New to investing? Here’s how you can formulate your strategy
Ever since the outbreak of the novel Coronavirus, the Indian equity market (the S&P,BSE,Sensex), has been on a rollercoaster ride. In general, it has been a challenge to earn respectable returns. On the contrary, investors have witnessed wealth erosion over the last few months. For newbies equity investing has been such a tumultuous experience and they are perhaps saying, “Cash is King”. But irrespective of whether it is a volatile market or not, if you are new to equity investing, here are some steps you can follow to devise a sensible and solid investment strategy:
- Hold ‘optimal’ cash – neither too much nor too little – for your necessary monthly expenses and emergency purpose. For the latter, you may hold 12 to 24 months of regular monthly expenses, including EMIs on loans, in a separate savings bank account and/or a Liquid Fund or Overnight Fund.
- Set your asset allocation right i.e. how much money you park in equity, debt, and gold (akin to placing eggs in different baskets).
- To optimally set your asset allocation, consider your age, income & expenses, assets & liabilities, investible surplus, risk appetite, the broader investment objective, financial goals, and the time in hand to achieve those envisioned financial goals.
- Set realistic return expectation and do not get carried away by past returns.
- Prudently diversify your investment within each asset class (equity, debt, and gold) to reduce risk. But take care not to over-diversify, because it yields no extra benefit beyond a point, on the contrary, adds to the hassle of managing a bulky portfolio.
- Look at the silver lining amidst the challenging times, and be on the search for appropriate investment opportunities. Make volatility your friend; do not get petrified by it.
- To plan for long-term goals (more than 3 years away), SIP into worthy and suitable mutual funds. While for the short-term goals (less than 3 years), consider recurring deposits and short-term deposits.
- To achieve the envisioned goal, keep investing. If you stop in between, it will apply brakes on the power of compounding and inflation could end up eroding the purchasing power of hard-earned money.
- If you already have an investment portfolio, review it comprehensively, preferably with the help of an expert. Do not take investment decisions (buy, hold, or sell) in an ad hoc or unscientific manner, which may do more harm than good. Similarly, do not base the investment decisions going by what your next-door neighbour, colleague, friend, relative, etc. does with his/her portfolio. Keep in mind, investing is an individualistic exercise. There is no“one-size-fits-all approach”.