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Your money: A six-step beginner’s guide to equity investing

Simply replicating your friend’s portfolio is never a good idea

Your money: A six-step beginner’s guide to equity investing
Investing is a disciplined process that requires dedicated time, knowledge and resources to do it right.

By Varun Fatehpuria

Retail participation in the capital markets, either through direct equity investing or mutual funds, boomed during the last 24 months. This was partly due to the growing free time but majorly due to the transactional ease made possible by do-it-yourself apps.

This, however, ended up as a double-edged sword. While the Covid-induced bull market helped bring a whole new set of investors, it also created a wrong set of expectations in these investors’ minds. It was not uncommon to see people act solely based on what they heard from their friends and relatives. Or, worse, invest based on the ‘expert tips and reviews’ circulated vehemently on social media. And the two-year-long bull market only helped reinforce these wrong ways of investing.

Investing is a disciplined process that requires dedicated time, knowledge and resources to do it right. Here is how you should approach it:

Invest with a clear goal and time horizon: Investing with a clear goal (retirement, child’s education, emergency fund) helps you take more informed investing decisions. For example, portfolios of shorter-term goals will have a higher allocation to safer asset classes like debt to protect your capital. In contrast, longer-term goals like retirement will invest predominantly in growth assets like equities to take full advantage of the time horizon.

Ascertain your risk tolerance: Invest based on how much of a risk you can tolerate. Your willingness/ capacity to take risks depends on various factors like age, stability of income, number of dependents, etc. Hence, simply replicating your friend’s portfolio is not a good idea since everyone’s life situation is different. Instead, review how that fund/stock fits into your risk profile.

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Asset allocation is the key: Asset allocation is the bedrock of a solid investment portfolio. In simpler terms, it means splitting one’s money across asset classes like domestic equities, international equities, fixed income, etc. Research has shown that 94% of a portfolio’s performance is driven by asset allocation. You should thus align the allocation according to the time horizon of your investment.

Do not chase only past performance: Investors are often tempted to invest solely based on the past performance of an investment or the trending ‘hot fund’, assuming that it will continue to deliver the same returns. However, it is essential to evaluate the performance in tandem with various other factors like benchmark/ index return, risk, the macro-economic environment in which it was achieved, etc. This ensures that the fund manager can deliver consistent returns in differing market conditions and it is more than just riding a bull-market wave.

Diversify correctly: Investors today often conflate the number of investments in their portfolio with diversification. However, that is not the case. A well-diversified portfolio is created by adding asset classes that behave differently in a given market condition. There is also a false belief that holding multiple funds leads to diversification. But having many large-cap funds is of no use since the underlying holdings of these funds are primarily the same. Diversification must be done in a targeted manner so that your bets are spread more efficiently.

Focus on the tax implications: Be aware of the tax implications of various investment options and study their post-tax returns before making any decision. Those in the highest tax bracket may benefit more from investing in arbitrage funds for their short-term/ emergency needs due to its favourable tax treatment.

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RISKS & RETURNS

* Diversify your portfolio such that your bets are spread more efficiently

* Align your allocation to the time horizon of your investment

* Do not go by only past performance or fall for ‘hot’ trending funds

The writer is founder & CEO, Daulat

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First published on: 30-11-2022 at 00:15 IST