Find out your Optimum Equity Investment Percentage


Should I invest in direct equity?

Being an equity analyst and a financial planner, I regularly face this question from my friends & relatives and also from the strangers. The question may look like very simple but the answer is not so simple one.

The answer depends on many things and the most important one is the questioner’s actual concept on direct equity investment. You may hear that percentage of equity investment of your total portfolio should be 100 minus your age. But it shouldn’t. It basically depends on your risk appetite and your concept on equity investment.

You may ask me that you can understand risk appetite is important but why concept? Here is the answer. More than 50% of the general people have a fantasy on equity investment. They think equity investment is just as gambling. They have a perception that if your luck favours in equity investment then you’ll be rich within a year and if you have a bad luck then all your money will be washed out. But actual picture is not so and this is the reason why I always ask them to build concept even before asking their age or other family constraints.

Investment in direct equity is not any ‘get rich quickly’ scheme. It is just like any other investment. It should be followed and maintained by proper planning. It depends on many factors. In short-term, it is riskier. So, if you want your returns in investment within 1-3 years of time, I’ll suggest you not to invest in equity, invest in some safer place where you’ll get fixed return on every year. But if you can wait for your return and can give your investment a time for more than 5 years, then invest in direct equity.

As I was discussing, investment in direct equity should be done with proper care and in step by step process. If you are interested in direct equity investment then follow the steps one by one.

1. Find out your Risk Appetite:

the first and foremost step is to know your risk appetite. The risk appetite of any person depends on many factors, like-age, family members, financial condition of the family, etc. Here in this link, you can determine your risk appetite.

First, take the risk appetite quiz from the above link then follow the below mentioned steps.

2.Know how much you can investment in Equity:

Now you have your score in hand as per the risk appetite quiz.
Here, for the simplicity of my discussion, I have made classification of the scores under 3 heads.
Just look at the table:-

% of Equity Investment ***All the fields on the table under each investment type are the % of total portfolio. This percentage has been calculated as per the studies, actual optimum percentage of any investor may differ from this, please consult any qualified financial planner for a personalized investment plan.

3.Where to invest in equity:

The next question is in which stocks or in which category of stocks you should invest. Normally, direct equity investment can be classified into long term equity investment and short term equity investment.

More than 1 year investment is generally known as long term, but in equity investment scenario, the tenure is normally more than 5 years of investment. Long term equity investment actually safe investment and normally give average yearly return as 12% or more. But as you know there is up and down movement in equity market, so in any year the return may be negative and in any year, the return may be double. So, you have to keep patience while investing in long term equity and never only withdraw money as per the pre-determined plan. Invest for long term basis only in good blue chip stocks.

Long term equity investment can again be classified into large cap, mid cap and small cap stocks. Large cap stocks are safer than other two.

Short term equity investment is little bit risky. Short term equity investment varies from weeks to a year. In this area, invest in stocks depending on good research report published by good financial institution and sell the stocks as soon as it reaches its target.

Another segment of equity investment is Mutual Fund investment. Mutual fund investment can broadly be classified as equity Fund, Hybrid Fund (Equity+debt) and Debt Fund. Advantage of investing through mutual fund is, you do not need to do any research on the equity market, the fund manager does it for you. Disadvantage is, the return might be less than the potential return from the direct equities.

Here, I’ve prepared a table showing probable percentage of different equity investment vehicles of different types of investor. These percentages are based on total investment.

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***All the fields on the table under each investment type are the % of total portfolio. This percentage has been calculated as per the studies, actual optimum percentage of any investor may differ from this, please consult any qualified financial planner for a personalized investment plan.

4.Diversify your investment:

You don’t need to think about diversification on your mutual fund part because fund manager will take care of it on behalf of you if you select a diversified mutual fund. You have to think for diversification on the direct equity part, separately for long term and short term. Don’t mix up these two.

Take these two as different entity and then think on diversification.  Consult any good planner for choosing good sectors for your investment or search for good research reports on this topic. Generally, choosing of sectors depend on the current socio-economic condition of a country.

After choosing 5-7 sectors, choose 2-3 good stocks from each sectors. Search for the past 5 years return of every stock of your list and see the category of each stock on their capital basis. Now make an investment plan as per your large cap, mid cap and small cap percentage criteria .

Always keep in mind that you should not have more than 20 stocks in your total portfolio.

5.Don’t investment the full amount at a time:

Now you are ready with stocks list and you know how much to invest in each share.

But don’t invest the pre-determined amount in a single transaction. Allow yourself some time and invest slowly.
Invest 5% of your pre-determined amount in one normal day, and then wait for next 2 days. Again invest another 5% if it is a normal day. If market crashes or move downwards by 2-5% in any day then invest more percentage.

Under normal circumstances, invest 80% of your pre-determined amount in 2 months of time and keep the rest 20% for any very bad day. Let’s make the bad day of market is a good day for you. If market moves downwards more than 2.5% in a single day then make another 10% investment and moves in this way.

The main point is that try collecting the stocks at lower price to get advantage over long term.

6.Keep a note for every short term invested stock:

Maintain a notebook for your short term investment. Here, you’ll keep note on the following areas:-

•    Stock name
•    Sector
•    Reason of investment/ suggested by whom
•    Buying Price
•    Buying Date
•    Target price/Target period
•    Selling Price
•    Selling Date
•    Target Met : Yes/No
This notebook will help you to find out the companies which actually give good tips in short term and this is beneficial in long term.

7.Never withdraw money from your long term investment:

You may have some plan or financial goals. If you need certain amount of your money for any of your goals within next 3 years then don’t invest that money in long term equity.

8.Revise your Investment regularly:

Normally at the end of a financial year. Make necessary adjustment in stocks once in a year.

9.Check your Risk tolerance capacity once in every 5 years:

Normally, our risk appetite changes over the time. Like- now you are a bachelor, but after 5 years you may have a family with kid. In that case, your risk appetite will also get change and your financial preferences also.

So, check your risk tolerance capacity in every 5 years and make necessary asset allocation percentage changes accordingly.

Invest in equity over the period of 5-30 years in good companies is safe and return is also good. Don’t invest in equity on rumors. Always follow good research reports and find out good companies for investment. A easy way to invest is invest in the company which has good percentage holds in the main index of the country. Because every country keeps those stocks in their index which are really good and the researchers regularly update the list.

Happy Investing!

About Moonmoon Biswas

Moonmoon Biswas is an Equity research analyst . She has more than 10 years of experience in this field. She has proven track record in the field of Technical analysis and the Fundamental analysis. From the educational background, She is an MBA-Finance with CFA (India). She has work experience in the leading broking houses in India and has also in hand experience in Australian Security Market. She has her own equity research firm and currently also engaged in digital marketing.

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