Investment dilemmas of new investors

Interest among retail investors for equity investment has been rising, and rightly so. Equity is the best investment for long-term wealth creation. According to data from the Securities and Exchange Board of India (SEBI) as on end-April 2018, the total number of folios were at 7.22 crore. It had increased by 1.2% compared to the previous month.

A new investor is likely to face a variety of dilemmas. Let us look at some and see how to address them.

Direct equities or equity funds

Should new investors invest in equities directly or through equity mutual funds? There are no straight answers, but here are a few pointers. If you do not have the time and expertise to analyse and monitor stocks, then it is better that you invest in equity mutual funds. If your corpus is small, then equity mutual funds are more meaningful since they give you the benefit of diversification and expert fund management. Equities are very useful in creating wealth over the long term, so you can allocate a small portion of your overall equity allocation to direct equities. However, remember that investing in direct equities is an onerous job and requires full time involvement in tracking and monitoring.

Long term versus short term investing

One can look at these two things in a complementary way. For example, while a large portion of your portfolio should be earmarked to long-term investment in equity, you can allocate the funds which you require in the short term in fixed income instruments or balanced mutual funds . Also your long term portfolio should be a diversified one.

Investing on your own or consult a planner

It is better for new investors to start overall financial plan with a professional planner. It is advisable to consult a planner with experience. Self-investing is not really advisable unless you have built expertise in that area. Investing is complex and multi-faceted.

A financial planner will help you in crystallising your goals and planning your investments around that. Besides, he will help you identify the most optimum investments and the right time of entry and exit.

Invest today or wait till tomorrow

There is really no right time to invest. It is impossible to catch the tops and bottoms of the market. What matters in the stock market is time in the market more than the timing. Over the long term, timing the market hardly adds any value. What you really need to do is to identify good equity funds or stocks and hold on for the long term. Equities generate best returns when the power of compounding works for you.

Save tax through ULIPs or ELSS Funds

Equity Linked Savings Funds offer an interesting way of combining the wealth creation of equities and the tax benefits under Section 80C. In fact, for new investors ELSS is a good way of investing in equities for the long term and also saving tax. But, ULIPs give you the added benefit of insurance, apart from equities and tax exemption.

There are two things you must remember as a new investor. It is always better to keep your investments and your insurance separate. Secondly, some ULIPs entail heavy upfront loading in the initial years lowering the returns.

Diversified equity versus targeting a specific sector/stocks

Many first time investors are of the view that they need to focus on a few equities or sectors to maximise returns. The problem is that when you try to maximise returns you end up maximising risk. As a new investor it is always advisable to diversify and spread your money across more themes. Better still, you can opt for diversified equity funds. A concentrated portfolio may be good for a veteran investor with a much higher risk appetite. That is the not advisable for new investors.

TIPS FOR FIRST TIMERS

• For small corpus choose mutual funds instead of direct equity
   
• Identify good equity funds and hold them for the long term
   
• Keep investment and insurance separate
   
• Choose a wide range of funds to invest in

The writer is head of research and ARQ, Angel Broking