How To Start?
Now that we have understood the benefits of equity investing from our last unit. Let us learn, how do you start your investing journey?
There is more than one answer to this question depending on one’s lineage, field of interest & available time.
Choice 1- Leave it to the professionals
Firstly, it is important to know if you are suited for this- students in an unrelated field, those with a poor history of managing finances, those with little or no knowledge about how the stock market works and lastly for people with limited time.
People belonging to this pie must opt for professional management of their money. No, it’s not a costly venture and will bring in much needed discipline to your saving culture. There are two tools using which you can start your journey:
a)Mutual Funds via SIP -
Basically, mutual funds are pooled investment vehicles that collect funds from various individual investors and diversify the same amongst available investment alternatives.
Mutual funds are managed by experienced Portfolio managers that charge a certain proportion of the total AUM (Assets under management) as their fees. The total gains and losses of the fund are distributed proportionately amongst investors.
The units of a Mutual Fund are traded on the Stock Exchange at their Net Asset Values (NAV)
Simply put, a Mutual Fund with assets (money pooled by investors) of ₹10,000 and total outstanding units amounting to 50 has a NAV of ₹200.
Now, if the value of the total assets rises to ₹11,000, the NAV of the fund would increase to ₹220.
An investor who bought units of the fund at ₹200 can sell them for ₹220 to pocket a 10% gain.
Enter, the concept of SIP or Systematic Investment Plan. Our goal here is to accumulate wealth over time and SIP comes in as a handy tool to help us fulfill our objective.
With SIP, we can invest a fixed amount in certain intervals on a fixed date, say the 1st of every month or the 2nd Thursday of every month as per one’s convenience. Investors can start with as low as ₹500.
With this fixed amount, mutual funds units are brought at the prevailing NAVs. This weeds out the risk of market volatility by averaging our cost of purchase.
SIP investing can be done discretionarily such as by investing double the usual amount when the market is in a bearish mode. The NAV’s will be lower when the market is correcting and hence investors can use it to lap up their favorite companies at reasonable prices.
b)ETFs or Exchange Traded Funds-
mimic the performance of an index, sector, commodity or asset class.
For example, the returns on the Nifty 50 ETF will be similar to that of the Nifty 50 Index.
An investor looking to gain exposure to the markets, can buy all the fifty stocks individually and the returns will still be the same. However the flipside to such an approach, is the high transaction costs involved with frequent buying/selling each stock discreetly i.e. rebalancing the portfolio.
ETFs on the other hand are a cost efficient manner of investing in the stock market. ETF Units trade just like Mutual Fund units on the stock exchange. The transaction charges are almost nil and it is very easy to buy/sell units as and when desired.
Investors can simply add ETF units at fixed time intervals or on market declines to eke maximum gains.
Choice 2- The DIY Investor
This is best suited for all those intrigued by the stock markets and have taken up a related field of study.
We believe that financial illiteracy is a serious impediment to the economic growth of the nation. The entire team at ElearnMarkets is dedicated to empower the retail investor with cutting-edge resources and know-how at his disposal.
The StockEdge App is an in-house tool that can be of great utility for everyone ranging from day traders to investors.
Besides, we have a bunch of carefully curated content on ELM School for newcomers curious to learn in greater detail about the stock market.