Stock indices are at all-time highs. Last week, the Sensex touched 47000 for the first time during intra-day trading. The year had begun on a disastrous note because of the pandemic with the Sensex falling below 26000 — a mighty crash of nearly 40 per cent from its peak of 42000 in January. From those depths, the markets have staged a sensational comeback of around 80 per cent in nine months. The euphoria over Covid vaccine as well as record infusions by foreign investors are fuelling this rally. The market’s performance will undoubtedly draw many first-time investors. Here’s a primer for them with lessons from a year of great volatility.

Why are you investing

First know why you want to start investing in the stock markets. This is another way of saying you must have a clear goal, defined in terms of what you want to invest, what your returns expectations are, how much risk you

can take, which is the best way to achieve this goal, how long you wish to remain invested and what you would do during volatility. With a goal in place, you’re more likely to succeed. Without it, you could get into trouble. Goal-setting can seem complex. Don’t hesitate in reaching out to an investment planner.

Trading versus investing

Know the difference. Trading would mean the purchase and sale of securities in the short term, where the holding period may range from a few days to a few months.Trading is aimed at maximising profits in the short run. It requires analysis and research of companies, industries, policy, trends, the economy at large — and often, sheer dumb luck.

It’s not everyone’s cup of tea. If you are a layman, be wary of stock tips from well-meaning friends and relatives. If you don’t know where to start investing in the markets, you could consider mutual funds that align with your investment goals. For example, index funds could be a low-cost investment to accelerate your retirement fund creation.

Think long term

For investing, you must have a long-term outlook. That is where you’re most likely to get the best results. Let’s take the example of a large equity mutual fund which debuted in 1995 with a unit price of Rs 10. Today, its price is

Rs 706. If you had invested Rs 1 lakh in this fund at its launch, it would be worth Rs 70.6 lakh today.

However, in the first 10 years, it would have grown to only about Rs 6.6 lakh. In the next 10 years, it would grow to about Rs 46 lakh, and in the last five years, it would reach its current value — but not before falling to Rs 43 lakh around March 2020.

In the last month alone, this investment would have grown from Rs 65 lakh to Rs 70.6 lakh — a five-fold growth of your initial investment in just 30 days.

Such growth is unthinkable in the short term. The lesson here is simple: it pays to think long-term where you give yourself time to recover from market falls and where your profits compound rapidly, allowing you to achieve your financial goals easily.

Risk tolerance and appetite

The stock market is volatile. Before you venture your money in equities, you must understand your own ability to digest the losses.

Risk appetite and risk tolerance are both measures of your ability to manage risks. The higher the risks, the higher the possibility of losses, and, therefore, higher the rewards.

Risk appetite is the general perception about the losses you may be able to suffer, whereas risk tolerance

looks to define the losses you will tolerate. For example, you invested in a small-cap mutual fund because you seek higher rewards by taking higher risks and you will be able to tolerate losses.

However, you draw the line at 30 per cent losses at which point you will exceed your ability to suffer losses. When you invest in the equity markets, you must define these parameters in line with your financial goals.

Don’t go all at once

The markets are ripe today which means they are due for a correction which would lead to a fall in prices once people start selling their securities. Last week, the markets fell 3 per cent when the UK announced the presence of a new, highly contagious strain of Covid-19. During such times, it would be advisable to invest in small quantities and not take large positions that could lead to heavy short-term losses. One of the smartest ways for small investors to invest in equity is through mutual fund SIPs. This averages your purchase costs and lowers losses.

Find your own winners

Whether you are picking stocks or mutual funds, find your own winners. This is another way of saying yesterday’s winners may not continue winning. Your picks will perform for you best when they align with your goals. For example, liquid mutual funds are suited for short-term cash holding but not for long-term wealth creation. While you are researching your options, you may be tempted to back winners from the year gone by. This may or may not yield results. Many equity funds today have six-month absolute returns exceeding 50 per cent. This in no way guarantees similar performance in the future.

Meet essential savings first

Do not mix up your investments with your essential financial obligations — having an emergency fund which you’ll need at short notice at any moment, or buying health and life insurance. Once met, you can move on to the goal of wealth creation.

You must also diversify your investments by adding debt-based investments such as provident fund or buying gold to hedge against volatility. A well-diversified investment portfolio will keep you afloat in all economic weathers.

The writer is CEO, BankBazaar.com