At the time of writing this blog, the absolute return of the Nifty 50 index has been 65% over a 1 year period and 42% over 3 years. Rs.10 lakh invested in a simple Nifty 50 index fund could have fetched you close to Rs.6.5 lakhs in just 365 days. What’s more telling is that this is the return generated by the top 50 listed companies of India. Many people were before this under the assumption that larger companies are generally on the expensive side of valuation and have limited return potential. Well, they are not exactly wrong there either. If you look at the 1-year returns from the Nifty Small Cap index(smaller companies by market capitalization), it generated a whopping 130%.
Such kind of returns in such a short period of time have never been seen before in the history of the stock markets. The stock markets in other countries too have a similar story to tell. While the reason for such a parabolic rally is no doubt due to the liquidity effects of the Covid19 pandemic, the question remains – How will 2021 be for Stocks?
2020 was a period where buying stocks of any company, big or small, would have guaranteed you decent returns. The same certainly looks slim to be repeated in 2021. This year will come down to selecting the right stocks. Hopefully, by the end of this blog, you’d be able to understand the process of identifying the right stocks.
Treat investing in a stock just like you would treat giving a loan to someone. Look at various aspects of a company before buying into their stocks. Don’t just make choices based on what you hear on the television or what your friends are doing.
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Understand the business model of the company and the industry/sector it operates in. Study reports on sectoral analysis. Once you are sure of a sector’s ability to do well in the future, the next step will be to identify a company that will benefit from it.
So, select a bunch of companies from one sector and then compare them on the following grounds:
Stock selection is an art and takes time to master. It takes years of continuous learning, reading and analysis to finally have it all start working for you. So the biggest lesson of stock selection is to be patient, both with your analysis and investment. So it is better to start the process with smaller amounts of capital. Over time if you find your strategies to be working, you can continue to expand your capital base.
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