A beginner's guide to stocks

It’s Long-term

Only invest money that you dont need for at least 5 years. Rather put your money only if you can lose ‘all’ of it. A holding period of more than one year not only reduces the possibility of loss, but also ensures that you will be treated better on tax front, as there is no tax on capital gains if the holding period is more than one year.

Study and invest

Not knowing about the possible outcomes of your actions is the true risk of investing in equities. Never invest on tips. Try to find information on the stocks and mutual funds you intend to invest in. A good track record across market cycles, while not a guarantee of future performance, reduces possibilites of future underperformace.

Direct or indirect

Should I invest on my own? The answer is no – if you do not have the time, expertise and inclination to research into ‘investment opportunities’ and if investing is not a full time activity for you. In such circumstances, it makes sense to hire an expert and invest through them. The transactional costs – such as demat charges, brokerage - are a deterrent for those with a a small investment corpus. This is where mutual funds come in as they start as low as Rs 500 and in some cases even at Rs 100 per month in the form of micro SIP.

SIP route

Systematic investment plan (SIP) is one of the better options for investing in the stock markets. Exposure at various time intervals helps reduce the risk associate with the market timing.

Index fund

In a rising market, the first to rise will be the front rung stocks. Index funds that track Nifty and Sensex help you to tap the opportunity. You just have to ensure that the fund will have least tracking error and minimal cost of the offering.

Equity linked saving scheme (ELSS)

Those who want to invest in equities and avail of tax breaks, equity linked saving schemes are the option. A scheme such as Franklin Templeton Index Tax can offer you a channel to invest in index while you enjoy a tax break.

Pitfalls to avoid

New fund offers (NFO) are best avoided if there is a lack of track record. Unit linked insurance plans are good only for those who typically have a term of more than 20 years on mind. If your investment horizon is three years mutual funds are better options. Do not get swayed by the online advisory services that claim to have 100% success ratio in day trading. Only god or a liar can claim a 100% success ratio.

There is no ‘one shirt fits all’ solution here. You have to assess your financial needs and your resources in the light of the markets. Portfolio rebalancing from time to time will further enhance the quality of the returns.