Investing in equities has a risk-reward association with it. Before you take the plunge, here are a few things you need to remember
Investing in equities is highly risky, but at the same time, can get you attractive returns over the long term. Direct investment in equities is possible by purchasing shares of companies listed on stock exchanges. You can also enter equities by investing in mutual funds, getting into portfolio management schemes or playing through the derivatives market by taking exposure to futures, options and structured products. With such a plethora of options available, it is sometimes confusing as to what is the best mode of entering the equity markets.
The mode of investing in equities depends on your risk tolerance and risk aptitude, in addition to your goals and financial situation. Those with high risk appetite would wish to invest directly in stocks or take an exposure to derivative products. In these methods, although the returns would be high, the risk is also very high, which may sometimes result in erosion of your investment.
The risk-averse would prefer to enter equities by investing through mutual funds. Here, although mutual funds mirror the stockmarket performance, you may get slightly lower returns than if you would have invested directly in high-return stocks.
As a long-term strategy, it is best to invest in mutual funds, especially if you do not have the time and knowledge for direct stockmarket investing. Here are a few things you must consider when you invest in equities:
Determine your risk taking capacity: As mentioned earlier, equity investments come with high risks. You may sometimes even lose out on your initial investment amount. Hence, you must think of getting into equities only if you are comfortable with the volatility associated with stock markets, especially over the short term. Equity exposure should be based on your goals, age and risk profile.
Align investments to overall financial plan: The objective and duration of your investment are important determining factors. Your investments should be aligned to your financial goals. Equity mutual funds are best suited for long-term goals, with duration of over five years. So,