Is Investing in the Stock Market Risky? What Indian Investors Should Know

People often ask, ‘Is the stock market good or bad?’ Many are confused and scared to enter the world of trading and investing. This is not surprising – there is often a lot of misinformation regarding the stock market, ranging from talk of guaranteed returns on a particular stock or rumours about an impending market crash. No wonder many investors are confused and scared to enter the world of trading and investing.

The truth is more nuanced. Equities do hold the potential for long-term wealth creation, but it’s never guaranteed. Conversely, though they can be very volatile, there are ways to mitigate these risks. So, it is important that investors follow a disciplined approach, understand the risks involved, and learn ways to reduce them.

In this article, we will break down some of the major investing risks and how you could potentially manage them.

• Table of contents

• Risks Associated With Stock-Market Investments
• How to manage stock-investment risks
• Putting trading and investing in perspective
• Crunch the numbers before you start
• Mutual funds: Built-in risk management

Risks Associated With Stock-Market Investments

• Market-Wide Swings (Market Risk): Economic shocks, global events, or policy changes can impact the entire market. For example, in March 2020, benchmark indices like the Nifty and Sensex fell sharply during the onset of the COVID-19 pandemic.
• Business-Specific Trouble (Company Risk):Even in a rising market, individual companies can face internal challenges such as weak financials, poor governance, or leadership changes.
• No buyers, no exit (liquidity risk): Shares with low trading volumes can be difficult to exit at the desired price. This is particularly common in certain small-cap stocks.
• Surprise in your tax bill (taxability risk): Gains from equity investments are subject to capital gains tax. In the case of frequent flipping, short-term gains (levied on investments held for less than 1 year), can accumulate. Short-term capital gains tax is higher than long-term capital gains tax and can significantly impact net potential returns.
• Interest-rate risk: Changes in RBI’s policy rates can affect borrowing costs for companies and impact valuations.
• Rule-book changes (regulatory risk): Changes in trading rules or sector-specific regulations can affect investor strategies.
• Silent erosion (inflation risk): If returns from shares do not exceed the rate of inflation, the real value of the investment can erode over time.

Read Also: Difference Between Shares and Stocks

How to manage stock-investment risks

• Diversify: Invest across sectors and company sizes to avoid concentration risk. Consider including domestic as well as global exposure if possible.
• Research: Before investing in a company, understand its business model, financials, governance standards, and past performance.
• Avoid emotional investing: Greed leads investors to buy at peaks; fear drives them to sell at lows, thus locking in losses. Set investment goals, entry points, and exit triggers. Avoid reacting impulsively to market noise or headlines.
• Review: Monitor financial results and keep track of broader sector developments. Staying informed helps make timely decisions.
• Hold a defensive core: Stocks from defensive sectors that have ongoing demand regardless of market conditions (like FMCG, utilities, healthcare etc) may offer relatively higher resilience during market volatility.
• Consider dividend-paying stocks: These may provide periodic cash flows, which can be reinvested or used as a cushion during downturns. Moreover, companies that have a track record of paying regular dividends tend to have strong business models and healthy cash flows, making them potentially more resilient. However, it’s important to note companies release dividends at their discretion and payments can be suspended during difficult times.
• Match your risk tolerance: A common rule of thumb is to subtract your age from 100 to estimate the equity allocation that may be suitable for you. For example, a 30-year-old salaried professional might be comfortable with 70% stocks; a 60-year-old retiree may cap it at 40%. *Example for illustrative purposes only. However, consider individual circumstances like income stability, financial responsibilities and emotional comfort with risk as well.

Read Also: Stock Market Trading: Meaning, Types, and Historical Context

Putting trading and investing in perspective

Short-term trading can lead to quick potential profits but also quick potential losses. It demands experience, discipline, and significant time commitment. A long-term investing approach with a well-diversified portfolio tends to be more sustainable, especially for novices and those who do not have the time or inclination to monitor the markets constantly.

Crunch the numbers before you start

Use a lumpsum calculator online to plan your investments. Such a tool helps you visualise the potential growth of your money over time, based on your investment amount, expected rate of return, and investment horizon.

Suppose you invest Rs. 5 lakh today:

• Scenario 1 (FD @ 6 % interest rate): Rs. 5 lakh grows to ~Rs. 12 lakh in 15 years.
• Scenario 2 (Equity fund @ 12 % annual returns): The corpus can potentially grow to ~Rs. 27 lakh.

*Example for illustrative purposes only.

While equity returns are not guaranteed and come with higher volatility, they have historically outperformed* traditional options over the long-term. However, this potential comes with the need for discipline and the ability to withstand interim market fluctuations.

*Past performance may or may not be sustained in future

Mutual funds: Built-in risk management

If direct stock-picking feels overwhelming, mutual funds offer an alternative. Equity mutual funds are managed by professionals who monitor markets, diversify across sectors, and rebalance portfolios. Investors can benefit from this expertise without having to track the market themselves. Moreover, mutual funds are diversified across multiple securities. This combination of professional management and diversification can help reduce investment risk when compared to direct stock market investing.

Mutual funds also allow you to invest regularly through SIPs (Systematic Investment Plans), which can help average out costs over time.

Conclusion

Equities can be a tool for potential long-term financial growth, but only when used responsibly. Much like a sharp tool in skilled hands, they require planning, awareness, and control. Investors who stay informed, diversify adequately, and invest with a clear purpose can access what equity markets have to offer.

FAQs:

Is investing in stocks safe for beginners?

No market-linked investment is safe. Moreover, stock market investing can be particularly risky because it requires sound knowledge of markets and careful stock selection. However, investment risk can be reduced by doing thorough research, including fundamental and technical analysis, and diversifying across stocks.

Mutual funds can be an alternative to stock market investing, because this process of research and diversification is handled by a professional fund manager.

When you’re new to the stock market, it may also be prudent to start with small investments till you get the hang of investing.

Begin with money you can afford to leave untouched for at least five years.

What are the risks involved in stock market investments?

Key risks include market volatility, company-specific risks, liquidity constraints, interest rate fluctuations, regulatory changes, and inflation.

How can I reduce risk while investing in stocks?

Diversify, do thorough research, set stop-losses, align exposure with your risk tolerance, and review holdings periodically.

Is long-term stock investment safer than short-term trading?

Historically*, long-term investments tend to recover from volatility and grow over time, provided suitable stocks have been selected. In contrast, short-term trades can amplify costs and emotional stress.

Even if investing for the long term, diversification is essential, because a particular stock or company may not recover from a prolonged downturn, policy change or another disruption.

*Past performance may or may not be sustained in future.

Should I invest in stocks during a market downturn?

Downturns may present potential buying opportunities if you have surplus funds and a long investment horizon. However, it is essential to pick stocks carefully after considering company fundamentals. Moreover, staggered investments are advisable to reduce market timing risk.