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he investment world has become dynamic with various factors impacting the investments decisions as well as its returns in todays world. We have recently seen how the economic crisis of Greece had a major impact on the global sentiments, including that of India. Gone are the old days of investments when making money was very easy in the stock market as the number of variables were very few. Everyone knew that a company like Hindustan Lever (now Unilever) would give a 30 per cent gain each year as there was license raj that controlled everything. It was never a case of other countries economic crises impacting the Indian markets. But today the investment world has changed and become more complex. There are various factors that come into play, each of which affects the gains one can make in the equity market. Also, the numbers of companies and business models have gone through a tremendous transformation because of which the volatility in share prices as well as the companys financials has increased manifolds. Due to this volatility there are a few who are able to rake in handsome gains while there are many who cut a huge amount of losses. It is the investment process that one follows which finally makes all the difference. DSIJ, through its 24 years of rich experience, has outlined a few criteria which can help investors get better returns from the stock market. Remember that your investment should work for you and our guidelines will help you to not only reduce the risk but will also improve your chances of acquiring better capital appreciations. Therefore, please apply these criteria in totality rather than selectively to be a successful investor.
Capital Protection
The first and foremost important principle of sound investment is capital protection. In other words, take the risk but not to such an extent that it wipes out your entire capital. It is often said that higher the risk higher the returns but at DSIJ we believe that taking moderate risks can also lead to better returns. One of the best ways to reduce risk is to take exposure in companies whose business you can relate to. So keep at least 65 per cent of your equity investments in companies whose business you are able to identify with and can understand.
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Overexposure in one stock or industry can quickly lead to losses. Diversifying your risk is well-regarded amongst the most successful investors as the best way to reduce the risk factor. In building a portfolio it is therefore very important to keep it diversified. The most important diversification is sectoral diversification i.e. the stocks should be from various sectors. How many sectors you include in your portfolio comes down to judgment. Most investors choose between four and six sectors. This way the impact of a large movement in a particular share, or even sector, will have less of an impact and reduce volatility in the portfolio. For instance, if an investor had all his/her stocks in information technology companies during 2000, the returns would have been low since most of these companies underperformed the Sensex. At the same time, dont do excessive diversification by adding more than ten sectors as this will bring down the overall returns and you may produce below average returns.
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It would be so nice to sell before every market goes into a downward spiral and then get back just as the good times begin to roll again. But nobody knows when the markets will turn. Investors often spend a lot of their time in trying to identify when the market is very low or high and thereby time the purchase and sale of investments. In other words, they want to time their exit when the market has reached its top and to time their entry when the market has reached a bottom. However, as Buffet puts it, Stop trying to predict the direction of the stock market, the economy, interest rates, or elections. Based on our 24 years experience, our suggestion is that you should stagger your investments in the same scrip in three stages. Thus, in case you want to invest Rs 1 lakh in Infosys, you can buy shares worth Rs 40,000 in the first lot, of Rs 30,000 after one month and the rest after a quarter of the second purchase.
Happy Investing!
About Us...
Founded in 1986, DSIJ (Dalal Street Investment Journal) is the oldest and the most trusted magazine when it comes to investment news. The DSIJ team of research analysts purely focuses on Equity markets. Backed by 24 years of stock market experience, DSIJ is the No 1 Investment magazine in India. Our strong reader base stands by us as we cut the chase and print Stock Recommendations and not News which is our USP. This can easily be seen by the large readership and the faith our readers have in us.
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