Avoid gambling, start investing: How to make money in the changing landscape of wealth management

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As you do not teach the paths of the forest to an old gorilla, these days you do not tell an investor how to make money. At least that is what many retail investors seem to say after a dream run in the stock market through 2020. Departing from “we think”, investors now typically say: “we know”. Is this confidence or overconfidence?

Rising mutual fund redemptions and increasing demat accounts
For eight consecutive months in the financial year 2021, equity funds have seen net outflows–more money went out than came in. Where is all this money going? Well, some of it went towards profit booking and a lot of investors are flocking investing in the stock market directly.

Hundreds of new demat accounts are being opened every day. In the year, mutual fund investors either redeemed their portfolio out of panic or for the safety of their capital, which later shifted to profit booking or buying quality stocks at cheaper prices. The last few months' trends show that the same then converted into regular and full-time direct stock market investing.

“What’s new?”
That’s what investors have been asking, and the constant search for the next big investment opportunity is on.

Changing landscape of wealth management
From investing in just the US markets, international funds now invest in economies such as China, Brazil, and the UK. Then come the Environment, Social, Governance (ESG) investing; momentum investing; IPO investments; bitcoin frenzy or the dogecoin mania in the current times. I have also heard many high-net-worth investors talk more about recent pre-IPOs or startup investments.

Changing behaviour and sentiments
Last year this time, equity markets were down in the dumps. The BSE Sensex had collapsed by nearly 40 percent in just under two months after the Coronavirus pandemic was declared globally.

A year later, Sensex has crossed 50,000 and even though today it is slightly below that mark, it is still flirting with the number. In 2020, investors were happy to get a bank fixed deposit rate of 6 percent but that has changed in the past few months as many of them claim that they make that kind of returns on a monthly basis from stock market investments. I also find a lot of people inquiring about penny stocks for intraday trading. They either have their own businesses and jobs, but somehow they find the temptation and time to do intraday trading.

Should you resist equity market temptation?
No, you need not resist the equity market investing, rather I would encourage you to explore this market for long-term wealth creation. You should, however, resist the temptation of gambling in stocks markets and focus on investing instead. Follow these tips to avoid the temptation:

• Avoid FOMO: Fear-Of-Missing-Out (FOMO) is a terrible state wherein an investor enters equity markets after everyone has gotten in. This means you may get into markets when they have already run away and soon after you’ve entered, the markets fall. You end up losing big money.

• Stick to your risk profile: If you do not like to lose money or you are conservative, then invest more in debt and less in equity. A raging bull market is not the reason why conservative investors should switch from debt to equity.

• Look at the last five-year data and not the recent months' success: The last one-year equity returns are tempting, but is your mutual fund scheme or a company’s stock price going up just because the tide has lifted it? When markets go up, a lot of junk stocks’ prices also go up. But a junk stock is still a junk stock. If the underlying company doesn’t make much money or is an inefficient one, things will catch up soon and its price will fall.

• Use Mutual Funds: It helps you diversify and make you stick to quality stocks till the time you understand the market well in terms of what to pick and when to sell. A combination of stocks and mutual funds can work wonders for your wealth creation.

The writer is a personal finance expert, a Chartered Accountant by Profession and founder of NRP Capitals (erstwhile Money Plant Consultancy)

The thoughts and opinions shared here are of the author.