Investing in equities has a risk-reward association with it. Before you take the plunge, here are a few things you need to remember
Investing in equities is highly risky, but at the same time, can get you attractive returns over the long term. Direct investment in equities is possible by purchasing shares of companies listed on stock exchanges. You can also enter equities by investing in mutual funds, getting into portfolio management schemes or playing through the derivatives market by taking exposure to futures, options and structured products. With such a plethora of options available, it is sometimes confusing as to what is the best mode of entering the equity markets.
The mode of investing in equities depends on your risk tolerance and risk aptitude, in addition to your goals and financial situation. Those with high risk appetite would wish to invest directly in stocks or take an exposure to derivative products. In these methods, although the returns would be high, the risk is also very high, which may sometimes result in erosion of your investment.
The risk-averse would prefer to enter equities by investing through mutual funds. Here, although mutual funds mirror the stockmarket performance, you may get slightly lower returns than if you would have invested directly in high-return stocks.
As a long-term strategy, it is best to invest in mutual funds, especially if you do not have the time and knowledge for direct stockmarket investing. Here are a few things you must consider when you invest in equities:
Determine your risk taking capacity: As mentioned earlier, equity investments come with high risks. You may sometimes even lose out on your initial investment amount. Hence, you must think of getting into equities only if you are comfortable with the volatility associated with stock markets, especially over the short term. Equity exposure should be based on your goals, age and risk profile.
Align investments to overall financial plan: The objective and duration of your investment are important determining factors. Your investments should be aligned to your financial goals. Equity mutual funds are best suited for long-term goals, with duration of over five years. So, this is an important factor you must keep in mind.
Build a portfolio by investing in good performing mutual funds: It is normally recommended to stick to four or five mutual funds in different categories. You can invest in large-cap mutual funds as they are relatively safer. Considering your needs and risk profile, you can also take exposure in mid-cap funds and sectoral funds. Ideally, you should have a mix to diversify risks and also returns.
You should always do careful research and analysis before investing in any instrument. This holds good for investing in mutual funds as well. Check third-party websites, such as valueresearchonline.com or Morningstar.in, to compare fund rankings and performance. Although past performance does not guarantee future performance, you should check the long-term performance of the fund. Also, check other factors like the fund house background, details of fund manager, risk profile of the fund, etc.
Invest systematically: You can invest through Systematic Investment Plans (SIPs) to beat the volatility in the stock market. Although your returns may be a bit compromised when markets are rising, the SIP route can be very beneficial in falling markets or volatile situations. Invest for the long term to get the benefits of equities. Similarly, you can consider withdrawing systematically as well, using Systematic Withdrawal Plans, which can again reduce risks.
Check performance regularly: Most people invest in equities, but forget to check the performance regularly. Equities are not like fixed deposits where you can invest and forget. You need to constantly check how your investments are faring, and need to get rid of the poor performers to improve returns of the portfolio. It is not advisable to churn your portfolio too often. Nevertheless, you must proactively keep a watch, at least once in three months to cut losses, wherever possible.
Automate investments: Nowadays, with all facilities pertaining to equity investments being available online, you must take efforts to activate online transacting. You should also sign up with your fund houses or brokers to get updates on email regularly. You may have to fill in additional forms and documents. However, this can help you save a lot of time over the long term and also make investing easier.
Use the help of a financial planner: Equity investments can be simple with some research, knowledge and time. However, if you do not have the time or knowledge or if you are confused with your holdings, you can hire a professional planner or advisor who can help you in deciding your investments based on your goals.
The author is CEO, BankBazaar.com