3 min read.Updated: 12 Aug 2021, 01:33 AM ISTRenu Yadav
Lay investors must understand that equity investing is for the long term
There is euphoria among investors with respect to the equity markets. This euphoria, along with the lack of alternatives, is driving retail investors into the market, which is further supporting the rally. S&P BSE Sensex, the bellwether index, has been hovering around its historic highs. It is up 109% (absolute terms) since its March 2020 lows.
People are also investing in direct equities and chasing initial public offerings (IPOs) for quick listing gains (as is evident from the oversubscription of the retail segment of IPOs). The number of demat accounts has gone up by 38% since January to more than 40 million as per data available on Central Depository Services Ltd. Even NFOs of equity mutual funds are witnessing record flows; it was ₹22,583 crore in July. The majority of this can be attributed to the NFO of ICICI Prudential FlexiCap fund, which garnered a record subscription of over ₹10,000 crore.
It is evident that a large number of investors are entering equity markets now, probably influenced by peers or social media advertisements about stock investing. However, some experts are sceptical about the current market rally as they believe that there is a mismatch between the euphoria and economic recovery. Most believe the current rally is driven by the liquidity available in the markets due to the loose monetary policy adopted by central banks worldwide to support economic growth. If you are someone entering the equity markets, you should be careful about a few things to protect yourself from any forthcoming market crash.
Direct equity investing is not for the faint-hearted: The performance lag of some active mutual funds has led to many investments in direct equities. However, direct investing in equities is not free from risks. In fact, the risk is much higher as lay investors may not have the knowledge or time to do the research required for investing in equities. “If you do not have experience and time to research (technical and fundamental analysis), do not invest in direct equities; equity mutual funds are a better option. Do not invest in direct equity just because media experts on TV/newspaper are asking you to do it," said Melvin Joseph, a Sebi-registered investment adviser and founder of Finvin Financial Planners.
Lovaii Navlakhi, the founder and chief executive officer of International Money Matters Pvt. Ltd, a Sebi-registered investment advisory firm, agrees. “Direct stocks have greater risk and the potential for higher return; a diversified mutual fund may give a more steady return. Both avenues have the risks of the asset class, viz equity—one should always be prepared for a fall of 10%. If one is not sure whether a particular stock fits the bill, a mutual fund does away with the need of stock selection. In any case, investment must not be made based on past returns alone," said Navlakhi.
Another advantage of investing through mutual funds is that your risk is diversified between different securities, unlike in stocks, where your risk is very concentrated in 1 or 2 company shares.
Avoid IPOs and NFOs: Listing gains may look lucrative, but investing in stocks for quick gains is a risky affair, especially when most IPOs are priced at high premiums. Even in mutual funds, it is not advisable to invest in NFOs until and unless it is offering something unique and you as an investor are very confident the theme will work. Also, some people have this misconception that ₹10 net asset value (NAV) means cheap. This is not the case as your returns will depend on how much the NAV has appreciated after you have invested rather than the value of NAV. “You should avoid NFOs. People do not invest in NFOs for long-term goals. The psychology is to make quick money in a span of 8-10 days, which can backfire," said Joseph.
Avoid high allocation to thematic and small-cap funds: In the past year, the categories of funds that have outperformed others are small-cap and thematic funds. The average return small-cap funds have delivered is 89% over the past year and is the best-performing category as per data available on ValueResearchonline.com. The IT sector fund category is the second best-performing category with a return of over 84%. However, if you are a first-time investor, you should not chase recent performance and invest all your money in small-cap funds as they are highly risky, while thematic funds should be used as tactical bets. Investing in equities requires a long-term horizon as in the short term, they can be volatile.