Tips to invest in equities

Choosing the right company

It is paramount for an investor to pinpoint the right company. This implies identifying a company which offers growth opportunities. Growth that is not just sustainable but also superior (that is, minimum 20 per cent) as well as profitable.

That is to say, the company should earn a superior return (of not less than 20 per cent) on its shareholders� capital (net worth).

Getting the investment 'time' perspective right

'Time is money' is a one-liner that says it all when it comes to equities! Timing your investment is extremely crucial. In terms of the investment 'time' perspective, in the short-run (typically 3 to 6 months), the performance of equity shares is driven more by market sentiment than by company fundamentals.So, you should invest so that you can participate in and benefit from the company's growth. Keeping this in mind, the ideal period to stay invested should preferably be greater than 5 years.

You would learn that in the long run, the relevance of the right price diminishes. If you choose the right company and have the right time perspective, in the longer term, it doesn't really matter too much whether you bought it at the lowest (right) price or not. This is because as long as the company is growing and you hold on to your investment, the Power of Compounding will multiply the value of your investment at a rate that will make the initial investment price insignificant. This makes a real mantra for wealth creation!

Returns you will earn

Taking the longer term perspective of staying invested for a period of 10 years and more, you can surely expect equities to yield returns ranging between 15 per cent and 20 per cent annually.

As unbelievable as it may sound, an overview of the performance of equities over two and a half decades confirms the same. For instance, had you invested in the Sensex for any one year period between 1979 and 2005, in 10 out of those 26 years, you would have lost money. But had you stayed invested for more than 10 years, your chances of loss would be almost zero. And that too, you would have made an average return of 17 to 18 per cent per annum.