CNBC-TV18's Informed Investor, in association with the National Stock Exchange, strives to narrow the gap between investors and their investments, so that their money is always working for them. But it isn’t always as easy as it sounds. Every investor has their own unique requirements and risk appetites and therefore it is imperative that every portfolio be designed keeping this details in mind.
This where Informed Investor steps in to help educate our investors about: Where to invest? How to invest? How to go about investing? And how much money should be devoted to each asset classes?
One of the things that we heard over and over again when Informed Investor series started is: "It's never too early to start investing". Therefore, the best way perhaps to put this into practice would be to encourage younger people to begin investing.
This week, Informed Investor is at the Monjee Institute of Management Studies in Mumbai and to interact with students, as well as professors here, to find out what is that they would like to know about their investments.
And helping us in our effort to create informed investors, two of the leading financial minds in the country: Rajiv Anand, MD & CEO of Axis Mutual Fund and Amisha Vora, Joint MD at Prabhudas Lilladher.
Below is an edited transcript of show achored by CNBC-TV18's Sumaira Abidi. Also watch the attached videos.
Abidi: I want to come and ask you one of the basic questions coming from a professor. They’re a group or a community that have a regular income, but perhaps not a very high risk profile. Are there any products that are directed at them or something that they could invest in?
Anand: One needs to look at balanced portfolio. One tends to put money away in fixed deposits for example and believe that that’s investment and fixed deposits on a post-tax basis are not even beating inflation. So, one needs to start investing surpluses with a balanced portfolio. You can have money in liquid funds, which give you day-to-day liquidity and at attractive returns and give you tax breaks.
You must have some money in equities — whether it’s 5-10-15% of your money — you must put some money in equities because that’s the only away to beat inflation. In the current context, like every other Indian, we must have some money in gold as well. Now, whether you buy gold in the form of physical gold or ETFs or gold funds, I think some portion of your portfolio in gold certainly make sense. Put it altogether and you’ve got regular savings.
Abidi: I want to ask you about the students. They are generally in a age group, which one would imagine would be a very high appetite for risk. This would translate to equity. But we did a lot of off-camera interactions with these students and we found that perhaps nearly half or about 52% odd of students weren’t willing to take risk even after conducting adequate research. There was a very negligible amount who described themselves as a real gambler or a risk taker. Where does the balance lie for someone in this age group?
Vora: I think that equities do have risk in short-term, but when you build for medium to long-term equities, have a tendency not to perform linearly. So, one-year will be negative, next year could be positive or balanced and third year can make up for the balance of the last two years plus the return on the debt. Now, whether that gets done in the third year or fifth year — so earlier you start investing your responsibility for regular income is less. So you can bide the time when the equity is not giving a very linear return and still manage to beat inflation and create wealth because equity is the only way you can create wealth.
Abidi: We are the management institute and one would imagine that students and professors here would have a higher analytical skills. Would they be better positioned, therefore I imagine, to analyze the news that comes in and the news flow on certain equities, stocks or whatever investment vehicles? Would you advice therefore a higher allocation to them because they are better able to dissect the news flow?
Anand: Being an Informed Investor is critical, especially when you are going into a fairly volatile asset class like equities. However, remember that you are not really buying the market; you are becoming a shareholder of a company. Therefore, you should do a adequate research in terms of what the company does, read the company’s balance sheet, have a regular understanding of that particular industry and so and so forth. If you can do that, you can over a period of time, be able to build a portfolio of high quality stocks. If you can’t do that there is really a very simple way to do it, you can buy into diversified equity mutual funds. We do that all the time. So, enjoy life have fun and outsource your money making to mutual funds that’s a good way to do it.
Abidi: Let that be someone else’s headache?
Abidi: If you start investing early, how can you then scale up investments with rising incomes, is there something that needs to be followed?
Vora: I would say that when you start investing early that is the time when probably your responsibilities are limited, your recurring income is met by your salary or whatever other remuneration that you get. So at that time, you can probably put amount into equity but as you keep growing, probably other classes of assets be it real estate, be it sometimes gold, as you keep growing further the debt part for complementing your regular income, which is what will keep coming in. The early investments into equity in your career would help build some reasonably respectable corpus.
Abidi: As we grow older like you are suggesting a good idea is to keep changing allocation to vehicles that suffice your risk or your appetite at that point in time. In fact, this is starting early is also a view that Debasish Ghosh who is the Head of Capital Markets Center at NMIMS is also echoing.
