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Indian equities are on a roll and have run up 40 per cent in the past year. Retail investors have started to come back but remain wary of direct investment. New investors, who had come in droves in 2006 and 2007, have mostly stayed away. The 1,000point gain made by the benchmark BSE Sensex in the past nine sessions, though, could lure them in. Many analysts have been going gaga over the country’s economic prospects and believe we are in the middle of a structural bull run. Many forecast another stellar year for the market and expect the benchmark indices to surge 20 per cent. First- time investors need to ensure they don’t get carried away by the euphoria and make rash decisions.

MFs better route

First- time equity investors should invest through mutual funds ( MFs), and not directly, reckon the majority of experts. That’s because the market is likely to be volatile in the coming months, which could be unnerving to first- time investors. “Retail investors have a tendency to look at share price movements almost every day. If their portfolio moves from, say, ₹ 1 lakh to ₹ 80,000 in a few months, it will take all their confidence away,” says Raghvendra Nath, managing director, Ladderup Wealth Management. Funds offer the advantage of diversification, liquidity and professional fund management. They are also choosy about picks and better equipped to assess a company’s management capabilities, balance sheet, credit profile and so on.

Nath believes one can invest 20- 30 per cent of surplus money in equity MFs and the rest through Systematic Investment Plans ( SIPs). He advocates investing in two large- cap and two mid- cap funds, from different fund houses. “ Avoid new fund offerings that do not have a track record. Invest in large schemes with assets under management of over ₹ 3,000 crore, as funds are likely to deploy their best fund managers on larger schemes. Up to two mid- cap funds are fine, as long as the investment horizon is more than five years,” says Nath.

Large- cap tilt

Those keen to invest directly must restrict their investment mostly to quality, large- cap stocks. “ Stick to the top 100 stocks by market capitalisation, as these are highly liquid and the possibility of manipulation is low,” says Nikhil Kothari, director, Etica Wealth Management. “The valuation gap between midcaps and large- caps have narrowed considerably, so the risk- reward ratio is not suited for investment in midcaps right now,” said Manoj Nagpal, chief executive officer, Outlook Asia Capital. According to Nagpal, those in the 20- 35 age bracket can invest 20- 30 per cent of their equity portfolio in mid- caps.

Those between 35 and 45 should restrict their mid- cap investment to not more than 20 per cent. The BSE Mid- Cap and BSE Small- Cap indices have risen about 70 per cent and 80 per cent in the past one year, respectively. Experts also advise caution as they feel the current rally is driven more by liquidity. “ Bull markets typically see bouts of 10 per cent corrections but we haven’t seen that in the past one and ahalf years. So, a big correction might be around the corner,” says Nagpal, adding the coming Delhi assembly elections, as well the Union Budget, might make the market volatile in the coming weeks.

Age factor

The early 20s is a good time to begin small and inculcate the habit of investing regularly in MFs through SIPs. As you gain confidence, you can move to direct equities. “ If in your 20s or 30s, you can afford to take aggressive bets and invest in mid- caps, provided the companies are market leaders and have a sound management in place,” says Prasanth Prabhakaran, president, retail broking, IIFL. From your 30s up to the early 40s, you can allocate about 70 per cent of your portfolio to equities, says Prabhakaran: “ This is the period when one’s income generating ability is at its peak and so, one should invest aggressively.” He feels it is better to stick to a non- aggressive portfolio once you touch 50: “ Beyond 50, your equity investment should be largely through MFs and/ or confined to largecaps. Once you cross 60, the bulk of your investment should be in debt and monthly income generating schemes.” However, some experts feel it is important to allocate some portion of one’s portfolio to equity even after retirement. “ Even someone who is 60 might have another 15 to 25 years to live. These investors can invest up to 20 per cent of their portfolio into equity MFs to get higher returns,” says Nath.

Stagger your investments

Don’t invest all your money at one go. “Even if you have a lump- sum to invest, stagger your investments over two to three months and buy during corrections,” says Kothari. It might even be worthwhile to look at some equity SIP options offered by leading brokers. Equity SIPs are similar to SIPs in MFs, except that here the investment is directly in stocks. SIPs work on rupee cost averaging, which helps reduce the average cost per share over time. Equity SIPs might prove useful in mitigating the risk of market volatility and the risk that comes with timing the market.

Invest long- term

Put money with at least a five- year horizon in mind. “ Do not invest with aone- year perspective and hope to make money. Come to the market only if you don’t need the money for the next five years. Also, remember, invest into stocks only if you are looking for wealth creation and not wealth preservation,” says Kothari. Adds Nath: “ Investors need to have the patience to stay invested for eight to 10 years, not merely one to three years. Only then will they be able to ride out the volatility and truly benefit from the rally.”

Entry/ exit strategy

Do not follow a price- centric entry and exit strategy. Don’t invest in penny stocks or prefer one stock over the other only because one is priced at ₹ 10 and the other is quoting at ₹ 100. “Look at the company fundamentals rather than the price point while entering or exiting a stock. Don’t go for stocks only because they are priced at a lower price point,” said Kothari. Don’t exit simply because the price has run up too much or fallen on hard times of late. “ Think like an owner. Would Sunil Mittal sell his holdings in Bharti Airtel just because the stock has run up too much? No, he wouldn’t. Analyse the fundamentals to understand whether there is still value left,” says Prabhakaran.

Focus on fundamentals

According to Ajay Bodke, head of investment strategy & advisory at Prabhudas Lilladher, investors should stick to companies with high cash flows, a record of strong earnings growth and which have managed to weather different business cycles. One must study balance sheets of companies, track growth and profitability over the past five to 10 years and study the sector the company operates in. Kothari feels investors should do their own research and supplement it by reading research reports brought out by broking houses: “ Look at how the stock price has moved in the past two- three years. Analyse the volatility and volumes, and factors that have impacted the stock price.” According to Prabhakaran, firsttime investors should not buy stocks based on tips given by brokers or what they read or see in the media. “ Stock picking is tough. You need to do the same amount of homework as you would do before purchasing a house. About 90 per cent of retail investors lose money in the market because they think investing is easy,” he says. Bodke warns against rushing to invest in fad stocks that are a feature of every bull market. For instance, he explains, several information technology, media and telecom stocks surged exponentially in the late 1990s, only to crash later. Similarly, in 200607, investors were gung ho on real estate and infrastructure plays focused on the power generation sector, bets that went awry.

From FDs to equities

A few months ago, Samar Singh, a 53- yearold retired army man, invested in equities, with the help of an advisor. He took the mutual fund (MF) route to get the asset allocation right. Singh’s MF portfolio includes investments in equity diversified and balanced funds. “ I was looking to invest some of my retirement corpus but was unable to find suitable options, which could keep the value of my money intact and beat inflation,” he says. He had considered investing in real estate, but high prices were a deterrent. He had invested ₹ 10 lakh in bank fixed deposits ( FDs) for 10 years, but was disillusioned with the returns.

Now, with interest rates on the decline, he feels returns from FDs will not be enough to beat inflation. Singh liquidated ₹ 6 lakh from his FD corpus to invest in MFs. As he didn’t have enough knowledge of equities, he didn’t invest in stocks directly. He was referred to his advisor by a friend who, Singh said “ made a good amount of money through MFs in the past 10 years”. “Moving into equities now is fraught with danger, as the market is recording new highs. I advise first- time investors to stay away unless they are willing to stay put for at least five years,” says Suresh Sadagopan, a certified financial planner. Invest 20- 30% of your surplus in equity mutual funds and the rest through SIPs; think like a company’s owner and don’t panic if the market corrects sharply