Assess time and risk for equity investment
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The recent Coal India IPO had caught Mr Sanjay’s attention. Mr Sanjay was one among the majority of the investors, who had stayed away from direct equity investments. He had seen the carnage of 2008 and heard the experiences of his friends.But the Sensex ruling close to 20,000 and the feverish pitch of the Coal India IPO, made him join the bandwagon of direct equity investments.
Now, is this the right time to enter the market? Price and value are the two things that are to be considered. Price is what you pay and value is what you get. And these could vary as per the investor’s perception.
Do remember that timing the market is impossible. But what is possible is to time in the market, and that is how the wealth grows.
The most important prerequisite for investing in equities is patience. You need to have a horizon in excess of three years and you should not look at the stock price on minute-to-minute or hour–to–hour basis.
You should not invest immediate or liquid funds in direct equity, regardless of how great an opportunity to make a quick buck.
Another cardinal rule, never borrow money to invest in direct equity. As Fred Schwed Jr rightly said, “Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.”
For those who still are unclear about direct equity investments, investments through a large cap diversified mutual fund, through regular SIP, is the way out.
Let’s now look at thumb rules that are to be followed for creating an equity portfolio:
* Determine the risk app-etite, time horizon and investment corpus. Invest the corpus gradually.
* Also, if the opportunity presents (as in late 2008), invest in lumpsum.
* Have a portfolio not exceeding 6-8 stocks.
* Trust investment source and advisor, if any.
* Look closely at the investment company’s fundamentals such as earnings per share, price/earnings ratio, book value per share, debt/equity ratio and dividend yield ratio.
* Review the portfolio at regular intervals, say every quarter.
* If a mistake is made in terms of stock picking, do not let the ego come in play and have the courage to get out and cut the losses. Remember, money does not know its owner.
Though these are not an exhaustive set of rules, you can start off with these rules. Later on, you can develop your own rules over a period of time. Happy investing.
Brijesh Damodaran is the founder of WealthWays Private Wealth Management and can be contacted at
brijesh@wealthways.in
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