How to Invest in Share Market with Limited Funds?
Investing is all about making you money work harder for you. Most people have incomes and they also have expenses. It is out of this income that they need to save for a rainy day and also invest for their secure and fruitful future. On the face of it, this looks like a steep challenge. But all that you need to do is to plan your investments properly and invest with discipline. Let us first look at the approaches to investing.
Approaches to investing
For an individual looking to invest with a view to creating wealth in the long run, there are different ways of investing. It is essential to know the gamut of options available before making the choice.
- Firstly, there is low risk versus high risk investing. Low risk investing would entail keeping money in government bonds, money market funds or just in a bank FDs. This can be safe but less productive in the long run when compared to equities.
- Secondly, there is the direct versus indirect approach to investing. You can look to directly invest in equity stocks or indirectly through equity funds. That would depend on your level of expertise and comfort with equity as an asset class. Investing in equities requires a high level of research and understanding.
- Finally, there is the active versus passive approach. A passive approach is about buying index funds and be happy with index level returns. The other option is to invest actively where a conscious choice is made of what stocks to invest in.
What are some of the Do’s and Don’ts of investing?
Before looking at how to invest in share markets, let us look at some basic dos and don’ts that you need to scrupulously follow while investing.
- Take a long term view to equities. Investing in equities for the short term can be extremely volatile and you could be disappointed with 1-3 year time frame.
- Do your homework before you invest in equities. It is essential to understand the business, its earnings and its management quality before investing.
- Every stock has a business behind it and so you must begin by understanding the business. Stock price will eventually move towards what the business is worth.
- Look at equities like bargains. There is nothing as exciting in equity investing as buying quality stocks at cheap prices and low valuations.
- Don’t panic once you have invested in a stock. Business reality takes time to reflect in stock price so you have to be patient.
- Don’t give too much credence to rumours and electronic media attention on the stock. A good business is a good investment irrespective of these factors.
- Don’t compromise on quality. The last two years have clearly shown that when the chips are down, it is only the quality stocks that survive.
How to make a wise investment decision in equities?
The great mathematician once said that there is no royal route to geometry. So also; there is no royal route to success in equity investing. This five point approach can certainly help you make wise decisions.
- Always start with your goals in mind. Write down your long term goals and structure your investment mix accordingly. You cannot invest at random. There has to be an overall asset mix that you must adhere to and keep rebalancing.
- Adopt a systematic approach to investing. There are two distinct advantages in this systematic or regular approach to investing. Firstly, it lets you synchronize your outflows with your routine inflows. Secondly, you get the benefit of rupee cost averaging.
- Invest in stocks online; either via the internet interface or via mobile app. There are some crucial advantages. It is more economical, the execution is quicker and as an investor you have greater control over the trade and also the post trade processes.
- Continuously benchmark your portfolio. You must compare your equity returns with the index, the peer group and also with an index fund. Remember, when you invest in equities, outperformance in the long run is the key.
- Periodically have a time table to review and rebalance your equity portfolio. You must rebalance when there is change in goals or when there is change in market condition or when the current allocation is out of sync with your original allocation.
Equity investing is not so much like rocket science. A little bit of discipline and a lot of patience can go a long way!
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