What Young Investors Must Know

'With interest rates declining, today's college-goers won't have the luxury of earning double-digit (or even high single digit) returns from fixed-income instruments.'
'They will perforce have to enter the equity markets.'
'By entering at an early age, they stand a better chance of developing into skilled investors,' experts tell Sanjay Kumar Singh.
Illustration: Uttam Ghosh/Rediff.com

Sumit Sanjay Singare, 26, a second-year student of the post-graduate programme in management at IIM-Ahmedabad, has been investing in equities for the past two-and-a-half years. His portfolio includes seven stocks and four mutual funds.

A top-down investor, Singare is currently bullish on themes like housing for all and electric vehicles, and has invested in stocks of housing finance companies and battery makers.

As the bull market matures, many college-goers are entering the equity markets.

Some are driven by peer pressure. They have heard of friends making money and wish to emulate them.

Such students usually go for short-term trading.

Others, especially those pursuing post-graduation courses, who have worked earlier and have invested their savings from those jobs in the capital markets tend to be more mature and long-term oriented in their investment approach.

For all new entrants in the stock market, the importance of a gradual and cautious approach that minimises risks can't be emphasised enough.

1. Get the advantage of an early start

Experts think that students entering the capital markets at an early age is a positive phenomenon.

"They should enter with a learning mindset. They should experiment and get first-hand experience of all approaches–fundamental investing, technical analysis, even futures and options -- and then decide what works for them. Time is on their side," says Aashish P Sommaiyaa, MD and CEO, Motilal Oswal Asset Management.

With interest rates declining, today's college-goers won't have the luxury of earning double-digit (or even high single digit) returns from fixed-income instruments.

They will perforce have to enter the equity markets.

By entering at an early age, they stand a better chance of developing into skilled investors.

2. Begin with a learning mindset

Read as many investment classics as you can, especially those by Benjamin Graham, Peter Lynch, Robert Hagstrom and Philip Fisher.

Newsletters by famous investors like Howard Marks, Warren Buffett's annual letters to shareholders, etc, will also help students hone their investment approach.

Following famous investors on Twitter, attending conferences and seminars are other ways to develop themselves.

An ability to interpret financial statements is a must.

Young investors who train themselves to use equity databases (Capitaline, Ace Equity, etc) will enjoy an edge.

Financial planners suggest that beginners should form groups and compete against each other using mock money.

"They will gather invaluable learning along the way which they can then apply to the real markets," says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

If you use real money, keep the bets small.

Educating yourself to invest in stocks is, however, a long-term process.

"It takes at least two-three years to get the hang of how to do it properly," says S G Raja Sekharan, who teaches wealth management at Bengaluru's Christ University.

3. Invest in mutual funds first

A safe way to enter the equity markets is to put the bulk of your portfolio in mutual funds.

Begin with exchange traded funds (ETFs), which give you exposure to a diversified basket of stocks for a small sum.

ETFs will give you a taste of market volatility.

Once you have educated yourself on how to pick the right equity funds (Christine Benz's Morningstar Guide to Mutual Funds is a good manual), move into actively managed funds.

Only a small portion of your portfolio should go into direct equities initially.

Debashis Sarangi, 30, a first-year student in the postgraduate programme at the Indian School of Business, Hyderabad, adopted this approach. He first began investing in 2011 via mutual funds.

Initially he took a broker's help to pick funds.

As he learned and grew in confidence, he shifted to direct funds, investing through the Web sites of fund houses.

To control risk, he has 40 per cent in equities and 60 per cent in debt.

"I have been ultra-conservative. At my age, someone could probably have a 70:30 equity-to-debt ratio," he says.

Only over the past year has he begun to invest directly in stocks.

4. Mistakes to avoid

Avoid betting on stocks with money meant for paying your tuition fee. A long-term orientation is a must.

Day trading and other short-term trading strategies entail high risk.

Be adequately diversified.

A portfolio needs at least 15 to 20 stocks, spread across sectors, to be well diversified.

Initially, stick to large-cap blue chips.

Even if they fall during a downturn, they will recover in due course.

Avoid overloading your portfolio with mid- and small-cap stocks. Their valuations have turned dangerously expensive.

When the markets tank, they will take a bigger hit and many may not recover for long.

Also, don't go for large leveraged bets in the futures and options segment.

Also, put your defences in place.

"Have a stop-loss in place at 15 to 20 per cent below the current price so that you don't suffer complete loss of capital," says Raja Sekharan.