How to Grow your Wealth by Investing in Equity

Back in April 2008, a 23-year old engineer started putting 10% of his salary every year in “equities”. Over the next eight years, his 5.5 lacs become 13.5 lacs, multiplying his wealth by two and a half times. Today, he is one happy 30-year old.

But wait, you’d say. Didn’t you say my wealth will grow three to five times when I invest in equities? Two and a half falls a little short of that claim, don’t you think? And what are these magical ‘equities’ anyway?

What is Equity?

Well, to put it very very simply, Equity implies Ownership. You may not be an owner in the sense that you can dictate what goes on in the company on a day-to-day basis, but you are entitled to a portion in the profits of the company if it chooses to distribute the profits through dividends. 

Confused? Let’s take an example.

Suppose company ABC Inc. wants to raise money to run its business. It goes to the stock market and says that it has divided itself nominally into 100,000 shares. Now, you hear this news and you go ahead and buy 1000 of these shares at their market value.

So, you are now a 1% owner of the company ABC. If a year later ABC wants to share its profits amongst its owners, rather than reinvesting those profits for higher returns, you are entitled to receive 1% of whatever the profits are. Hurray!

Now, usually, the returns through dividends are not that much and that is not what we were referring to when we said it will multiply your wealth. The real money is in buying, holding and selling the shares themselves. 

Compared to today, the company whose shares you are holding will either go uphill or downhill in the future. Depending on how well it does, the value of the company in the market will increase and as a result, the value of the stock you are holding will go up too.

Now imagine that instead of one, you hold stock of multiple companies through a mutual fund. So the total value of your equity investment will go up depending on the overall performance of these companies taken together. Over time, once the value is high enough for your satisfaction, you can sell it off and get your money.

In the remainder of this article, we argue that if you are patient enough, you can multiply your money by up to 5 times through this process. Please note here that we are discussing stock or shares in a publicly listed company like Infosys. However, equity can be in a private firm as well. 

How to multiply your wealth by 5 times?

OK, now that you understand equities a little better, let’s get back to our engineer friend’s investments and see why we made the outrageous claim.

When he started in April 2008, he put a total of 40,000 in a top-rated equity mutual fund. Every subsequent year, accounting for a 15% increase in his income, he put in more and more money in that equity mutual fund. You can see in the table below how much each of those amounts has grown to today.

As you can notice, Equity rewards Patience. The investments in 2008 and 2009 have increased by more than four times. This is what we meant when we said that equities could grow your wealth. If you stick to it long enough, your rewards could go up by 5 times.

How does equity do compared to other investment opportunities?

We ran an analysis by taking the same investment amounts and checked how much our friend’s money would have amounted to had he gone for the other options.

** Interest rate of long-term Bank FDs, greater than 3 years, was considered for analysis

As you can see, his choice of putting his money in equities has far outstripped the other options like Gold, Public Provident Fund (PPF) and Bank Fixed Deposits. 

On top of that, Equity Investment is not risky. 

Are you kidding me? The stock market goes up and down all the time!

Yes, it does, but we are talking long term here — upwards of 5 years. Individual companies may go down real bad, but a good equity mutual fund typically gives you good returns overall. If you stay disciplined and don’t get worked up each time your investment portfolio goes down in notional value, you will see that equities will reward you, unlike any other investment choice. 

This brings us to the big daddy of all questions:

How can you invest in equities?

If you are sold to the idea that equities are a good enough investment choice for you, there are several ways you can go ahead and do it. You can:

• Buy units of equity mutual funds
• Purchase stock of a listed company from BSE or NSE
• Invest in your friend’s startup

We have discussed each of these in greater detail in the subsequent articles of this section. Do check them out. 

And yeah, most importantly, Happy Investing!

If you liked the article and are sold to the idea that equities can increase your wealth 5 times over, do recommend this article to the people you care about.