This explains how you can go about building an equity portfolio
The domestic stock markets are in a consolidation mode. They have been drifting downwards since the last few weeks after touching all-time high levels in November last year. Many blue-chip stocks have corrected quite significantly from their yearly highs, and are trading at attractive levels.
The main reason for the profit booking in the markets include the persisting high inflation rate, rising interest rates which have started to impact economic growth, stretched valuations in the markets and funds being diverted by foreign institutional investors (FIIs) due to the improving situation in the developed markets.
Analysts believe the markets will consolidate in a range with a negative bias in the next few weeks before a reversal in sentiment. The correction is a good opportunity for long-term investors looking at entering the markets with a long-term perspective. However, as in any other business opportunity, investments here also need time, understanding and regular tracking in order to produce the expected results.
These are some major aspects of building and managing an equity portfolio:
Investment planning
Realistic expectations: First of all, it is very important to set realistic expectations from equity investments. There is no doubt equity-based investments have given dramatic returns during certain periods in the past, but it is important to keep in mind that past performances may not be repeatable in the stock markets.
Time management: Investors should plan the investment horizon, the risk that they can take and the time that they can devote to tracking and maintaining their portfolio. This will help in identifying the right investment instruments for the portfolio.
Risk appetite: It is important to understand that investments in equity-based instruments are risky, and in adverse conditions investors may face a loss of principal. It is advisable to invest only your risk capital in equity based instruments and understand your risk profile to identify other appropriate instruments. Risk profile depends on many individual factors such as age, financial background, earning visibility and stability, and family background.
Diversification: You should allocate a percentage of your total portfolio to equity-based instruments. Look at diversification and balance your total investment kitty among various kinds of investment instruments such as life insurance, medical insurance, tax-saving instruments, commodities, property, and bank deposits.
Avoid timing the market: It is not possible to predict market movements and buy during the bottom. Therefore, investors should look at buying in smaller quantities at regular intervals in order to ensure a good average entry price.
Identifying stocks
Here are some methods to identify sectors and stocks for your portfolio:
Analysis: Making an analysis of stocks and sectors is possible for experienced investors. This includes past performance of the stock with respect to market indices, outlook of the sector, management guidelines for the future on business and earnings visibility etc.
Other investors can go in for some basic research. For example, figure out the price-to-earnings (PE) ratio of a stock and compare it with its own historic PE ratios, and PE ratios of its peers.
Expert opinion: Many investors rely on tips from experts, stock brokers etc to invest in the stock markets. Investors should try to understand the basis of the recommendations.
