Q. How do you make Rs.1 crore in the stock market?
A. Invest Rs.2 crore in the stock market
This witty riddle has resurfaced and is doing the rounds of social media and messages thanks to the current market situation in India.
Experts think the market will remain volatile and there can be some more correction. But at the same time, many stocks in the top 100 companies in terms of market capitalisation are 10%-40% down. Stocks in different sectors such as banking, FMCG sector and auto have gone down. Should you go on a buying spree now and buy equity or invest in equity funds?
Though the market is significantly down and there are opportunities to buy stocks at low prices, investors need to be cautious. The retail investor’s investment strategy should consist of the fallowing actions –
- Follow the basic criteria for stock selection – Some stocks may have reached their 52-week lows and some might be stable. As an investor, do not be swayed by the volatility. Look at the business model, return on equity in the past and profits. You can invest in good quality stocks when they have fallen due to market volatility or add existing stocks in the portfolio when the prices are lower as compared to the price you paid for the earlier purchase. This will average out your costs. Traders may take advantage of volatility in the market but the exposure to risk of loss is significantly higher.
- Disciplined Asset Allocation – There are many assets out there to invest. Understand your financial needs, risk tolerance and risk ability and invest proportionately in different assets such as FDs, Bonds, Equity Mutual Funds, Non-equity Mutual funds, property, direct equity etc. Asset allocation means to invest the appropriate amount taking the right level of risk. If the markets have risen continuously, your investments in equity must have risen in proportion to the initial allocation. You have to rebalance the portfolio else you might be overweight in one asset which is risky.
- Goal Based Investing – Write down your investing goals. You should know the reasons for which you want money and the amount you need. Work towards reaching these goals by investing appropriately.
A goal such as – ‘I want to save enough money to buy a house in 2022’ is vague. It does not say anything about how much is to be saved and how you are going to get the funds to buy the house. The price would be different in 2022 as compared to now.You have to be clear about the budget for the house, the downpayment and the loan amount if required.
- Spread Your Risk – Once the school board exams marks are announced, students do not just apply to their favourite college or the college they think they will most likely get admission. They apply in multiple colleges to ensure that they do not lose out on admission. Similarly, diversify your portfolio and invest in different assets to get the most optimum returns and reduce risk of putting all eggs in one basket.
The markets crashed in January 2008, but recovered and Sensex was up by more than 3000 points by September 2010. Nifty closed at 7809 on August 24, 2015 but in August 2017 its value was around 10000. So it is important to stay calm and rational. If you manage your risks well and invest for the long-term, you will create wealth and generate optimum returns.