners - If you had bought Bharti Airtel (BOM:532454) around 10 years ago, it was trading at around 12-15 Rs. after adjusting for splits. It now trades at around 300 Rs. level. So your sum of 1,00,000 Rs. would be around 20-25 Lakhs today!
4. Picking losers - There is of course a risk factor to equity. For example, if you had bought DLF in early 2008, it was trading at around 1000 Rs. and now it languishes at around 300 Rs now, after 2.5 years. So your sum of 100,000 would have become a measly 30,000 Rs! In the same period, a 7% FD would give you a relatively healthy total return of around 1,18,000 Rs.
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.
So the fact of the matter is that there are varying degrees of risk involved, as far as equity is involved. When you choose the right stock, you can get enormous returns, but only 5-10% of the listed companies are long term winners. So, it's very important that you rely on a very sound stock advisor, who can show his performance track record as a proof, rather than marketing gimmicks that are very prevalent in India. That's where tools like Moneyvidya come to picture where you can get
Indian stock tips by analysts who have transparent track record of their performance.
My advice to people who like to make their own decisions, and not rely on mutual funds, is to invest only in companies they understand. If you are from an IT background, you can understand the basics of IT business, and understand what they are talking about in their annual reports.
Same is the case with mutual funds. The best mutual funds have outperformed their respective indices, but many of them don't. Look for long term "NAV charts" of the mutual funds before you invest. It is best that you diversify your mutual fund portfolio with different kinds of funds. Index funds carry less risk, but they typically can't give you huge returns. A mid cap fund, if chosen well, can certainly outperform the index, but in bearish markets, they typically fall more than the index funds do.
