Life of the first-time investors is generally very difficult
because in many cases, they don't have the basic knowledge of how to start
investing. And to add to the problem, lots of people keep giving different
suggestions. Like, we have been listening from our parents since childhood that
FD is the best to invest. A friend of yours may say that you should invest in
mutual funds, or lots of relatives may keep informing you about LIC or NPS too.
But it rarely happens that someone understands the problems you are facing in the detail and tells you which plan is perfect for you and why.
So, that's what we will talk about in this article, that how
we can solve the problems generally faced by first-time investors and start
their investing journey with a small case. In this video, we are going to focus
on first-time investors. So let's start with the biggest and main problem, i.e.
where to invest. Right? There are lots
of options that are available. You can invest in FD, PF, stock market, gold, or real
estate. So how to determine where your money should be invested.
The first thing is, it is very important to compare all of
them. We have analyzed different asset classes for the period of the last two
decades, i.e. 20 years, and have seen how they have performed, and how they have
generated wealth or money for the investors. From this, you can clearly
establish that if you are investing for the long-term, like, 10 or 20 years, then
stock marketer equities, as we call it, have significantly outperformed all the
other asset classes. So, after this, it is very easy to establish that if you
always invest for5, 10, or 15 years, then your money should be invested in the
stock market. Here, it is very important to understand that before starting the
investing journey, the first and most important thing is to determine when you
will need the money back. You may need the money back in 6 months or 1 year. This
need can be for anything. You may want to buy a car after 1 year, or go on a
holiday after 6 months, or buy a house after 5 years, or plan for retirement
after 15 years. So your goal for the end of the time period can be anything.
But it is very important to determine the duration of your investment. If you
want the money back in6 months or a year, it is always safest to deposit it in
FD in a bank because it carries zero risks to your money.
You always get the money back with a fixed return on your
investment. But if you have a long-term horizon where you are investing for5
years, or 10 years, or more, then you should always invest inequities or the
stock market because, as you saw in the chart, you can earn good returns in
that period compared to other asset classes. Now, given that we have established
that long-term investments should go in the stock market, let's look at the
problems that you face if you are a first-time investor. The most common
problem is that you don't understand lots of difficult financial terms.
Like, some will come and talk to you about CAGR, some will advise you to invest
in arbitrage schemes, and some will ask about returns or risk-reward ratio.
Understanding all this becomes a very difficult thing for
first-time investors. So this is a very common problem which we have always
observed in the case of first-time investors. The second problem is that, generally,
first-time investors give too much importance to returns, although you can
always see a regulator or disclaimer in a document that past returns never
guarantee future returns. It means that if anything has performed well before,
there is no guarantee that it will perform well in the future too. If there is
such a disclaimer, is it right to give too much importance to the past returns
or not? if, anyone is trying to sell any investment product to you, at first
they will talk about past returns. The third important thing to understand is how much risk is involved in the investment. If you want to avoid that risk, protect
yourself from it, you need to diversify. Why do people say that instead
of a single stock, you should invest in a portfolio of stocks? the fourth thing, which is very important, but
most people avoid it, is how much fees are involved in a product.
Because you may think
that the fee is just 1% or 0.5%, but whenever you invest, compounding is always
at work. You think it is 1%, but if it is 1% for 10 years it won't total to
10%.It compounds to a much higher "%". It can total to 15% or 20% or even
higher because compounding is always at work. So these are the four general
problems for first-time investors who have decided to invest in the stock
market.
Firstly, there are a
lot of jargon. Secondly, the risk on returns, how much important historical
returns are, and how to see them. Thirdly, how to know, understand, and avoid
risk, and how much important fees are. When you invest in the stock market, your
money is actually invested in a stock
which can be of Reliance or HDFC, or it goes into an ETF. Now, there are
different methods to invest in those stocks or ETFs. You can invest through
mutual funds. When you invest in mutual funds, you actually give your money to
a mutual fund company that invests your money in different stocks on your
behalf and transfers the returns and losses that you earn to you. It is one of
the ways to invest in the stock market.
A second way is to invest directly through a broker. Through
a stock market broker like HDFC Securities, or Axis Direct, or Zerodha, you
can directly buy the stocks. You can buy stocks of any company through these
brokers, like, HDFC, Reliance, Kotak Mahindra Bank, or any company. So I have
told you two general ways. You can invest in stocks either through mutual
funds, or directly invest in stocks. A third way to invest in stocks is small cases.
