Equities Investment Guide For Indians: Getting Started

Investing in equities in India can be a great way to diversify your portfolio and capitalise on emerging markets. India has the seventh-largest economy in the world by nominal GDP and has become a major centre for foreign investment.

1. Get a Permanent Account Number (PAN) card: This is a primary requirement for entering any financial transactions in India and will be needed to open a bank account, invest in mutual funds, file income tax returns, etc.

2. Find a broker: You cannot directly go to the stock exchange to buy or sell stocks/shares; you need a broker. Brokers can be individuals, companies, or online agencies registered and licensed by the Securities and Exchanges Board of India (SEBI).

3. Get a Demat and Trading Account: A Demat account will hold the stocks or shares in your name, while the Trading account will facilitate the buying and selling of shares.

4. Understand the Depositories: There are two depositories in India: NSDL and CDSL. These depositories have agents called Depository Participants who will provide an account to store the shares you hold.

5. Get a Unique Identification Number (UIN): A UIN is required if you trade for Rs. 1,00,000 or more at a single time.

6. Start Buying and Selling: Inform your broker about the share, quantity, and price of the stocks you wish to buy or sell. The buying and selling take place in two exchanges: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

Remember to do your research and have a clear investment plan before entering the stock market.

Understand the business by doing your research

Researching investments is a crucial process known as due diligence. It involves looking into the business prospects of the company whose stock you want to buy, as well as how the stock has performed, the stock prices of its competitors, and more. Here are some detailed steps to guide you through the process:

Review the company's public documents

Start by visiting the company's website to understand what the company does, its mission, and its business philosophy. Then, review the company's earnings reports and annual reports to assess its financial health and performance. These reports will provide insights into the company's short-term financial results and long-term strategy.

Review the company's core business

Analyze the company's products or services to predict their future demand. Consider whether the company's products have a future or if they are becoming obsolete. Also, look at the company's competitors and its position in the market. Assess whether it has the size and scale to offer cheaper products or buy up its competitors.

Find out what other investors are saying

Investment banks often analyze publicly traded stocks and share their thoughts with the public. There are also blogs, message boards, and websites like Glassdoor where you can see what employees think about working for the company. Keep in mind that some writers may have an agenda, so double-check any information you find.

Watch the stock itself

Look at the stock's performance over time. Is it increasing, staying flat, or highly volatile? Understanding the stock's historical performance can help you decide if it is a wise long-term or short-term investment.

Know your portfolio strategy

Ask yourself how this stock fits into your overall investment plan. Be clear about your investment goals and risk tolerance. Assess how long you plan to hold the investment and ensure that you are not too heavily invested in one particular sector or industry, as this can create unexpected risks.

Diversify your portfolio

Diversifying your portfolio is a crucial step in minimising risks while investing for the long term. Here are some detailed tips to help you diversify your portfolio when investing in equities in India:

Understand the Importance of Diversification

A diversified portfolio helps your investments withstand financial disruptions, providing an optimal balance for your savings plan. Diversification is not limited to different types of investments or classes of securities but also extends within each class. Invest across different industries, interest plans, and tenures. For example, instead of putting all your money in the pharmaceuticals sector, even if it is performing well, consider diversifying into other sectors like education technology or information technology.

Allocate Your Assets Wisely

Stocks and bonds are the two primary investment options. Stocks are typically high-risk, high-return investments, while bonds offer more stability with lower returns. To minimise risk, allocate your money between these two options. A good rule of thumb is to subtract your age from 100 – this should be the percentage of stocks in your portfolio. For instance, a 30-year-old could keep 70% in stocks and 30% in bonds. As you get older, reduce your risk exposure by adjusting the stock-to-bond allocation accordingly.

Assess Qualitative Risks Before Investing

Minimise the unpredictability of stock transactions by conducting a qualitative risk analysis before buying or selling. Evaluate stocks based on parameters such as business model robustness, integrity of senior management, corporate governance, brand value, compliance with regulations, risk management practices, and dependability of products or services.

Diversify Your Investments

Invest in a mix of cash, stocks, bonds, and government securities. Money market instruments like certificates of deposit, commercial papers, and treasury bills offer high liquidity and low risk. Treasury bills, issued by the Reserve Bank of India, are particularly secure and ideal for short-term investments. While these securities may not offer high returns, they can offset riskier investments in your portfolio.

Choose the Right Investment Vehicles

Mutual funds are a stable and reliable option, but you can further diversify within mutual funds. Consider investing in mutual funds with systematic cash flow or a systematic withdrawal plan (SWP). This allows you to withdraw a fixed amount monthly or quarterly, providing access to your money even when locked in a savings plan. Alternatively, a systematic transfer plan (STP) lets you transfer a fixed amount between different mutual funds to maintain a balanced portfolio.

Adopt a Long-Term Perspective

Equities typically demand a long-term investment perspective. At the short end (3 to 6 months), equity share performance is driven more by market sentiment than company fundamentals. The right time perspective for investing in equities is generally greater than 5 years, allowing you to benefit from the company's growth.

