Be cautious. The market has volatility in its nature. Evaluate your risk appetite.
Sajjad Bazaz
In my previous column Banks Face Drought on Deposits published in this newspaper on August 21, 2024, I pointed out an unprecedented shift in the bank depositors’ behaviour, especially the young ones, who have boarded (and continue to board) the capital market platform and are investing in financial products fearlessly. The household and other retail investors’ large-scale participation in the financial market reflects their growing interest and confidence in the equity (stock) market. This surge is evident through the significant rise in demat accounts and robust inflows into mutual funds. Here it is the same amount of money which used to be parked in bank deposit schemes.
The shift of household savings from banks into the stock market was vetted by the union finance minister Nirmala Sitharaman while speaking at a Viksit Bharat 2047 event at BSE, Mumbai, on May 14. She said, “Households savings is finding a way into equities, that shows the trust in the market. Middle class families realise that even if it is risk laden, there are better returns, thus showing willingness to invest in stocks and shares.”
Attractive returns than the bank deposit schemes – savings account scheme or term deposit schemes – offered by Capital market investment in equities, mutual funds, tax-saving equity-linked savings schemes (ELSS) etc. is enticing the new-age investors to plunge into the world of stock market. However, they pay very little attention to the risks associated with the investment they make in the stock market.
Since the market is crowded by novice investors, it is imperative for them to understand certain basic things of the market. They need to know how to make the most of their investments. Precisely, there are many crucial things for new-age/first-time investors to take into consideration to stay invested safely in the stock market.
It is imperative for those intending to make their initial investment to first get themselves acquainted with the stock market dynamics and have a thorough understanding of the architecture of the financial products they intend to invest in. It is equally important for them to understand the associated risks, potential returns, lock-in periods, any applicable charges etc. Once they get themselves loaded with knowledge of the financial products, they can start with their initial investments.
However, they need to align their investment with the time horizon – short, medium, or long-term – to achieve their financial objective. This will offer vital guidance to the investor not only about the amount to invest, the duration of the investment, the types of investment products to consider, but will also help them to evaluate their risk tolerance and their liquidity needs (the ability to pull out of the investment as and when required) .
In other words, investments should be closely tied to financial objectives. And one should start gradually, and progressively increase his investment exposure, ensuring that his/her investments contribute effectively to achieving the desired goals within the desired time-frame. It is prudent to refrain from allocating all capital to a single investment that captivates investors’ interest at first glance. Instead, one should aim to diversify his/her investments across a range of instruments that encompass various asset classes and risk profiles, each offering different potential returns. This strategy can help the investors to manage the overall risk of their investment portfolio and facilitate consistent, favorable returns, ultimately aiding them in achieving their financial goals in a timely manner.
It is also advisable not to borrow funds for investment purposes. Investing should ideally be done with the money one has earned and saved after fulfilling his/her financial responsibilities.
Meanwhile, volatility is the permanent companion of the market. The market has failed even the best of the experts. However, there are certain basic guidelines which an investor needs to follow to negotiate the volatility and stay safe in the market. In this context, the following is an extract from a chapter in my forthcoming book Straight Talk – Decoding Contemporary Banking, which is soon to be launched in two volumes.
How should an investor evaluate selling and buying decisions of stocks?
You have to keep it in mind if buying at the right price is vital; selling too is equally a vital link. It’s selling which decides your profit and loss in the investment matters. If you can’t sell at the appropriate time, the benefits of proper buying disappear.
No one wants a loss while being in the stock market. But if it happens, don’t let your ego get in the way of making the right decision. Most of the time, the best course of action is to cut your losses and move on to the next deal.
Meanwhile, selling a stock is triggered by two things – either it may be personal reasons or may be market driven. You may find your risk tolerance reaching to maximum and you immediately off load the stock and reinvest in a new stock. Sometimes an ‘unexpected’ happens and you need cash to negotiate that ‘unexpected’. So you lay your hand on your stock for this financial emergency. Or you may find the stocks in your investment portfolio not matching your moral and ethical values and you sell them. The stock falling to unexpected levels are some of the market driven reasons which may prompt you to sell the shares. There may be other valid reasons to sell , but it’s important to evaluate your selling decision in the context of all the alternatives and consequences.
Precisely, when a sale results in a loss, and is accompanied by an understanding of why that loss occurred, it too may be considered a good sell. Share market experts say selling is bad when it is dictated by fear. They want investors to always focus on selling dictated by rational reasons of valuations and price.
What should retail investors do to insulate themselves from the risk of losing their money?
In the given circumstances, it makes sense to route through your investment in the market through professional financial advisors. It has assumed significance and you have to think about
the importance of a financial advisor as you think about a doctor who prescribes medicines for treatment of your illness. Precisely, a financial advisor is like a medical doctor for an investor.
Before making any investment, it would never be a bad idea to have an expert opinion of a professional financial advisor.
For example, you should not go into the stock market without a professional stock market consultant. This way you can lay your hands on profitable investment tools and a worry-free future with respect to your financial strength. You may think about yourself as a knowledgeable investor for having access to financial information on the internet, but the fact is that advice from a financial advisor in the matters of the stock market definitely makes a difference.
Today the market is flooded with varied financial instruments and it is impossible for an individual to understand everything that is available for them. In this crowd of financial instruments, individuals cannot pick what is best for them and it’s only a good financial advisor who can help an investor to put the right investments in place.
Since financial markets are unpredictable, we cannot say financial advisors will give foolproof advice. However, his advice based on your particular situation and goals can help you to minimize the financial risks. To get maximum out of your financial advisor, you have to at least let him know about your level of conservativeness and your appetite for risk.
Don’t forget to make your financial advisor understand you better so that his financial plan for you includes a diversified portfolio of various instruments to meet your goals. It’s the financial advisor who will help you to strike a balance by making you aware of various options.
Let me also have a word about market analysts. Of course,analysts in today’s markets are key to important sources of information. But investors should understand the potential conflicts of interest they might face. Some analysts work for firms that underwrite or own the securities of the companies the analysts cover. Analysts themselves sometimes own stocks in the companies they cover-either directly or indirectly. So what matters is the investor’s own application of mind while playing in the markets. You as an investor should not exclusively rely on an analyst’s recommendation when deciding whether to buy, hold, or sell a stock. Instead, you should also do your own research about the company whose stocks you are going to purchase. Don’t overstep your financial circumstances while making a decision to invest in the financial market. However, an analyst may have a conflict of interest, but it does not mean that his recommendation is always faulty. It’s up to you as an investor to assess whether the recommendation is wise for you. You should educate yourself to make sure that any investment you choose matches your goals and risk bearing capacity. It’s to be noted that engaging a financial advisor doesn’t exonerate you to remain aloof from your investment portfolio. Once you are on board with a financial advisor and your portfolio is put together, you need to monitor that portfolio. You should have a regular performance review of your investment portfolio with your financial advisor. Don’t forget to update your advisor about any life situation change which you may undergo at any point of time.
(The author is a veteran journalist/columnist. He is former Head of Corporate Communication & CSR and Internal Communication & Knowledge Management Departments of J&K Bank)
