How will you benefit from investing early in mutual funds?

It has been proven that investments in equities have generated humungous returns over a period of time. However, there are equal chances of wealth destruction. Here are a few ways through which you can minimise risks and create wealth through equity investing.

Ignore gossip: Joseph Kennedy, a legendary investor of the early 1900s took the cue to exit his equity investments when his shoeshine boy started suggesting stocks for investment. A personal experience of watching investor behaviour when the stock markets have run up substantially and are close to peaking out is the amount of noise created. Typically, this is the time when inexperienced traders in stocks, who are a different breed from sober investors, loudly share their ideas with others without investment experience. This leads to gambling rather than investing. Gamblers lose money with an occasional win.

Understand the business that you plan to own: There are a few thousand stocks listed on the BSE and NSE. Shortlisting a few is a hard task. Just as we study through college and do professional courses to earn at our profession, some effort and time spent studying will ease earning from equity investing.

Financial health check: Return on Capital Employed (ROCE) and Price-Earnings (PE) ratio are two important parameters of legendary investors Warren Buffet, who is known as one of the most successful investors in the world. The former ratio is an indicator of the percentage of profits a business makes. Naturally a company that has a high ROCE is a healthy business and vice versa. On the other hand, a low PE is more attractive unless the business is growing at a fast pace.

Time your investment: Nobody can time the market. However, like our parents and grandparents knew the right time to stock up on groceries and vegetables during the season, when they were cheapest and most abundant. So, the same applies to equities. “The time to buy is when there’s blood in the streets,” said Baron Rothschild in the 18th century. He made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon. The cue for selling is quoted above, from Joseph Kennedy’s wisdom.

Don’t forget the 8th wonder: Albert Einstein considered compounding to be that wonder. Have a core portfolio that you will not sell unless the money is needed for non-negotiable essentials, such as an owned home. Good businesses grow at a pace about double the rate of the country’s GDP. Reasonably consistent growth will create a mammoth investment value over time. Patience is the key to unlocking wealth from the best stocks. Compounding works as well in equities as in fixed-income investments.