September 2, 2013

Equity Investment and our behavior

Today let us discuss how for the majority of investors equity is so unlucky and must not investment product. This behavior pattern was developed either through their own experience or from others. They never analyze what went wrong in their past equity investment. Simply we mark it as “Equity Investment is Risky” !!! Is it so??

Before proceeding further we must sum up few strange ideas like what do you mean by equity investment for few.

1) Equity Investment=ULIPs

When you ask someone to invest in equity their first reaction is a big no as they experienced the loss in their previous investment and the product is also not the pure equity investment. They are the combination of Insurance+Investment products (which were costly before IRDAs regulation). In few of such ULIP products expense ratio was so high that in first year it was around 60%. Then how can they realize the positive return in the short span of even within 10 years? This made them to stay away from equity investment.

2) Equity Investment=Direct Stock Investment

Eventhough it seems correct but for the beginners or persons who are unable to track the investment this is a huge risk. They invest simply following the tips provided by either by some news channels or through friends. But not following their own risk appetite and the research idea. The result is a big loss of principal.

3) Investing based on the tips is good-

When I started my stock broking franchisee, I flooded with questions like am I provide stock picking tips? If so they are ready to invest !!! Mean everybody these days in need of ready-made suggestions but not their own research based ideas.

4) High expectation-

Yes few think that they need to earn daily around Rs.1,000 by investing Rs.25,000, because they are investing in equity market. But they forget the simple basic idea that return always be associated with risk also. They take big risks and incur the loss.

5) Over confidence-

If they loose money they again invest more in anticipation of square offing that loss and booking profit than what they lost. But they never judge the market condition and forget the idea that “Trend is Friend” !!!

Now below are the few market situations and I will show you for each market conditions how equity investors react. We take that Nifty touched the breadth of 5000. From now onward let us see how investors behave for each condition of market movement.

1) Market jumped from Nifty 5000 to 5400 within a two trading days-Wow investors start to look at it with hope that now market will start to jump and ready to invest the money.

2) Market jumped from Nifty 5400 to 5800-Investors start to think that it is a big loss if we miss the bus so we need to buy as the market is in an uptrend. They buy at this level.

3) Market now moved from Nifty 5800 6100-Thank god I didn’t waited and did a right decision by investing at low level.

4) Market start to go down from Nifty 6100 level to again at 5700-Wow it is correcting and so investors start to think that they need to again utilize this opportunity and increase their holding.

5) Market again will go downward from Nifty 5700 to 5500-They think it is the best time to double their holding and again they start to invest more.

6) Market again will go downard from Nifty 5500 level to 5000-Now they start to feel the heat as their all holding start to give negative return drastically.

7) Market again will go down from Nifty 5000 level to 4800 level-They look for help or news like why market are going down and why few experts are not giving any opportunity of investment or positive news items.

8) Market will go down again from Nifty 4800 level to 4400 level-At this level they don’t have any clue what to do as their returns took a huge negative trend. So in a huge depression they sell all their holdings and book the loss. They will decide on that point that they will never turn again towards stock market 🙂

9) Market will again go down and touches a new low of Nifty 4000-They feel have that they came out early and they are proud of their decision.

10) Again down trend continue Nifty touches 3800-Now they again feel great about their decision making style and start to give tips on the same to others.

11) Slowly again market start to go up and within few days market again touches 4500 level-Again they look at it strangely why from low level of 3800 to 4500?

12) Nifty again touches 5000 level-They feel confident now and invest once again as they feel this level is best than their previous first investment in equity.

Finally history repeats again and again but only name of investors changes !!!

Even though it doesn’t resemble many but this is the trend how one experience the equity investment. Hope all of you will share the stories behind your own experience and let us learn together.

 

21 Comments

  1. Hi, going through the various mails, In 2013 u had recommended Franlin Blue Chip, UTI and Reliance opportunity equity fund and HDFC Prudence funds for investment. Is ur recommendation unchanged still.

    Reply
  2. Hi Basu,

    Your site holds nice and informative articles for common man to understand investment market gimmicks. Your prompt response to queries is well appreciated.

    Being an Aam admi :), I needed your expert advise on road map to invest on mutual fund and equity on a long term basis. Say for more than 10 years from now on.

    My current investment portfolio is as below

    1. 30K per year in a market linked endowment plan of reliance for 17 years. 7 years are passed so far.
    2. 85K per year in LIC (Jeevan Saral + Jeevan Anand) for next 20 year. 3 yrs passed so far.
    3. 50K per year in ICICI Finnacle Super which is a market linked plan for 7 years. 4 years passed so far.

    I dont consider EPF as an investment for the time being :), which takes away around 1 lakh per annum from my salary.

    With all the above investments, I still feel the returns are average for my future needs and could have been planned in a better way in past. Hence from now on, I would like to increase my risk appetite for better returns.

    I am not a big fan of investing directly in share market with demat accounts as I dont have time to poke in to that.

    Can you please advise how whould I plan my next investments for maximzing returns?

    Regards
    Mr Dash

    Reply
    • Dash-First come out the dummy products which you already investing. I said them dummy, because they neither fulfill your insurance need nor returns are good. Then why to continue? Increasing risk appetite is best idea, but at the same time please understand that taking untoward risk will harm your finance. I am not suggesting you direct equity but you can surely opt equity mutual funds for your long term goals. At the same time first priority should be to buy pure life insurance, health insurance and accidental insurance. Then we can discuss further.

