Investing directly in the stock market can be highly risky, take the mutual funds route instead
Seek the help of a financial planner to get your overall money life in place
More people have taken to investing directly in the stock markets ever since the pandemic set in. According to India’s largest stock market broker Zerodha, the demat account opening numbers for the first five months of 2020 surpassed the overall client growth figures of 2019. The brokerage added over 750,000 new accounts since the end of February.
Financial planners we spoke with said that many people looked at the stock market correction in February and March as a good opportunity to invest directly in equities.
“We attribute this growth to the low-priced stocks which gave new investors an opportunity to enter the markets. Low deposit rates in banks also brought new investors looking for higher returns compared to other asset classes. The fact that people were working from home allowed them a bit of extra time towards reconfiguring their personal finances. Similar patterns were displayed in 2008. We are yet to see how this surge in activity plays out in the long run," said Nithin Kamath, founder and chief executive officer, Zerodha.
Though equities are a good investment tool to help you achieve your long-term goals, investing directly in the stock market may not work for retail investors given the high risk.
If you’re a first-time investor or don’t have a high-risk appetite, we tell you the right way to approach equity investments.
Go for mutual funds
Picking the right stocks requires research and analysis. Before you start investing, it’s important to understand the basics of equity investments such as risk-reward ratio, how to analyze the financial reports of a company, different types of shares, methods of investing, diversification, and so on. This requires both, time and knowledge.
“Most investors are busy with their professional and personal commitments and may not get enough time to gather information about the companies they wish to invest in and may not be able to monitor their portfolios constantly. They may also not be able to take timely action," said Harshad Chetanwala, co-founder, MyWealthGrowth, a financial planning and investment advisory firm.
So it makes sense for retail investors to go for mutual funds as they are run by professional fund managers whose full-time job is to choose suitable stocks. Mutual funds also help you invest in a basket of stocks instead of only a handful of them.
“The management charges are reasonable compared to the benefits. Also, the mutual fund industry is controlled by capital markets regulator Securities and Exchange Board of India which acts in the best interest of investors. For a retail investor, this is the best option to make money from equities as it lowers the risk to quite an extent," said Melvin Joseph, founder, Finvin Financial Planners, a Sebi-registered investment adviser.
Mutual funds also allow you to invest in equity markets with an amount as small as ₹500 a month.
Within mutual funds, opt for the systematic investment plan (SIP) route.
Investing systematically for a long period of time gives you the benefit of rupee-cost averaging. Since the amount you invest is fixed and goes at regular intervals, you are able to secure more units when the stock prices fall and benefit when the prices go up subsequently.
Joseph said one must invest in equity mutual funds through SIPs as it helps average out the cost of investing and you stand to gain in the long term. It also helps you inculcate the habit of disciplined investing.
“Invest through SIPs in one or two diversified equity funds. After three to five years, you will understand the way the market behaves. You cannot expect positive returns from equity every year. If you are expecting that, equity is not for you, invest only in debt," said Joseph.
Seek professional help
A successful investor always has a concrete plan. “You must define your financial goals, determine your risk tolerance, and have an investment horizon to create an investment plan that is tailored for you," said Harsh Jain, co-founder and chief operating officer, Groww, an online mutual fund investment platform.
But if you’re tied up with your everyday commitments, you may not get the time to research on the performance of various mutual funds and the kind of stocks or categories they invest in because there are over 2,500 mutual fund schemes today. This is where a fee-only financial planner or a Sebi-registered investment adviser can come to your rescue.
Financial planners are unbiased. They look into your income and expenses to help you optimize saving habits. They also help in identifying the right investment avenues in line with your risk appetite. They review your investments on a regular basis to know if you’re on the right track. If you are in a fix and unsure about how to go about finding a financial planner that suits your needs, read here.
Joseph said he’s seen many investors entering the equity markets with the intention of making quick money. “They are induced into direct investing through some TV shows and other media which highlights only the success stories. But what’s not highlighted is that there are many who lose all their savings in the stock market. Last three months’ return on Reliance Industries stock is around 60%. But if I purchase it now, can I expect a similar return in the next three months? It is not guaranteed even in the next three years," he said.
Also, investing in equities for the short term could be dangerous. Chetanwala said investing in equities is like investing in the companies and their businesses. “These businesses take time to grow and the results of their growth take time to get translated into returns. This process takes a few years and not weeks or months. Hence, patience is the key," he said.
Very few people are successful with direct investing on a regular basis. For the majority, mutual funds are a safer bet.