How to go about your equity investments in the New Year?

Given the present time, it's prudent to stagger your investments rather than investing in a lump sum. Lump sum investments are more vulnerable to losses, which may ruin your entire equity investing experience

Rahul Jain

January 09, 2022 / 07:29 AM IST

Rahul Jain, President & Head - Personal Wealth, Edelweiss Wealth Management

Another new year has dawned upon us, but markets look precarious. The new coronavirus variant that’s spreading thick and fast has spooked investors, with markets entering into a correction mode. There's an imminent fear among a large section of investors about the gains made wiped out in the coming days as things look tentative. Amid the air of uncertainty, many investors are looking for the approach they should adopt towards their equity investments in 2022.

Avoid Knee Jerk Reaction

Yes, markets have witnessed corrections over the past few months, and things appear a little dicey. However, this is the time to exercise patience and avoid knee-jerk reactions. Taking the exit route at this point would do more harm than good as you will end up converting your notional losses into actual ones. Note that several tailwinds in the economy propelled markets to new highs in 2021. These included robust corporate earnings, rapid vaccination pace, and strong FII inflows.

Amid these factors, select pockets of the market have gone beyond expectations. It is this portion which is witnessing a correction. So, be patient and avoid pressing the panic button. Remember March 2020, when markets corrected heavily. However, they bounced back beyond expectations and rewarded those who held on to their investments. The present time is just a phase and will pass soon.

Given the present time, it’s prudent to stagger your investments rather than investing in a lump sum. Lump sum investments are more vulnerable to losses, which may ruin your entire equity investing experience. And, this may turn you away from markets altogether and hamper long-term wealth creation.

On the other hand, staggering your investments through systematic investment plans (SIPs) keep you invested across market cycles and help accumulate more units when the markets are down. Eventually, it will average the cost of buying and help you earn a bigger corpus.

Stick to High-Quality Stocks

With markets being discerning, you must stick to high-quality stocks. During a correction mode, even fundamentally sound stocks take a beating. However, they eventually bounce back and add to your riches. This is also the time when some fundamentally strong stocks are available at attractive valuations. As an intelligent investor, you must not lose an opportunity to add them to your portfolio.

Stay away from penny stocks and those with weak fundamentals. Before investing, check out the company's fundamentals and corporate governance model and commit only if you are confident about the long-term growth prospect of the company and the sector it’s investing.

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Diversify Within Equities

While diversification across asset classes is always desirable, it’s equally important to diversify within a particular asset class. You must diversify within equities to provide optimum balance to your portfolio. A mix of large, mid and small caps can boost the wealth creation potential of your equity portfolio and help preserve the gains in the event of a downturn.

However, given that mid and small caps are riskier than large caps, it is better not to make your portfolio tilt heavily towards them. Restrict your equity investment to 5-10 percent towards mid and small caps.

Also read - Expect budget to be pro-growth, government to keep fine balance between tax and growth, says Santosh Joseph of Germinate Investor Services

The Final Word

As evident, there's nothing much different that you need to do while investing in equities this year. Markets are on tenterhooks, but a long-term approach towards equity investment can help you ride choppy waters with ease and augment your riches in the coming days.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.