Things you should know before investing

- Pankaaj Maalde, CFPCM , Head – Financial Planning, Apna Paisa

India’s GDP de-grew at 5.5% in April to June’12 quarter compared to 8% during the same period last year. The GDP growth was 5.3% in last quarter of Jan to March’2012. These figures are really alarming. The market has reacted badly to these GDP numbers and experts predict that they are likely to fall further. There is a deadlock in Parliament over CAG report on coal allocations, lack of political will of the government, GAAR issue, crude oil hovering above 95$ a barrel, rupee constantly above 55 against $, higher inflation tying the hand of the RBI in reducing the interest rates, worsening balance of payment and fiscal deficit as these are the major concerns for the Indian economy.

Further European crisis and Iran Israel tussle may add fuel to uncertainty. Things are going bad to worse and more so there is no hope of any early revival in the economy. Experts are also apprehensive about India’s sovereign downgrade. Most of the equity investors are in a confused state and unable to take any investment decision. Whether this standstill will continue till next general election or we will have early general election? There are no specific answers to any of these questions.

Than what should lay investors do in the current market situation? Before coming to solution one must look back and check what happened in the past. We have seen nine governments in last twenty years post liberalization, three major stock scams, gulf war, Kargil war, communal riots, 26/11, US sub-prime crisis and European debt crisis. Still India is a preferred destination for investment for FIIs. What it tells us that uncertainty comes and goes, if you know what risks you are taking. You should know that your decision  may surprise you in the long run with good returns. Risk comes from not knowing what you are doing. If you take calculated risk it will benefit you in the longer run. Economy also runs in a cycle; like good phase, bad phase is also not permanent.

Investors must also try to understand equity as an asset class before investing. You cannot expect overnight profit from equity as it is always a long term game. It has always outperformed other assets class in the longer run. One should not forget that returns from the equity over one year period is tax-free. If you understand and follow the basic rules of investing in equity then this volatility in stock market will never affect you. Firstly your time horizon for investing in equity should be minimum 5 years and above. You must invest as per your asset allocation ratio and never go overboard and concentrate on single asset class. You must also review your investment portfolio periodically and rebalance the portfolio. Never try to time the market and always stay invested is the success mantra for investing in equity.

Hardly 5 to 7% people of India invest in equity the others feel it’s gambling. Even those who invest in equity want their money to be doubled in 3 to 6 months and therefore end up losing their money. It is also important how you invest in equity. There are four different ways by which you can invest in equity. Direct equity investment through stock market, Portfolio management schemes, Unit linked Insurance plans and mutual fund investment. Direct investment through stock markets requires in-depth research and analysis and individually it is not possible for us to do so. Therefore, it is not recommend investing directly in equity. ULIP and PMS are also not advisable for retail investors looking at charges and complexity of the products. SIP in mutual fund schemes is the best solution for investing in equity for the long-term in a volatile market scenario. By investing through SIP you reap the advantage of rupee cost averaging. This lowers the average cost of your holding. Secondly if you invest through SIP, you do not have to worry about daily volatility of the market and thus do not have to time the market. Since SIP can be done with as small an amount as five hundred rupees you can start with a small saving also and get the advantage of power of compounding. It is not advisable to discontinue your SIPs in the current market scenario. Tough time is always the best period to invest in equity. It is rightly said it is the darkest before the dawn.

ApnaPaisa is India's leading Online market place for financial products such as loans, credit cards and insurance plans. Author can be reached at www.facebook.com/apnapaisa.