Debasish Ghosh: While they are in the programme, we do try to inculcate the habit of investing by exposing them to stimulated stock trading programmes. We try to encourage them to start investing in paper format not actual trading. We hope that after they go through that experience, they actually start investing. Once they are working, we expect them to invest initially in largecap stocks, that is what we say that is risk-averse kind of investment. As they start making probably initial money by making investments in some largecap stocks, probably then they should look at midcap and smallcap that is the way we have been trying to propagate the equity culture.
Q: I have invested around Rs 1.5 lakh in two stocks and mutual funds, so my current savings will take me through for the next six months. Given the current market scenario, should I sell my stocks now or wait for another six months to liquidate them?
Vora: Equity returns cannot be linear. So the next six months could be difficult in terms of getting good appreciation for your equity investments. But this will be the time when one should invest in equity for very good long-term return particularly in a country like India next six-eight months will be the time to invest. So depending on how much that you need for your regular income support, you should withdraw. I don’t think you should take out money from the markets.
Q: As an amateur investor, what are the parameters one should look upon while investing in equity?
Vora: Worldwide, it holds true here too that equity investments and capital flows for equities typically chase growth. So you are investing in equity for growth so while you select a sector or a company, you are definitely looking at growth. What is the growth potential but growth becomes sustainable only when the business throws some cash. So these are the two things I think you should focus. One is while reading whatever balance sheet or any reports, what kind of growth either an analyst or the management itself in the balance sheet, management discussion is projecting. The second important thing is go through the cash flows, is the business generating any cash and what are the return on equities.
Abidi: What are the parameters that you need to look out for in equity? What would be the parameters to select the mutual fund?
Anand: I think what Anisha Vora spoke about how you would select a company. You take that one-step forward, it is about how you select entire portfolio of stocks and the aim of every fund manager and similarly every investor is to be able to be the market or to be able to generate absolute returns over an extended period of time. Therefore, the way we do it is look for sustainable long-term businesses with high return on equity, which are available to us at reasonable valuations.
The entry point in that sense of when you are buying into a particular stock is also very important The biggest virtue that you can have as an equity investor is patience. Equity gives you multiples of returns not percentage of returns. I think for you to be able to get that, you have to be patient and it will come to you over an extended period of time.
G Raghuram, Professor, IIM-A: Currently, my investment strategy is pretty simple. I look at it from the point of view of conserving my time. Going for convenience, most of my money is actually in fixed deposits. In the early years of my career, I did go for some equity investments. But there again, my objective was to invest essentially in the transportation and infrastructure sectors because that way I would be directly studying organisations, which also fall in the realm of my professional interest. I have some stocks in Transport Corporation of India, Shipping Corporation, L&T, and Reliance. While I may have a temptation to invest in stocks again in the general realm of infrastructure and transportation, I don’t have the time and the necessary research to see what would be an appropriate investment?
Vora: For those who do not have time and they still need to grow their wealth, should go through the mutual fund route. Affinity to one sector will not be the right strategy because knowing a sector from some other perspective, but the financial perspective and market’s perspective is very different. So, he needs to really diversify his equity investments through either any diversified equity mutual fund for sure and should not keep that exposure only into 3-4 limited stocks.
Anand: The other point that he made was he was basically using fixed deposits because it was convenient probably buying is close to him. I would urge him to look at debt mutual funds, liquid mutual funds, which are very convenient, the returns are reasonably attractive from an income perspective. Most importantly, there are tax advantages as opposed to fixed deposits, which are available in liquid funds and income and debt funds. In that sense, it makes sense for you to take advantage of those tax breaks that are available. So I would certainly urge him to look at some of these instead of fixed deposits.
Sampa Ray Bagchi, Assistant Professor, Dr. Kanailal Bhattacharya College: My investment usually centres around health and education. Can I invest in money market fund in place of emergency funds since they are considered to be more liquid? In case of mutual funds, is it safer to invest in fund of funds, though they charge a bit higher?
Anand: A liquid fund is absolutely the perfect place to put your emergency money, your returns are reasonable, there is a tax break available and liquidity is available to you pretty much on an overnight basis. So yes, please do use liquid funds for your emergency requirements. If you are really looking to buy a diversified equity fund, you can just go and buy the fund itself and not necessarily a fund of funds.
One of the fund of funds that is quite popular in India is where mutual funds have launched a fund, which invest in gold ETFs basically to simplify the way to buy paper gold. So that is one fund that is quite popular, but otherwise if you are buying into an income fund or a diversified equity fund, I would argue that you can buy the fund directly.
Q: I am a risk averse investor and I prefer alternate investment in real estate because I think the population is increasing really high and it is forecasted to increase. So the demand is comparatively high than the supply of land in India. So according to my research, around 25% is a return on investment in real estate. So what can be my incentive if I want to shift a little bit of my portfolio towards a more liquid market in equity?
