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Are you ready for equity risk?

If you are following the market movement on a daily basis, rejoiced at the 6% single day rally, you would be fretting now that the large cap benchmark Nifty 50 seems to be moving lower by around 1% daily.

If you are following the market movement on a daily basis, rejoiced at the 6% single day rally, you would be fretting now that the large cap benchmark Nifty 50 seems to be moving lower by around 1% daily. 

As they say, this is the nature of the beast; equity investments are volatile in the short term. You have to decide whether you are ready to take it on. But first you need to understand what equity risk is all about. 

Investing in equity is about owning companies and participating in their earnings growth journey. This can take many years. As a shareholder you have to be patient and hold through the ups and downs of the organisation. 

It’s about creating wealth

Don’t make the mistake of comparing experiences in financial products like fixed deposits with returns from equity. While, it is correct to expect a higher return from equity investments compared to fixed deposits, the investment time horizon and the path you take to these relatively higher returns is not the same as your path with fixed deposits. A fixed deposit gives you a defined income and you can decide the frequency of the pay-out.

Investing in equity is about owning companies and participating in their earnings growth journey. This can take many years. As a shareholder you have to be patient and hold through the ups and downs of the organisation. 

In the wealth creation journey – you should not

- Check the market price or mutual fund NAV daily. This will only make you nervous about the daily ups and downs in stock prices

- Panic and redeem in times of stress. Keep in mind that your equity investments are allocated towards long term goals at least 7 years away

- Be overly concerned when you see negative returns or even capital loss, especially in the early part of your investment tenure

Your focus instead needs to be on the quality of your equity investment. 

It’s important to understand the risk

If you don’t understand the risk involved in equity investing, it is very likely that either the fear of losses will drive you out too soon or the greed for very high return will lead to poor quality choices which ultimately can result in recoverable losses. 

Once you understand that short term volatility is part of equity investing, you are better prepared to benefit from the long term returns in equity. 

The other risk, is picking stocks and equity funds of poor quality. Poor quality equity investments can underperform peer returns over a period of time. Don’t compare with other asset returns and don’t compare daily. Remember, equity investments need to be held for at least 7 years and hence, such comparisons should also happen over a period of several months. 

Do your homework before investing. If you don’t know enough about picking equity funds or stocks, do your research and pick a good advisor. Secondly, keep in mind even formerly good investments can turn sour. Keep checking on the fundamentals, don’t hesitate to switch out if quality has deteriorated. What you must do is, reinvest in better quality equity (funds or stocks).

If you are unprepared for equity risks, it is very possible you will have a poor experience at the start and log out permanently. Prepare your behaviour in advance so that you can benefit from the long term returns of this asset class.

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