Investing in the stock market in India is undoubtedly a good investment option for generating good returns when you have a long term perspective.
Although volatile in the short term, the stock markets in India are stable over the long term. To give you an example, over 5 years between April 2014 to Mar 2019, Nifty has generated a return of 72.93%. Looks impressive, isn't it?
But you would be even more surprised to know that Research & Ranking’s model portfolio has generated even higher returns of 400.53% during the same period which you can check here.
On the other hand, if one would have invested in either gold or real estate, the returns would have been significantly lower at 12.33% and 25.30% respectively.
Of course, there are other risks too, with gold like chances of theft and cost of storage in the form of rent for bank lockers.
So investing for the long term in the share market in India is definitely a great investment idea.
But investing all your money in equities is definitely not a wise idea. Remember the golden rule we have been taught as a child ‘’Don’t put all your eggs in one basket.’’
So it makes sense to distribute your investment across multiple investment options. The idea behind this is to reduce the risk, which may arise if one particular investment fails to perform as expected.
There is no doubt equity has the power to generate superior returns over all asset classes. But it would be still advisable to divide your investments across the stock market in India and debt instruments after keeping some funds aside for an emergency.
History reveals a lot of valuable lessons — lessons which every investor in the share market in India should consider quite seriously.
The year 2008 saw one of the biggest global financial calamity triggered by the American sub-prime crisis, with markets across the world falling badly and wiping out investor wealth by huge margins. Indian share markets were severely affected too.
During the bull phase before the 2008 crisis, investors were so bullish on share market investments that apart from their own money, people even used borrowed money to invest.
When the markets crashed heavily, many investors not only suffered huge losses, but many investors were left in debt. As a result of losing all their money parked in share market investments, many people had to postpone their retirement, marriage or higher education of children and even sell the property to pay their debts. The situation was so bad that many people who could not pay their debts ended up committing suicide.
So, the lesson an investor can learn from this is to divide his investments among multiple investment options as discussed above, such as the stock market in India, debt and emergency fund.
The ideal way to allocate your investment in the stock market in India
The best way to decide on the proportion of your investment in the stock market in India is by deducting your age from 100.
For example, if you are 30 years old, you can allocate 70% of your investments in the share market in India and rest 30% to debt or other instruments of your choice.
On the other hand, if you are closer to your retirement, your equity allocation should be restricted to 30-35% and the rest to debt as the time horizon for investment is quite less.
The whole point here is that the longer the time duration you have in hand for investing, the more you should allocate to equity.
Here are a few things you need to do while making share market investments:
Maintain an emergency fund
Before investing your money in share market investments and other investment avenues, it is essential to maintain an emergency fund because you never know when an emergency can pop up. Emergencies are unpredictable and can emerge unexpectedly in the form of a loss of job or a sudden illness or an accident. Lack of money in such circumstances can make the situation worse. Apart from the financial stress it can also cause mental stress. So, it makes sense to be financially prepared for the same. An ideal amount would 3-6 months of your expenses as cash or in your savings account for emergency purposes.
Do proper homework before you invest in the stock market
It is imperative to do proper research and have a sound plan before making share market investments. If you don't have the time or expertise to read financial reports of companies, you can seek professional expertise.
Get the professional edge in stock market investing with financial advisory service
There are many external, economic conditions and global factors which can impact stock markets and stock prices. These factors which affect stock markets could range from anything like a political instability in our country in the form of a hung parliament or international trade wars like what we often see between USA and China. This could also include high crude oil prices or terrorist attacks like what happened in America on September 2001 or even natural disasters like Hurricane Katrina in USA and the tsunami which affected countries in the Indian ocean region in Dec 2004.
It isn't very easy for an investor to constantly monitor and track all these events and its impact on his investments. On the contrary, a financial advisory service which has their research team keeps a constant track of all those factors. Apart from that, research teams of financial advisory service also keep track of factors like earnings, growth, debt, scalability of operations of businesses.
These are the crucial factors which determine the price of the stock over longer terms. A novice investor neither has the time nor the expertise to do all this. In such circumstances, a retail investor should choose the professional advice of a financial advisory service. Know more.