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I have just retired from service 10 yrs earlier on VRS. I am hoping to deal in stocks slowly initially and as an occupation a little later. Do you think it is a good time to start and how much should I start with?
Sankar Aiyer | Nov. 9, 2011
First things first, you need to be very clear what is the biggest reason you want to invest in stock markets. Is it to meet some short term financial need (like a loan repayment in 1-2 years)? Or is it to meet a long term financial goal (which is still 5+ years down the line).
If it is the first, then you must stay away from stocks. However, if your needs are long-term in nature, stock markets are a good place to be in.
Also, any decision to invest in stocks depends a lot on your financial position – whether you have any dependents who might need money in the future, or whether your dependents (like your children) are all well-settled to take care of their own needs.
Then, have you kept enough money aside for any possible emergency – like a health issue?
If you are comfortable on all the above fronts, and want to stay invested for the long term (at least 5 years), you can go ahead and start investing some money in the stock markets. This you can do in 3 ways (or a combination of them):
- You can study businesses and identify good stocks on your own
- You can hire the services of a consultant who can advise you good stocks for long-term investment (here you need to be very clear about the character and principles of the consultant, and he must be an ethical person)
- You can start Systematic Investment Plans (SIPs) in some good mutual funds (a good financial planner can help you decide on such funds)
At your age and risk-taking ability, I would recommend you opt for the third option whereby you can start SIPs in some good equity mutual funds.
Keep investing small amounts of money every month instead of committing a big amount at one go. And then leave that money for the long term so that it can grow.
Vishal, is this the right time to jump in the stock market, or is it better to be on sidelines and wait and watch?
Ankur Gupta, Mumbai | Aug. 15, 2011
Experience has shown that markets rebound and grow over time. The key question is your time horizon.
So if you are looking to invest for the long run (say 5-10 years or more), buying stocks near the bottom of the market (when the fear runs the highest, as it is now) is a good strategy.
This is simply because a long-term commitment gives you ample time to ride through any short term market volatility.
However, I’d suggest that you invest in bits and pieces, as investing in the current markets is like catching a falling knife.
You know how our hands move when we catch a knife. To avoid getting hurt, we drop our hands slightly as soon as we hold on to a falling knife.
Similarly, while investing in volatile markets, and especially when there exists a huge amount of near-term uncertainty, you will do well to start investing small amounts of money, either through SIPs in some good mutual funds or directly into stocks.
Do you recommend that a man earning an average income include some stocks when he invests his savings for the long term?
Ankit K, Mumbai | July 24, 2011
My answer would be definitely ‘Yes’. This is simply because stocks have the advantage of representing sound, growing investments in the Indian economy, and with a higher return than you would get on bonds.
Also, stocks carry some measure of protection against inflation. Given the double-digit inflation we have seen over the past two years and that inflation is expected to remain high in the future (expect a 7-8% range), stocks (and only the good quality ones) will provide better protection to your savings.
However, I would like to mention one thing here…and believe me this is a very important consideration before you start to invest in stocks.
If you don’t have much savings and want to ‘try out’ investing a small sum in stocks, just because someone has told you that you can earn good money from the stock markets, my suggestion to you would be to just stay out.
My reasoning for this is that whatever you could gain by having little amount of stocks in your savings won’t be large enough to justify the amount of intelligence and character you would need to carry out investments in stocks soundly.
In simple terms, what I mean is that if you want to become a chemist selling medicines (akin to investing small amounts into stocks), why take the effort to study to become a doctor (having the intelligence and character to buy stocks sensibly)?
So just keep away from buying stocks, and instead put your savings in some good quality mutual funds, government bonds or bank fixed deposits.
How can a retail investor minimize the risk exposure due to ultra high volume activities from Foreign/Institutional Investors in MF/stocks?
Jitin Arora, New Jersey | July 21, 2011
There are two ways a retail investor can minimize the risk exposure due to ultra-high volume activities from FIIs & Domestic Institutional Investors (DIIs):
1. Invest for the long run: Please note that the real ‘risk’ in stock market investing comes from nothing else but not knowing what you are doing. So if you buy a stock without studying the company and without knowing whether the price you are paying is right or not, that is the biggest risk you are taking. The risk on account of high volume activities of FIIs and DIIs is something that a trader/speculator must be worried about, and not a long term investor. This is because both FIIs and (most) DIIs are fair weather friends. They buy and sell stocks with great rapidity, just because they need to ‘show’ some kind of performance to their ultimate clients. You, as a small investor, have an advantage in this respect because you need not worry about someone else’s returns and must concentrate on what is good for you. So, just ignore what the FIIs and DIIs are doing. In fact, when these big investors are panicking, it gives you all the more chance to pick up your favourite stocks cheap.
2. Invest in stocks with good liquidity: This is another factor that you must take into account. A stock that is illiquid (less traded volume) is highly volatile, as even a single FII or DII activity and create sharp movements in its price. So, invest in stocks that are traded in reasonable quantities on the stock exchanges. You can get the ‘traded quantity’ data on BSE’s website.
As far as mutual funds (MFs) are concerned, while these are not that much impacted in the short term due to high activity by FIIs and DIIs, again it pays well to stick with good quality funds – those that have well laid out process, non-flashy fund managers, and past track record of good performance.