15 Jun 2011

Why We Should Invest in the Indian Stock Market...


The stock market is one sector which a lot of us want to avoid. We’ve heard terrifying stories of people losing money like never before and going bankrupt. We have conditioned ourselves to believe we are not capable of understanding financial markets and decide to stay away. But FDs give us about 10% interest annually, MFs something like 12 – 13% after all fees being cut and inflation is consistently rising; it’s currently at 10%. Are we really making enough money to secure our futures?

We have geniuses of minds when it comes to professions. We come up with ideas that sometimes make crores for the company and also those which save costs and increase efficiency. But we believe we don’t have the financial wisdom needed to earn, and that alone prohibits us from venturing into unchartered territories of stocks & equity. We mostly invest in Mutual Funds to save on taxes without understanding how much potential they have for us rather than commissions for the agents.

The Stock Market gives us a chance to see a lot more of this
It does not take an Einstein to invest and make profits in the stock market. Yes, derivatives and intraday trading need some practise and understanding. But to start with, long term investing is no rocket science. One can look at current & future trends, company management and potential, valuations, Price to Earnings, etc. and make an estimate. These terms can be explained by any stock broker and do not take much time to comprehend. There are shares which have grown 3 – fold in as many years, and some have experienced a little lesser growth (some even more) but shown solid performances. So if you had invested Rs. 10,000 in ITC Ltd. in 2006, it would have grown to roughly around 40 grand by now, including bonuses and dividends, etc. The same amount invested in Page Industries (licensed marketers of Jockey) and Jubilant Foodworks (distributors of Dominos Pizza) would have become 150,000 and 72,000 respectively. There are patterns to technically analyse stocks (Wedge, Head & Shoulders, etc.) which allow understand what the possible movements of the stock prices will be. A little practice, experience, etc. will enable one to be able to perform much better in the markets. Technical analysis will even help in intraday trading and money making. Of course, if one loses money in the market, he/she analyses his/her mistakes and gains an even better understanding of this volatile market. Spend 30 minutes lesser a day reading novels and invest in reading in a business paper or watching a business channel with the experts speaking, and see the difference.

Mutual Funds are actually much better performers over a longer period of time; more than the 3 years we park our funds in them. MFs like HDFC Top 200 have given almost 30% returns over 10 years vis – a – viś 11% over 3 years. Systematic Investment Programmes (SIP) over a period of 7 years or more (the more the better) with a little bit of R&D on the fund will give much better investment returns than short term investments. Factors to look for are fund manager reputation, returns over the last few years, sectors and companies the fund invests in, how often they change investments (that’s a bad sign), whether the agent himself invests in the fund, etc. Try applying the concept of Compound Interest with an average of 25% over 10 years to the amount invested via SIPs and compute the returns you get at maturity. For any queries about it feel free to leave a comment or e-mail me.

India is still in its infancy when it comes to investment. The penetration into equity is less than 2% in India, while our country contributes to only 0.63% of the worldwide MF assets. More and more foreign and Indian investors are bullish on the market growth. This temporary hiccup of inflation will soon be sorted by whichever government wants to stay in power. Why should we lose out on the party? Yes, there will be instances when we will lose out on money invested (even experts lose money after playing in the market for decades) but that will make us only more seasoned. Try starting with virtual stock games like www.khelostocks.com and http://money.rediff.com where the movement is real but the money is virtual. One can afford to take more of risks when one is young (portfolio can comprise of 70% equity and 30% debt in one’s 20s and change inversely as age and responsibilities increase). So don’t wait for long. There is a huge bull run still to be witnessed in the Indian stock market. Try and make sure you are a part of it for a more financially secure future.

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