Beware before entering equity mkt

There are umpteen numbers of investment avenues available to an individual to protect oneself and the family during rainy days. The investments could be in bank deposits, postal deposits, general provident fund, mutual funds and in MFs, by way of systematic investment plans (SIPs).

Buying an insurance policy to secure the family and taking a health insurance policy in these days of prohibitive cost of medical treatments, are also avenues of investments.

While these avenues assure low to moderate returns, ranging from 4% to 7%, investments in equities, bonds and also derivatives are expected to yield higher returns. When investment in bonds would yield definite and assured returns like 8-9% and even slightly higher, investment in equities and derivatives would yield much more. However, investment in these avenues is fraught with high risks.

According to Warren Buffett, an investment expert in equity market, ‘buy low and sell high’ should be the mantra for those who wish to enter the equity market, signifying the fact that one should enter the equity market when the market is low, and should sell while the market is high.

He also says that his teachers have taught him that in the short run, the equity market is a ‘voting machine’, and in the long run, a ‘weighing machine’, which indicates that the investment in equities will be for longer periods and not for short runs, as one could hardly expect the gains in the short run.

Study sensex carefully

As the investments in equities are for long runs, one should have the appetite to wait for longer periods, if one wishes to invest in them. Before entering into the stock market, one should study the sensex carefully as that indicates which way the market is moving. When the sensex goes too high, it could be a bubble which may burst, resulting in  the share prices tumbling down. That is exactly what happened in the case of Harshad Mehta.

The precaution that one needs to take is to study the shares of companies carefully over a period of time, say a week or fifteen days, before buying them. It is always desirable to buy the shares of well-known and blue chip companies rather than unknown ones to secure investments.

One should also study the financials of the companies and look at the background of the directors who are at the helm to ensure that investment in their chips is safe, secure, and returns assured.

There are a number of broking firms and investment advisors in the equity market for one to know in which stocks to invest. However, the best way to do it is to understand and study the stock market oneself before entering it. Even the stock brokers/advisors vouch this line of thinking.

Many have gained, and have also lost money, by investing in the equity market. However, the story of those who have lost outnumber those who have gained. In that context, one must beware before venturing into the equity market.

For those who have a penchant for investing in equity markets, the best option is to invest through mutual funds and systematic investment plans (SIPs). Though MFs are subject to market risks, they distribute their investments in the government, instruments, debt market i.e. bonds and equities.

The investor has the option to determine which way his/her money could be invested by indicating by way of percentage to invest in maxi misers, equalisers or low-risk avenues.

In case the investor indicates that his money could be channelised in maxi-misers, the MFs would invest more in equity market and less in debt market, and vice versa. There would be an option to choose either ‘dividend payouts’ and/or ‘re-invest’. It is advisable to choose ‘dividend payouts’ as the MFs are subject to market risks and there could be investment wipe-outs if the market reacts adversely.

The precaution to be taken while taking this route for investment in equities is to know which MFs are doing well, and who are the fund managers. The fees and the administrative costs the MFs charge should also be carefully looked into. However, even in the case of MFs, the investments are for longer periods as there could hardly be any gains in the short term.

Therefore, the mantra is ‘beware before entering into the equity market’, and even while choosing the MFs route, one should note that the investment is fairly for a long time and accordingly, should one’s appetite be. SIPs are best bets for investment in the equity market and the investment amount could be as low as Rs 500 with varying frequencies like weekly/fortnightly or monthly.

Stay away from the equity market if the funds are needed in the short run and better look for short-term investment avenues like bank/postal deposits, which are liquid, safe and assure steady returns.

(The writer is Chief Manager (retired), State Bank of Mysore)