Investing directly in equities? Here are a few strategies to follow

7 MinsAug 30, 2021

The rising stock markets have attracted a significantly high number of investors to equity as an asset class. In FY21, a record 14.2 million demat accounts were opened compared to 4.9 million in FY20. Besides, a larger number of retail investors–––many of whom are new to the markets and from Tier 2 and Tier 3 cities–––are betting big on the equity markets. That said, to be successful at equity investing, one should not follow the herd but must do their own in-depth analysis. It is essential to have a strategy in place as the markets may not work in your favour always.

At a glance

  • Research the company you want to invest in and study its financials and compare it with its peers
  • Understand the sector you want to invest in
  • If the market is at an elevated level, invest in a staggered manner
  • Invest across market capitalization and sectors
  • Review your portfolio regularly and rebalance when required
  • Sell a stock when its fundamentals look weak or the sector’s outlook looks challenging

direct equity investment


Here are a few strategies to follow when you make direct equity investments:

Check the fundamentals – When it comes to direct equity investing, having the knowledge and correct understanding is true power; it is the master key to wealth creation. To make a holistic judgement it is important to:

  • Learn more about the business and the business model
  • Recognise the segment in which the company operates, the brand value it carries, its market share
  • Understand how the company deploys capital, what drives the revenues and profits, the management, the corporate governance practices, how stakeholders are treated, the company’s vision statement, future growth prospects, etc.

Since companies do not operate in isolation, it is also important to study the industry and its peers, the economic environment both in the domestic and global market, and the political environment among other factors.

Apart from these qualitative aspects, you should also look at certain quantitative factors. These are: Price-to-Equity ratio, Price-to-Book Value ratio, Return On Capital Employed (ROCE), Return on Equity (ROE), Return on Assets (ROA), the debt-to-equity ratio, dividend payout, dividend yield, forecasting future cash-flows, intrinsic value, etc.

It is important to pay the right price for the right stocks. To quote Warren Buffett, “Price is what you pay, value is what you get”. While price and value are perceived to be two sides of the same coin, they are different. If you follow this approach, you may be able to select stocks successfully.

[Also Read: 7 Mistakes to Avoid When Investing in Equities at a Market High]

Stagger your investments – There could be periods when markets seem to touch all-time highs daily. At such times when valuations look stretched, it would be wise to stagger your investments, rather than investing a lump sum. Do not invest everything in one go. Make use of intermediate market corrections that may come your way. 

Diversify within equity as an asset class – Diversification is one of the basic tenets of investing that lowers the concentration risk, which might adversely affect your portfolio’s performance. Hence, pay attention to how much of your funds you allocate across market capitalisation segments (large-caps, mid-caps, small-caps) and across sectors whereby the portfolio does not look lopsided. 

You may consider following the 'Core & Satellite' strategy to invest in equities. The term 'Core' applies to the more stable, long-term holdings of the portfolio, while the term 'Satellite' applies to the strategic portion that would help push up the overall returns of the portfolio, across market conditions.

The core holdings may comprise a larger portion of your equity portfolio and consist of large-cap. Whereas, the satellite holdings may be a smaller portion comprising of stock of mid-cap, small-cap domain . Core & Satellite investing offers the best of both worlds, i.e. short-term high-rewarding opportunities and long-term steady returns. Having said that, ideally, how much you allocate to large-caps, mid-cap, small-caps should be in line with your risk profile, investment objective, and investment horizon.
To diversify across geographical boundaries, you may also consider investing in international equities. That may help reduce country-specific risks and help you gain from investment opportunities abroad.

Hold optimal cash – For your regular expenses and emergencies, you need enough liquidity or cash. Therefore, hold ‘optimal cash’, neither too much nor too little. Maintain enough balance in your savings bank account so that the money is easily accessible whenever you need it for whatever purpose, including its deployment in the market when there is a significant correction and/or attractive investment opportunity.

Review and Rebalance your portfolio – Investors often make the mistake of chasing momentum to earn fast profits. But do not simply assume that equity markets will move upward in a linear manner. Volatility and corrections are part and parcel of equity markets and may increase the risk to your equity investments. Besides, over time there may be a change in your financial circumstances, personal risk profile, outlook towards money or investment objective. Or you may wish to adopt a different investment option. So, review and rebalance your portfolio by looking at the following factors, among others:
- Broad asset allocation
- The total number of stocks and equity-oriented mutual funds
- The fundamental attributes of stocks and/or equity-oriented mutual funds
- The price-to-equity ratio (P/E ratio), Price-to-Book Value ratio, the earnings trend (quarter-on-quarter, year-on-year), Return on Capital Employed (ROCE), Return on Equity (ROE) Return on Assets (ROA), the debt-to-equity ratio, dividend payout history, forecasting future cash-flows, intrinsic value, among many quantitative aspects- The company-wise exposure
- Exposure to market capitalization segments – large-cap, mid-cap, and small-cap
- Sector-wise exposure

You may sell the stock under any of the following conditions: the stock's fundamentals look weak, future growth of the business looks challenging, the sector outlook looks challenging, your return expectations have been met, you have achieved the desired corpus to achieve your envisioned financial goals, your risk profile has altered, the portfolio review and rebalancing warrants the exit, you wish to change your investment strategy, and/or you need the money for an emergency.

If you have built stupendous wealth in the short term, that’s great, but do not get blinded by the outstanding market returns, as we have witnessed in the recent past. Follow a sensible approach, be disciplined and do a timely review of your equity portfolio, in the interest of your long-term financial wellbeing.

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.