Want to make money from stock market? Remember these 3 key rules (2024)

Are you holding the same views about equity investing today? This is how he opened his chat with me. It was 27 years ago that I had met him at an investor meet, where I was persuading the assured return seekers that refused to look beyond the recurring deposit and monthly income plans, to look at equity. I asked him if he thought that those views were still valid. We both agreed heartily about the enduring the joys of equity investment.

I still meet people like him, frozen in the same mindset as they were back in 1997. The sharp decline in the market index from 4,500 levels to 2,800 levels over a few years left many spooked and anxious. While those levels for the Sensex appear extremely low by today’s standards, many investors still remain on the edge. Even today, we have only a very small section of the population investing in equity shares, ETFs, actively managed mutual funds, portfolio management schemes and all these forms of equity investment.

Equity investing offers a fantastic potential for growth and capital appreciation. There are only three rules. First, money is made on a portfolio, not from bets on individual shares. For every star entrepreneur who stands on the top of the list of wealthy people, on the strength of the equity holding in his business, there are businesses that fail. The humility to accept that we can make a wrong choice is vital. Holding a bunch of shares across businesses is an efficient, accessible, and inexpensive strategy for small investors. Whether it’s an index, mutual fund, or portfolio, opt for your preference but stay diversified.

Second, money is made from being with the winning stocks. But there is no magic formula to forecast tomorrow’s winner today. Instead, make sure your portfolio remains healthy by weeding off the losers. Either you do it with your bunch of stocks, or you invest in mutual funds and portfolio schemes where this is done by the manager. An index ETF is your lowest cost portfolio that is revised to a formula to stay with the top stocks.

Thirdly, to ensure success in both of the aforementioned processes, give your investments enough time. Markets go through cycles of euphoria and despair, influenced by a multitude of individuals expressing their opinions on the listed equity shares. Their motives vary widely. Businesses experience highs and lows; some thrive while others fail. These events take time to unfold. As an equity investor, your belief rests in the perpetual presence of numerous thriving businesses. Your losses occur when all present and future entrepreneurs lose hope entirely. However, the human race usually does better than that.

But I am saving for my child’s education, protested a friend who had heard these arguments that I have made for a long while now. Are you going to need it in the next two to three years, I ask. No, I won’t touch it even if I need it, because it is for the child’s future, she says. That’s precisely why it’s suitable for equity investment. She can wait and hold back from accessing the money. The volatility of the markets spook me, she says. You don’t have to invest the entire amount, but maybe 60% in equity and 40% in the current deposits?

If the goal needs a large sum of money you either save more or you earn more. Equity investing offers that opportunity for a better return. If your need is at least 10 years away or more, you are very likely to ride the volatility and do fine. If you won’t touch the funds, you don’t have to keep looking at its value either.

Does this apply to me, now that I have retired, asked an elderly relative who was hearing this story. This is only the savings I have, from a lifetime of work. How can I stake it in the equity markets that look like a glorious gamble, he asked. Many equate equity investing with picking stocks and betting on them randomly. That gamble and speculation is just the face of the day-to-day market. Fundamental value will reveal itself inevitably. You can either stand in the street with the gamblers or be the discerning investor that holds a portfolio of good picks, revised as events unravel. He seemed to agree with the latter position. Many like him hear and believe the gamblers and dismiss the portfolio view as sales talk.

Retirees don’t typically intend to exhaust the last rupee from their savings. Even if not intended, there is always a portion left behind for heirs. That portion has two features: It was not accessed all through retirement; it would go to someone with even a longer time frame for investing. That makes it an ideal candidate for equity investing.

Consider a 30% equity allocation, I told him. This might represent a portion of the corpus you won’t need or draw from. But the upside is that this portion will grow and appreciate over the years. It might offer a great buffer if you like to draw something later in your retirement. The appreciated value will give you the confidence to use, if needed.

Would this be applicable if I am still earning and saving for retirement, asked a middle-aged man. Wouldn’t I be risking my precious retirement corpus by investing in something as risky as equity? Across the globe, pension fund managers face scrutiny from their boards if they neglect to allocate an appropriate portion of investments to equities. Place at least half the corpus in equity investments, I would recommend.

Equity allocation in a portfolio for a retirement corpus ticks all boxes we have discussed. The money is not immediately needed, and it can stay invested for the long term. There is adequate regular income to take care of needs if the markets go through a down phase. There is no dependence on this corpus for short-term and immediate needs. The changes in the value of the corpus from market cycles does not impact everyday life, but staying invested enables capital appreciation and growth.

The case for equity investing is strong and persuasive. What hasn’t changed in the last 27 years is that people see equity markets as the place to make a quick buck. They hear stories of windfall gains and want it. They seek tips and names to bet. To invest in an index systematically and simply participate in the run seems boring and unappealing to most. That is a tragedy.

(The author is chairperson, Centre for Investment Education and Learning)