Investing for long term is a better strategy

3 Oct, 2010, 05.56AM IST,
Ashish Gupta,ET Bureau

Investing for long term is a better strategy

With the breaching the 20,000 mark and looking good for 21,000, what should be the strategy of individual investors? Should they take the plunge? Normally, during times like these, everything sells. Look at the number of IPOs hitting the market in such a short span of time and demanding huge premiums. And most were a running success.

The fast-growing economy has pushed the growth process. The most important factor has been the sustained foreign institutional investor (FII) interest in the markets that gave the Sensex its big thrust. Inflow of foreign capital and strong economic are behind the optimism in the markets.

FII factor

Although bull phases are good, need to be cautious. A bull run is good news for investors. However, some analysts expect a correction. A deep correction could create panic among investors who may resort to booking profits. Such a situation is more likely as the index rise has been rapid and unexpected. Moreover, as the bull run is largely due to foreign capital flows, the market direction is highly unpredictable.

This is because FII sentiment is impacted by global developments and trends. Many factors may trigger a fall. A slowdown in growth, political developments, employment data, inflation -anywhere in the world -could have an impact. In case the start pulling out, it may lead to a financial concern. It is better for small investors to be cautious lest there is a deep correction.

Go by fundamentals

Further, investors should invest in and stick to fundamentally-strong companies. The stocks of these companies are normally stable and grow at a steady pace. They are neither affected by booms nor by falls. They tend to weather volatile times well. Investors should ideally invest in large-cap stocks. These are less risky than small-cap stocks. Although small-cap stocks have tremendous growth potential, they carry a higher potential of downsides.

Diversify portfolio

You should also diversify your portfolio. There should be a mix of debt and equity. A reasonable portion should be invested in debt, offering secured returns. The entire funds should not be parked in equity. Although it has the potential to provide higher returns, the equity route also carries with it the inherent risks of a downside as well. Also, borrowed funds should not be used to invest in the markets. One should look at strong, growing sectors that hold potential for growth. Even in these growing sectors, you should choose the fundamentally-strong companies.


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