12/28/2010 10:02:00 PM
What must I do now?
This is the question probably every equity investor would have asked himself a number of times in the past few months.
With the stock market moving to dizzying heights before succumbing to gravity, it's easy to get nervous or over-excited.
Here's what we suggest you do when the bulls and bears kick up a lot of dust.
1. Don't panic
The market is volatile. Accept that. It will keep fluctuating. Don't panic.
If the prices of your shares have plummeted, there is no reason to want to get rid of them in a hurry. Stay invested if nothing fundamental about your company has changed.
Ditto with your mutual fund. Does the Net Asset Value deep dipping and then rising slightly? Hold on. Don't sell unnecessarily.
When the market dips, go ahead and buy some stocks. But don't invest huge amounts. Pick up the shares in stages.
Keep some money aside and zero in on a few companies you believe in.
When the market dips -- as it did this month -- buy them. When the market dips again, say in November, you can pick up some more. Keep buying the shares periodically.
Everyone knows that they should buy when the market has reached its lowest and sell the shares when the market peaks. But the fact remains, no one can time the market.
It is impossible for an individual to state when the share price has reached rock bottom. Instead, buy shares over a period of time; this way, you will average your costs.
Pick a few stocks and invest in them gradually.
Ditto with a mutual fund. Invest small amounts gradually via a Systematic Investment Plan. Here, you invest a fixed amount every month into your fund and you get units allocated to you.
A stock does not become a good buy simply because its price has been rising phenomenally. Once investors start selling, the price will drop drastically.
Ditto with a mutual fund. Every fund will show a great return in the current bull run. That does not make it a good fund. Track the performance of the fund over a bull and bear market; only then make your choice.
To compare funds, you need to look at returns and risk. How to compare mutual funds and How risky is your mutual fund? will enable you to do that.
When you buy and sell shares, you will have to pay a brokerage fee and a Securities Transaction Tax. This could nip into your profits specially if you are selling for small gains (where the price of stock has risen by a few rupees).
With mutual funds, if you have already paid an entry load, then you most probably won't have to pay an exit load. Entry loads and exit loads are fees levied on the Net Asset Value (price of a unit of a fund). Entry load is levied when you buy units and an exit load when you sell them.
If you sell your shares of equity funds within a year of buying, you end up paying a short-term capital gains tax of 10% on your profit. If you sell after a year, you pay no tax (long-term capital gains tax is nil).
What you MUST do
1. Get rid of the junk
Any shares you bought but no longer want to keep? If they are showing a profit, you could consider selling them. Even if they are not going to give you a substantial profit, it is time to dump them and utilise the money elsewhere if you no longer believe in them.
Similarly with a dud fund; sell the units and deploy the money in a more fruitful investment.
Don't just buy stocks in one sector. Make sure you are invested in stocks of various sectors.
Also, when you look at your total equity investments, don't just look at stocks. Look at equity funds as well.
To balance your equity investments, put a portion of your investments in fixed income instruments like the Public Provident Fund, post office deposits, bonds and National Savings Certificates.
If you have none of these or very little investment in these, consider a balanced fund or a debt fund.
Don't invest in shares based on a tip, no matter who gives it to you.
Tread cautiously. Invest in stocks you truly believe in. Look at the fundamentals. Analyse the company and ask yourself if you want to be part of it.
Are you happy with the way a particular fund manager manages his fund and the objective of the fund? If yes, consider investing in it.
If you decided you only want 60% of all your investments in equity, don't over-exceed that limit because the stock market has been delivering great returns.
Stick to your allocation
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