Rebalance Your Portfolio Periodically

Regularly review the balance of various assets in your portfolio. This review should be based on your financial goals, life milestones, and progress made. A financial advisor can help you make informed decisions and develop a disciplined investment strategy.

Consider Systematic Investment Plans (SIPs)

SIPs are ideal if you have a small amount to invest over time rather than a large sum at once. You can invest a fixed amount in mutual funds at regular intervals, making it a disciplined approach for young investors. SIPs also benefit from rupee cost averaging, improving your opportunity for gains.

By following these tips, you can effectively diversify your portfolio when investing in equities in India, minimising risks, and optimising your long-term returns.

Make investment decisions without emotion

Investing in equities is a risky business, and it can be easy to let emotions like fear and greed affect your decision-making. However, it's important to make investment decisions without emotion and to avoid buying a stock just because it's hyped or selling it just because it's in demand. Here are some tips to help you keep emotions out of your investment decisions:

Have a plan and stick to it

Before making any investment, set clear investment goals and decide how much risk you're comfortable taking on. Understand your investment style and the types of outcomes it can entail. This will help you feel more confident when things don't go your way. For example, if you're planning to hold an investment for thirty years, a short-term drop in value won't be as concerning.

Diversify your portfolio

Diversification is a crucial tool for any investor. It helps to protect against market swings and reduces the emotional response to market volatility. Invest across different sectors, industries, asset classes, and geographies to ensure your portfolio is well-balanced. That way, if one particular industry or company has a bad month, it won't affect your overall portfolio too much.

Understand your risk tolerance

Know your risk tolerance and the risks of your investments. This can form the basis for rational investment decisions. Understanding the risks involved can help mitigate the emotion associated with investing and prevent emotional reactions to market movements.

Brace yourself for market collapses

It's important to expect and prepare for market downturns. When markets plummet, resist the urge to make impulsive changes to your portfolio out of fear and panic. Instead, stay the course and ride out the storm. Remember that the market can go up as quickly as it goes down, and keeping your cash invested during fluctuations is how your money grows over time.

Pick index funds for stocks

Rather than trying to pick individual stocks, opt for broadly diversified index funds. By investing in mutual and index funds, you take on less risk than when investing in a single company's stock, and you can let your portfolio grow over the long term.

Check your portfolio infrequently

To avoid the temptation to make frequent changes to your investments, check your portfolio no more than once a year. This helps you avoid getting caught up in the daily news cycle and making impulsive decisions. Instead, focus on investing for the long term and stick to your investment plan.

Find an international broker to invest with

Among the various international brokers, U.S.-based Interactive Brokers has a presence on the NSE (National Stock Exchange) and offers trading in Indian shares, indices, futures and stock options listed on that exchange. They also offer specific account structures for non-resident Indians (NRIs) living abroad, as well as for Indian residents in India. These accounts allow Indian traders to access NSE stocks and derivatives depending on their location.

Indians living abroad must meet the requirements for an NRI and have a Permanent Account Number card (PAN) issued by the Indian Tax Authority to qualify for these accounts. After verifying all of the applicant’s information, Interactive Brokers performs a one-time Know Your Client (KYC) interview, which is a condition imposed by SEBI for anyone trading in the Indian markets.

Interactive Brokers also offers a Demat account for clients to hold Indian securities electronically. A Demat account is an account at a depository agency that issues a unique account number used for trading purposes. The Demat account is where your Indian securities are held in a paperless digital format.

NSE trades cost a low flat rate of Rs 20 per order for stocks, futures and options. In addition to the broker’s $10,000 minimum deposit, you can expect to pay a fee of $500 to $2,000 for a subscription to market data and research for NSE-listed stocks and derivatives.

Furthermore, Interactive Brokers provides some of the best trading platforms in the industry. It offers a web-based platform, its premiere Trader Workstation (TWS) with advanced features and a mobile option available for both Android and iOS smart devices.

Keep in mind that Interactive Brokers charges an inactivity fee if a minimum brokerage charge of $10 per month is not met for traders operating in the Indian markets. You can contact the customer service staff 24/6 through email, live chat and phone.

Open an account with an Indian stockbroker

To open an account with an Indian stockbroker, you must first register for a PAN card. This allows Indian tax authorities to track your investments and tax liabilities. You will also need to open a bank account in India, as you are required to transfer funds to your broker to buy Indian stocks and deposit money after you have sold them.

You will also be required to open a Demat account, which will hold the stocks or shares in your name. This is necessary as you cannot hold shares in physical form or store them physically. A Demat account stores the shares you buy from the markets through your brokers in your name. The selling will also be facilitated through this account.

You might be better off opening an account with a full-service broker in India that can give you access to research and tailored guidance on investing if you need advice on which stocks to buy and what kind of investments would suit you best. This kind of broker can give you an idea of how your investments will be taxed, and so can an accountant. Keep in mind that if you hold an investment in India for more than one year, you may not be liable for capital gains tax.

Some of India's best stock brokerages include ICICI Direct, Sharekhan, Kotak Securities, and IndiaBulls.

Frequently asked questions