Investors need to follow basics to make the most

There is something aspirational about investing in the stock market. You may choose to believe it or not, but when you see those stock prices flashing across the bottom of the television screen and hear people discussing how much money they have made in the market, even those who claim to be totally uninterested often have a temporary desire to be a part of this group.

So they open a demat account, ask a couple of friends for stock suggestions and simply put some available money into shares. But when the markets take a dip and the possibility of loosing money looms, they exit the markets with less money than they initially entered.

In fact, it is this ad-hoc attitude to investing that has caused the downfall of many a first time investor in the market. Irrespective of whether you are twenty-five or fifty-five when you first begin to invest; there are a set of thumb rules that you need to keep in mind while investing. With markets sentiments improving and many young investors showing the desire to take the ride down the investment highway, SundayET outlines these rules of the game.

Teething rings

There are two fundamental decisions that you need to make before you begin the actual formalities of investing, the first of which is an assessment of how long you propose to stay invested in the market.

Be realistic at this stage, as your investment strategy is fundamentally driven by whether you are a short-term, medium-term or long-term investor.

However, experts recommend that to reap the benefits of investing in equity, it is better for an individual to remain invested long-term.

"Post-returns on equities are likely to beat inflation and are better than most other asset classes (on a risk adjusted basis). So individuals must have a long term view and commit funds that will not be required for at least five years,” says Veer Sardesai, CEO of Sardesai Finance.

Another critical element to making successful investment is your ability to take risks or to catch a good night of sleep irrespective of volatility in the markets, especially after what we have seen happening in the markets last year. According to Rajiv Deep Bajaj, vice chairman and managing director, Bajaj Capital, “The investor needs to analyse his ability and willingness to lose some or all of his/her original investment in exchange for greater returns.”

To a great extent, the classification of whether you are a conservative, moderate or aggressive investor is also dependant on how much you earn and what your liabilities are. So, if you have good capital surpluses to offset losses in the market, then you could afford to take the aggressive route to investment.

Building blocks

When it comes to deciding on the rules of asset allocation, the thumb rule is that you should subtract your age from the number 100 and invests only that much of your portfolio in equity. But with markets currently improving, you need to be wary of brokers who will try to instill the feeling that the only way for the markets to move is upward and urge to invest more on stock.

Experts, however, recommend that in the current situation, first time investors should follow a more diversified approach to investing and look at stocks of blue-chip companies such as those in the BSE Sensex or the NSE Nifty, which are considered safer than the mid-cap stocks.

“In these current volatile situations, if the investor wishes to invest in equity, it is best if the investor sticks to investing in diversified equity funds/large cap funds, which have a proven track record,” says Bajaj. He adds that investors should further look at investing through SIP as it allows them to take advantage of the principle of compounding and also allows them to average out the cost of other investments.

But if you want to do it your own way, there here’s another adage that will help you pick right: It is better to buy great stock at a good price than fair stock at a cheap price.

According to Sardesai, people often have the tendency to buy a stock quoting at a price less than Rs.10. But he warns that there is a generally a reason for the low price and there is the possibility of it sliding down even further. Also keep an eye on the quality of the management.

Its always better to put your money behind a management which has a high level of transparency and looks after its shareholders, in contrast to simply going after cheap stock. "However, if they choose to invest in an IPO, then they should analyse the IPOs and strive to invest in the IPOs of PSUs,” says Bajaj.

Never succumb to investing in an IPO on the basis of promises that good returns are always assured.

Don't play with fire

Another battle that you will have to fight is the urge to book profits by buying when prices are low and selling when they are at their peak and re-entering the market when prices dip again. However, timing the markets rarely works and you run the risk of loosing fundamentally good stock in the process. Also remember that risk and return go hand in hand.

“Taking excessive risks may give superlative returns but you stand to loose all your capital but it is better to be safe than sorry,” says Sardesai. You should also resist the urge to follow the investment practices of your friends and to compare the returns on your portfolio with that of your friends. If in doubt, make it point to seek professional help from a financial advisor rather than from your peers.

Source: economictimes.com