Outlook Money draws up a list of five do's and don'ts for new investors
The runaway stock market rally has piqued the interest of even conservative investors who otherwise baulk at the thought of investing in equities. Now, it is set to become part of their drawing room discussions. The rise in interest levels in equities is a positive sign as it is regarded as the best performing asset class over the long term. However, this newfound enthusiasm amongst novice investors is also risky as the less-informed ones could end up burning their fingers due to hasty decisions, resolving never to look back at equities again.
Understand risks and returns
Before new investors consider equities for investment, they must understand the workings. “First of all, you must understand that past performance of equity markets is no guarantee that the good run will continue,” says Harshvardhan Roongta, financial planner and CEO, Roongta Securities. Be prepared to dig in your heels and stomach fluctuation in returns in the short term. If you are investing towards a long-term goal, tracking your equity portfolio’s returns every day can be counter-productive. “Markets are soaring now, but when they turn, you will make losses. And typical reaction in such cases is to redeem the investment, which will be detrimental to your portfolio and goals,” points out Nikhil Banerjee, co-founder, MintWalk, a robo-advisory mutual fund platform.
Link investments to goals
If you plan to invest in equities at this stage without specific goals and long-term strategy in mind, merely to gain from the market upsurge, you need to do a rethink. Without a definite goal and horizon, equities may not offer best results.
Invest for the long-term
Equities are capable of yielding best returns amongst all asset classes, but only if you are willing to stay put over the long-term. If your goal – say buying a car – is just a year away, equity might not be the right instrument, particularly at this stage where the indices have galloped to record highs. However, if you intend to remain invested for five to seven years, all-time highs should not be a deterrent.
Take the SIP route
Investing in equity mutual funds at regular intervals rather than at one go is considered the ideal strategy for all retail investors, especially new entrants. “We are advising our new clients to strictly stay away from investing lump-sum into equities,” says Roongta. It leaves no room for the urge to time the markets, offers benefits of rupee-cost averaging and dilutes the impact of volatility. “Though markets are touching new highs, macro-economic factors are not yet stable. It is best to stagger your investments in equity through the systematic investment plan (SIP) mode,” says Banerjee.
Choose your funds carefully
Once you are convinced about equity as an investment avenue after considering all pros and cons, you can get into the nitty-gritties. “Do not be overweight on mid- or small-cap funds. The valuations for these stocks are much higher than historical medians and are driven by retail inflows into small-cap strategies and portfolio management services,” cautions Kunal Bajaj, founder and CEO, Clearfunds.com, an online direct mutual fund advisor. Opting for diversified and large-cap equity funds is fraught with fewer risks. “They have a wide mandate and the flexibility to move out of small and mid-cap stocks if the environment changes,” he adds. Also, while identifying mutual fund schemes, look beyond recent return record and focus on the long-term history. “Do not invest in a fund just because it has fetched say 20% returns in the last six months. Evaluate the consistency of its performance over one-, three- and five-year periods,” advises Banerjee.