How should one invest in a rising equity market?

Indian stock markets have witnessed a spectacular rally over the past six months. As the stock markets touch new highs, some investors are becoming jittery, while others are excited. While some believe the bull market is here and will take the market to much higher levels, others are scared of a crash.

Akash wants to start saving for his daughter’s higher education. He has a horizon of about 10 years. He is looking for ways to avoid dramatic losses when buying at high or peak levels.

It is difficult to take a call on the direction of the equity markets even though they have risen sharply. Akash has already missed a huge part of the rally. Like many others, he spent the last six months waiting to see if the rally was for real and invest when it was about to end. That was risky. He might lose out on another rally and precious time waiting on the sidelines. He must start investing through systematic investing plans or instalments. The market is expected be volatile and, if he staggers his investments, he may be able to buy at lower levels. This will provide some sort of a natural hedge against volatility.

So this brings us to another question, what sort of stocks should he invest in? Penny stocks are a complete no-no. They are prone to manipulation by market operators. He must not get lured by their lower prices. It is incorrect to assume that the risk in a stock priced at Rs 2 is much less than in a stock priced at Rs 2,000. The likelihood of a Rs 2 stock falling to Rs 1 is much more than of a Rs 2,000 stock falling to Rs 1,000.

Therefore, he must look at market leaders, good quality companies, strong dividends and low business risk. However, he must avoid over-exposing himself to a particular sector or theme that seems to be doing extraordinarily well. Moreover, during a bull market, there will be several stories of people making money by day trading or in the futures and options (F&O) markets. But long-term investors like Akash should focus on investing and resist the temptation of speculation.

Most importantly, having begun investments in a staggered manner, Akash must refrain from panicking and cashing out by booking losses in case the market falls. He must stick to his strategy of investing systematically, so that he is able to ultimately build the corpus that he needs to pay for his daughter’s higher education.

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)

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