Must Read
for all Retail Investors…
The term ‘investor’ by
itself might sound like a heavyweight and make you ponder whether or not you
are one of those. Come to think of it, all of us at some point of time or the
other have acted as investors, without even realizing so. Buying out a stock,
mutual fund, bond or infact the most popular class of investment- precious
metals (gold, silver, diamonds, platinum etc.) automatically brings us under
the umbrella of investors. Coming to the reason of writing this article: Whether
or not one should stay invested, no matter what the corpus of funds he has or
which asset class he chooses, we need to first have a clear understanding of
the rationale behind doing so. So, the first thing that comes to your mind when
somebody asks you- “Why should you invest?” you would automatically revert with
a sweet cliché, “For higher returns”, which is the crux of investing per se.
But my purpose is to take you a step forward and make you realize the
consequences of not doing so at all.
For this, we need to
interpret the real difference between ‘Saving’ and ‘Investment’. We would never
discourage you from saving, it’s important. Savings should constitute around
15% of your income, primarily for the sake of liquidity and safety, in the form
of insurance policies, bank deposits or so. But saving beyond that level would
mean more of your funds remaining idle. That’s because the only problem with
them is that the returns on savings have not been able to outpace inflation,
especially in an easily overheated country like India, where the prices of food
articles and other necessities like petrol, cooking gas etc. have been
accelerating over the years. This results in negative real returns. Hence comes
the utmost necessity of Investing, where the returns are higher and so are the
risks at times. Then there are capital gains that come with higher leverage.
You can easily outpace inflation by adopting the right kind of investment
strategy, which might sound very time consuming, but on the contrary, it just
involves identifying the targeted time period, instrument and the intermediary.
What if I talk about
Stocks? You would be apprehensive and lose your calm thinking of the massive
market crash of January 2008, when the Sensex registered a dip of 2250 points
in a single day washing out the long-term investment returns of many retail
investors in India. Heavy fall in valuations due to the FIIs pulling out their
money from ‘other markets’ and the rupee losing its value against the dollar
took a toll on the portfolios of domestic investors who were relying on the
growth potential of Indian Companies and stayed invested therein. But, has
anybody noticed the fortune of those ‘out-of-the-box’ thinkers who entered the
markets during that phase? Interesting point to note is that post-2008 crash (of
about 50%) the markets generated positive returns of upto 80% in 2009. Which
means if someone entered at 9647 levels, he came out flourishing by the end of
2009 at 17465 and a further 17% in 2010 at 20509 levels. Now, doesn’t that
sound tempting enough to you? We are not considering the downfall of 2011 when
fears of a double-dip recession and Global unrest again dragged the bourses
down, but then, it is all a part of the game. Capitalizing on the volatilities
(the interplay of the bulls and bears) is what differentiates a smart investor
from the herd. Now comes the question of what to buy and what to sell. You must
be getting umpteen stock calls from various broking houses, financial portals
and the like. It’s good to follow technicals, they work sometimes. But,
identifying fundamentally strong companies is not that difficult as experts
make them look like. Each of us are acquainted with the Blue-chip companies like-
State Bank of India, Reliance Ind., Sterlite Ind., L&T, HUL etc. When we
are talking long-term investments, betting on these stocks can never go wrong.
A simple strategy is to hold them in your Demats and observe them appreciating
overtime, while accumulating more of them on every large dip possible. For these
sound companies, their stock prices are nothing but a reflection of their
robust growth, strong businesses and the confidence that investors bestow on
their potentials. This goes out for the experienced investors, who have been
there and watched these stocks over a while.
What about the
inexperienced ones? We have a suggestion for them- ETFs like Nifty Bees. What’s
that? ETFs provide investment returns that correspond to the total returns of
the Index, in this case, the S&P CNX Nifty Index. By investing in them, one
needs to have some idea of the broad markets rather than hunting for single
stocks, hence they seem to be apt for those investors who are
time/experience/knowledge restrained and reward them with the benefit of
diversification and low cost. Does that mean we suggest you to jump into ETFs
at the very outset? Honestly speaking, being stockbrokers, we may not be keen
to suggest so. Also, due to overall unawareness, lower volumes and lesser
liquidity, ETFs may not be that rewarding for retail investors at the moment,
apart from a couple of deals like Gold BeEs and some large cap equity funds. So
we better adopt a wait-and-watch strategy for this financially innovative
product. Till then, our favorites would still remain individual multi-bagger stocks
that have been consistent value creators.
Moving forward to the
much talked about ‘Mutual Funds’. A diversified, professionally managed basket
of securities, mutual funds are said to be common man’s easiest resort to the
financial markets. Despite the numerous advantages associated with MFs, they
have somewhat failed to create a mark among the Indian investors’ portfolios.
The risk associated with MF investing, poor investor interest, higher costs and
lower assets under management have acted culprits to their success as compared
to the US MF industry, where every third person is a MF owner. Let’s tap them one
by one. Risk: If a large number of MF holders decide to liquidate their
positions in that fund, the fund manager is forced to sell out and reimburse,
thus resulting in the drop of the MF value. This might be the case despite some
of the individual stocks in the portfolio being under-valued and good picks.
Poor investor interest: The one thing an Indian investor would completely
detest is to pay taxes on every single penny that gets credited to his name.
The bad news is that you have to pay taxes on capital gains even if you
withdraw no money during that year. Higher costs: Mutual fund managers charge a
fee to cover their costs, which sometimes turn out to be higher than what you
plough back. The fund managers ought to be paid no matter how the fund performs
at the year-end. Low Assets under Management: Now let’s study some hardcore
data to prove that all of the above is correct. MF industry’s AUM have dropped
for 2 consecutive years straight, by 11% in 2010 and 5% in 2011 losing Rs.
36,000 cr. in FY12. In a nutshell, you might be allured by the promises that
some of the MF brands make, but to name a few- HDFC Mutual Fund, Reliance Capital
Asset Management, ICICI Prudential, Birla Sunlife MF and UTI MF have proved to
be the dark horses in this race registering consistent returns to their
investors.
Coming to the last bit
of this composition, no Indian investor is said to be complete without a holding
of Gold/Silver in his kitty. Till date, Commodities as an investment class was
either popular in the form of Futures Trading on an index like MCX, buying out
physical gold from a neighborhood jeweler and storing it in-house or investing
in Gold ETFs as discussed earlier. However, each of them is attached with their
own prejudices. In Derivatives trading, you usually have to square up your
outstanding positions before the contract expires, which might result in either
profit or loss booking. Physical delivery
and storage of gold involves risk of safety and warehouse costs. Gold ETFs are
usually expensive and do not offer Remat facility. How about the new e-Series
Spot Commodity investing launched by NSEL? For those who are not aware, all of
the above issues can be resolved by this brand new fabrication. Buy out
commodities you have faith in, like Gold/Silver and now even Platinum in
electronic form and keep the option of converting them to physical form handy.
No storage costs, no risk and no complicated NAV calculations. Sounds good?
Now that you are aware
of a gamut of investment opportunities that our markets provide us, do not
hesitate to explore them further. It takes time for an Indian mind to instill
credence in financial products, but at some point of time you realize it
becomes inevitable to probe in, with the growing importance of financial
markets in an emerging economy like ours. Apart from choosing the right
intermediary (financial advisor, fund manager, broker whatever the case may be)
who can professionally manage your funds and make your money work for you best,
open up your senses to make the right judgments, as that would definitely act
salt to your preparation and add taste to your fin-meal.