Anand: While I appreciate the point that you are making in terms of real estate and the fact that it could do well you need to be well versed in that sector, you need to buy in an area, which will grow as we go forward. Secondly, you have to make a choice of whether you buy a land or a flat or a house. Finally, you also have a construction risk, which means that if you are going to buy into a soon-to-be-made building what is the probability that the building could get stuck for various reasons whether it’s regulatory or the builder has got into problems etc. So yes, it could deliver 25% CAGR, but the attendant risk on your portfolio is also very high. In that sense, what we have been discussing so far is really to run a diversified portfolio, you must have some of your investments in real estate. But certainly don’t put out your eggs into one basket, put some money into equities, put some money into fixed income and certainly by given the state of the world that we have today certainly buy into some gold.
Dr Bhalchandra Mungekar, a Member of Parliament and also former Vice Chancellor of the Mumbai University: Basically I am more a saver than an investor because throughout my career hardly there was sufficient money for investing and whatever was little amount I could save rather than invest.
Abidi: What was your first investment and how much did it yield and if you could go back and change it, is there anything you would change about it?
Mungekar: Basically there are two considerations so far as investment is concerned. One is getting sufficient higher rate of return and second is safety. From this point of view, after I became Vice Chancellor of University of Mumbai somewhere I think May 2000 and getting some reasonably good salary compared to salary of professor in the Department of Economics of University of Mumbai, I think the first investment which I made was in the bank's fixed deposit.
Even today, to the best of my knowledge whatever we have got little savings those have been invested mainly 90% or so in the fixed deposits of nationalized banks and whatever little is remaining which we don’t want immediately for our daily expenditure has been invested in mutual funds.
Abidi: Also a higher education is increasingly becoming very expensive and a lot of students have to take loans to be able to afford it. Is there anything you would like to tell them regarding how they should balance between repaying that loan and also managing to invest some part of their income?
Mungekar: According to me, the government should prepare a complete logistic plan, there should be gestation period in the sense that students completes his or her education till he or she gets the job at least there should be a period of moratorium for one year or two years during which students should not be unnecessarily bothered that you must make the repayment and likewise.
Under any circumstances, there should be a streak, vigilance and bond between the government and the student because there should not be any kind of default and we know that there are non-performing assets of the PSU banks. The question is if you are taking loan from the government and the government should give liberalized loans for higher and technical education because that is what is we require - skill pool, we are talking of demographic dividend, you cannot get demographic dividend without sufficient investment. According to me, the government should prepare a contingency plan in the case of non-repayment. I don’t expect any kind of non-repayment from the students because that will be moral fraud if students are taking money but then repayment of the loan as well as whatever little amount they could be able to save but they must give preference to the repayment. The money is given to them in form of the education loan by taxing people, money is not coming just from currency notes being printed by the Reserve Bank of India (RBI).
Abidi: I know you were instrumental in formulating the higher education loan guarantee scheme, are you satisfied with the way that things have shaped up?
Mungekar: In 2007, I suggested to the planning commission that since education is becoming increasingly privatized and to the lower middle class and to the middle class students, finding education non-affordable. I suggested to form higher education loan guarantee authority where upto Rs 5 lakhs loan will be given free of interest and then without collateral security. Thereafter, concessional rates of interest upto about Rs 10-15 lakh and then not at the market rate of interest that is why I am very happy that the government has recently taken a decision to form higher education loan guarantee authority with initial capital of Rs 5,000 crore.
Abidi: You have spent last fiscal year as a teacher and you have been interacted with a number of peers and contemporaries. What is the most common stumbling block that a lot of teachers face regarding investments?
Mungekar: Teachers are not an exception. Teachers nowadays have developed interest in earning money, a good sizeable section of teaching community at the secondary and college level go for private tuitions, they invest their money. But by and large, there should be certain training courses, small training modules and workshops in order to enable the teaching community how to invest in a better possible manner. I think that is now being done to some extent, teacher themselves are organizing workshops but I think it should be done in a professional manner. At the larger level, national economy will also benefit and economy will be on the sound rate or growth trajectory.
Rama Subramaniam, Principal, DAV Higher Secondary School, Chennai: I invest 30% of my salary. Instead of diversifying my portfolio, should I invest in hybrid or balanced fund?
Anand: I think most diversified funds would have portfolios, which to a certain degree, would mirror index typically the Nifty or the Sensex or the BSE 200. So in that sense, a diversified fund is a good entry point if you want equity exposure on your portfolio. The question was about using balanced funds. Balanced funds is – you can do it either on your own or you are in a sense getting the best of both worlds because the world of fixed income as well as equities in one fund and there are some balanced funds, which have delivered fantastic returns over the last five-ten years. I think balanced funds should find a place in most investors’ portfolios as well.
