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Over the last year the Indian stock market regained some of its lost sheen. The BSE Sensex has given a return of nearly 30 per cent year-to-date.
Many retail investors might have missed this rally, as they preferred to stay out, having burnt our fingers several times earlier. You may like to get into the market when you are sure the going will definitely be good.
When you do this, you are timing the market. The problem in such a strategy is that retail investors miss the bull runs and get in the market right before they are about to fall.
The good news is, there is a way around this problem. One of the most prominent shows of ET NOW, Investor Guide by Faye D’souza lists simple and widely accepted facts about investing in the stock markets.
SIP it
Using a Systematic Investment Plan or an SIP will bring down your risk of losing money in the market.
We earn our money in monthly instalments. We plan our expenses in monthly instalments and we also pay our loans in monthly instalments. It makes perfect sense for us to invest our money in monthly instalments as well.
It fits better into our household budgets and reduces the possibility of default. But most importantly, when you invest in the stock market on a monthly basis, you average out the level of the market and bring down your risk.
Diversify
Diversifying your money across all categories and sectors of the market will ensure you are not heavily dependent on a certain sector or stock for returns.
When investing in the stock market, it can be very tempting to bet on a sector or a category of funds that currently seem very exciting but would increase your risk of investment.
In 2006-07 the infrastructure sector was getting a lot of attention, several fund houses launched infrastructure funds and raises thousands of crores of rupees. In 2008, when the market suffered these funds took the worst hit.
Over the last five years the infrastructure category has lost an average of 2.9 per cent and over three years it has lost an average of 3.2 per cent.
Investors who invested in equity-diversified funds on the other hand, have gained 3.5 per cent over five years and 6.1 per cent over three years.
Follow the index
Investing in index funds instead of individual stocks will allow you to benefit from every market bull run and will guarantee you the same return as the broader market.
For those of use who do not have the time or the inclination to track the market on a regular basis indexing is a good option. Index funds will give you the same return has the broader market, ensuring you gain every time the market has moved.
Using the same example as the previous point, investors who choose the a nifty index have gained 3.5 per cent over five years and 6.5 per cent over three years.
Penny saved is penny earned
Money saved on investment costs will increase your returns substantially over the long term. Compounded over time, 2 per cent saved on fund management fees on an SIP of Rs 10,000 a month adds up to nearly Rs 13,50,000 (Rs 1.35 million) over 30 years.
Portfolio
Considering all of these parameters, is it possible to design an investment portfolio that is both cost-effective and low-risk? Well, it turns out there is. At Investor’s Guide, we have put together one such portfolio. A simple combination of two index funds.
These two funds charge customers 0.5 per cent of the invested corpus in fees in comparison to 2.5 per cent charged by actively-managed equity funds. The savings in charges will compound over the long term to increase your returns.
The 30 per cent allocation to the junior index fund will also give you moderate exposure to midcap stocks, allowing you adequate diversification and putting you in a strong position to profit from a run up in any part of the market whether large or small cap.
Investing in these two index funds together will not only keep your costs low while diversifying your portfolio but also spread your money across all sectors and categories of the market.
The important thing to remember is to always use the SIP format of investing to bring down your risk and ensure that you do not discontinue your SIPs or pull out your investment during market bear runs.
For more details on this portfolio watch Investor’s Guide this weekend Saturday at 9:30 AM and Sunday morning at 10:30 AM.
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