While investing in the stock market is the best option for millennials, there are many precautions which they must take.
While it is a well known fact that investment in shares generates higher returns than all other asset classes over a long period of time, yet very few investors actually make money in shares. This is mainly because they do not fully understand the risks involved in stock investing. Many are simply lured by the prospects of quick returns and end up speculating and losing their hard-earned money. Hence while investing in the stock market is the best option for millennials as over a longer period of time equity will help them build a nest egg, there are many precautions which they must take. Equity investments are very risky and unless planned and executed deftly can do more harm than good.
To begin with, millennials should approach a financial planner who can work out an asset allocation plan based on their specific and unique risk profile and needs. Chose your financial planner or advisor carefully. Go for someone who is knowledgeable, has a good track record and is easily approachable. Kindly do not give too much importance to brokerage or fee cost. Good and timely advise can help you save much more than the fees charged by the advisor. Invest as per a carefully thought out plan and do not simply chase momentum or a favourite hot theme or sector in the market. Only the money you can spare for a very long period of time should be invested in the market. Also, you should be comfortable with the risks associated with the markets. Whether you have the temperament to invest in the markets and how much money you should invest is something which comes out of a detailed discussion with a qualified financial advisor or planner. Once you have made a plan, do not make changes in it without thinking about it deeply and discussing with your advisor. This is the first and the most important step to making money in shares.
Next is to chose how to invest in stocks. You can directly invest in individual stocks or take the help of some PMS (Portfolio Management Service) or invest through mutual funds. Unless you have knowledge, time and temperament for researching stock ideas, do not directly invest into shares. Chose mutual funds or some PMS scheme. Mutual funds are suitable for smaller size or regular investments. SIP in mutual funds is a great way to channelise monthly savings into building a sizeable corpus over the years. PMS is suitable for larger investment corpuses of, say, Rs 50 lakh or more. This is because the minimum investment in any PMS scheme is usually Rs 25 lakh and you should divide your surplus with at least two different fund managers. PMS has the advantage of a more focused and better monitored investment plans. Hence if your investment surplus is large, PMS may be a better option than mutual funds.
Lastly, do monitor your investments regularly either yourself or with the help of your advisor. Markets change continuously and sometimes unbelievably. Business prospects of companies which you have invested in can change dramatically. Also, mutual fund schemes which were top performers might stop doing well due to change of any fund manager or some other reason. Therefore, regular checking/reviewing of portfolios invested in equities is a must.
(By Ashish Kapur, CEO, Invest Shoppe India Ltd)