Recently, the Nifty surpassed 9,300 and the Sensex closed above 30,000 for the first time. Both these indices are at a lifetime high. Does the market look overpriced, and is a crash imminent? Or will the bullish trends continue into the foreseeable future and continue to earn investors handsome returns?
In this article, we will discuss aspects of equity investment and help readers make an informed decision. We assume that you—the investor—have a risk appetite and are looking to bet on the markets. If you are not comfortable with risk, you can invest in balanced funds, high-grade bonds, government securities, debt funds, small savings schemes, and bank deposits.
But if you’re looking to enter the stock market now, here are five thoughts to consider.
- Stock indices and companies are different
Even in a rising market, there are many stocks that underperform. Conversely, even in a subdued market, there may be stocks that outperform their benchmarks. Unless you are buying an index fund, you are not investing in the indices. You are investing in individual stocks, or in a set of assets through Mutual Funds. The growth in the stock market that we are seeing now is not across the board. Despite the Sensex and Nifty scaling new peaks, there are a few sectors growing at a much slower pace. For example, the IT index has been hit hard. Conversely, steel stocks have grown appreciably despite weak global sentiments.
- You must find the right stocks
The selection of the perfect stock is the biggest challenge to wealth creation. The holdings of the world’s wealthiest people are typically made up of a small number of stocks, often no more than one or two. Therefore, finding the right stock for the long term is important. Do not base your entire equity investment plan on popular stocks or investment advice from a relative. Rather, look for companies with a long-term plan and potential for growth. Study their financials for the last 5-10 years. You must do a fair study of their revenue, CAGR, profit growth, debt levels and stock valuations. Additionally, look out for the future superstar stocks – young companies that may not have a ten-year track record but do have the potential for growth.
- Diversify between large, mid and small-cap stocks
Small-cap stocks are often new companies on the block. They are small in terms of capitalisation and revenues but have potential to grow multi-fold in a few years. However, finding the real gems out of a plethora of small-cap firms is a herculean task. Small-cap stocks are riskier than large-cap funds, which means that you may also be rewarded handsomely if you pick the right one. You must limit your exposure to mid and small-cap stocks to around 20-30% of your overall equity portfolio.
- Don’t understand stocks? Choose Mutual Funds
Many investors are not comfortable with direct equity investing. Even if they have a risk appetite, they may find researching stocks an arduous task. If this is the case, they may invest in equity Mutual Funds. Through these funds, you entrust a fund manager to decide which stocks to pick, buy, hold, or sell on your behalf. To pick the right Mutual Fund, you must look at the long-term performance of a fund (ideally five to ten years), its investment costs (every fund has an expense ratio), how it has compared to its benchmark, and the underlying assets of the fund.
Additional Reading: What We Learned About Equity Investing In 2016-2017
Final thought: when in doubt, consult an investment advisor, who may help you navigate the wild world of equity investments.