Overload of information ruining your investment decisions? Here’s how to invest efficiently amid all that noise.
Earlier, gathering information on financial products such as Credit Cards, Home Loans and investments like Mutual Funds was a tall order. Today, there is actually an information overdose! Any and every finance website has information on how you should invest, which products to choose and how much you should invest. Now, the big question is which information should you consider?
All you need is common sense! You have to first be clear about what information you need. Then, you can try to use the information that you gathered. Here’s how to go about investing in stocks or Mutual Funds.
Start by shortlisting
Before investing, remember that the stocks/Mutual Funds space is huge. You need to have a list in hand before you start your research. Based on your income, financial goals and risk appetite, shortlist stocks/funds that you would want to invest in. If you are a novice, take the help of a financial planner.
Additional Reading: Your First Steps To Investing In The Stock Market
Equity diversified funds/ large cap stocks tend to be less volatile. If you have a high-risk appetite, you can go for mid cap stocks/funds. However, you will need expert help for picking these.
Gather information
Once you have the list in hand, go to the right sources to gather information on them. Let’s look at how to do it for stocks and Mutual Funds.
For stocks: Check if the company has been in the news recently. Was it for ‘good’ or ‘bad’ reasons? If it was for losses, huge debt or litigations, you could consider dropping that stock from your list. This method will help you filter out the bad ones. Once you have filtered some out, download financial statements of the firm. You will need to look at the profits/losses that the firm has been making and the loans it carries. High debt is risky unless the business requires it (a business like a real estate business might need it). You also need to check whether its cash flows have been healthy. You can gather all this information from the company’s website.
Also, check financial ratios. The best way is to compare the numbers with the company’s peers to see if the ratios are in line. Look at the market share of the company in the industry. All this information will give you a fair idea on whether you picked the right stocks.
Additional Reading: What Really Affects The Stock Market
For Mutual Funds: Always download information from the fund house’s website rather than getting them from a financial website. Look at the past performance of the fund. Even though past performance is no indicator of the future performance, it is only common sense that a fund that has performed well for the past 5 years won’t fail suddenly.
Also, look at the fund’s portfolio and how it has performed when compared to its peers. Has the fund invested in big, popular firms? Has it been able to do better than its peer funds? It is imperative that the fund should have beaten at least its category average by a good margin. Take a look at the fund’s standard deviation and beta to understand how risky it is. Both are high? The fund might be risky and volatile. You also need to check the entry and exit loads.
Check dividends
For stocks, look at the dividend pay-out ratio. This is the percentage of the income that a company pays out as a dividend. You should look at a stable ratio rather than a high one. For Mutual Funds too, you can look at the dividend history if you are investing in Mutual Funds for a regular income. A consistent dividend history is a sign of a good fund.
Additional Reading: Why Mutual Funds Score Over Stocks
Read reviews
You would find that a number of experts would have an opinion on every stock/fund. Read reviews online and in magazines and newspapers. But don’t follow them. Use them to compare the information with your own research. You can corroborate your decision with such reviews. You could read analyst reports to see what experts have to say about the stock/fund.
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