Why do you invest?
We begin with asking a simple question -
Why do you invest?
You invest to generate profits. Your fundamental principle behind your investments will always be to
Safeguard your capital by reducing risks
Generate more returns than prevailing rates of inflation
Avail tax advantages, if possible
Ensure quick liquidity or easy leverage option for meeting any adversities
Your investments also could have uncertainties like risk of capital erosion, reduction in profits, illiquidity. You need to know and understand the impact of risks your investments could entail.
Risks associated with investments
Low return yielding investments like Fixed Deposits with banks, Government of India bonds carry hardly any risks. But returns from them may not even protect you from the impact of inflation. So such investments are prone to inflationary risks.
Investments in equity and equity related investments poses high risks but at the same time also ushers a great potential for high returns.
Risks associated with equities are
Liquidity risks [can be minimized to negligible level by investing in highly traded entities]
Market risks – Stock prices on bourses fluctuate based on numerous reasons, with or without logic and some entities may continue to underperform for a very long time.
Market risk can be lowered systematically by a proper diversification approach and careful selection of stocks.
You may have lost in the past if you did not pay attention to the risks involved and possibly did nothing to mitigate your risk. Many investors always lose in equity while smart investors in the medium to long run always make handsome returns.
And why many investors lose?
Some Investors make a mistake of considering Investment as a pure science. Investment decision is just not about computing and formulas. It is equally an art. It may be beyond many investors’ scope to get to investing profitably. Most of them lose because they do not
Filter stocks to gauge its investment worthiness
Possess infrastructure and access to fundamental & market sensitive information to make informed decisions
Comprehend businesses of the entities and so cannot make good judgments
Understand the impact of balanced diversification or adverse impact of over diversifications
Time their buy and sell decisions aptly. Usually harvest good stocks too early or get saddled with bad stocks
Are you among the sizeable lot of investing community who has lost more than probably have gained?
Did you lose money on your investments?
You would not have lost in the medium to long run, had you followed a disciplined and systematic approach. Yes, you could have lost in a few of your investments but as an aggregate you surely would have made worthy returns if you followed fundamental rules like –
Investing only in companies with continuous growth in profits and sales over last 3 years.
Balancing between high, mid and small cap companies with smaller exposures to small and mid-cap stocks.
Fixing a tab on investments in any single entity, industry and business house to ensure that you on an overall perspective do not suffer because of bad performance of a particular sector or corporate.
Timing the purchase and maintain restraint and caution while buying stocks at or nearing their peaks.
What should you expect out of your investments?
Before we get to answer the expectations, it is important to make a distinction between investments and trading. Investments is always done with a medium to long term perspective while trading is a speculative activity targeting to take advantage of price fluctuations in the intraday or near term. Speculation, on other hand, is an extremely risky activity and no yardstick of return or loss expectations can be done with any accuracy.
We do not recommend speculation activity and recommend you to make careful investments for profitable growth.
What is the kind of return can you make on your investments?
Investments in debt instruments will give you fixed returns. Usually the longer the commitment period higher would be the returns. Around 10 to 15% returns in debt instruments per annum is an achievable target.
Investment in equities has huge potential. There are scores of real stories of investors becoming millionaires and billionaires by returns from stock markets. Investing with medium to long term tenure has possibilities of fetching you returns easily beyond 20% per annum, if managed well. However, it is imperative to note that investments are subject to market risks. The stock prices may not reflect their true intrinsic value and the market sentiments could remain bearish for longer period. Whatsoever, in the long run and taking a portfolio investment viewpoint, stock markets stands testimonial for scores of precedence’s of offering unmatched returns to innumerable investors.