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There are various methods and strategies one can adopt while investing in equity. Some of the popular ones are enumerated below:

Diversification

Diversification means spreading your money over a number of investments. In other words, you don’t concentrate your money over just one or two, or only over a few investments. For instance, if you have an investible surplus of Rs 1 lakh, you can diversify into two ways. Firstly, don’t invest the entire Rs 1 lakh in just one asset class. Allocate the amount among 2-3 asset classes. For example, instead of investing the entire Rs 1 lakh in say, equity, invest a portion in equity, another portion in mutual funds and the balance in debt. Secondly, within each asset class you are investing in, don’t invest all the amount allocated to that asset class in only one or two investments. For instance, if out of Rs 1 lakh, you have decided to invest Rs 35,000 in equity, don’t invest the entire Rs 35,000 in shares of just one company. Allocate this amount between 2-3 companies at least.Diversification - benefit and pitfall. Diversification is a well-established risk management investment strategy. It helps spread your risks over investment options offering different risk-return levels. Diversification especially helps when one invests in investment options with complementary risk-return profiles. For instance, it has been historically proven that when the equity markets are on a bull-run, the debt markets are usually sluggish. Now, if you invest in a combination of equity and debt, you are protecting your investments from a significant fall. In other words, if you had only invested in equity and the equity markets were in a bearish situation, you would have made significant losses on your investments. However, by investing in both, debt and equity, a portion of your portfolio, which is invested in debt, will offer profits during this time to reduce the losses on your equity investments, resulting in either an overall lower loss, or even a marginal gain depending on the level of investment in debt. The reverse will hold true if the equity markets are moving upwards and the debt markets are stagnant.

Cant afford to forget your InvestmentsOnce you have made your investment in shares of the companies you have selected, you cannot afford to simply forget about your investments and hope that someday, when you need the money and you check on your investments, they would have significantly risen in value. As stated earlier, companies go through business cycles of ups and downs, which affect their share prices. Not only this, companies also go through mergers, acquisitions, changes in managements, new business developments, etc., all of which affect their stock prices for the better or worse. You need to periodically monitor your company’s performance. The periodicity could be quarterly since companies report their results on a quarterly basis. Use ‘Ratio Analysis’ to study the company’s quarterly performance.

There are broadly two kinds of risks associated with investing in equity: Systemic risks & Non-systemic risks

Systemic risk
This implies ‘risk in the system’. This risk applies to the entire market and includes risks such as interest rate risk, inflation risk, exchange rate risk, political risk, etc. Some of the important systemic risks are indicated below:

Interest rate risk. Interest rate risk can affect the overall market. Interest is the cost of borrowing money. As interest rates rise, money become more expensive to borrow, and companies that have lined up expansion plans may postpone their plans due to the high interest cost they have to bear. Moreover, for consumers high interest rates can alter their plans for purchasing a home or car due to high monthly installments. This results in lower consumption and reduced economic activity.