Let's understand what small cases are. Small cases are actually a group of stocks, or you can say it's
a basket of stocks that are related to each other through a theme or an idea.
Let's understand it with an example. There is a small case on our platform naming
Brand Value. It represents those companies which have quite strong brands.
These can be the brands that you are observing or using in your daily life, or
you have seen someone else using them. Essentially, these are the brands which
people have either seen or experienced in their day-to-day life. Okay? So it
helps you to invest in all those companies.
So it is a readymade basket of stocks which is related to a
theme or an idea which can either be of investing in brands, or you may want to
invest in the companies related to the rural economy, or you may want to invest in
the companies working on the Smart City projects, or you may want to invest in
the companies which are benefited from the implementation of GST. So there can
be different types of ideas and themes. A readymade portfolio of stocks made
for all those ideas and themes is called a small case. Just like you buy stocks
directly through a broker, you can buy smallcases directly through a broker. Just like mutual funds and
direct stock investing are ways to invest in the stock market, a small case is a
new-age modern instrument that you can use to invest in the stock market.
Now that we have
understood what small cases broadly are, let's see how a smallcase can solve all
the problems that we discussed earlier for first-time investors. So the first
problem faced by first-time investors that we discussed was the use of too much
jargon or financial terms which make it very difficult to understand a
product. For example, we were talking about arbitrage. I've mentioned it a few
times that if someone advises you to invest in an arbitrage scheme, it becomes a
bit difficult to understand, right? On the other hand, when you invest in
smallcases, you are always investing in a theme. So you can easily understand what type of companies your money is being invested in. But if you are
investing through mutual funds, if you are investing in mid-cap mutual funds,
or large-cap mutual funds, or any other type of mutual funds, then you will
never be able to understand in what type of stocks your money has been
invested. But when you invest in a smallcase, you can clearly understand where
your money is being invested with our decoding of any financial terms or jargons.
Let's take the example of the two smallcases that we
discussed earlier. First is Brand Value. So you can easily understand from the
name of the smallcase that your money is being invested in the companies having
a strong brand. People have been using those brands in their daily life, and
these companies are en-cashing this brand value. The second example that we
took was a smallcase called Rising Rural Demand. It has the companies having
big exposure in the rural economy or rural areas in India. So, whenever the rural
economy or the people living in rural area shave a rise in the income level, it
leads to an increase in their expenditure, and the companies catering to the mare
benefited. So this smallcase is a group or basket of such companies. Thus it
becomes easy to understand without knowing the returns and risk. The first and
most important thing that gets clear instantly while investing in a smallcase
is where your money has been actually invested. Has it been invested in the
companies with the strong brand, or in the companies serving the rural economy, or
in the companies that benefited from the GST? That's how smallcases tackle or solve
the first problem for you. The second problem that we talked about was that
often too much emphasis is laid on the returns. And there is always a regulator
or a disclaimer in the note. It says that past returns are never a guarantee of
future returns. It means that if a particular thing has performed well
historically, it doesn't guarantee that it will keep performing well in the future.
So, will it be obviously the right decision to invest in anything on the basis of
returns only?
Because there are
changes in time, things, government policies, regulations and different
countries support different sectors at different times. With all these things
changing, there is no guarantee that the sectors or companies benefited from
those policies, those companies, or ideas, or philosophies will keep working
well in the future. So it is very important for first-time investors to
understand that returns are not to be given too much importance. The thing that
is important for you is that you understand the thing in which you invest, and
you can relate to it so that when that thing performs well or badly for you,
you can understand why your money increased or reduced. For example, if you
invest in Rising Rural Demand smallcase and that smallcase is performing good,
and you are also reading in the newspaper that the government has allocated a huge amount of the budget to the rural economy, or the government has brought a
special scheme for the rural economy, or a simple thing that we observe in India
every year is that the monsoon was good, a good monsoon always benefits people
in rural areas because, generally, these people are connected to the
agricultural economy, so you understand very quickly how this case or the thing
you read or observed can affect your investment.
So if you think that all the current programs or schemes of the
government of India will benefit the rural economy in the next 2-3 years, in that
case, you should invest in this smallcase. So, the first crucial thing to note
for first-time investors is that never make an investment decision on the basis
of historical returns. Instead, understand where your money is being invested.
Do you understand the philosophy or the sector in which you are investing and
can relate to it? If you can, do you think it has a bright future? If you know,
understand, and relate to the answers to all these three questions, you can
invest in that particular smallcase or sector. Now, the third problem we talked
about was the risk.
