INVESTING IN EQUITY MARKETS – Necessity or luxury
Investing in Equity markets – is it a blessing or curse. There are many stories of successful stockbrokers suddenly one day going bankrupt. Sometimes hard earned fortunes are squandered on the stock market due to greed or dangerous speculation. Is it an advantage or disadvantage adjectives/ qualities could go on & on but the fact remains that in a growing economy it is a necessity first let’s understand what is the Equity market? Besides Equity, there are other markets such as Debt markets with products such as Government Securities (G-secs) Bonds (Government bonds. Corporate Bonds), Commercial Papers (CP’s) Fixed Deposits (FD’s) offered by banks/Companies etc. offering fixed or variable returns in a narrow band. Commodity markets wherein commodity derivatives dealing in future prices are traded.
Equity markets where a buyer is actually Equity shares of listed/ non listed companies either directly or indirectly. Directly could be through an Initial Public Offering (IPO) – Primary Market or through a Stockbroker – Secondary Market. Direct Equity can result in large gains/losses. Risk factor is high as the investment is linked to the fortunes of a single company. It requires expertise & greater involvement of time & effort in monitoring the investments. Indirectly is through Equity How to Invest in Mutual Funds (Pool of money contributed by a large no. of investors investing in equity shares with the expertise of a Fund manager & his team of share analysts). Typically a diversified Equity Online Mutual Fund Investment would generate 12-15 % returns over a 5-10 year horizon.
So whys is it a necessity? In a growing economy Inflation grows at 7-9 %. Inflation is a double edged sword. It increases demand which fuels growth of companies. This growth of companies reflects in their stock/share prices. The bad part is that prices of food, consumer goods etc keeps increasing year on year. The good part is that the share prices reflected in the Sensex or other Indices grow faster than inflation. So if an investor has a Portfolio with a good asset allocation (Debt & Equity, Maybe real estate & gold, he can generate a return (12-15 %) which can beat inflation.
So far so good…great theory. How to put in practice. Can the majority of investors benefit from this advantage of the Equity Markets Yes, but before this can happen, awareness & knowledge of the investors has to grow with the basic market knowledge being imparted at school level , Investor Portals , Investor education programs & growing no of CFP’s professionally guiding investors.Equity markets are like the proverbial fire. Use it well it can give warmth, useful energy. Following rules can give you good returns, create great wealth. Not following rules is like playing with fire. It can singe & burn. So let’s understand the rules.
1) Understand your risk appetite & have staying power – 15% erosion should not cause heartburn. A 30 % fall in stock prices should force you to panic & sell. You have to steel yourself, wait for the markets to recover & give you the expected return.
2) Allocate your assets – Do your asset allocation keeping in mind your goals, age & expected return
3) Beat volatility – Invest systematically either through SIPs (Systematic investment Plans) or STP’s (systematic transfer plans). Monthly investments average out the volatility & give a good return over a long horizon. Remember the longer the horizon better is the return due to the power of compounding
4) Direct Equity – If you are investing directly in Equity shares do with caution. Monitor your investments. Set triggers. E.g. Book profits at 30% upside or losses at 30% downside)
5) Review your investments – Equity investments need to be reviewed periodically as blue chip funds/ shares will not stay blue chip forever.