3 things young investors must know about equity investment

Stock markets are not scary. With investment basics in place young investors can make good returns, says Noopur Runjhun.

Equities are the proverbial 'double edged sword' in the field of investment. Technically, they are dubbed as 'high risk, high return' assets. And the fact that they are 'high risk' automatically pushes them into the forbidden category for the ones who are planning to start off in the field of investment.

While it is true that one should not invest in anything, least of all equities, without understanding their dynamics, it is equally foolhardy to steer clear of an excellent investment avenue just because it seems too daunting or scary.

Equities are an essential component of any effective investment portfolio and young investors must not make a complete exclusion of this category if they want to create an efficient investment scheme for themselves. While it is not possible for us to delve into the dynamics of equity investment as a whole in a single article, we have culled out the three most important and basic things that a young investor must know and keep in mind when dealing with equities.

The best time to start is 'Now'

Of course the markets are volatile and the returns hardly look like what they did in the pre-recession era. But if you are waiting for the markets to improve and equity assets to prove their worth, it is probably the most disastrous investment error that you can make. Equities fluctuate directly with the markets and hence, a downward curve is never a bad time to invest in equities if you plan to remain invested for a long period of time. This way, you are assured of reaping the benefits of the inevitable upward swing in the market which succeeds the lean phase.

As far as young investors are concerned, time is their biggest asset and irrespective of market conditions, our standard advice for any young investor is to start investing as soon as possible.

The longer the investment time-frame, the greater are the benefits that are reaped. And of course, a longer time frame also increases the risk appetite of the young investors who have the security of income generation to cushion any unexpected loss, hence giving their investments time to recover through varying market cycles.

Invest small, invest systematic

Bulk investing is almost never advisable, especially in the current market conditions. A systematic investment in small fractions ensures that your investment is evenly spread out, thus reaping the maximum benefits from the varying market conditions. SIPs or systematic investment plans offered by most funds are the best way to ensure that your money is simultaneously regulated and invested in a disciplined manner.

Apart from the fact that this is an excellent way to discipline your savings, SIPs are also recommended to weather the changing market conditions efficiently.

Don't be conservative. Do diversify

Being conservative is a cardinal sin for young investors when it comes to investment. The risk appetite of the young investors is their biggest strength and it should be utilised to the hilt. However, this does not imply that the young investors should be careless with the way their investment is positioned in the market. It is crucial for them to understand the dynamics of various asset classes and then diversify the investment as per their long term financial goals.

However, we reiterate, risk is an essential feature of a young portfolio and young investors should take the maximum advantage of high risk asset classes like equities. Even while investing in equities, there must be careful consideration of the nature of the equities (large cap, mid cap, small cap stocks/funds; diversified or sectoral funds etc.) and the investment must be distributed according to individual goals and capacity.

The young investors must understand that investment is not a sleep walking exercise or else, they would be confined to a portfolio that would be 'safe', but definitely not efficient. And once the young investors do get into the investment scene, they must be keen, aware and vigilant.

The best way to ease oneself into equity investments is through mutual funds (Read: 3 reasons why you should invest in mutual funds). They are relatively easier to understand and manage.

Irrespective of the mode of investment, young investors must understand the risks involved, always have an emergency corpus to deal with unexpected situations, in market or otherwise and be extremely aware and well researched on the asset classes they include in their portfolio. Investment in equity is hardly an avoidable proposition if one intends to get the maximum value for money and hence, young investors should delve into it with an aware gusto.