Tuesday, May 24, 2011

How to maximise your stock market returns :

The current market conditions can be best described as unpredictable and volatile. Those with a short-term investment horizon can park their surplus in debt instruments that are currently yielding lucrative returns. The equity markets are currently suited for investors with a long-term investment horizon of a minimum of three years or more.

In spite of short-term risks and associated volatility, stocks have yielded rich dividends over a time span. The markets might have crashed but have rebounded with vigour. With 80 percent of its crude oil requirements met by imports, the unrest elsewhere in North Africa and West Asia has impacted India.

Crude oil prices are showing no signs of softening. Inflation is well above the comfort level of 5.5 percent. Here are a few strategies to maximise your stock market gains:

GARP strategy

Value investors fish for stocks of companies that are under-valued and ignored by the markets. They strongly believe that stock price movements are impulsive reactions to good and bad news floating around. They do not reflect the company's long-term fundamentals and intrinsic worth. Growth investing is about identifying and investing in stocks that have above-average growth potential.

The appreciation in the value of growth stocks is rapid and helps investors maximise their capital gains. The GARP strategy is somewhere in between value and growth strategies. Growth at a reasonable price (GARP) strategy is a combination of both value and growth investing. It strives to identify companies that are not only undervalued but also have sustainable growth potential.

Price-to-earnings growth (PEG) ratio is an indicator used to identify stocks that possess growth potential at a price that is below the real value of the company. The ratio determines a stock's value while taking into account earnings growth. A lower PEG indicates that the stock is more under-valued.

Portfolio of themes

India , China and other emerging markets continue to have an influx of foreign investments owing to the tremendous growth potential. In such a scenario, identifying themes and building a portfolio of stocks of companies that will chalk the future growth story is a good idea. There are numerous themes that can find a place in your portfolio.

They include champions in innovation, energy and agriculture-based industries, companies that have high market share and few competitors, market leaders, brand leaders and natural resource extraction industries. Invest in themes that are likely to witness a spurt in demand in the near future, nascent market to tap, high domestic consumption and tremendous growth potential.

Systematic investment plan

Systematic investment plan (SIP) is an excellent way to invest in mutual funds regularly. It inculcates the habit of investment discipline. As timing the market is not easy, buying units at regular intervals is a fairly easy way to iron out volatility over the long run. SIP helps the investor benefit from rupee cost averaging. Rupee cost averaging eliminates the need to time the markets as fixed money is invested on a regular basis over a time period.

Since the amount invested remains constant, the investor buys more units when the price is low and fewer units when the price is high. As a result, the average unit cost will always be less irrespective of market movements. Several brokerage firms are now offering SIPs to buy stocks. These work the same way as mutual fund SIPs, the only difference being a fixed number of stocks of a company are purchased on a regular basis as against a fixed amount of money invested in mutual funds.   
Source : ET

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