More and more people want to invest in equities, but have no clue how. Then there are some who are so worried about volatility that they prefer putting money in banks and paying 30% tax on interest, but will not put money away EVEN IN A LIQUID fund!

Can you lose money in equities? Of course you can and will. Equity investing is about knowing YOURSELF, markets, companies in which to invest, knowing a few good equity investors, creating equity investing clubs and groups, and of course READING TONS and TONS and knowing how to apply. For most people investing means calling Kotak, Motilal Oswal, Icici direct, Hdfc securities, ….buying some share that the RM recommends and then hoping to make money. Hope, sadly is not STRATEGY. Many people who invest in equities do it just because ‘they want to earn a lot of money and that too fast’.

Well just too many people have no rules, limits, …and have no clue on how to invest in equities. These people can, should and do lose their shirt, pants and undergarments and deserve it. Completely.

Let us say you are a well qualified, sensible, boy or girl and wish to invest in equities. Well if you do not want to be an active participant, you could choose a mutual fund. If you do not trust fund managers (I trust only 5 out of the 100 odd that I would have met), choose an index fund – the cheaper (and lesser tracking error too) the better.

Ok, you are a little more adventurous. You wish to invest in direct equities. Now comes the challenge.

Let us say you are 31 years and wish to create a portfolio. You are a woman, earning Rs. 8 lakhs, and ARE NOT THE PRIMARY PROVIDER of the house. So you can take a little more risk than a man, WHO IS THE PRIMARY PROVIDER.

So let us say you have Rs. 10 lakhs to invest, and influenced by this site, you decide to put Rs. 8 lakhs in equities.

Rule No.1: NOT more than 80% of the SECONDARY earner’s portfolio will be in equities.

Rule No. 2: NOT more than 5% will be invested in ONE Company, as an initial investment. In case the share does well, we will LET it go up to 25% of one’s EQUITY portfolio. Anything in excess will be constantly sold off. Let us say you are able to add Rs. 20,000 to the equity portfolio every month, and this share is also going up every month, it will take a real long time to breach the upper limit (unless you have picked one diamond and all other duds!).

Rule No. 3: Industry diversification I will learn or copy from good fund manager’s portfolios, and I will buy only in group A, or B1. I will NOT touch a share in group B2, or T2T….even if says these are future blue-chips.

Rule No. 4: I will keep a 25% trailing stop loss. Let me explain. You have bought Rs. 40,000 worth of Carborundum Universal (my examples are obviously from my portfolio, and my cost of this share is Rs. 3.59 per share, thanks to split and bonus, so if you want to copy me, go to 1990, or create your own portfolio). Suddenly the shares value falls to Rs. 30,000. You will do nothing. However on the day it falls below 30k, YOU WILL SELL. Knowing how to cut losses is as important as knowing how to let profits run.

Rule No. 5: I will review my portfolio on a quarterly basis. I HAVE NO business managing my own portfolio UNLESS I can beat the index. Clearly if you beat the index for one year, then second year, then 3rd year…you are doing well. If you do not beat it for the first 4 quarters – and are trailing by a huge margin, sell and go to a good fund house.

Now tell me with all these rules in place how much can you lose? Rs. 800,000 is the total investment, Rs. 40,000 is the maximum exposure to one stock, 25% is the trailing stop loss- so you can lose about Rs. 10,000. Your liquid net-worth is Rs. 10,00,000.

My dear girl, you can lose about 1% of your net-worth. Neither you nor your husband should lose sleep over this.

Once you get confident, take charge of your husband’s portfolio…and make sure that you invest about 60% of his portfolio – the other portion being in bonds, pf, ppf, some stupid lic policies, …and other debt instruments.

While calculating IGNORE your primary residence, and the loan that you have against it. Cars, golf kit, Asics, Adidas, Nike, Reebok, gold jewelery, Garmin 910, Trek mtb, Canondale Road bike are all expensive, but sorry they are expenses, NOT assets.

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  1. when you say “In case the share does well, we will LET it go up to 25% of one’s EQUITY portfolio. Anything in excess will be constantly sold off.”, can you please clarity these words?

    you mean, you mean if that particular share’s profits crosses 25% of overall portfolio then we should sell profits of over and above 25% of overall portfolio? e.g. 1.lakh is overall portfolio and say 10,000/- is invested in share A then if I get 27% profit in share A then I should sell 2% of share A?

  2. Curious to know which fund managers are you talking about – “I trust only 5 out of the 100 odd that I would have met”.

  3. Can you do a post on how a 25 year old should invest in direct equity? Someone who is 2-3 years old in his job & has the requisite knowledge to start investing in direct equity?
    Eg: How to find money to invest in stocks while continuing his/her SIPs.
    Or someone who gets say a bonus of 50K to 100k and whats to invest this in stocks, while continuing his/her regular investments in PPF/Equity MF SIPs, the above canot be applied.

  4. hi Subra sir,
    you often talk to keep equity for long term and you also say to sell if the market is too high.. its confusing.. Please provide calrity.

  5. Good eye opener for those who are about to blindly enter the markets looking at the recent highs.

    By the way, Sir, I have a question.

    Q: If my portfolio size is Rs. 1 lac (I am just starting to invest in Direct equities after getting confidence by investing previously for 3 years in Mutual Funds), and I decide not more than 5% of my total portfolio size should be invested in a single share (i.e., not more than Rs. 5000/-). But my analysis finds that MRF (for example) is a good share to enter currently. Now as it is above 20k, what should I do? Relax my rule for this share if it is really a value buy or ignore it because my rule doesn’t allow to invest more than 5k in a single share?


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