We are all familiar with the SIPs in the mutual funds. They allow you to stagger your investments in the stock markets and let you benefit from the market volatility. Now brokerages have also started offering SIPs in direct stocks in the direct equities on the similar lines. But are these SIPs safe? Should you go for them? Well, here is a low down on these SIPs.
These SIPs like those of the mutual funds, let you buy stocks in small amounts. This can be very good strategy in case of expensive stocks like BHEL of Infosys. Now if the market crashes at the time of your SIP installment date, you can buy more stocks of these companies. So the returns you earn in this way are much higher than what you would normally earn by making a lump sum investment in the stocks.
But the problem arises if the market goes up drastically. In case of mutual funds, it won’t make much difference. But in case of direct equities the price of a stock can go as high as Rs 100-200 within a month. This will affect your investments as you will get smaller number of shares in this instance.
Also your stock selection should be perfect. If you had opted for SIP in stocks like RCom or DLF, you would have lost money. Hence it is essential for you to be aware of the fundamentals of the stock.
Lastly, it is costlier to go for SIP in stocks as you have to pay brokerage on each purchase. Besides you also have to pay for the demat charges. Hence you should be very careful when going for SIPs in direct equities.
Raju is an engineering graduate working in an MNC. He earns Rs 50,000 a month. His company has given him a platinum credit card that allows him to spend as much as he desires. Raju takes full benefit of this card and spends all his monthly income on clothes, mobiles and eating out. He has totally ignored the concept of investing.
So if you are in this situation, here is how to invest if you are in your 20s.
- Buy a health insurance: Today health care has become expensive. A simple visit to a doctor can set you back by as much as Rs 500. Hospitalization, medicines, medical examinations have all gone up. This is where having a good health insurance helps. Besides paying for any health expenses, you’ll also save money on premium, if you start early. It also gives you tax benefit under section 80-D.
- Invest in equity mutual funds: Equities are the best bet to make money and become wealthy over a long haul. Also earlier you start you can get more by investing smaller amounts due to the power of compounding. Moreover in your young age, you have higher risk appetite, thus allowing you to go for aggressive investments. But a word of caution: DON’T GAMBLE OR SPECULATE.
- Buy your own home: Earlier you buy your home, sooner you’ll find you have exhausted repaying the loan. E.g. if you take a home loan of 20 years, when you are 25, you’ll find you are debt-free by the time you reach 45. This means you’ll be debt-free by the time you retire.
These are some of the useful investment option for people in their 20s. follow them and you’ll grow healthy and wealthy in your old age.
Today stock markets are at an all-time high. The companies are reporting rise in their profits and are giving out hefty dividends. Yet why are investors not making any money? Why are only a few investors getting richer?
Well, here are the reasons why this happens. Avoid these mistakes and see a rise in your wealth.
- Concentrating a lot on growth: A company may have taken a lot of debts in order to fuel its growth. But its profits may be sinking. This means the company is in big trouble when the recession strikes or when the interest rates go up, as it can make it difficult for the company to meet its obligations. Instead it would be better if the investors pay attention to the company’s financial statements to avert their losses.
- Overconfidence: Many people tend to adopt the same approach to stock investing as mutual funds. They buy more of poor-performing stocks if the stock price goes down, as they would do with a mutual fund. But while mutual fund is a collection of different stocks, direct stock investing involves only one stock. So if the stock is performing poorly, sell it and move on to better performing stock.
- Concentrated portfolio: When a particular sector is doing well, people tend to accumulate more of the companies included in the sector and ignoring others. Similarly if small and mid-caps are doing well, people tend to accumulate more of them and ignore others. This lop-sided portfolio will end up ruining your wealth.
- Excess activity: Different analysts and brokers have different opinions about the stocks in your portfolio. While one broker recommends you sell stock A, another will tell you to buy the same stock. The result – balance sheets of the brokerages go on increasing. And of course, it is from your pocket.
No wonder with all these mistakes, people don’t make any wealth in the markets. Stop these mistakes and watch your wealth soar.
We all know that equity is the best asset available to help you become rich and achieve your various dreams. However you need to be very careful when investing in equities. So how do you become a smart investor? What should you do to get the best returns from your investments? Here are some important tips that you must follow to be successful in equity investing.
• Think long-term: Equities are a long term investment option. Ensure you remain invested in the stock market for at least 5-6 years.
• Invest in quality stocks: Look at the company’s performance, its various ratios like PE ratio, debt-equity ratio, EPS etc. Compare these ratios with its competitors’ ratios. Find out the company’s growth prospects and check if the company has sufficient cash in hand to tide over any financial emergencies.
• Don’t listen to noise: Noise is the useless information that emanates from the stock markets. E.g. during the recent financial crisis, many large FIIs withdrew their monies from Indian stock markets. This led to market crash, which scared many local investors, who withdrew from the markets, thus worsening the situation. But despite all this, Indian economy remained healthy.
• Check out the reputation of company management: Find out what is the reputation of company management. This will prevent the occurrence of Satyam-like episodes to a great extent.
• Don’t be swayed by market movements: Market movements are for the traders, who are interested in making the quick buck from the stocks. You, as an investor should not worry about market movements as you are going to be in the market for a long time. Over a period, stock prices even out, helping you recover your losses.
• Read the company’s financials carefully: Go through the company’s balance sheet carefully. Attend the AGMs of the company and understand more about the company’s future plans.
• Be aware of the risk-reward ratio: Certain stocks like mid and small caps are very rewarding but very risky. These stocks can easily become very illiquid, or the companies can close down. This exposes your investment to excessive risk. So be aware of it before investing.
• Diversify your portfolio: While equities should comprise 70% of your portfolio, divide the balance amongst other asset classes like FDs, gold and realty. This will protect you against market downturns.
Investing in stock market is a long term game. It is risky, yet rewarding. It is important to balance your risk vs rewards to get the best from your stocks.