With the 30-share Bombay Stock Exchange gaining over 11% since January this year, retail investors are once again showing keen interest in equities.
With the 30-share Bombay Stock Exchange gaining over 11% since January this year, retail investors are once again showing keen interest in equities. As for the recent IPO of Avenue Supermarts, the retail investor portion saw 7.51 times more demand than the shares on offer. In mutual funds, for the 11th consecutive month in February, equity funds witnessed net flows of `6,462 crore compared to `4,880 crore in January this year. In fact, equity assets under management (AUM) of fund houses rose 46.6% year-on year to `5.2 lakh crore in February this year. In FY17 till February, total inflows into equity category has been `62,151 crore and the segment is likely to report higher inflows in March too, because of attractive valuations and investors looking for equity tax-saving options.
The first and foremost rule of investing in equities is to look at long-term holding. While in some years, the value of stocks may grow, in some years it may drop. The near-term volatility should not be a major concern unless the fundamentals of a particular stock or a sector doesn’t look encouraging.
While the compensation for taking on increased levels of risk is the potential to earn greater returns, look at the potential of the particular stock or the company to give higher long-term returns. Always prefer to invest in those stocks that offer an easy-to-understand and straightforward company business model with growth potential.
Pick select promising stocks
One of the most preferred way for investing in stocks would be to select a few good companies and invest in them. However, the selection should be based on both fundamental and technical valuations. Most long-term investors often shun technical analysis because it is thought to be a tool used solely for short-term speculation. Valuations should be looked at in terms of cash flows, earnings, corporate governance, debt-to-equity ratio and returns. The primary valuation matrix that every investor must look at is the price-to-earnings (P/E) ratio. It is computed by dividing the market price with the company’s earning per share.
Invest through mutual funds
Individuals who have never invested in stocks or do not understand company fundamentals should invest in equities through mutual funds. Ideally, they should opt for systematic investment plan, which can create wealth for the individual in the long run. Through SIP, an investor has the option to invest regularly in equity markets irrespective of the bull and bear phase. In SIPs, investors will also benefit from the power of compounding over time.
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An investor can start with even `500 a month. In mutual fund, the investors will not have to time the market. By investing a fixed amount of money every month, an investor can pick up more units when the prices are low and vice-versa. Over a longer period of time, the acquisition cost per unit will come down. Investors must keep in mind the characteristics of the scheme like the fund manager and his long-term track record, asset management company and its philosophy, fund expenses and investment style.
One of the most important benefits of investing through mutual funds is that the fund manager ensures that the portfolio is well-diversified and can absorb certain market-related downturn.