It is no secret that equities have the potential and the track record for generating inflation-adjusted returns over the long term. This makes it a must-have investment idea for your long-term goals. According to a Morgan Stanley Report titled Asia’s Financial Acceleration – Moving Centre Stage, within the Asian Region, the Indian equity market is expected to clock a CAGR of 10.1% to reach USD 6.1 trillion by 2027.
Also, the past year was one the best for the Indian equity market as S&P BSE Sensex earned 35% returns in dollar terms, the best since 2009. The returns generated by equities prompt investors to consider this asset class.
Here are some suggestions for making money in equities.
- Invest in Fundamentally Strong Companies
The first step in equity investing is to identify stocks of companies that have robust fundamentals. Mutual funds make this easier. Most large-cap funds invest up to 80% in the top 100 companies by market capitalisation. Such a portfolio makes it easier to ride the volatility and prevent major dips during bearish phases.
- Have Realistic Expectations
When investing in equities, have realistic expectations. While more risks can mean more returns, it is not always the case. Some experts suggest that 10-14% p.a., return in the long-term is a fair expectation from Indian equities, anything more can be unrealistic. Align your actions with these expectations. If your goal is reached, sell and book profits.
Diversify your Portfolio
Traditional wisdom forbids keeping all eggs in the same basket. Diversification is
the key to cushion a portfolio from erosion during market swings. It refers to
spreading risks so that even if one or a few ideas are not performing, the gains
from the others lend a balance. Mutual funds offer this much-needed
diversification as one can choose from an array of diversified equity funds, multicap
funds, and hybrid funds.
- Avoiding Timing the Market
Trying to time the market is a fundamental mistake that some equity investors make. They try to guess the bottom (to enter) or the top (to exit). However, no one can predict these movements – not in the short-term, and certainly not consistently. It is equally difficult to predict the period for which the rally will be sustained.
Various systematic and unsystematic factors play a role in dictating market movements and hence ‘time in the market is more essential than timing the market’. Investors trying to time the market more often than not end up making losses. Hence, it is recommended that equity investors consider SIPs to spread their investments across bullish and bearish phases, thereby achieving cost averaging.
Stay clear of the herd mentality and make goal-based investments as such a move will prevent impulsive decision making and will help you zoom out to see the bigger picture when the market drops temporarily.
- Staying Invested for the Long Haul
While past performance may or may not be sustained in future, historically, equities have delivered better in the long-term. When you stay invested, you allow compounding to work its way and have a multiplier effect on your wealth. Hence, it is recommended that investors consider equity mutual funds for goals that are at least 8-10 years away.
Equity and hybrid funds from IDFC Mutual Fund help you build a diversified portfolio and plan your investments for long-term financial goals. To know more, subscribe to our page.
Visit www.idfcmf.com for more details.