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12 Jan 2021 by Pradeep U
Golden Rules for Investment in Indian Stock Market - Research & Ranking

“Dil na umeed toh nahi, naakam hi toh hai

lambi hai ghum ki shyam, magar shyam hi toh hai

Yeh safar bahut hai kathin magar, na udas ho mere humsafar

nahi rehne wale yeh mushkilen, ke hai agle mod pe manzilen

meri baat ka tu yakin kar, na udas ho mere humsafar”

These beautiful lyrics penned by Javed Akthar for a song from the movie 1942, A Love Story sums up the kind of mindset a serious long-term investor needs for success in the stock market.

Let’s understand how:

“Dil naumeed toh nahi, naakam hi toh hai

Heart has not lost its hope, it is just helpless

lambi hai ghum ki shyam, magar shyam hi toh hai

this evening of misery (market correction is long), but then it is just an evening (correction)

Yeh safar bahut hai kathin magar, na udas ho mere humsafar

This journey (patience in stock market) is very difficult, but don’t worry my companion

nahi rehne wale yeh mushkilen, ke hai agle mod pe manzilen

This bear phase won’t last forever, revival is just around the corner

meri baat ka tu yakin kar, na udas ho mere humsafar”

Just believe me, and don’t worry

Sensex has crossed the 49000 mark for the first time in its history since inception. A few years ago, this looked impossible to many.

Just ten years back when Sensex was at 18,300 levels in Jan 2011, if one would have a quoted a target of 49,000 for Sensex, I am sure people would have laughed it off or even called the person crazy.

But markets have done it again and again. From 5200 levels in Jan 2000 to 16,300 levels in Jan 2010, 29000 levels in Jan 2015 to 40,000 levels in Jan 2020 Sensex has always followed an upward trajectory.

However, between all these years there have been periods of negative growth, subdued returns as well as mind-boggling returns. During the last 20 years, there has been multiple recessions, military conflicts, trade wars, financial scams and numerous other reasons for market corrections. Despite all this, those investors who had the patience to remain invested in good quality stocks could create wealth.

This explains why it is essential to focus on long term investments for creating wealth.

So, what is the definition of long-term investments? Ideally, when investments with a time frame for at least five years or more can be considered long-term investments. Long term investing is all about investing in fundamentally strong companies which can grow with time, thereby maximising your returns.

Unlike short term investing, long term investing is not affected by stock market volatility as markets tend to be stable over the long term with fundamentally sound companies outperforming with time.

Golden rules for investment in Indian stock market

#1. Invest only for long term

Legendary investor Warren Buffet says, "If you are not willing to own a stock for 10 years, do not think about owning it for 10 minutes". What it means is one should invest only in stock which is worth holding for ten years. To select such a stock, detailed research is critical, because when you are investing in a company's stock, you are purchasing partial ownership of the company.

#2. Ignore short-term market fluctuations

 To become a successful long term investor, it is essential to avoid frequent buying and selling. Volatility is a part of the market. Long term investors never worry about the direction of the market in the short term as they are confident that it will always go up in the long run.

3. Keep your emotions at bay                                                                                          

Many investors invest in stocks or remain invested in under-performing stocks based on their emotions. As a result, they end up holding onto the non-performing stocks based on their past performance or based on the hope that someday they will rise. It makes no sense to hold on to stocks which have lost their fundamentals. Investors would be better off to sell such stocks and invest in better options available in the market.

#4. Never invest only on the basis of Price to Earnings (P/E) Ratio

For long term investments, it is imperative to take a 360 degree look at all financial and other aspects of stock. However, several investors make the mistake of investing only on the basis of P/E ratio. P/E of a stock which is greater than the industry average doesn't imply that the company is overvalued or vice-versa. One should always look at it in conjunction with other valuation metrics such as Price to book ratio, Price to sales, PEG ratio.

#5. Never invest in penny stocks

Due to their low pricing penny stocks appear tempting. It also gives a false sense of belief that the probable losses would also be less. However, investing in penny stocks are riskier because such stocks have fewer disclosures, and not much financial information is available in the public domain.

Due to their low market capitalisation, penny stocks' prices can be easily manipulated by operators who pick up large quantities of stocks, causing the stock price to rise. This creates an illusion of heavy demand attracting new investors. Operators use such opportunities to exit the stock with hefty profits, thus trapping innocent investors. Low liquidity is another major cause for concern with penny stocks because there may be no buyers.

#6. Maintain discipline in investing

Invest once and forget no longer works in today's world. You have to invest regularly, monitor your long-term investments periodically (or hire a professional to conduct this task) and stick to your investing approach. Ignore the tendency to book profits when you see marginal gains or sell your investments when there is a correction by keeping your long-term goals in mind.

Sensex may touch 75,000 or 1,00,000 in few decades. But remember there will also be a lot of corrections. Now that you know the golden rules for successful investment in the Indian stock market, you know what to do when there is a correction. Don’t panic. Just stay calm and remain invested.

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