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How to ride the sensex

Despite being near its all-time high, there’s no reason why the Sensex should not give returns comparing with the world’s best markets. Gautam Chikermane tells how to ride the Sensex.

business Updated: Nov 11, 2010 15:09 IST
Gautam Chikermane

Step 1
As a rule, if broking or investing is not your day job, avoid buying stocks. What you need is not the short-term returns of equities that a Reliance Industries oil find announcement or a Coal India listing but long-term wealth creation through equity exposure. The latter is a method to get the best of equity returns with less risk than if you were to invest in individual stocks.

Step 2
Know your risk or how comfortable you will be if the market halves in three months. Will you panic? Then, equities are not for you. Will you buy more? Go for it. If these questions are difficult to answer, talk to a financial planner. More important, if you have been staying away from stock markets so far thinking they’re risky, you should not get in now. “Everyone talks about the profits they’ve made in the markets,” Delhi-based financial planner Surya Bhatia said. “I have never heard anyone saying ‘I made a loss’.”

Step 3
Now you come to products. The best products are equity mutual funds, the cheapest of which are exchange-traded funds or an index funds (these are funds that mimic indices like Sensex or Nifty). If you find it difficult to track your investments, it would be better to ride the India story passively through these products. Managed funds have outperformed with huge margins, however, and if you can spend two hours a year to update your investments and evaluate your fund manager, this is the better way.

Step 4
Having chosen a fund, don’t try and time the market. In fact, just ignore it. Allow day traders to get their thrills from the fluctuations of the market. Remember: your focus is not thrills or to expound on your two-day gains at the evening cocktail but long-term wealth creation. The best way to do that is to lock your income by getting into systematic investment plans of mutual funds. Patience is your friend, while thrill is your enemy.

Step 5
Watch your agent. It is not in his interest to sell you mutual funds. He will try and force a ULIIP down your throat and then get you to sell it and buy another one after three years. The moment he says that, you know that he is not acting in your interest. Dump him, even if he is your favourite uncleji down the road.

Step 6
Get rich.