I am a homemaker and interested in investing in the stock market. I am 43, with some knowledge of stock markets. Which route should I choose to enter the markets? Should I invest in direct stocks or mutual funds or both? After all expenses, I have Rs 5,000-6,000 by month-end. I already have five fixed deposits worth over Rs 5 lakh.
What I understand from your query is that you have over Rs 5 lakh worth of fixed deposits and no money invested in equities and, therefore, you wish to take exposure to equities within your investments. You have further stated that you should be able to invest Rs 5,000-6,000 every month in equities. Given the situation, I would advise you to invest your monthly Rs 5,000-6,000 in diversified equity schemes of mutual funds through a Systematic Investment Plan route. Direct equity investments require a lot of time and effort in researching and identifying quality stocks to invest in and also keeping continuous track of these companies and their performance, which might not be feasible for you.
I am planning to make investments in derivatives. But, typically, who would you suggest should invest in them? Also, please elaborate on the kind of risks that would be involved in this product? Should I opt for this route?
First, derivatives are normally used for trading, hedging and leveraging, not investing. A derivative is a complex financial product that derives its value from an underlying, which could be any item that can be traded. The derivative generally tries to replicate returns from the underlying, albeit at a lower cost. These are generally meant for sophisticated investors looking to hedge their investments, traders trying to capitalise on market swings and speculators trying to leverage their positions. These can be very volatile and provide high risks and rewards, since they tend to magnify both gains and losses. Therefore, one should only trade in derivatives after gaining proper knowledge of the same and knowing fully well the associated risks and returns.
The writer is CEO, Dalmia Securities