How to invest in the stock market without taking anyone's help?

An important key to investing is to remember that stocks are not lottery tickets – Peter Lynch

Many are fearful when it comes to investing in the stock market. We keep hearing stories of many people being cheated by tip sellers. The majority of you have been searching for this one answer on how can I invest on my own without doing deep down research. 

There are a few passive ways of investing in the stock market. The underlying factors of those products through which you can passively invest are completely based on learning these basic concepts of,

NIFTY AND INDEX

NSE is the largest stock exchange in India and nifty is its base index. Sensex is the base index of BSE [Bombay Stock Exchange]. Now let’s go to the NSE website and check on the live market, next go the equity market. It shows you a default list of stocks. The number of stocks there is 50 and its called nifty 50. There are many other indices like broad market indices, sectoral indices, thematic indices, etc. But we shall be learning more on nifty 50.

An index is an indicator or measure of something and in finance, it typically refers to a statistical measure of the change in the overall securities market. The authorities selected the top 50 companies of the top 15 sectors of the economy to include in nifty 50. 

When I say the top 50 companies that may not hold true always, there are more criteria also. The companies they select will be based on good companies, widely held companies, good market capitalization, a lot of customers, with good track records. You can see the list includes ADANI PORTS, ASIANPAINTS, AXISBANK, and BPCL...Etc. The list goes on. 

Consider you are investing in all these companies together, so in a way, it means you are investing in the overall economy or the overall stock market as well. Are each of them given the same weightage in the nifty 50?? Well, no! They get calculated as per their investible weightage factor. There are some companies which have 2% to 3% weightage, some even own 7%. So it differs based on the companies. 

The overall performance of the nifty gets calculated as per the change in every stock, multiplied with the weightage it has been given. Then they cumulatively calculate the overall change in the nifty 50. The change happens on a daily basis. This index value keeps changing as per market conditions. 

Instead of identifying and investing in an individual stock, what if I told, you can buy nifty itself as a share?? Yes, it is possible! You can invest directly into nifty and it’s done through two methods, through ETF and Index mutual fund.

You can buy nifty at the current price and when the value increases your invested money also increases. The same happens when the market falls too. 

ETF (Exchange Traded Funds)

It trades like a stock throughout the day, unlike mutual funds that trade on a specific time period only. You can buy the ETF through your trading Demat account just like you buy the stocks. 

The concept of ETF is, companies pool money from a lot of people put together, and invest this money for a specific purpose. The purpose can be a diversification to balance the risks. Instead of buying just one stock, you buy ten stocks, this is called diversification.

If you are buying all 10 stocks from the same sector, then it’s concentrated in one sector and risk is more. So what you need to do is diversify among many sectors and within those sectors, one or two companies will be pooled together. Some ETFs can be very concentrated and some will be more diversified. 

The idea here is they have to go and achieve one objective. So now we know that you can invest in the performance of the nifty and when the nifty goes up you will make money and if nifty goes down you will lose money in the same proportion. So how to directly go and invest in nifty? 

For that, you need to go and find out the weightage of each stock in nifty and buy only that much of the value of stocks into your portfolio. But doing in this fashion is very complicated and you won’t be able to achieve as a retail investor. Your minimum investment size may go up to 10 to 15 lakh to achieve it. 

So in order to simplify it, some companies came forward and said that they will allocate this collected money in such a way that, it will track the performance of the nifty itself. To track such instruments, ETF was made which can be traded on the stock exchange just like the stocks. 

You can check out the various ETFs on the NSE India website. Highly traded ETF currently is the nifty 50 ETF. So with just a small amount, you can actually invest in the nifty ETFs without anyone’s help and still get benefited from the market. You can check the individual prices of the ETF by clicking on the details of each of them. 

Since the whole market has to grow, this investment may not give you huge returns, but overall 10% to 11% compounded annual rate is there on most of the indices around the globe. In India also FD rate is 7% to 7.5%, and then you can expect a return of 10% to 10.5% on nifty ETF for another four to five years. 

If you are investing for the short term, chances that the market may crash, and you may lose money in the ETF. So it’s not a risk-free instrument. ETF can also give a hit on your portfolio. Keep buying every quarter with a perspective of investing for the long term.

There are many other companies too, which are managing the ETF’s as you saw on the website. But my suggestion would be to choose something which has the highest liquidity. NIPPON INDIA ETF NIFTYBEES is having the highest liquidity. Every time you come to market both buyers and sellers are available with these nifty bees. There is also NIFTY BANK BEES which track the nifty banks. 

Since it gets traded like stocks, you need to give a brokerage on this. You are aware of the brokerage you give for the stocks; a similar kind of brokerage will be applicable for your nifty ETF performance as well. But you need to check with your broker and it should not be high. 

Apart from the brokerage since the companies are involved in managing it, so there will be a certain management fee as well. But it is very low when compared to the mutual fund's investment. ETF’s are very popular in western countries, now in India also it’s getting popular because of the low management fees. 

So ETF is one way of investing in the stock market without taking anyone’s help and still tracks the performance of the stock market. 

INDEX MUTUAL FUND

A mutual fund is a financial product from the asset management company. In simple terms, a mutual fund is a collective fund of common people that gets invested into equity or other markets.  

So there are companies which get a license, that are very expensive and get approval from authorities to pool fund from different people and invest in the market. In return for managing your fund, they charge you some fee. They charge you around 1.5% to 3% in equity mutual funds. So they promise you to manage your investment and give better returns. 

So their objective here is to generate better returns for you than the market or better returns than what you can generate for yourself. One professional or a group of professionals hired by asset management companies make decisions and invest the money. 

WHAT IS PASSIVE INVESTING?

Many think the mutual fund is a passive investment. But it’s not. Before saying much on it, let’s understand the basics of passive investing. The philosophy of maximizing the returns by minimizing your cost of buying and selling by not actively participating in the market is called passive investing. 

The passive investor believes in value investing and he invests his money into one asset class for a very long period or until the time he sees the fundamentals of the product going wrong. So there are so many products. 

Like you can think of a person who wants to buy land. He plans to keep it for another 10 to 15 years and enjoy it after his retirement. So he is a passive investor, who knows the land prices in this country will keep increasing and have seen it in his last 10 to 15 years of life. He does not actively check, if the price of the land is increasing or if he has to time that, and invest again once he gets double the amount, after selling the first land. 

There are also people who buy the land and keep it until the price increases and sell it off. Then they invest again in some other land and wait for price appreciation. I know some people like this who make money by timing the land. In this also you need to give transaction cost which is higher like 7% to 8%. 

In the equity market, every time you buy or sell shares there are certain brokerage fees and expense ratios like transaction cost, impact cost, etc. and there will always be a timing issue. As I said earlier passive investor believes in long term investing. 

However mutual funds managers are not passively investing in the equities. They are constantly checking for good opportunities and that’s why they charge you 2.5% to 3% of the total amount. 

So holding equity mutual funds for long is not a passive investment because internally it is managed actively. Let’s quickly make a comparison of mutual funds and direct equity.