The Sensex hit an all-time high on Monday, making retail investors pause and think of investing in equities. But is the Sensex or Nifty the true barometer of this exuberance?
The Sensex consists of 30 stocks with varying weights and the Nifty consists of 50 stocks. In the Nifty, three stocks — Infosys, ITC and Reliance — have a weight of about 25%, and eight top stocks have a weight of over 52%. The rest 42 have a weight of merely 48%. What does it mean? Price movements in the top eight stocks influence the Nifty disproportionately.
As the composition of stocks constituting the Nifty keeps changing, an investor who puts away money in equities directly should build a portfolio that is oblivious of the indices.
Moreover, they should look at an investment horizon of over five years and ignore the daily movements of the Sensex or Nifty.
The most important things an investor should look at before investing in a stock is the company’s management and corporate governance. Then they should look at the products, cash flows, returns on equity and on investment, debt-to-equity ratio and the P/E ratio. Investing is a marathon, and a key step to success is not following the herd. Step aside, understand the dynamics of the economic outlook vis-a-vis the company and decide on long-term investment.
After investing, create an exit strategy by fixing a target for booking profit or losses as the case might be. Do your homework towards finalising a checklist. Various studies have shown that investors often get the stock right but when it comes to booking profits, they fear exiting. Always remember, when you sell, you make either a profit or a loss.
What determines your success at wealth creation is the execution part. Many a time, you will face situations where the market has rallied but your stock hasn’t. You might get frustrated and exit the stock. As if that were not enough, the stock rallies after you exit it. This is where a sound exit strategy will come in handy.
If a stock is not doing well in the short and medium term, but the fundamentals of the company are sound, stay invested in the stock. Monitor the stock at regular intervals. When it comes to stock investing, there is no right time to invest. Remember, it is the time in the market, and not timing the market, that will create wealth for you in the long run.
Understanding your risk profile and doing suitable asset allocation is key. Do not look at your peers’ investments and returns as the investment needs of each individual are unique.
Pen your investment goals, the time horizon and the anticipated returns. For investments with a horizon of over five years, equity should be the asset class. Look at companies with growth potential and low debt on their books.
Remember, volatility is not risky. The sooner you understand this difference, the better your investment strategy. Smart investors always take advantage of the volatility to multiply their wealth.
* The writer is founder and managing partner at Zeus WealthWays LLP