Salary, interest income, rent income and business income. Think of the businessman – he pays you your salary, he pays interest on loans taken, he pays rent on premises he uses and then he makes his business income – after paying everyone else. His income is not steady – some years he makes a lot of money, some years less. Some years he makes losses. But at the end of the day, who are the richest set of people? It is the businessmen. Not salary earners. Not landlords. Not bond owners. The world over, when you look at the richest people, it is always businessmen.
Businesses create wealth. Owning a piece of a business means owning a wealth creating asset. Equity is nothing but a piece of a business. An equity fund is a collection of such pieces of businesses, carefully selected by experts. Just as businesses have good years and bad years, your equity fund will also have good years and bad years. Just as businesses report losses in some years, your equity fund will also report losses in some years. But ultimately, just as businesses create far more wealth than salary, rent and interest, your equity fund can create a lot more wealth for you over time, than other assets that also generate returns.
Think of equity as your 3rd child
Most families have two children. We spend a lot of money over a 25 year period in educating our children, providing for all their needs, marrying them off – in short, getting them well settled in life. It is good investment practice to think of equity as the 3rd child and put in the same amount each year into an equity fund that you spend on one child. Do that for the same 25 years. After 25 years, this 3rd child will grow in to a decent corpus to look after you very well for the rest of your life.
Informed Investor is a Happy Investor