Take market correction as an opportunity to invest in qualitative stocks

The recent stock market correction and the big drop in prices of many jewels of the stock market has created lot of negativity about equity investing. But one should note that higher the intensity of stock market correction, the higher is the possibility of making more money in the long run.

You can take this correction as an opportunity to invest in the most qualitative stocks available at an attractive valuation. You should gradually build a portfolio of your lifetime and the only question you need to ask is how to select the right stocks given the current market situation and global economic upheaval?

As you must be aware, buying stocks requires expertise and knowledge of technical and fundamentals analysis. Investors use different strategies to optimise their investment in stocks. In fact, there are external factors that are different from technical or fundamentals factors, which also affect the price movement of any stocks. These could be any development in the global and Indian economy. For instance, oil prices or interest rates can have a huge impact on the Indian stock market. These developments can also bring down stock prices of strong companies, at times. This often leads investors to part with their good quality stocks, which they had invested in for long-term wealth creation.

Since many investors do not possess these necessary skills to manage their investment in equities, investing in stock market via mutual fund route is the best option. Being a first-time stock market investor, if you don’t know all the technical intricacies, you can still create a sound portfolio on your own by following certain important parameters. 

One of the most important things to note is to invest in blue chips, that is, large-cap stocks. These are stocks of those businesses which impact the lives of many and the products they make are used by huge strata of society. It makes sense to investing in the stocks of companies which is one of the best or at the top of their game. These companies are cash rich and are numero uno in their respective fields and chances of going wrong with these investment is remote.

It is also important to invest in the business you understand, because knowing about the business your desired company is in to helps you gain better control and avoid a shock later on. These companies also offer better financial strength and good quality management and also possess the necessary economic MOAT. The term was invented by the legendary investor Warren Buffet. It means a company that has a great competitive advantage over its competitors.

So, use the stock market correction as a great opportunity to invest in good quality stocks, which are already discounted by 30%-40%. They may provide some more discount in the next few months. A first-time investor should invest in stocks at a gradual pace and should not exceed their investment beyond 5%-10% of their overall assets base till their understanding about the stock market improves. You can create a portfolio of around 10-15 companies and keep buying regularly. Remember, the longer you keep invested in these stocks the longer you gain not only in the form of capital appreciation but also by way of dividends and bonus shares.

(The writer is chief gardener, Money Plant Consultancy)

This story first appeared in DNA Money: Invest gradually as market corrects