Reblog: Five golden rules to always be in profit when you invest in equities

After a rally of more than 8 per cent in the first two months of 2017, voices have become louder on Dalal Street that the benchmark equity indices may touch fresh all-time highs in the coming weeks.

The 30-share BSE Sensex surged 2,186 points, or 8.21 per cent, to 28,812 on February 27 from 26,626 on December 30, 2016.

The momentum may remain positive in the long run, as India could see a rating upgrade in the coming months on account of a slew of reforms by the government, including an ambitious plan to introduce the Goods and Services Tax (GST).

GST is expected to improve tax compliance in the medium term besides removing barriers to investment, particularly for foreign direct investment. It will also improve the ease of doing business.

“India is on the right track to see rating upgrades in the coming years,” brokerage Nirmal Bang Securities said in a report.

If you are an equity investor or are planning to be one, here are a few golden rules that can help you be in profit on Dalal Street.

Rome was not built in a day

This adage perfectly tells the story of investors who bought shares of Eicher Motors in 2010 in anticipation of robust gains. Those who sold the stock in the interim have definitely missed the bus. Eicher Motors is one of the companies that have witnessed tremendous growth in market capitalisation since FY11.

On April 1, 2010, the company commanded a market capitalisation of Rs 1,759 crore, which was 4.52 per cent of Hero MotoCorp’s total market-cap of Rs 38,897 crore. At present, Eicher Motors’ market capitalisation is around 104 per cent of that of Hero MotoCorp. The share price of Eicher Motor has surged 3,590 per cent since the beginning of FY10, rising from Rs 659 to Rs 24,333 at the end of Monday’s trade. The Hero MotoCorp stock has rallied 62 per cent to Rs 3,168 on February 27 from Rs 1,947 on April 1, 2010.

There are several examples that have created wealth for investors who gave time to their investment. Another example is Symphony, which surged 3,835 per cent to trade at Rs 1,337 on February 27, 2016 from Rs 34 on April 1, 2010.

“Three years is the minimum time one should give to a quality stock to grow. If business or industry dynamics looks in favour of a stock, then one can stay invested even longer,” said Anil Rego, CEO, Right Horizons.

Don’t depend on stock trading for daily need

Market experts say a big no to first-time or novice investors who are planning to totally depend on stock trading to meet their day-to-day needs. This is not going to work, as the pressure of your daily requirement is going to take precedence over the fundamental principle of stock investment, which is that you cannot make the market dance to your tune. It’s always the other way around. Expect the market to always go the other way when you need it to behave in a particular manner.

Your risk profile is of paramount importance

Don’t invest in stocks beyond your capacity. You should always check your risk appetite before putting money in equity. Your risk profile is dependent on your day-to-day requirements, number of dependants and your age. “Proper financial planning can help you to check your risk profile. There are online tools that can help you check and understand your risk profile,” Rego said.

Also, there are some thumb rules like the 100 minus age formula, which can tell you how much risk can you take in equities. Going with that rule, if your age is 35, you can allocate 65 per cent of funds into equities. In case of a conservative investor, the rule can be changed to 80 minus age.

Don’t trade with borrowed funds

Market experts believe the domestic market is highly volatile, so investing borrowed money in equity is not a wise idea. However, some professionals at certain point do go for leverage when they are bullish on market conditions and when they understand a business cycle.

Booking profit is important

Many people do not understand the selling part. “It is not possible to get the right price all the time for your holdings. Broadly, the right time to book profit is when the overall dynamics of the industry and a company does not look in favour of the stock. If you want to be a disciplined investor, you should set a target and exit when it is achieved,” Rego said.

The original article is written by Rahul Oberoi and appeared on EconomicTimes.com. The article can be found here.

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