Thursday, May 28, 2009

HOW TO INVEST IN EQUITY MARKETS IN TIMES OF VOLATILITY

The Indian Stock Markets are showing consistent sign of exuberance ever since the results of the 15th Lok Sabha General Elections have come in. The mandate is being hailed as " historic and path breaking" considering that it is for the first time in nearly two decades that a single party has managed to cross 200 MP mark on its own in the Lok Sabha. As soon as the results came in , the market experts hailed it as game changer for the stock markets. Congress was expected to bring in sweeping reforms on back of a decisive mandate. The same optimism and hope was reflected in the historic rise of stock markets the following Monday when the trade had to be suspended because the markets had breached the upper circuit twice in a single day. This was historic indeed.
But, today as the final lot ministers got sworn in , much of that optimism and hope is being proved little too much for the government to live upto. The government is full of old faces and as such chances are that the pace of reforms may not be as fast as the markets expect them to be.
The Indian stock markets have appreciated by close to 70% from its lows last year. The market is now trading at 16 times the forward earnings while just 2 months back it was trading at 9-10 times the 12 month forward earnings. At these levels, one surely needs to be cautious before approaching the markets. This is not to say that one should shun the markets , but, surely there is need for more rational approach to it.
So, as a retail investor, what should be your strategy in these times. I think for an average retail investor looking to build wealth over a long period of time , following should be the way to go
1. Continue to invest in equities at every dip in the market - Considering that the markets are slightly over valued at this point in time, chances of correction in the market are there and as such as an investor, you must look to buy at every dip in the market. The markets will be volatile and this strategy will help you keep the cost of entry low.
2. Don't look to make quick kill - As a serious retail investor you should not look at equity markets as a place to bet and make a quick kill. This is a dangerous game with too much risk for an average investors appetite. Leave this "Buy in the morning and sell in the noon" strategy to the traders.
3. Always look at fundamentals of the company and its valuations- Some things never change as far as investing in equity markets are concerned like the business fundamental of the company, its management quality, the scope of business, its valuation etc. You must look to invest in a good company with sound business fundamental , great management team . You must alos look at the price at which you are getting into the stock. As you would appreciate that your final returns on your investment is a function of your entry price, you must look to buy stocks which are not very expensive, even though , they are of good companies.
4.Stick to SIP if you have time on your hand- If you are below 40 years of age, then you can not afford to miss equity as an investment option and since time is at your side, best strategy would be to stick to your good old SIP. It will take care of the entry price by the virtue of it's rupee cost averaging tool. You must invest in 5 star rated funds only . Check out morningstar and valureasearchonline.com ratings to spot the winning funds in each category.
5. Don't base your investment decisions on so called "Experts" - One of the most common mistakes people make is to make their investment decisions in equities based on the advice or opinions of the experts on TV channels. For record, most of these experts are proved wrong over a period of time. No one predicted the 2008 bear market and similarly no one predicted the current rally in the markets. On the contrary, most of these experts were busy painting rosy pictures and talking about how BSE would touch 25000 by 2008 end etc. Fundamentally stock markets do not behave in any predetermined rational way and as such it is impossible to predict its movement with certainty over a long period of time. Anyone attempting to do so will be proved wrong more than he will be proved right. So, next time you tune in to listen to these experts , listen to them but when it comes to investing make an informed choice.

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