9 Valuable Investment Lessons For Beginners

The ferocious equity bull run in Indian stock markets post Covid-19 has significantly contributed to investors’ wealth. Financial inclusion is thus set to reach record levels. Improvement in corporate earnings and the return of Foreign Institutional Investors (FIIs) were the major drivers for indices scaling new highs of late. Moreover, the growing awareness of equity investing and the rising equity cult have added to the success story of the Indian stock market. So much so that India has outperformed the S&P 500 Index of the US and the Shanghai SE Composite Index of China.

This outperformance has aroused a lot of interest amongst retail investors and therefore, Team Tavaga would like to provide 9 valuable investing lessons which can help in becoming better investors.

1. Prefer index funds over active funds

An index fund is a passively managed mutual fund where the investor funds are invested into the assets that the index comprises in the same proportion. On the other hand, in an active mutual fund, the fund manager managing the fund applies his investment skills in selecting stocks to build the portfolio.

Passive funds are simple to understand, free from the biases of any fund manager, and most importantly, the costs of managing an index fund are comparatively lower. History suggests that low-cost index funds have generated more excess returns than expensive active mutual funds.

2. Opt for SIPs than doing lumpsum investments

Systematic investment plans (SIP) are a favored tool among retail investors in India. SIP mode in investing lets an investor invest regularly without having to bother with timing the market. Investing a large chunk of money, especially at market highs, can lead to lower returns for a significant period of time. E.g.: An investor who invested a lumpsum amount at the beginning of 2015 made zero to negative returns for five years (up to 2020). Instead, a SIP would’ve helped in investing at various intervals. While the lump sum approach isn’t as bad as it seems, the timing is crucial. Team Tavaga recommends investors focus on SIP and do a staggered lump sum investment in passive funds during market crashes.

3. Asset Allocation

Gold, silver, and fixed income are important for an investor’s overall portfolio. There are times when equity markets haven’t performed well, especially during high periods of inflation or during contraction, but gold has done well during such times. The returns of gold might be lower than equity as an asset class on a long time horizon, but a goals based oriented approach works the best when there are multiple assets in a portfolio.

4. Buying stocks after a thorough analysis

Consider this: If a mutual fund generates a return of anywhere between 13%-20% (CAGR) on a long time horizon, an investor must invest in direct equity only if he/she has the confidence to do better. Team Tavaga considers this as the best parameter to evaluate and advise its customers on whether to opt for direct equity investing or use the mutual fund route. Few parameters which an investor must screen before buying a stock: Corporate governance, management commentary, operating cash flows, other financials, con-call transcripts, and sectoral headwinds and tailwinds. Out of all these, screening the management is the most important task. There can be good and bad times for every company, however, if the management upholds the highest standard of corporate governance, then other metrics follow.

5. Conviction

Self-conviction is important before deciding to take a position in a stock. Borrowed conviction has never worked in investing. One sign of a fall in stock price and the investor will sell the entire position without knowing the complete details. Therefore, team Tavaga while providing advisory to its clients ensures that the entire thought process behind a recommendation is communicated properly. This not only helps the client to understand the reasoning behind particular advice but also helps in developing mutual trust.

6. Stop checking your portfolio every day

Technology has made it possible for investors to check their investment portfolios daily with live insights and price movements. While it is true that there should be proper checks and balances of the hard-earned money one has invested, checking the investment portfolio too often can be detrimental. The behavioral and psychological effects can be harmful. The right way: keep a tab on company filings on BSE/NSE, follow the results calendar, read the con-call transcripts and monitor the stock portfolio every 3/6 months.

Concerning the mutual fund portfolio, checking it once a year is optimal.

7. Hire a SEBI Registered Investment Advisor:

Using the services of a fee-only investment advisor registered with the SEBI helps an investor in getting the right advice. With a fee-only advisor like Tavaga, there are no trailing commissions attached to a product or any recommendation. This simply means that after taking the fees from a client, the advisor ensures the best-suited products are made available for a client. As per SEBI norms, a registered investment advisor is not permitted to accept any monetary compensation (neither from the client nor any other agency) except for the fees a client pays. 

8. Ask yourself the reason for investing – Goal-based investing

Goals and the objectives to invest helps an investor select the right set of choices. There are different ways to invest for every goal. With goal-based investing, we are relieved of the need to scour the news for changes in the markets overnight or jump to buy or sell stocks. Once we allocate our funds, we can sit back and let them take their course—e,g.: A retirement goal that is 30 years from today will have a different equity allocation from a goal to fund a child’s education which is 5 years from today.

An advisor will help the investor allocate an amount for every asset class as per a goal. Every goal is unique and every individual is different. There can be no generic advice. An investor who is happy with a 7% return will probably keep allocation limited to conservative hybrid products rather than keeping a higher equity weightage in the portfolio. 

9.  Position Sizing

One of the most important aspects of investing is to understand the allocation of a particular stock or a mutual fund scheme to the overall portfolio. A rise of 50% of portfolio investment with very low allocation to the overall holdings, will only satisfy an investor psychologically. In monetary terms, the effect might be minuscule. Therefore, having an optimal allocation to investment is important. 

Tavaga is everything you need to start saving for your goals, stay on track, and achieve them in time. 

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