      Reply
  3. Dear Sir,

    Since last month i am going through your website and i must say the website has lot of good information. Great work !! More over i am impressed with your prompt response. Double KUDOS !!
    I have three query :
    First Question: what is difference between : health and accidental insurance
    why Accident Insurance is needed if you have health insurance. Do you have any article on choosing the best Accident Insurance available in market.
    Second Question:
    I have already a Group Insurance of Rs 4lk provided by my Employer. Along with it i have taken a Personal Health insurance for Rs 5lk(Premium 9k/ yr) from ICICI Lombard for me and my wife. I have added Critical Illness for My wife in the same plan for Rs 5lk with additional premium of Rs 1500.
    Do we need to have Critical Illness cover if yes then what is the optimum amount for it?

    Third question:
    Should i add a Critical Illness Plan with the same Health Insurance(ICICI) or take a different Plan for Critical Illness. Currently i have a different CI plan for Self of Rs 5lk for which i pay Rs 3600/ year.

    Thanks
    Singh

    Reply
    • Singh-Health insurance need for any type of health issues (in broader sense) but accidental insurance actually meant for post hospitalization due to accident which requires more sum assured and other features. Hence you must separate both the things. Also nowadays few health insurance companies offer you both combined plans which will reduce your premium to some extent. Critical illness is required but how much depends on lot of things like your family history or your life style and many more. So I can’t say universally that certain sum assured is enough. Better to separate it. Critical illness policies are lot of complex things than health and accidental policies. So keeping them separate and buying based on your need will be good. I will soon come up with a post about best accidental insurance plan.

      Reply
  4. Hi Basu,

    Nice one.
    I am planning for long term investments
    In your earlier Posts you mentioned invest 30 % in PPF and one term insurance and 60 % of savings in Equity mutual funds.
    My savings around 20000
    I have new born child so for his education and career i am planning for long term investments
    I have HDFCClick2Protect term insurance
    I have started PPF account with 5k monthly
    I dont have any idea in mutual funds, stocks, trading Could you please suggest me where can i invest to get good returns with minimal risk

    Reply
    • Veera-Before proceeding, do you have health and accidental insurance also? If not then have them then build an emergency fund of at least 6 months of your household expenses. After that let me know the same and will guide you to start investing in mutual funds.

      Reply
      • Yes Basavaraj I have that insurance our company will provide the same

        Reply
        • Yes Basavaraj I have that insurance our company will provide the same
          Could you please guide guide me how to start investing in Mutual funds
          looking for my child career and education so need info on long term investments with minimal risk
          Please note that i have very poor knowledge on stocks trading mutual funds etc dont have any basic knowledge on these things

          Reply
        • Veera-what if you left the job and new employer decline you to provide the health cover or what if they decline to provide health cover to your family but only to you? Hence it is always better to have your own health insurance cover for your family than depending on your employer. Do you have emergency funding placed? Now it is left with you to have these basic things to do first before proceeding investment. I see you are more eager to proceed investment before have a right strategy for emergencies. It is left with you to decide.
          You can choose below funds for your mutual fund investments. Diversify your investment among these funds equally.

          1) Franklin India Bluechip Fund (G), 2) UTI Opportunities (G), 3) Reliance Equity Opportunities (G) and 4) HDFC Prudence Fund (G). But I recommend you to regular review of the same fund is a must.

          Reply
          • Thanks Basavaraj for ur suggestion i didnt think in this way as my employer is providing so i didt thought my own at all
            First i will go for my own health insurance then i will look into the the other investments
            Once again thanks for your valuable suggestion
            U always rocks

            Reply
  5. Tell me then when to invest

    Reply
    • Sandip-When you have a time frame of around more than 5 years then you need to look at equity investment that too in the way of monthly investment (like SIP). So if you have the above said mind set then the best time is when you start to invest but not the timing of the market.

      Reply
  6. very good article for those who new to stock market. thanks for it …..

    Reply
  7. Hi, Basu
    Reading your article was very interesting. I need an advise from you, can you please help me? I have about 400 shares of IOB purchased way back in 2000 at the time of IPO @ 10.00 per share. About an year back the value per share went almost upto 150.00, but i failed to encash the opportunity. Now the value is hardly 33.00 per share. What should i do… should i sell or hold them with a hope that the values will go up. The fundamentals of IOB seem quite bleak to me with rising NPAs and dropping profit margins but the positive side is the massive expansion program of the bank and being one of the most trusted banks of south India with sound banking principles. I am not in any urgent need of funds now and my risk-profile is moderate conservative. Can you give me any tips, please? Thanks in anticipation…. I wish you happiness. 🙂

    Reply
    • Balagopal-First thing I personally not a direct investor in the stock market. Second thing, going by the current trend of rupee depreciation against dollar, all banking stocks came down heavily. So better to wait till rupee stabalize. The concerns you raised like risking NPAs and dropping profit margins are effect of current economic trend. Hence better to wait for some more time.

      Reply
      • Thank you Basavaraj ji for the express reply… 🙂 I really appreciate your promptness in responding; not only to this query of mine but also the hundreds & thousands of queries that you keep patiently replying. Hats off to you sir… I really wish I too wore a hat….! 😉 🙂 I wish you happiness, sir…
        Regards,
        Balagopal

        Reply

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