THERE is optimism and euphoria in the air. The Sensex has crossed 18k levels (intraday on July 14) and touched a 30-month high. Once again, conversation at social gatherings is moving to equities and almost everyone has an acquaintance who has doubled his money in the stock market. Brokerage firms are once again getting active and using customer greed to encourage them to go for short-term trading. With the Sensex trading at 17 times 2011 earnings, the markets are definitely not cheap. Hence, at such times, investors should not get trapped in this euphoria. They should understand what kind of equity products are best suited for them and accordingly stay with them.
Systematic Investment Plan (Sip)
Most retail investors do not have the time and energy to track stock markets. Very few of them have the ability to crunch numbers or dissect balance sheets, read transcripts of conference calls available on company websites. For someone who has no time to track the markets, follow day-to-day movements or understand financial numbers, balance sheets, Systematic Investment Plans (SIPs) could be a good starting point.
Once you have an asset allocation in place, you could start investing the equity component of that allocation through SIPs. When the market goes up, you get lesser number of units. When the market moves down, you get more number of units. SIPs help you in investing regularly and in a disciplined fashion that helps you tide over volatility in the stock markets.
Diversified Equity Funds
Once you understand the basics of investing, you could opt for diversified equity funds. Equity funds offer you the benefits of diversification with a fund manager's expertise at a low cost, without having to bother about the hassles of maintaining a broking account and a demat account. Retail investors should invest in large cap diversified funds or exchange traded funds (ETFs) with an established trackrecord.
Direct equities: The lure of spotting multibaggers and making a quick buck lures one to trading in direct equities. However, one must remember that there is a lot of hard work and risk involved here. Trading and short-term investing is not easy. If you are a short-term investor, you need to follow trends, track news and how it affects the markets, be ready to book losses. If you are a long-term investor and believe in the fundamentals of the company, you need to research how the industry in which the company operates functions. This entails reading and understanding macro economic factors, watching results, reading transcripts and forming an opinion about the company. Also, one must remember that while the top 100 companies would be covered by analysts and fund managers and may be fairly transparent in sharing information when it comes to mid-cap and small-cap companies, access to information will not be easy. Only if you have the time and expertise to follow the markets, should you opt for directs equities. Hence, weigh your options appropriately before jumping into the world of equities.
Investing overseas: It may be exotic and tempting thinking about owning a share of Apple or Coca Cola or Wal-Mart. Using the RBI window, you can invest up to $200,000 overseas every year. However, it is very difficult to track your investment overseas. So, one must realise that investing overseas is something for high net worth investors.
Investors with more than Rs 50 lakh invested in traditional asset classes of equity, debt and cash could look at investing in alternative assets like international commodity ETFs for global portfolio diversification. While investing in international commodity ETFs, they should invest for their medium- to-long term goals with a minimum 3-year time horizon to minimise the impact of capital gains tax outflows.
