Five ways a new investor can get ‘good’ returns from the market

Market


When you decide to make an investment, one of the key goals, invariably, is to earn a maximum amount of gains, without taking a high risk. There are several ways to commit your money to the stock market. Some prefer to invest in an IPO, while others buy stock in the secondary market.

Similarly, some of you want to hold mutual funds, while the others may want to manage their own portfolio to spot some “hidden gems” in the dark alleys of the stock market.

No matter which path you decide to follow, there are some generic rules that come handy if your goal is to increase your returns. Here we give the lowdown on five of the most common rules that will help you maximise your gains, especially if you are a new investor:

1. Choosing asset class to invest: First and foremost, the challenge lies in choosing the asset classes to invest. When you are a new investor, it is highly recommended to allocate more money to equity than debt. Since equity has more potential, relatively speaking, to fetch gains – the new investor can apportion more money for stocks and less for bonds.

2. Choosing sectors and companies: When you know that you will allocate, say, 70 percent of your investments to equity, the next step is to identify the sector and companies that you will choose for your investments. You can identify the sectors that have historically paid better returns and importantly, they still have a wide scope to grow.

When it comes to deciding the type of companies to invest in, you must apprise yourself that small companies have more scope to grow in comparison to the large companies. So, if the company is small and led by a competent and efficient leadership team, it offers far more opportunity to grow in comparison to a large company that has already grown big. In case you want to make more money in the short term, you may take a hard look at the smaller companies.

3. Value or growth companies: Growth companies are the ones that are growing faster, and are considered successful. Their shares, for obvious reasons, are priced higher. On the other hand, value companies do not grow at a rapid pace, and hence, their shares are priced lower.

Historically, value companies deliver higher returns in comparison to growth companies. The share prices of value companies are relatively lower than that of growth companies. So, it is advised to explore value over growth companies to the investors who want to increase their gains.

4. Rebalancing: Once you have allocated your investment between equity and debt, there are chances that the ratio will change after a few months because of appreciation in one asset class. So, it is suggested to revert to the old ratio that you decided at the outset to maintain consistency and discipline.

For instance, you decided to allocate 70 percent of your investments to equity and the remaining 30 percent to debt at the beginning of the year. Towards the end, if the ratio changes to 55 percent and 45 percent because of increase in stock prices, you should sell some bonds to buy more shares in a bid to revert to the earlier ratio.

5. Diversification: One of the key methods to minimise the stock market risk is to diversify your portfolio. In diversification, you make some allocation of your total portfolio to the asset classes that tend to move in the opposite direction to your key stocks. For instance, keeping some money in commodities is part of the diversification process. It is a tried & tested, and universal strategy which is followed in almost every form of investment.

As we saw, it is pertinent to choose the right asset class, sector, type of stocks (value or growth) and the right companies if your goal is to make maximum money in the minimum period of time. But always remember that the stock market investments continue to be risky – no matter how much caution you exercise.

Follow MintGenie for more such stories.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint.
Download The Mint News App to get Daily Market Updates.

More
Less



Source link

0 0 votes
Article Rating
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments