Make Equity Investing less tricky: the JainMatrix Eleven

I’ve been through a cycle of Education, Corporate life, Jobs and Investing long enough for me to understand the importance of starting Equity Investing early. Once you start earning, and ‘roti, kapda, makaan’ are doing ok, you need to take care of ‘long term wealth creation’.

I know that a lot of people wince when told about the ‘share bazaar’ and recount deep losses of their own or a close friend or family member. But Investing if done with some care and control can certainly build you good assets and a lifetime of gains.

There are ways for an Indian investor to make Investing a profitable process. Here are my top eleven tips.

The first five, for those new to Investing:

#1 – Make a Plan: Before you take any investing decision, run your numbers. If salaried, you need to pay your monthly rent or Loan EMIs. Next your food and utilities (electricity, internet, telephones and fuel) payments. And money for the family back home. After your essentials, the available funds are for entertainment, gifts, vacations and savings/ investing. Some professional planners recommend 10% of take home set aside for long-term investments like equity. Others work backwards from your future expenditures and commitments like children’s education, retirement, etc., incorporate inflation and a simplified return rate, and come up with a monthly amount you should set aside. Take any approach. Come up with a monthly investable amount.

#2 – Understand Risk, and Set your expectations: Understand that by nature Equity investing is far more volatile than a Fixed Deposit. There will be bad years. A 30% fall in Indices can happen once in 5 years. But most other years will be flat or positive. Gains can be as high as 50% in good years. An expectation of 20% gain per year over the next 4-5 years starting today, is a reasonable target to set. See Fig 1.

Risk and Returns, JainMatrix Investments

Fig 1 – Risk and Returns, JainMatrix Investments, Click image to expand

#3 – Get a Demat account, and Invest through SIPs: Today a Demat account is to investments what a savings bank account is to finances. Pretty essential. The choice for this can be based on convenience. Can your current Bank offer you a linked demat facility? The cash transfer would then be easy. Or you need to find a good broker. If you are internet savvy, go for an online trading account, linked to the demat and savings accounts. Systematic Investment Plans normally involve investing a monthly sum of money into a chosen basket of investments, like MFs or a group of stocks through Direct Equity. The SIP approach helps as in times of bear markets, the investor accumulates a larger number of shares (or MF units). And in bull market periods, he can gain from the appreciation of his portfolio.

#4 – Start with Equity Mutual Funds: The entry point, and safest initial experiences with equity can be MFs. Typically a MF consists of a portfolio or a group of shares chosen by an equity analyst/ Portfolio manager.  This group can be chosen by company size and market capitalization (Large Cap, Mid cap and Small cap) or vertical (Banking, Pharma, Consumer, Auto, etc.) or ownership (PSU, MNC, etc.) or an Index (Sensex, Nifty, etc.; these MFs are known as ETF – Exchange Traded Funds) or some other theme.

#5 – Move to Direct Equity: Direct Equity is a lower cost, more powerful way to invest in Equity. The MFs also may not be the best vehicle for investing if you want better returns at lower costs. They charge a management expense that eats into your gains. And performance varies widely from year to year, rarely providing consistent gains (with a few exceptions). Instead take inputs from professional Investment Advisory Services (like my firm, JainMatrix Investments). Such services focus investments from the very broad portfolios of MFs to a smaller focused group of stocks.

The next six for experienced investors:

#6 – Have patience …… and review your portfolio periodically: In long-term investing, returns come with time. The important thing is to get your portfolio right up front with some research and discussion. Then stick with it for a decent period of time, measured usually in years. Annual reviews are definitely required. A subscription with an Investment Advisory Service (such as JainMatrix Investments) can also give you more frequent monthly inputs that can reinforce your choices.

#7 – Exit your laggards, reinforce your winners: A good Portfolio Manager is able to make successful share picks only 6 out of 10 times. So it’s no big deal if some of your picks give losses. Some stocks just do not go as planned or expected. Once you have given the share a fair amount of time, and the fundamentals are just not looking up, and it remains loss making, exit. You are saving yourself from extended losses. Doing this is difficult with shares that have in the past given you great returns, but are now looking flat or weak for a long time. Unless there is a good explanation for the under-performance, and a convincing reason that these conditions are going to change in the future, it’s better to exit the stock. If required, get advice from your Investment manager.

#8 – Don’t transact very often: Every purchase and sale of shares or MFs costs you 1-2% of your asset. An investor should not do too many trades. Note that many Brokers, Portfolio managers and MF distributors may be compensated (partially or fully) from every transaction you do. It is in your interest to reduce the number of transactions, and examine such advice closely.

#9 – Taxation is important but not critical for portfolio decisions: The current Indian taxes on securities are pegged at your personal Income tax rate for Short Term Capital Gains (STCG) or gains in a holding period of less than 1 year. Taxes are zero for Long term Capital Gains (LTCG). It helps if every gain is a LTCG. But if there is an unusual gain in the short-term, unlikely to extend, by all means, book your gains. From a taxation point of view STCG and STCL – losses – can cancel each other out in the same financial year.

#10 – A Note on Trading, as different from Investing: I will quite simply call Trading as an equity purchase made with the intention to profit from price movements rather than from an appreciation of the value of the underlying business. Typically trading in India involves a holding period varying from a few hours to less than 2 months. Lets be clear that in Fig 1, Trading is on the right hand side, beyond and larger than Small Caps in terms of Risk and Returns. Trading for many is a profession that requires many years of learning before you get profits. Beginners are advised to have adequate preparation before trying to trade. I’ve seen rich grown men lose their life savings due to the addictive attraction of quick gains from trading. If you just want to gamble, go find a Casino. At least you will enjoy the ambiance while losing your money!!

#11 – Humility and Continuous improvement: Learning is an ongoing requirement. Change is constant in our lives. There are new companies, new sectors, new government regulations and increasing international influences. Like in any other sphere in your life, be open to new ideas, study and learning, and engaging in discussions with even those with opposite views. Something valuable may come out of it!!

I just read an article by Richard Branson called ‘Make Travel less tricky” and liked the concept so much, it gave me idea for an article on investing. Thanks Richard Branson, thanks Mint :-) 

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  • An Investor’s Checklist – LINK
  • For Long term investments start a direct market SIP – LINK
  • Bharti Infratel IPO: Aggressive offering of Passive Infrastructure LINK

Disclosure: It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it.

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