What you must not do..
1. The market is volatile. Accept that. It will be unpredictable and keep on fluctuating. Don’t panic.
If the prices of your shares have tumbled, there is no reason to want to get rid of them in a hurry. Stay invested if nothing fundamental about your company has changed.
Same is true for your mutual fund. Does the Net Asset Value (NAV) going down and then rising slightly? Hold on. Don’t sell unnecessarily.
2. Don’t make huge investments: When the market dips, go ahead and buy some stocks. But don’t invest huge amounts. Pick up the shares in stages. Keep some money aside and zero in on a few companies you believe in. When the market dips, buy them. When the market dips again, you can pick up some more. Keep buying the shares periodically.
Everyone knows that they should buy when the market has reached its lowest and sell the shares when the market peaks. It is impossible for an individual to state when the share price has reached rock bottom. Instead, buy shares periodically, this way you will average your costs.
Pick a few stocks and invest in them gradually. Same with a mutual fund. Invest small amounts gradually via a Systematic Investment Plan. Here, you invest a fixed amount every month into your fund and you get units allocated to you.
3. Don’t chase performance: A stock does not become a good buy simply because its price has been rising phenomenally. Once investors start selling, the price will drop hugely. Same with a mutual fund. Every fund will show a great return in the bull run. That does not make it a good fund. Track the performance of the fund over a bull and bear market; only then make your choice.
4. Never ignore expenses: When you buy and sell shares, you will have to pay a brokerage fee and a Securities Transaction Tax. This could nip into your profits especially if you are selling for small gains (where the price of stock has risen by a few rupees). With mutual funds, if you have already paid an entry load, then you most probably won’t have to pay an exit load. Entry loads and exit loads are fees levied on the Net Asset Value (price of a unit of a fund). Entry load is levied when you buy units and an exit load when you sell them.
If you sell your shares of equity funds within a year of buying, you end up paying a short-term capital gains tax of 10% on your profit. If you sell after a year, you pay no tax (long-term capital gains tax is nil).