You should invest for the long term, and should stay invested in equities. But what does this mean? How should you do it? Read on.
As a savvy investor, you know that investment in stocks for the long term gives the best, inflation beating returns. In fact, if you invest in the share market for the long term, you can easily ride out all volatility – equity investment can be virtually risk free!
You also know that irrespective of the level of the market (Sensex / Nifty), you should stay invested in the market. For example, you know that you should not stop your systematic investment plan (SIP).
But what do these things mean? How do you actually do it?
- Should you buy a company’s share, and not sell it for, say, 10 years?
- Should you start an SIP in a mutual fund (MF) scheme, and continue it forever?
- Should you sell anything before your goals are reached?
- When should you sell your shares / MFs?
(Please read “Goal Based Investing” to know how you can invest in order to achieve specific goals)
Too many questions! But let’s start with the basics.
Why should you “stay invested” in the stock market?
There is a one-word answer to this: Compounding. You should stay invested in stocks for the long term to take advantage of compounding.
When you stay invested, your profits automatically get reinvested in the market. And you earn a further profit on this! This accumulates in the long run, and it means that your ultimate returns would be very high.
How should you invest in the share / stock / equity market?
For small investors like you and me, the best way to invest in the stock market is through mutual funds (MFs).
(Please read “Direct investment in Stocks versus Mutual Funds (MFs)” for a thorough comparison.)
There are many benefits of investing through MFs, but here are some that are relevant to this discussion:
- You can diversify even with a small investment. Thus, even if you invest just Rs. 2,000, you can own a small part of many companies.
- Data relating to an MF’s holdings, sectoral allocation, performance, etc. is widely available.
- A company’s profit depends on its operations, whereas an MF’s returns depend on the fund manager’s skill to pick good companies. Therefore, taking a buying decision based on a mutual fund’s past performance is more reliable.
So, how should you “stay invested”?
Here’s where we come back to the questions that we asked earlier!
The most important question: Should you never sell?
You definitely should! Staying invested means that you don’t take out your money from the stock market. It doesn’t mean that you shouldn’t take out your money from a mutual fund (or a company’s stock).
What does this mean? This means that you can definitely sell units of an MF, or stocks of individual companies that you own – as long as you reinvest that money in the stock market.
When should you sell – Periodic Evaluation
In fact, you should sell your units from time to time. But only after periodic evaluation of performance, not due to the prevailing market sentiment or due to a “tip”.
You should monitor the performance of your investment every 6 months, and see whether the MF scheme you have invested in is beating its benchmark (For example, the Nifty, or the BSE-200 index) or not.
If it isn’t, check its performance after another month or two. If it is still falling behind its benchmark, it’s time to sell it!
Investing the proceeds back into the market
But before you sell, also find another MF scheme that is performing well, and is similar in nature (large cap, small cap, sectoral, ELSS, etc.) to the scheme you want to exit from.
Only then you should sell the under-performing scheme – and invest the money thus received in your chosen scheme!
This means you are staying invested in the market. And this is the only way to invest for the long term…