Whether you are a school going student, college student, new professional, or any one, if you are a beginner in investing, there are a lot of mistakes you can make when it comes to investing. This post will provide you with information on “How to invest in stocks as a beginner in India” properly so your capital grows steadily.
When you are a beginner who wants to invest in the stock market, there are many ways you can choose.
How do beginners invest in stocks in India?
First, primarily we can divide this investing process into two main groups. One is you yourself do the research about the companies and invest, and the other one is you give your money to a mutual fund house which invests your money according to your preferences by a professional manager.
Lets see first, generally how a beginner should invest:
- They should not invest in something that they do not clearly understand.
- They should not be greedy. In general, anywhere from 12-20% return per year is a decent return.
- Beginners should not get into intraday, options, futures trading because those are risky, fast-paced and not suitable for beginner investors.
(Also, if you are looking for how to get all the setup for investing like opening a demat account, choosing the app, etc – click here.)
A beginner can be of two types. One is a risk taker. Another one is risk averse. We have both types of beginners.
Lets first talk about the person who is not willing to take much risk, he is more like a “play it safe” kind of guy and wants to invest in the stock market. He is aiming for around 12-15% returns per annum and he’s okay with it.
For this type of person, there is a different route compared to someone who is a risk taker. Right? Of course there should be two routes.
For this type of person who is not willing to take that much risk, there are few options. The first one is called index funds. The next one is called Mutual funds.
Index funds are companies that are in an index, or simply, in a list under a category.
Mutual funds are also a list of companies that the fund manager has selected, in certain percentages.
The difference between index funds and mutuals funds are:
- Cost. Professional managed Mutual funds have higher fees compared to index funds.
- Management. The fund manager actively allocates the funds at needed time intervals versus in an index fund the percentages are allocated according to the index.
There is an important detail here that you must know.
Mutual funds can be of two types. Active and Passive. Active is the one where the fund manager is involved, fees are slightly higher, gets you higher returns. A passive fund is the one where it allows you to invest in an index without a fund manager, have lesser fees, and get returns similar to the index that is being tracked. So index funds are also sometimes interchangeably called mutual funds. This is a small difference but an important one to know.
Let’s see an example so it’s clear. Let’s take an index. There is an index in the Indian stock market called Nifty 50. This is a list of top 50 companies in India. And they have a value/number for this entire list of companies like 22,500 or 23,000 which goes up and down every day. Likewise, we have indexes for sectors like Bank Nifty, Nifty Metal each of which have a list of companies operating in the respective sectors.
Now, being a beginner, not willing to take risk, index funds are a decent option because you just look at the past performance. Just check how much each year Nifty 50 has grown yearly and you will know. Likewise, check for Bank Nifty, Nifty Metal, you will know the annual growth.
As a safe beginner, when you try to invest in an index like Nifty 50, you cannot directly invest in the index itself. Rather, you invest in something called exchange traded funds (ETFs) that closely tracks (not actually tracks, but for now, lets just go with that) that particular index which is Nifty 50. What happens here is when the stock price values of the index company changes, the ETF fund value (called NAV – net asset value) automatically changes. These ETFs are provided by the mutual fund companies.
If you want to know the difference between ETFs and mutual funds, if you feel like you’re confused, check this post.
Let’s explore the second method for the safe beginner investor, which is active mutual funds. Here, a person, called a fund manager, manages your funds within the selected category of your choice. For example, let’s say you want to invest in top 100 large cap companies, you would select a mutual fund that deals with large cap companies. Now the fund manager will periodically check and manage your money for you in the aim of generating the expected returns. You can always check the value of your portfolio in your dashboard anytime.
There are many mutual funds in different sizes and sectors.
Now let’s talk about the second investor who is a risk taker, like you and me, who wants more than the normal 12-20% (although not guaranteed) per year, who is willing to take some risk, and maybe get more.
These types of beginners should invest in stocks that are growth oriented. These people should be willing to do some research about the company, industry, companies’ growth potential, etc. And there are step by step methods to do this.
From a general sense, let’s say manufacturing will always happen in a country, power generation will always happen, likewise there are sectors that are essential for the functioning of the economy.
Investing in those companies after checking the numbers, competition, and growth potential can be a good idea.
If you want dividends plus growth, there are companies that fall in those categories. With some research, you find them.
I’m saying it is possible to get returns over 20% with some knowledge and prediction, although not guaranteed, it’s more likely possible if we spend some time and invest smartly.
Here we should also talk about the industry’s growth and decline. You don’t want to invest in an industry which is in a decline phase. I suggest you check out the industry cycle diagram and learn more about industry cycles which will give perspective to invest in companies that are in the growth industries rather than decline industries.
Also when you are aiming for higher returns than the market (say Nifty 50), you must be willing to take some uncertainty, risk that inevitably comes with it.
So these are the ways beginners can invest in stocks in India. Read books, listen to podcasts on Youtube about this subject and you can most likely make 20%+ returns.
If you have any questions, leave the comments below and I will see you guys in the next post.