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Four investment mantras for wealth creation

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Indian investors are taking a liking to the equity markets in a big way. Individual investors are now holding more stocks than ever before, as major indices climb to fresh highs. They are also upping the ante by borrowing to magnify their exposure or increasingly buying on small dips in the market. Data from India’s market regulator, the Securities and Exchange Board of India (Sebi), amplifies this detail.

According to Sebi data, new dematerialized, or demat, account additions rose to an all-time high of 10.7 million between April 2020 and January 2021.

This is an increase of more than double the new accounts opened in FY20, FY19 and FY18, where about 4 million accounts were opened.

The most common reason for this surge has been people having more disposable income and free time to trade, as most were working from home. Markets, during the past 12 months, were volatile and first-time investors grabbed the opportunity for short-term gains and an alternative source of income. But as the volatility ebbs and we see normalcy returning, bagging these short-term gains might not appear to be an easy task. 2020 seemed like a fairy tale for investors who commenced their equity journey, but the experience can be an upsetting one, as the markets might not always turn out to be in your favour.

Investing in equities may not come with a guidebook, but there are certain mantras that an investor can always adhere to before making investing decisions. Four broad, evergreen, or all-season, investing mantras for wealth creation are listed below:

Quality first, always

Investors can have varied time horizons for investing in equities. Some might look at it for the short term (~12/24 months), while some might stay invested for the long term (5 years+). Irrespective of the time period, the first mantra is to always consider investing in companies which are of the highest pedigree. The companies that rank high on all quantitative parameters such as return on equity, leverage ratio, earnings growth as well as qualitative parameters such as management pedigree, accounting policies, treatment of minority shareholders can be termed as quality companies.

The management is as good as the business

There is a saying in cricket: “The captain is as good as the team is.” The same holds true for corporations as well. An average business run by an extraordinary management can become a great business, and a great business run by an average management can lead to doomsday.

In the Indian context, we have been privy to both cases, and hence, from an investing standpoint, the former can be one of the foremost filters than an investor can apply.

Growth and pricing power

There are countless investing theories by great management gurus on why we as investors should invest in companies which have a strong moat. A moat, in simple terms, refers to a competitive advantage that a firm has over its competitors.

The moat helps a firm keep its competition at bay, and ensures that the firm can maintain pricing power, which will lead to superior margins. A firm that is a combination of pricing power along with above-industry growth can deliver consistently and lead to superior wealth creation

preserving wealth over creating wealth

The rule of math tells us that it is easier to recover when the fall is lesser. To put it in perspective, a fall of 20% will require a gain of only 25% to recover the capital, whereas a fall of 50% will require the investment to double to recover back the capital. Our subconscious bias towards investing, in any asset class, does not prepare us for a drawdown in capital. But unfortunately, it is inevitable. The key in this case is to ensure preservation of capital and therefore some of the mantras mentioned above are of prime importance.

There are many ways through which an investor can develop an exposure to equity markets. Investing in equities can be an overwhelming experience, especially for investors who are yet to find their feet. In such a scenario, it is better to place your hard-earned money to professional money managers who are masters of the trade and can guide you in your journey towards wealth creation.

Trideep Bhattacharya is senior portfolio manager – alternative equities, Axis AMC.

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