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.

However, diversification also results in lower profits. For instance, if you had invested only a portion of your portfolio in equity, and the equity markets are in a bull-run phase, you would make profits on only the portion of your investments made in equity. The portion invested in debt would not offer the same level of profits, or may even result in losses. Having said this, diversification helps cap losses, which is important, especially for risk-averse investors.

Diversification methods. Diversification can be done across different asset classes (equity, debt, mutual funds, gold, property, etc.) as well as across different investment options (say, in case of equity – investment in companies with different market capitalisations, in different sectors, etc.). The amount of investment made in each asset class and investment option will depend on your investment risk profile and expected investment returns.

Growth investing

Growth investing means investing in companies, whose turnover and profits are expected to grow significantly, which will result in appreciation in their share prices. These companies are in a phase of rapid growth and expansion of their businesses.

Value investing

Value investing means investing in companies that are believed to be currently undervalued but whose worth will be recognized by the market eventually. These companies’ intrinsic or fundamental values are higher than their market values. This strategy implies investing in such companies before the markets recognize their true values and push up their share prices accordingly.

Rupee cost averaging / value averaging

To buy ‘low’ and sell ‘high’ is very difficult to do, especially in volatile markets (where prices rise and fall significantly over very short periods of time). One investment strategy that helps overcome this volatility and take advantage of it by averaging out cost of investment, is ‘Rupee cost averaging’ (RCA) or ‘Value averaging’. Under RCA, you decide how much you want to increase your investment by at fixed periodical intervals of time, say on a monthly basis. If the markets rise, you will need to invest a lesser amount or book profits. However, if the markets fall, you will need to invest more to achieve your target investment amount. Let’s understand this with an example. You plan to increase your equity portfolio by Rs 15,000 every month. In the first month, you invest Rs 15,000. In the next month, due to a market fall, your portfolio value falls to Rs 12,000. You will need to invest Rs 18,000 in this month to make up the loss of Rs 3,000 and add fresh investments of Rs 15,000. If in the following month, the market is bullish and your portfolio rises by Rs 13,000, you will invest only Rs 2,000 to bring up your portfolio value by Rs 15,000. Similarly, if the market is very bullish and your equity portfolio value shoots up by Rs 17,000, instead of investing that month, you will book profits to the extent of Rs 2,000. RCA helps you undertake disciplined investing. You need to set a target and use the market movement to achieve it. It also helps you decide when and to what extent to exit from the market. However, in a long bull or bear phase, this strategy becomes difficult to implement.

Investing in dividend yield stocks

Dividend yield is a ratio, which divides the dividend paid out by a company with the current market price. For instance, if a company pays out Rs 5 per share as dividend and its current market price is Rs 55, its dividend yield is about 9 per cent (Rs 5 / Rs 55 x 100). Companies, which offer high dividend yields, are usually ‘value’ companies, which ‘value investors’ look for. These companies have strong fundamentals and good potential, which the market has yet to recognize. When the market recognizes the worth of these companies, their dividend yields fall because of rise in their market prices. They, then offer a significant amount of capital appreciation.

Source: Minterest

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