If you are new to investing then those green portfolios and high returns might excite you. But truth be told, there is much more to investing than stocks from high-growing sectors/companies with high returns that catch your attention.
However, the question remains: are they suitable for beginners? While high returns may seem tempting, understanding the associated risks is important before diving into these stocks. So, let’s get started.
Understanding High-Return Stocks
High return stocks are equities that offer significant returns over a short period. These returns usually surpass stock market averages, making them attractive to investors.
In India, sectors like technology, renewable energy, and pharmaceuticals have recently seen substantial growth, with some stocks generating returns of over 50% in FY24 alone.
For example, shares of Reliance Power increased by 184% in FY24, with 35 lakh stockholders holding around 202 crore shares valued at Rs 5,711 crore.
Volatility and Risk
You might have heard the saying “You cannot have it all,” and it stands true to investing as well. Because high returns come with high risk. Stocks that show rapid price movements are often volatile.
Beginners need to understand that volatility can lead to quick gains, but it can also cause significant losses. For example, during FY24, certain small-cap and mid-cap stocks such as PSU stocks delivered returns exceeding 70%, but when market conditions turned, they also faced sharp declines.
For beginners, getting through this volatility can be difficult without the knowledge of risk management. This is why many financial advisors recommend starting with more stable investments like index funds, which offer lower but steady returns.
Liquidity Concerns
Another factor beginners should consider is liquidity. While high-return stocks, especially in smaller or emerging sectors, can deliver great gains, they often face liquidity issues.
This means it might be hard to find enough buyers or sellers when you want to trade. For instance, several small-cap stocks in FY24 experienced liquidity squeezes, making it difficult for investors to exit their positions at desired prices.
Beginners who invest in these stocks might be trapped in a declining market, unable to sell at the right time.
Diversification is Essential
Have you heard the expression,” Do not put all your eggs in one basket?” Well, that implies investing as well. Placing all your capital higher return stocks can expose beginners to unnecessary risk.
For a balanced portfolio, it’s important to spread investments across sectors and asset classes. For example, a portfolio consisting of high-return stocks, stable blue-chip companies, and government bonds can help manage risk while still providing growth potential.
Are There Any Alternatives?
If you’re keen on higher returns, some safer alternatives are available that still offer growth without the extreme risks. Options like index funds, exchange-traded funds (ETFs), or blue-chip stocks provide more stable growth, allowing beginners to gain confidence while minimizing risk.
Index funds, for example, mirror the performance of major indices like the Nifty 50, which delivered nearly 30% return in FY24. This is far less volatile than chasing individual high-return stocks. For beginners, it may be prudent to explore these options before jumping into riskier investments.
Alternative Strategies for Beginners
If after all this, investing in the share market looks intimidating to you, then you must check the following beginner-friendly options to start slow:
- Index Funds: Investing in these funds provides instant diversification and reduces the risk associated with individual stock selection.
- Dividend-Paying Stocks: They offer a steady income stream and can be a good option for beginners seeking a balance between growth and income.
- Mutual fund: They offer expert management and diversification benefits. Beginners can choose from various fund categories based on their risk tolerance and investment goals.
- SIPs (Systematic Investment Plans): SIPs allow you to invest a fixed amount regularly, averaging the cost of buying units over time. This reduces the impact of market volatility.
Conclusion
While the pursuit of high returns is understandable, beginners must prioritize risk management and long-term wealth creation. Diversification, disciplined investing, and continuous learning are key to building a successful investment portfolio.
Consider exploring alternative strategies like index funds, dividend-paying stocks, and mutual funds before diving into high-return stocks.
