Investing in stocks of fundamentally sound companies, when they are available at a discount from their fair price (MRP), assures you of very good returns. Sell them only when market has priced them so high that future returns are likely to be low.
Investing in the ‘right’ Mutual Funds (MFs) enables you to earn high returns and diversify with ease. However, selecting the right MF is a challenge, because today’s best performers are unlikely to be tomorrow's winners. They come at a high cost, and hence, make sense only when they beat Index Funds.
Index Fund is a Mutual Fund whose portfolio mimics a particular index (e.g. SENSEX 30, Nifty 50). They are much cheaper than MFs. Index Funds will become more attractive, as MFs will find it difficult to beat the Index and justify their high costs.
Ensure Security! Equity always comes with risk. Ensure your security by allocating a portion of your Investable Surplus to low-risk fixed-income assets
Putting all or most of your investable surplus in the equity basket exposes you to high risk and putting too much in safe, fixed-income asset reduces your returns drastically.
Companies in the same sector are likely to be impacted by the same economic factors. Large exposure to a single sector, or correlated sectors, could result in a drastic fall in your portfolio market value.
A stock is exposed to several company-specific risks, (business, balance sheet, valuation or people risk.) A 20% drop in a stock comprising 20% of your portfolio reduces your absolute returns by 4%.
While some smaller cap companies have potential of high returns, most come with high risks. Many have weak business models and are badly hit by economic or business downturns, and can erode your wealth!
Companies with poor fundamentals and weak business models can not deliver consistent and sustainable profitable growth.
If over-priced stocks form a large portion of your portfolio, a price-correction will reduce your portfolio value substantially.
Low-trading Assets have very few buyers. So, one cannot sell it, when needed without compromising on prices.
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