Blame it on a lot of time on hand due to the nationwide lockdown or the excess liquidity chasing equity markets. Many new investors have been investing in equity markets. From a figure of around 98 lakh active accounts with 15 of India’s largest stock brokerages in January this year, the number rose to 1.28 crore by the end of July. Having equities in our portfolios is crucial as they are considered the best vehicles for beating inflation over the long term convincingly. Also, basic investment principles say that both equity and debt are needed in everyone’s portfolio. But mindless investing in equities is not desirable. Here’s what you should do and avoid while directly buying equity shares.
Have a plan
If you are a first time investor in equity markets, draw a solid plan. Don’t just jump into equity markets. Ensure that you have an emergency corpus (monthly unavoidable expenses for the next six months at least) and adequate health insurance. Decide on financial goals and a plan – with a good mix of investment products – to get there. Your equity investment should be a part of this plan. “While many people start out opportunistically, it's important to have a plan. Following asset allocation (diversifying your investment across multiple asset classes) principles or a core-satellite philosophy (diversifying investment across products with different risk levels) is important as one builds his/her portfolio for the long term,” says Vasanth Kamath, founder and CEO, Smallcase Technologies.
Nithin Kamath, CEO of Zerodha, one of India's largest stock brokers stresses on the need for diversification. “First-time investors end up taking concentrated bets,” he says. Not just among stocks, but make sure you diversify even within asset classes, such as debt instruments and gold.
Have a time horizon
To make the most out of equities, make sure you are ready to stay invested for at least three years to begin with. Typically, for equity funds, a minimum time horizon of five years is highly recommended. A Moneycontrol CRISIL Research study done in June 2020 showed that while one-year and two-year systematic investment plans (SIP) have given very high returns, such short term SIPs also have a greater probability of giving negative returns. “To try and time the market is bad. Take a three to five-year view. Otherwise, equity investing doesn’t make sense,” says Mayur Patel, Principal-Fund manager, Equity at IIFL Asset Management.
Understand companies and industries
Stick to businesses that you understand. Kirtan Shah, chief financial planner, Chief Financial Planner, SRE Ltd says that many young investors these days are attracted to the pharmaceutical sector because the sector’s prospects look good in the hope of a breakthrough in a Coronavirus vaccine being found. But one pharmaceutical company can be quite different from another. Kirtan explains that some pharmaceutical companies make raw materials used by others to make their drugs. Some other companies make what’s termed as ‘bio-similar’ products that are similar to products on which other companies already have patents registered, so as to not violate other companies’ patents. Then there are those who only do research on behalf of those pharmaceutical companies who cannot afford a lot of research and development. Understanding businesses whose products you can see, touch and experience – food products and consumer goods, for instance – could be much easier.
Stick to large-caps
First-time investors should stick to large-cap stocks. These are well-established companies and there is a lot of information about them already in public domain. They are also less volatile than small and mid-sized firms.
Don’t be tempted by rising markets
After a catastrophic fall in March (the S&P BSE Sensex fell 36 per cent in a month), the Sensex was up 30 percent by April. By August 24, Sensex is already up 49 percent from its March lows. Experts say that the bus loads of investors who came in the lockdown may have got a sense of confidence that they have managed their portfolios well. But that’s a mirage. Take a look at number of stocks that have gone up and down in this period. Nearly all stocks within BSE 100 index fell on March 23. In the month of August so far, an average of 57 stocks have gone up and 44 stocks have moved down. The turnaround is sharper in mid and small-cap stocks.
“Many investors buy a stock by looking at only its past performance. While it should be one parameter while deciding, understanding the philosophy, criteria, its risk levels and so on should be factored in while adding it to your portfolio,” says Vasanth. Mayur is quick to point out that the current market rally is driven by technical factors such as falling interest rates and increased funds coming into the markets, thanks to liberal central banks, around the world, pumping liquidity. Economic growth and fundamentals have deteriorated in the meanwhile.
Don’t make this a living
Kirtan further adds that young investors might just feel like making stock trading a full-time activity, “looking at the way returns from equity investing have happened in the last three months.” Stock investing is not a full-time activity for you unless you are a professional money manager. Spending too much time looking at your investment portfolio, in the worst cases, almost daily, can wipe off your entire capital sooner or later.
Avoid social media
Till about a few years ago, we read many media articles of multi-baggers and stock picks. Such news reports have got amplified on social media platforms such as twitter and even Facebook. People have been talking companies, markets, sectors and so on. “Millennials and first-time investors are always in search of multi-baggers. And social media has many such ideas floating around. That is scary. You’ve got to do your homework, instead,” says Mayur.