Equity investments are exciting, fruitful and quite preferred by a large number of people in India for wealth creation. However, equity investments also carry a fair share of risk and this is why many investors are wary about them.
If you have dabbled with investments for a while and now have gained the confidence to deal with the riskier equity funds, you should be sure to understand the basics of equity investments before proceeding forward.
Take a look at this article to get some handy information about these investment opportunities.
Basics About Equity Investment
- Equity Investment Success Depends on the Company’s Performance
When you invest in an equity fund, you become a tiny shareholder of the company of whose equity you buy. If the company does well in the future, you stand to earn profits and vice-versa. This is why you should choose your funds carefully and select reputed companies that have the potential to perform well.
Pro Tip: Study the past performance and performance patterns of numerous shares to understand which investment would work for you. Stock investment is not gambling and you need to choose your funds carefully, after proper research. You need to understand the company’s future potential and then choose accordingly.
- Equity Investment Requires Patience
As Paul Samelson, a famous American economist had said that “Investing should be like watching grass grow or paint dry. If you want excitement, take $800 and go to Las Vegas”
The stock markets are volatile and this is a fact we can never hide from. You will have periods of highs and periods of lows. You will gain from some equities and suffer losses in some. You have to practice patience when investing in stocks and equities. If you get demotivated by the first loss you encounter, you will find it challenging to earn the yields you wish for. Thus, always remember that the returns take time and you have to wait till you start making profits in the equity markets.
Pro Tip: Equity investment is for the “Long term”, which is a minimum of 5 to 10 years. So, research properly before investing in equity, either directly or through mutual funds. But after the investment is done, just be patient and do not keep checking your portfolio every day!
- It is About Continuous Learning
Understanding the ways in which stocks and equities work require years and years of research. You will have to keep on studying and looking at research material to increase your profits. Investors and stock gurus who have decades of experience with them still keep studying and researching and they all agree that this is an ongoing process and the learning can never stop.
Pro Tip: Mutual Fund is a safer route of investing in equity than doing it directly as you have fund managers taking the calls on your behalf on whom you can trust. Direct equity investment is a lot higher risk than mutual funds and needs way more research!
- It is a Long-term Commitment
There is no short-cut to earn money. Equity investments are not akin to lotteries. You do not get the assurance of earning some quick bucks or losing it all. You need to stay invested for periods as long as five to ten years to start earning satisfying yields.
Pro Tip: If you want quick returns, the equity investments may not be very well suited for you. Instead, in such situations, you should stay far away from equity investments as investments in the financial markets that are carried out in haste can cause massive losses.
- You Need to Take Risks
As stated above, there is quite a bit of risk associated with equity investments. You should have a higher risk-taking capability when you look to invest in the money markets. If you do not have this risk profile, you would be better off investing in fixed deposits, government schemes or even debt mutual funds.
Pro Tip: However, investment platforms such as equity investments that come with more risk always offer a higher return. So if you really want your wealth to grow, you need to take some risk and start investing in the well-rated equity funds.
- Everything is Digital
Gone are the days when you had to stand in queues in the crowded stock markets and physically buy and sell your equities. The entire process was chaotic, disorganised, noisy and very stressful! Thankfully, these days you can do everything online with just the click of a few buttons. You can sit comfortably at home and sort through the options and then buy and sell your equities via your DEMAT account.
Pro Tip: For mutual fund investment, you don't even need a demat account to transact at all points of time. This is a huge modern-day financial benefit that you receive when you set out to make some equity investments.
Types of Risks in Equity Investments
Some of the common risks you encounter when investing in equities include:
- Market Risks - The risk that shows when the markets are volatile and fluctuate, resulting in sharp dips and rises in the various share prices. This is the most common type of risk that is associated with equity investment.
- Currency Risk - If the investment is done in a different currency, then there is a risk associated with the exchange rates.
- Business Risk - If the company fails, the investors will have to sell their stocks at much lower prices, thereby incurring huge losses.
Types of Equity Investment in India
There are different types of equity investments available in India. It could be bought from the primary or secondary market, i.e. the stock exchange as direct equity or through the mutual fund route. Either ways, they can be classified as:
- Large Cap Equity Funds - Stocks of the largest companies belonging to the biggest industries in the country in terms of market capitalisation.
- Mid-cap Equity Funds - Stocks and equities of the mid-range companies in India that have shown positive growth
- Small-cap Equity Funds - Stocks and equities of the small scale industries and companies of the country.
- Multi-cap Equity Fund - Flexible funds that offer the freedom to invest in different sectors.
Keeping all the above points in mind, you need to choose your equity fund with a lot of care. Doing so will ensure you get the best returns from the investments you make.
Always remember to review your investments at least once a year so that if a particular investment is not performing as per the expectation, you have the opportunity to switch it before it's too late.