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.
What you must NOT do
1. Don't panic
The market is volatile. Accept that. It will keep fluctuating.
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
2. Don't make huge investments
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
When the market dips --buy them. When the market dips again, ,
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.
3. Don't chase performance
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.
4. Don't ignore expenses
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
If you have none of these or very little investment in these,
consider a balanced fund or a debt fund.
3. Believe in your investment
Don't invest in shares based on a tip, no matter who gives it to
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
4. Stick to your strategy
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.