While you don't need the level of expertise that fund houses and brokerages demand, some ground work is a must to select stocks.
Bye bye 2010 — Welcome 2011! While a new year calls for celebrations and partying, it also calls for you to make some new resolutions for the year. And what better way to do it than make some smart investment resolutions? . Here's offering you a start.
I will commit to saving: First things first. There can be no portfolio unless you save. And so before you go ‘duh', note that you may well have started off saving perhaps even last year. But with mounting expenses , you may have put off investments till you accumulated some cash. The result: Before you know it, the year is over. The rule here is, therefore, discipline. Earmark a certain amount to be saved every month and invest. What's more, phased investments will negate the fall out of investing at highs and shying away at lows, averaging out cost of investments. How to go about it? Well, look at Systematic Investment Plans in mutual funds and don't pull out when markets tumble. Benefit from the power of compounding — reinvest returns earned, grow investment corpus and increase total returns. Discipline also means that you do not glibly convert a short-term investment into a long-term one on grounds of non-performance. Confused? Well, let's see what Arjun, an IT professional did this year. He bought the stock of Punj Lloyd in late September to make a quick buck. But the stock took a downward turn after that, and he decided to hold out.
He is now sitting on deeper losses of over 27 per cent. The lesson: Don't do what Arjun did. If you buy a stock for a quick buck, keep it like that. The lesson: Don't move stocks to your long-term portfolio because it failed to give you quick returns. This, though, does not mean you invest and take a look after two years. No, we're not out to confuse you. Monitoring of your portfolio and booking profits from time to time is a must to make the most of your investments.
I will not speculate with IPOs: Initial Public Offers are not always a sure-fire way to enter stocks at low prices. In fact, of all IPOs that came out in 2010, only 40 per cent are trading above their issue price. Similar to investing in a stock, do your own research about the IPO. Do not go only by the number of times an IPO is subscribed, as it isn't a gauge of reliability or good fundamentals. An analysis of the 2010 offers that saw subscriptions of over ten times shows that half still languish below offer prices and have trailed the broader secondary markets. Offers that come at reasonable valuations are more likely to deliver good performance.
I will look beyond PF: In other words, spread your investments across asset classes and diversify your risk. The investments have the leeway to ride market uncertainties. For instance, if you had put all your money in stocks back in 2008 it would have dealt a severe blow. So, a portfolio should also contain safe investments which earn a regular income, such as fixed deposits, bonds and provident funds. Equity investments such as stocks and mutual funds will deliver a higher return on your investments. Gold will protect portfolios from steep slides. Within each asset class too, there is a wide spectrum of options, which will temper risks and better returns. Consider stocks. A mid-cap focused investment would have given a 67 per cent return in 2007 against the 46 per cent delivered by large-caps. But in 2008, mid-caps would have lost 67 per cent while large-caps slid 52 per cent. In 2010, large-caps notched a 16 per cent return against the 13 and 12 per cent return of mid and small cap stocks. Gold would have given you a 27 per cent return in 2008, countering the slides in equity in that year. This year, gold has delivered a 22 per cent return. With interest rates trending up and new fixed-income products introduced, debt investments too should be considered.
I will not fall for my friend's neighbour's uncle's advice: All right then, so much for a sermon on planning. How do you actually go a-picking investment avenues? Oh! look, your friend made a killing in penny stocks. Your neighbour advised you to be safe and stick to bank deposits only. You read An interview featured where a financial advisor advocating investing in infrastructure bonds to diversify investments and save taxes. Or wait, the dozen news channels sporting brokers, planners, the works, suggesting stocks, bonds and mutual funds for seemingly solid reasons. The deluge of information, abounding advice and not to mention scam exposes could create a potential investment minefield.
The only way around is to also do your own research.
Understand the product, have your own idea of how much risk you can bear, investment time horizon and purpose of investing. Don't invest simply because products are hyped or your friends made money in it or because everyone else seems to be doing so. For instance, before buying a stock, do a fundamental check — go into financials, management and corporate governance. Gauge whether you are comfortable with the prospects of the companyand the risks involved before taking the plunge. Know that it is far easier, for instance, to operate a small cap or a penny stock which could lead to sudden price erosion if such facts come to light.
The stock of Karuturi Global, for example, plummeted 11 per cent in a single day on reports of promoters involved in rigging the stock's price. So before you take that small-cap leap, understand the risks involved.
I will improve my knowledge: This resolution, then, brings us to the final one, that of educating yourself on matters financial. While you most certainly do not need the level of expertise fund houses and brokerages demand, some ground work is a must to select stocks.
Ratios, sales and profit growth, idea about the health of the sector, and so on, could go a long way in helping decision-making. The trusty Internet offers a variety of Web sites offering basic investor education. Here's another good source — read this page every week for the explanations we provide on a multitude of topics!