In the past two years, participation from retail investors in the markets have increased dramatically. According to an article in Business Today, over 1 crore Demat accounts were opened in 2020 which is a record growth in the number of Demat accounts in a year.
This underlines the increasing belief in the capital market and their performance compared with other avenues of investments.
While many individuals have started investing in the stock market, some are still skeptical.
For them, we’ve listed some benefits of investing in capital market in 2021:
Rising stock markets
When markets move upwards, savvy investors prefer to take advantage of them. Investments in shares of fundamentally strong companies tend to do well in the long term. In the past one year, shares of such companies have been in demand. There are always periods of extreme volatility in markets and as a result indices correct themselves in a shorter period. But experienced investors do not stay away from markets during volatile periods. In fact, they use volatility to their advantage. Historically, it has been observed that long-term investors benefit from investing in a rising market.
Better returns
Globally, central banks have cut interest rates and infused liquidity in the markets. The motive behind this is to prevent the economy from slipping into recession caused by lockdowns. When money is cheap, consumers spend and this leads to more demand for goods and services. And revival of demand means revival of the economy.
Low interest rates also help corporations borrow money to expand their businesses. Capital expenditure or expansion generates employment and provides business to sectors which cater to the demand arising out of expansion. As a consequence, the economy is pulled out of recession. However, when interest rates are low, investors find it unattractive to invest in low interest paying bonds. Such risk-averse investors look for high returns on their investments.
Today, investments in capital markets are considered rewarding by many such investors. They invest in high dividend yield stocks to earn higher returns. A dividend yield is calculated by dividing the dividend payout per share with the price of share. There are some investors who buy medium-term government securities to earn decent returns. As more and more investors turn to the capital market in search of higher returns compared to that offered by short term fixed income investments, flows in the capital market are likely to grow considerably. These flows will also increase the average return of various investment avenues in the capital market.
Beating inflation
Developed markets have been facing energy crisis and supply chain challenges since September 2021. Though central bankers are hopeful that inflation may come down soon, the reality could be slightly different. If inflation stays sticky and interest rates do not move up to compensate savers for high inflation, then the capital market in 2021 becomes an effective investment avenue. Investing in stocks with a long-term view tends to generate returns that comfortably beat inflation.
Post tax returns
Investing in capital markets with a long-term view serves two goals:.
1. Generating high returns.
2. Saving taxes on gains.
When individuals evaluate various investment options to multiply their savings, they consider investment avenues which help them save on taxes and also grow their wealth and the capital market offers just that!
Diversification
Low interest rates and supportive monetary policy by the Reserve Bank of India has led to increased supply of money. The government has also increased spending. There is direct transfer of money to certain segments of households. These factors have resulted in high liquidity in the economy. This liquidity is chasing various assets. Some investors have invested in shares, some in real estate and some in gold. No wonder, we have witnessed prices of all asset classes – stocks, bonds, gold, and real estate going up in CY2020-CY2021. Though prices of gold have come down in CY2021, for most of the investors investing in well-diversified portfolios, the last few months have been rewarding.
Such a situation of all asset classes doing well may not last forever and such periods of boom are sometimes followed by periods of sideways movements in prices of asset classes. Many investors are experiencing this situation now with regards to their investments. It is a tricky situation because investors may be unable to predict the next set of companies or the next asset class which will do well. In such a situation, smart investors maintain a diversified portfolio. They invest across asset classes. They take the capital market route to achieve exposure across asset classes. Also, there is ample liquidity in secondary markets which makes it easy for investors to exit and enter markets at any point.
In the light of all these factors, it is beneficial to invest in the capital market in 2021.
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