Swim smart in equity’s turbulent waters

Swim smart in equity’s turbulent waters
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First Published: Mon, Feb 02 2009. 01 21 AM IST

Updated: Thu, Feb 05 2009. 03 35 PM IST
Let’s assume you have money in bulk. The equity markets are down. But you are risk-averse right now. So, the dive into the equity pool is ruled out. Right? How about swimming with a float to ensure that you do not lose money. Is that possible?
Yes. With systematic transfer plans. Typically, it goes like this: You make a large investment in a fixed-income mutual fund scheme and give a mandate to the fund house to transfer only the capital appreciation every month to an equity scheme of your choice. Thus, you are not eroding capital while squirrelling away a small amount into equity when the markets are down.
Consider this example : You invest Rs12 lakh into a liquid plus short-term income fund. Assume it returns 8% a year or Rs8,000 per month. Thus every month, Rs8,000 is transferred to an equity scheme at the prevailing net asset value. Over a long period of time, you have built a decent equity portfolio.
There are many benefits. To begin with, it preserves capital as you have mandated transfer of only the appreciation. Second, the sheer convenience of such a transaction makes it a winner. Lastly, while the whole thing may look counter-intuitive to some, this strategy presents the best option for uncertain and “fence-sitting” investors. It quickly nips the opportunity costs associated with delays in investing.
For the really risk-averse, just think of it as interest from your fixed deposit going into a recurring deposit. Given the present state of the equity markets, you are buying stocks at bargain basement prices.
Don’t pay for these mistakes
Investing is not just about picking winners, but also about avoiding mistakes. Keep these in mind to get the most out of your money.
• Don’t be unrealistically optimistic and don’t think that stock prices only go up.
• Don’t be overenthusiastic to trade. Not every ball should be hit. Some of the world’s best investors follow a buy-and-hold strategy. You should too.
• Compounding capital can benefit you only if you leave your money untouched for a long period. Don’t wait to start investing only when you have a large amount of money to put to work.
• It’s difficult to predict the market. You should instead be systematic or regular in your investments. This way, you will have fewer decisions to make and yet save more.
• Don’t sell in times of panic. You should be doing the opposite. The best time to buy is when the market is falling and there is fear in the minds of investors.
• Don’t just focus on past performance. It is a very common perception that because a stock has done well in the past year, it’s the best to invest in. Often the best performers will underperform in the market in the future because their optimistic outlook has already been priced into the stock.
• Don’t diversify too much.
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First Published: Mon, Feb 02 2009. 01 21 AM IST