Generally, first-time investors fail to understand the risk
involved in a security or a stock, and how important is diversification. We
can understand that with a small example. Let's say, you have noticed that the
petrol prices are dropping. The government may also have announced it or you
may have to pin it. But if you know it and you think that if this is happening, people
will buy more cars. If people will buy more cars, it is obvious that the
automobile manufacturers, e.g. Maruti and Mahindra and Mahindra, will see an
increase in sales. So you decided that I should invest in these companies because
petrol prices are dropping. But what you do is, let's say, you invest in
Maruti. Till now, your hypothesis is absolutely correct. But suppose Maruti's
plant catches fire, or someone in Maruti's management resigns. There can be any
problems specifically affecting Maruti. Suppose, due to this, Maruti's
production stops for the next 2-3 months, or any problems arise. And the stock
you invested in, i.e., Maruti falls heavily. Now you will incur a loss. So it
was very important to understand that your hypothesis was right. You even
executed it well, but still, you incurred a loss. This is because your
exposure in the stock market was very company-specific.
If anything happens
to that company, you will face a problem. Now, it is very important to
understand and tackle it while investing in the stock market and the method to
tackle is called diversification. Diversification means that while investing,
don't invest in just one company. Instead, invest in a portfolio or basket of 5
or 10 companies. The advantage is that when one company faces any problems, it
doesn't affect your investment in the other 9 companies. If I have to quantify
it for you, let's say, we are investing ₹100
in Maruti. If Maruti faces any of the problems as we discussed earlier and
your investment of ₹100
reduces to ₹50. The
stock price drops by 50%. So you have incurred a loss of 50%. But, let's say,
to execute it if you had invested in 10 automobile manufacturers, and you had
invested ₹10 in each
company with a total of ₹100.
Now, if Maruti had faced the same problem, you would have incurred a loss of
just ₹5. And you can
actually execute your hypothesis in both the ways. So that was the third point,
i.e., risk. It is very important to understand how much risk is involved in a
stock market investment. And why is it always beneficial to have more exposure
in your portfolio? Because it adds diversification and you can protect yourself
to a great extent from the problems that a company may face in the future. Now
the fourth and the last problem we discussed were fees.
It is always very
important to know and understand how much fees you are paying to invest in the
stock market. If you are investing in mutual funds, they generally have an
expense ratio associated with them. That expense ratio can be 1% or 2%. It
doesn't mean that if you have invested 100 or 1000 rupees, you are paying 2 or
20 rupees to the mutual fund at a 2% rate. The expense ratio means that you'll
pay 2 rupees or whatever is the amount every year for the whole period of your
investment of 100 rupees. So every year, if the expense ratio is 2%, you will
be paying 2% of the current value of your investment.
These are the fees that you pay when you are investing in mutual funds. Similarly, you pay brokerage when you invest in stocks. So
when you invest for the long term... as I said earlier, you must invest for a
long term if you are investing in the stock market. So when you invest for a
long term, the expense ratio becomes very problematic because you have promised
to pay a fixed amount or a fixed percentage of money to someone every year without
any promise or guarantee from the mutual fund company that they will be
generating specified returns for you. But when you invest in smallcases, you
don't need to pay a fixed percentage of money every day or every year. When you
invest in a smallcase, you only pay when you are transacting in a smallcase, buying
it, or selling it.
Thus you are not being charged any constant fees. And if you
invest today and keep it with yourself for 10 years, you are paying any fees.
So let's quickly revise all these things. So we have understood that the
biggest problem for first-time investors is to determine the asset class in
which he should invest. FD, real estate, or equities, or any other class. So we
have determined that if you want to invest for a long term, like, 5 or 10
years, you should invest only equities. After determining that, we first understood
the four major problems in it. The first problems were financial jargons. The
second problem was that your decisions were always returns-based. Then we saw
how smallcase solves both of your problems because when you invest in a smallcase,
you invest in an idea or a theme after understanding it and after knowing that
it will perform well in the future in your opinion. There were two more
factors. Our third factor was a risk. So we learned how you should never invest in
only one stock because it increases your risk. when you invest in smallcases,
you invest in a portfolio or a basket of stocks which provides the advantages of
diversification, and your risk is quite limited and the fourth and a very
important thing. When you invest in smallcases, you only pay when you transact.
You never have to pay any constant fees. Thus you can easily establish that if
you want to invest in the stock market for the long term, smallcases are the best
option for long-term stock market investing. So if you want to know,
understand, or want more details on a specific topic, you can ask about that
too in the comments, or you can email.
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