December 29, 2014
Stock markets have seen phenomenal upside in last one year. Media is abuzz with stories of several companies whose share prices have doubled or even tripled in this period.
Individuals are suddenly getting interested in investing in shares. With Mr.Modi being the prime minister of India and ‘Achhe Din’ ahead of us, making money from the stock market seems to be a walk in the park. Nobody wants to lose this sure shot(?) opportunity of creating wealth.
We believe that investing in quality businesses by buying stocks is a good way of creating wealth. However, investing in equities directly is quite risky. Only with sufficient money, time, discipline and knowledge, one can think of creating wealth from stock markets.
Individual investors willing to take this plunge should ask themselves the following five questions before committing their hard earned money to stocks directly.
1. Do I have the knowledge and tools to research and identify good companies to invest in? Or I am planning to invest on the basis of tips provided by TV channels and my friends?
Wealth is created by quality businesses. With changing market dynamics, it is not easy to identify quality companies that shall consistently grow and reward their shareholders. An individual should have the knowledge, time and research material to identify such companies.
It is a mistake to think that money could be made by watching TV channels and reading newspapers. Every person watching the same channel has the same information. Even the person shooting that TV program in studio has the same information (That too before you get it).
How do you think you will make money from the information, which you are the last one to receive?
2. Do I have enough money to buy stocks of multiple companies to diversify my portfolio? Or I am planning to play with few thousand rupees to see how I perform?
Buying only one or two stocks pose a huge risk to investment. If these one or two companies do not do well, even your invested amount may be at risk. A more structured way to create wealth is by diversifying your portfolio among 10-20 different stocks.
A quality portfolio of 10-20 stocks shall require at least Rs. 50k-100k to buy only one share each of 20 quality companies.
An indicative portfolio of 18 well known companies
Note: This is only for illustration purpose and should not be treated as an investment advice for any specific stock.
If your total planned investment is few thousand rupees, there are high chances that you shall buy shares of smaller companies (whose share price is 10-50 rupees) and thus will run risk of investing in low quality companies with no great cash flows or business models.
3. Do I have enough tools and time to track my investments? Will I be able to manage my investments if I get more responsibilities in my office?
Investing is not a one-time exercise. One needs to track his investments periodically to keep the portfolio up-to-date by making necessary changes, as and when required.
Individuals who have junior or middle level roles in their office may find time to invest and track their portfolio. But once the responsibilities increase, or if the job demands travelling or frequent transfers, executives can hardly find time to research and manage their investments.
Investments in shares, if not tracked, may sometime go horribly wrong even in well-known companies. Satyam, MTNL, Educomp, Suzlon, Unitech, JP Associates, DLF. The list is endless.
4. Am I looking at creating long-term wealth by systematically investing in equity market? Or am I looking at making some quick money because I feel market will go up in future?
As I mentioned in the beginning, every expert, business channel and newspaper is positive about outlook on India. I do share the same enthusiasm and positively feel that India is the place to invest.
But, to invest in equities for short term gains has normally proven otherwise to investors in past. People have lost significant money by following the herd mentality and believing that the markets shall only go up.
More than watching the Stock Market over short term, one should look at long term Economic Progress of the country and invest systematically in a diversified portfolio of quality companies to create wealth.
5. Have I already made sufficient investment for my future financial goals and I plan to invest spare money? Or is this some money with me that I want to play with to gain from stock market?
This is the last but the most pertinent question to ask yourself before investing in direct equity.
Every individual can have financial goals like supporting parents, planning for children education and marriage, planning for retirement, owning a house and so on. Before committing money to the most risky asset, it is important to list down your personal, inevitable financial goals and invest your money for these goals first.
Once you are on the road to completion of your goals, you may think of experimenting with your spare money to fulfil your desire of investing in stocks.
There is no denying of fact that equity investing creates huge wealth. But individuals planning to invest directly in stocks should understand that it is not everybody’s cup of tea. One needs deep knowledge and understanding of economy and industry, discipline, research material, time and patience to reap benefits of equity investing. If you are blessed with all these qualities, you may look forward to investing directly in equities.
For individuals looking for creating wealth with peace of mind, diversified mutual funds provide a well-researched, professionally managed, low cost and transparent investment option. With no restriction on investment amount, one can start with as low as Rs. 1000 per month with no upside limit. So whatever your pocket size is, just go ahead and make your dreams come true with diversified equity funds.
Pawan Agrawal is the founder and managing partner of Investguru. You may reach him at firstname.lastname@example.org .