How many shares should you own?

After last week's bloodbath in tech shares, you might well have decided never to invest in the stock market again.

If you are a lazy investor, it's the right decision. For the key to making money in shares is understanding the markets, and studying your company well.

In today's world of shortened business cycles and volatile markets, there is no such thing as a good share that will stand the test of time.

You can't just say Infosys is a good company, and so I will hold Infosys shares till kingdom come. Just ask the guys who unloaded the share last week.

If you have to track your core stocks day in and day out -- by reading the pink papers, by studying balance-sheets, and by generally keeping yourself updated on their performance -- it stands to reason that the more you own the more your homework piles up.

Conversely, the less you own, the more easy it is to track them. Which brings us to the question: How many shares should you realistically own?

We asked this question to two value-oriented investors and this is what they had to stay. According to Parag Parikh, who runs a financial advisory service, no common benchmark can be set for the number of stocks anyone can own.

It depends on the investor's risk appetite. The greater your appetite for risk, the more the stocks you can own.

One thing everybody agrees on is that the number of stocks you own will depend on the size of your outlay. If you have Rs 5,000, it doesn't make sense to invest in 100 shares of Rs 10 each. You will never make money by spreading your money so thinly over such a large number of shares.

According to Motilal Oswal, chairman and managing director of Motilal Oswal Securities, the lesser the investment amount, the fewer the stocks one should own.

As a rough ballpark figure, he says that with Rs 1 lakh of investible funds, you should invest in a maximum of three or four stocks – an average outlay of Rs 25,000 per company. Having more than that would decrease the chances of substantial gains. The same would hold true for investments up to Rs 500,000. One can add a stock or two, but the total should not exceed six.

However, Oswal says that even with a lot of money the optimal number of stocks can only range between 12 to 20 at any one point of time.

His reason: having too many stocks in the basket makes it difficult to monitor them. Another major reason against extensive diversification is that there should be at least 5 to 10 per cent invested in any single stock for adequate returns.

The key to stock ownership is understanding risk. Says Motilal Oswal: "The fewer the number of stocks, the greater is the risk." But higher risk brings higher rewards -- if you put in sufficient homework.

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