Friday, October 17, 2014

Buy low; sell high: fundamental rule for security investments

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How to play safe with equity investments
Adhil Shetty

BankBazaar.com

With the stock markets achieving high growth and a sustained bull run, a lot of investors are seeking ways to maximize their gains. While making gains in such a cycle is a great opportunity, investments must be done with due diligence and thoughtfulness. Equity markets irrespective of the high sensex figures remain a highly volatile and high risk investment market that must be planned carefully. A lot of first time investors in their quest for making a quick buck often end up burning their fingers and losing their investment in the market. So, before making any equity market investment, make sure you understand the risks involved in the market and do a complete study of the underlying investment securities.  

While there is no single rule that can guarantee safety in equity market investments, following a dedicated and principled path can make sure the investment has a higher chance to stay safe and offer better returns all through the year. Let us look at some of the ways one can play safe in the equity markets.

Mutual funds versus stocks

One of the basic dilemmas almost every new investor has is to choose the best suited security for investment. Shares versus stocks seem to be an age old debate, but the answer is that there is one clear winner. Both equity stocks as well as mutual funds have their advantages and disadvantages. It all depends on the investor and how familiar he or she is with the stock markets and its day to day functioning.  

For a new investor, mutual funds offer a safer alternative to enter the equity markets. Mutual funds are not only managed by professional fund managers who know their job of investing in the right sectors at the right time, but mutual funds also offer a systematic investment plan allowing fixed monthly investments rather than a lump sum investment in case of equity markets.

However, for the more advanced investor who knows the fundamentals and market dynamics of any company and its growth prospects, investing in shares of that company directly could lead to a better growth cycle compared to mutual funds.

Diversify your investments

If there is one advice that can act as a golden rule for investing, it has to be about the power of diversification. The market moves in various waves and cycles. One must always plan his or her investment in such a way that all broader bases are covered. For example some part of the investment portfolio must be allocated to low risk securities like debt funds, bank fixed deposits and government bonds. Some part of investment can be devoted to gold and mutual funds while a similar share can be allocated towards shares and securities.

Even while investing in shares and mutual funds, make sure to maximize the coverage by covering all possible sectors to increase chances of growth and covering risk in case of bad market performance.

Tips on choosing the right funds

Choosing the right mutual fund has a direct correlation between success and failure in the equity market. A lot of people venture into mutual funds by following the crowd, without doing any fundamental study on the sectors the fund is associated with. Before choosing the mutual fund it is imperative to check the various sectors that the fund invests into, the past performance of the funds and its underlying sectors as well as the previous performance of the fund manager managing the mutual fund. All details of the fund manager and the portfolio of the mutual fund are made available on the website of the concerned mutual fund house and in its prospectus.

Stay put or book profit? 

With the market entering a bull run cycle, one of the biggest dilemma faced by almost every investor is to have a balance between exiting the security and stay invested in the same. The key to exiting the right time is averaging your overall investment goals. There is also a case of doing some research and brushing up the knowledge of various technical tools like candlesticks and Fibonacci charts to make sure you are exiting at the right time.

‘Buy low; sell high’ remains the fundamental rule for security investments and many investors often get their timing right. In case you did not get your timing right for one stock, do not get disheartened and try to understand the market dynamics and technical trends in more details to make sure you know the best time to exit the market.

Keep your expectations realistic

There is no magic formula to double your investment in six months or one year. Slow and steady wins the race is the golden rule for equity market investments. Always make sure to keep your expectations realistic so that you are not disappointed in the long run.

Remember, investment is a journey and you will gain some and loose some as you go along. Make sure to make a steady attempt to maximize your gains and minimize your loses to emerge as a winner at the end.

Stay informed

A lot of investors invest in a particular company share or mutual fund and forget about it. It is always wise to keep a track on your investment and the fundamental sectors to see if any big change is about to emerge or that sector. Foreseeing a positive change can make a difference between a winning stocks or a losing one. Keep yourself informed and up to date with news and analysis rather than acting as a passive investor.

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