Union Minister of Finance Nirmala Sitharaman, during the discussion on the Finance Bill in Rajya Sabha on August 8, 2024, said that India’s middle class is becoming increasingly smarter in their approach to savings.
Union Minister of Finance Nirmala Sitharaman lauded the middle-class’ interest in diversifying portfolios and their growing interest in stocks in her Rajya Sabha speech. But here are a few risks that the middle-class should be mindful of
Union Minister of Finance Nirmala Sitharaman, during the discussion on the Finance Bill in Rajya Sabha on August 8, 2024, said that India’s middle class is becoming increasingly smarter in their approach to savings.
Possibly hinting at stock market returns, she emphasised that middle-class families have recognised the potential for higher returns by diversifying their portfolios to other investment avenues. “Individuals are not sitting in post offices anymore, or going for a fixed deposit. Instead, they are looking for portfolios with better returns. They are also investing in property,” she said.
Sitharaman had earlier, in May 2024, mentioned the growing trust of the middle class in the equity market and highlighted the role of domestic savings in offsetting foreign portfolio investor (FPI) outflows in recent months.
But in spite of these encouragements, an investor should not overlook the perils of investing in equity. Experts advise caution in stock market investment, and recommend a long investment horizon of at least seven years. They also warn against overexposure to equities, emphasising the potential for steep and prolonged market downturns that could lead to panic selling and poor returns.
What Do Experts Say?
Avinash Luthria, a Securities and Exchange Board of India-registered investment advisor (Sebi-RIA) at Fiduciaries.in, a financial planning firm says that one should invest in equities thoughtfully and with due caution and diligence.
“Everyone imagines that they are more courageous than they actually are. If a person had 80 per cent of their net worth in equity in 2008-09 when the Nifty 100 TRI Large-Cap Index crashed by 61 per cent, then their net worth would have dropped by 49 per cent. Apart from billionaires, almost everyone will panic in such a situation and sell most of their equity holding to prevent any further fall in net worth. This would have resulted in permanently locking-in very poor equity return,” says Luthria.
Across the world, there have been periods when the market took decades to recover from a crash and catch up with inflation.
“For the US, it was 16 years while for the UK, it was 22 years, and for France, Germany and Japan, it was 50+ years,” Luthria adds.
Says Sudheer M., Sebi-RIA: “When investing in stocks, it’s not advisable to have an investment horizon less than seven years. If your investment goal is less than five years away, you should either not consider stocks at all, or allocate only a small portion of your investment to them. For an investment horizon of 7-10 years, stocks can serve as a good hedge against inflation, but the percentage of your investment allocated to stocks should be based on your goal duration and risk profile. If you have a low-risk tolerance, it’s best to avoid small-cap stocks completely.”