Catch ’em young and teach them equity

Direct equity investment is not everyone’s cup of tea. There are people who understand the risk and take the time and effort to invest in shares with the aim of earning higher returns than the savings bank interest and fixed deposit schemes. Equity is also a hedge against inflation and for those not interested in direct equity, there are always the mutual funds.

Money is not a subject discussed in most homes; there are always exceptions. However, the kids are encouraged to work and save money and the money is usually deposited in a savings bank account or in a cookie jar and the saved money is later spent to buy something. There is no teaching about personal finance in schools and in graduation and post-graduation, we learn how to value companies, corporate finance and international finance; but how to manage our own balance sheet is often self-taught and often painful lessons.

After my first year of work, all I had to show of my earnings were a cupboard full of clothes and a new car on EMI. I  was living from pay-check to pay-check and all the money got divided between expenses, credit card bills and EMI. There was no savings, let alone investment. It’s only when one makes a conscious decision to get out of the debt rut and think about building a corpus does the interest and the learning about personal finance begin. By then you are in your late 20’s. Then you discover compounding, equity and mutual funds and set about making mistakes and learning with an aim building a corpus for the future; all the while wishing that we started earlier.

Equity investments are risky, to be handled with care
Equity investments are risky, to be handled with care

Kid’s pick up saving and investment habits from parents; through again, there are exceptions. Our kid has a bank account, the interest rate is 4% and applying the rule of 72, at the current rate, the money will double in 18 years. Equity mutual funds offer higher returns and all that is required is setting up an SIP from the bank account to the MF scheme, but choosing a MF will be an important decision. I am not going further into investments, but we have encouraged our kid to invest in direct equity.

It’s a once a year decision-making and he has not seen a balance sheet or a P&L statement till now. The money comes from the cash he receives on his birthday from grandparents and other benevolent relatives. It is difficult to make the kid part with the money so, we sweetened the deal by doubling the money he is willing to invest. The amount is still very small, but it’s a good start. This was started 2 years ago.

His first purchase was the shares of the leading 2-wheeler company in India called Hero Motorcorp. It was an expensive buy. There was no beginner’s luck and the share rose initially only to fall later. But he discovered the concept of dividends and was interested in the news items pertaining to the company. There is not much thought given to the rise and fall in price month on month; only when the newspaper headlines scream a major jump or fall in the benchmark indices, is he curious to see how much his investment is worth.

His second purchase, next year was a major private sector bank called Axis Bank, which was quoting near its 52-week low, plagued by NPA worries and an impending CEO change. This time he had a few familiar names shortlisted and decided to buy something close to the 52-week low. This was a lucky purchase as with the announcement of a new CEO and hopes that all the NPA provisioning was done with; the share began to rise started making new highs.

This year once again, he had to make a decision and we were hoping to hear a third name to the list; but surprisingly he decided to buy more of Hero Motorcorp again. The company was quoting near its 52- week low but more important was the concept of cost averaging. His new purchase price was lower that the last one. Hero is still the leading 2 wheeler manufacturer in India and is a good long-term bet.

He has no knowledge of how to read the financial statements and has not yet learned the concept of intrinsic value. The investment decisions are purely made from watching the world around, listening to conversations and maybe news on media. Maybe not the best way. But the learning and interest is there and the companies selected are not contrarian bets or something out of the ordinary; they are large caps present in the day-to-day life in India.

This risk of losing capital is always there and so is the reward of higher returns. He is not allowed to sell in the sort term. Let’s wait and watch !!



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