When it comes to investing in the stock market, it immediately comes to mind that there is risk in it. Equity and bonds, as an asset class, are riskier than other asset classes. This is true to a great extent. When we talk about safety in stock markets, it does not mean avoiding risk completely, but managing the risk. A systematic way of safe investment in the stock market should be found, so that the risk can be reduced. Let us discuss ways here that can help you manage stock market risk so you can make money.
Trust asset allocation
According to SBI Securities, understanding asset allocation from an investor’s perspective is about how much of your money should be in equities, how much in debt, how much in gold and how much in liquid assets. After this, you can get detailed information and decide how much should be invested in large-cap and mid-cap equity, how much in long duration and short duration debt. Its advantage is that it is automatically redistributed between equity and debt.
For example, if your ideal exposure to equities is 55% and the market rally has taken the equity share to 70%, then it is time for automatic redistribution. You need to reduce your exposure to equities and increase your exposure to debt. This has two benefits. This ensures that a portion of the profits are automatically withdrawn at high market levels and secondly, it also ensures that you have cash to invest when the equity market falls to more attractive levels. .
Consider equity funds
There are many challenges in buying direct equity. Firstly, it requires a lot of understanding and insight about the stock market and the business models of different companies. This may be too difficult and time consuming for most individual investors. Secondly it is very difficult to diversify into direct equity unless your corpus is very large. A better approach is to choose diversified equity mutual funds. Nowadays mutual funds are very liquid.
There are many challenges in buying direct equity.
Investing in a systematic and disciplined manner is necessary
You should invest through Systematic Investment Plan (SIP). Equity mutual funds are also not completely safe investments, as equities involve risk. When you choose SIP you are investing a small amount over time. This works better for you in case of market fluctuations. This works best when markets are volatile as it ensures you get a better average price than buying outright.
Passive investing relieves the trouble of choosing stocks.
When the question arises how to invest in the stock market, the logical answer is that you want to outperform the index. However, if the fund manager is struggling to beat the index, you can buy the index. Yes, you can do this today by investing in index funds and index ETFs. These funds are passive funds that simply mirror the index over time. There is no unsystematic risk and only systematic risk to worry about in index investing. Index investing can be very profitable in itself. Also, the risk also remains controlled.
think honestly about the long term
A basic rule of investing in the stock market is to really think long term. This may not make it a safe investment, but it can reduce the risk involved in such investments to a great extent. According to SBI Securities, a study indicated that over a holding period of 1-3 years, the probability of loss could be as high as 40%. However, if you hold the equity portfolio for more than 7 years, the probability of loss is less than 5% and if you hold it for more than 10 years, the probability of loss is close to zero.
