Your first few salary credits bring a strange mix of freedom and responsibility. Friends talk about IT Stocks, colleagues compare mutual fund returns and someone inevitably mentions the Jio Share Price as if everyone should know it. If you are new to equity investing, all this talk can feel intimidating. The good news is that a clear, step-by-step approach makes entering the market far easier than it looks.
Build the Safety Net First
Before starting to invest in stocks, ensure that you have secured your fundamentals. Have at least 3 to 6 months of your monthly expenses covered in a savings account or liquid fund. Buy health insurance to cover you against needing to divest during bad times due to medical bills. If someone relies on your salary, consider buying term insurance.
Ensure that you clear off any high interest debts such as credit cards. By clearing off your high interest debt, there is guaranteed earning which very few market instruments can compete with.
Starting With Mutual/Investment Funds
Many new investors tend to look for single stocks recommended by friends or videos. However a much more relaxed approach would be to invest in diversified equity mutual funds or index funds. This helps you invest your money in a diverse range of companies within various sectors. This means that if one company underperforms there will be less impact on your overall investment. Index funds also have low fees meaning more of your earnings will go to you.
By using systematic investing into your investment account as a salaried individual, you can invest a set amount each month. This means that when the price falls, you will receive more units and when it rises you will get less. Overall, this ensures you get an average price of your investment over the years and takes away the anxiety of getting the timing right.
Adding Some Individual Stock
Once you have a solid foundation you may want to include some individual stocks. This can help diversify your portfolio slightly more by investing in a satellite portion. Before you buy make sure you have done your research:
Understand how the company makes money and who their customers are.
Check 5 years of revenue, profits, debt and cashflow.
Check valuations against similar companies and the company’s past.
Check level of trading volume and bid/ask spread.
Have a limit on how much you will invest in the company.
Ensure that if the company isn’t readily available on an official exchange, check they are traded officially. Don’t invest on unregulated platforms.
Setting Up Your Accounts
You will need to open a bank account, demat account and trading account with a SEBI registered broker. Complete KYC using ID and address documents and connect your bank account. You will also need to nominate someone. When choosing your broker, have a look at the fees they charge. If you are looking to invest little amounts on a regular basis then having a flat fee can eat into your balance.
Never share any passwords or one time codes with anyone. Even if they claim to be a representative from your broker, make sure to check they are genuine on the regulator’s website.
Common Mistakes
Many young investors make common mistakes. They invest in high flying stocks, over trade, use borrowed money and panic when they hit their first big dip. They also tend to forget about fees and realise that over trading and high fees from their broker will mean less returns.
To protect yourself, only invest spare money. Diversify your main investments. Don’t use any borrowed money and check how you are doing every quarter. When the market dips you know that by investing on a regular basis you will gain more units at a cheaper price.
Learning
You don’t need to know everything straight away. Try to read one annual report per quarter. Look up educational content provided by the regulator and exchanges. Notice how your investments behave depending on the market mood. Every season you learn something that no book can teach you.
Also understand that no one can predict short term movements. Very rarely will the best investors be the most accurate, they will be the most consistent.
Tax Implications
Any gains from shares and equity funds will be taxable depending on how long you have held. There have been changes to this recently in the Union Budget. Ensure you keep all your contract notes and statements in an organised folder. Talk to a chartered accountant to see what the current situation is, especially as your portfolio will grow.
Getting Started
You don’t need to have a large amount or know everything. Simply investing a small amount each month into a diversified fund, having a growing emergency fund and researching before investing will put you ahead of many experienced traders. Start small and be consistent. Let time work in your favour!
