It's wise to go for spread-out investment option

Recently, one of my friends called me to inform the news of his newborn baby. He was so elated, while I was congratulating him. He said that he received few gifts in cash and was looking for some ideas about investment options, where he could park it. He was so specific if I could suggest a stock, which he could buy now, forget it and pass on to his son, when he becomes a major.

I liked the idea, but couldn't come up with any particular stock that he could own it and forget it. There were many ideas or stocks that revolved in my head, but I couldn't just answer him because though investing for long term is definitely correct.

It's been a common practice for the advisors to mention about long term, when looking at investments and also forms a rhetoric from the investors to come up with questions of those invest and forget it stock ideas. But the reality is quite different.

Business exhibits various cycles, many natural and then the market cycles, which top up over them. While business-related cycles could be more fundamental in nature, the market cycles could be pure whims i.e. beyond the economic fundamentals.

It's rarely that business fundamentals change overnight except in systemic risks like technology shifts, change in regulatory environment and government policies.

However, we tend to get carried away with statistics where if one invests in a particular stock at the time of its Initial Public Offering (IPO) or if one holds for the few years, the return is a number of multiples of the investment. But it's difficult to hold on the conviction and stay invested during those testing times a company goes.

For instance, Reliance Industries (RIL) went for IPO in 1977 and if someone continuously held on those stocks, the investment more than doubled every two-and-half years. But the stock price didn't much move for almost eight years between 2009 and 2017.

During this period, the company underwent many changes, the core business went through a tough cycle, there was a turmoil within the managing family, etc. But after this spell, the company's entry into retail, which they did almost a decade earlier, the entry to telecom, but mostly utilizing their own infrastructure which they'd invested almost two decades earlier and the overall environmental/regulatory change which aided the company's growth.

This has resulted in quadrupling of the stock value in about two years.

Similar is the case with HDFC Bank and one of the fund managers who still retains great faith in this company when asked about his holding the stock for fifteen years. He quipped that he didn't hold it for fifteen years, but for sixty quarters.

This is because he was preparing to downsize his holdings when the company comes with their quarterly results. Though he didn't actually sell, he was prepared for the rhetoric. All I'm trying to state here is that it's not impossible to do stick to a stock all the while, but very difficult to do it.

So, what's the way out? It's to SIP it i.e. invest in bits and pieces and there're options like Systematic Equity Plan (SEP), where one could contribute a fixed amount to a particular stock(s) and accumulate it over a defined period of time.

This could be a better strategy as it doesn't tax the individual in terms of timing the market, etc., also helps in building a large number of units over a period of time.

Also, the current market environment also helps in going for this mode than a lumpsum investment into stocks. In conclusion, there could be an idea about invest and forget it, but with an eye on the fundamentals one could consider investing staggered way.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at [email protected])