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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
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The equity market is always considered a high risk investment, given its volatility and unpredictability. On account of this reason, many conservative investors who are risk averse often steer clear of the stock market. If you are afraid to take on investment risks, it’s likely that your portfolio also may lack exposure in equity.
But did you know that despite the inherent risk in the stock market, it is possible to invest in equity shares in a safe manner? Yes, that’s right. Although it is not possible to entirely eliminate the risk, you can follow some tips and tricks to reduce it significantly.
Here are 5 safe ways to invest in the stock market.
1. Choose index funds
Index funds are mutual funds that track a market index like the Nifty or the Sensex. The advantage of index tracking is that you get to experience broad market exposure, since every index is already heavily diversified. Index funds are also easier to manage, since the fund manager need not take any exclusive decisions about where to invest your money. All they need to do is mimic the index that is used as a benchmark.
This effectively reduces the cost of investing in such mutual funds. It also eliminates bias and ensures that the fund manager makes objective investment decisions. All these factors reduce the overall risk associated with investing in the markets.
2. Start a Systematic Investment Plan (SIP)
A Systematic Investment Plan (SIP) is an investment strategy where you invest small sums of money on a regular basis in a mutual fund of your choice. The main advantage of an SIP is that you don’t need to time the market. This is particularly useful if you are investing in equity, because it can be extremely challenging to figure out the right time to enter the market or exit it.
Instead, with an SIP, you can spend more time in the market rather than timing the market, as the popular adage goes. SIPs also make investments easier because you don’t need to wait to save up a lump sum amount upfront. And you get the benefit of rupee cost averaging, which reduces your overall investment cost.
3. Invest in dividend paying stocks
Some stocks pay dividends more regularly than others. Dividends are a part of the profits made by a company. At the end of each financial year, companies may decide to distribute a part of their profits to their shareholders. Occasionally, they may also do this during a financial year.
If you want to make the most of your equity investments while simultaneously enjoying some additional income from the stocks in your portfolio, then you can consider investing in companies that pay out dividends frequently. This also helps you add some degree of certainty to your portfolio. And even in volatile market conditions, you can rely on the dividends from your investments.
4. Opt for ELSS
An ELSS or Equity Linked Savings Scheme is a kind of mutual fund that invests predominantly in the stock market. But it is different from traditional equity mutual funds because it also offers tax benefits. As per section 80C of the Income Tax Act, 1961, the amount that you invest in an ELSS is deductible from your total taxable income, up to Rs. 1.5 lakhs per financial year. This, in turn, reduces your tax liability too.
If you are worried about the risk that comes with equity investing, ELSS can help set off some of that risk by offering you tax benefits instead. So, the savings you make by investing in a scheme like this can benefit your investment portfolio too.
5. Diversify your portfolio
Lastly, once of the most common ways in which new investors tend to increase the risk in their portfolio is by choosing just one or two top stocks to invest in. If those stocks perform poorly, the corpus could be partially or completely wiped out. So, if you are looking for a safer way to invest in equity, consider diversifying your equity portfolio in different ways.
For instance, you can choose to invest in the top stocks across different sectors. Or, you could diversify across market caps by choosing small cap, mid cap and large cap stocks. Spreading your capital across different equity stocks like this can help bring down the risk factor.
Conclusion
These 5 strategies can help you increase your exposure in equity without increasing the risk component too much. Whichever strategy you choose, remember that equity works best as a long term investment avenue. Over the course of 5 or more years, you get to see many market cycles and tide over short term volatility. This, in turn, increases the possibility of earning better returns over the long term.
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