Hari Parmeshwar, Visiting Professor & Corporate Trainer: Safety of investment is my first motive followed by assured returns on savings, and of course, tax avoidance. Risk taking is virtually nil, keeping these three parameters in mind. Apart from that all the tax saving schemes including infrastructure bond, and thereafter, is the remaining savings is in fixed deposits with banks. This savings plan is definitely not taking care of inflation, safeguard against inflation, erosion of savings in incomes is to participate in the equity market but then where do I get my information from?
Of course, there are a lot of newspaper columnists who write in the newspapers. Last I remember, they said the equity market will touch 20,000, it has gone down to 16,000. None of them were able to predict the rupee decline, there are so many imponderables, so how does one judge this stock market, should pension funds invest? In the US, it is almost 50% of the pension funds, and in India, there is great pressure for asking the provident funds and pension funds to enter into the stock market coming from the Prime Minister as well as the chairman of planning commission, deputy chairman of planning commission. But then, this is the savings of the working class, is it appropriate that this should be subject to market risk?
Vora: I think for investments you don’t need to go through the plethora of information, which is available through different channels. It is for trading that you need to keep track of some of these things. Also, it is for trading that you need to worry whether my portfolio today is less than what it was yesterday or what return it has given. First, we need to clearly understand the difference between investment and trading.
Abidi: What about pension funds; is that advisable? There is an ethical question of whether pension funds should be investing in what most people described as a volatile asset class?
Anand: I would put it differently that my monthly savings, which is going into a problem fund is actually going into fixed income. This money – I have been working for twenty years, and hopefully, I will work for another fifteen-twenty years is long-term money and that is going into fixed income, which is not even beating inflation. If that money had gone into equities, I would have been much richer than I am today.
So I think pension funds is a pool of money that some portion of that money whether it is 5-10-15% of that money must go into equities such that citizens of this country are able to beat inflation over a long period of time.
Q: Gold has risen to new heights few days back. Is it still considered a good hedge against inflation? Is it a good time to invest in gold?
Anand: I don’t necessarily look at gold as a hedge against inflation. I look at gold as insurance in my portfolio. What it really means is that when there is serious turmoil in this world, you will find that the one piece of a portfolio that will hold value is gold. Clearly, we have seen that that play out since 2008. Secondly, as we are seeing more and more quantitative easing or pumping of liquidity into the system by various central banks across the world, there is a sense debasement of currencies. Therefore, people are buying into real assets, real estate, gold etc. to be able to continue to hold value on their portfolio.
Q: In today's market, if you compare today’s stock market to the 10 years back, there is a lot of pull of institutional investors like FIIs and mutual funds. In such times, how will the retail investor gain confidence?
Anand: I think this is a phenomenon that’s playing out globally. Equity markets are getting institutionalised. So which means that retail investors are finding various vehicles to enter into the market particularly globally it’s hedge funds and into mutual funds and pension funds.
In the Indian context, you have mutual funds, which give you that vehicle. At the end of the day, the institution will always have better information, better capability to transact on a markets will have much tighter pricing for transacting on the market places well. Therefore, it does make sense to piggybank of that expertise to be able to benefit from the markets. Globally, even governments really do want to institutionalise the equity markets and want retail investors to come through these various vehicles, there is insurance, mutual funds, hedge funds.
Q: Some stocks of blue chip companies from long-term perspective, the equities have non-linear payoff pattern. Sometimes when the scrips go bearish, I try to accumulate those stocks and when it goes bullish I try to sell-off those stocks. So my question is exactly when to get in and when to sell-off those?
Vora: Typically, the answer is there is no time frame when to get in and when to sell-off. But very broadly, till the time the stock does not correct more than 20%, one can assume that it is still in the trend that it was into. When it corrects more than 20% is definitely the time you should review your investments because you are following a system of buying at dips, buying at declines. But all the declines are not always for buying, so you need a very strong review. While selling, it is not always a strategy when it touches a new high you should sell, it shows that probably it has much more potential to go above, but this may just help the strategy to keep on averaging your cost.
If you are still keeping into that stock and you buy at decline or book a part of the profit your average cost keeps coming down and you still remain married to that particular stock, so for that, that strategy is correct. But these are the two cautions that you should apply to and there is no exact time.
Q: What are your views on the India’s growth story? Recently we read that Fitch has downgraded India’s investment rating and it is feared that the euro zone breaking could affect India in a very bad way?
Anand: I am a believer of an India growth story. I think what we have seen over the last couple of years really has been in a sense everything that could potentially go wrong has really played out. But if you look at the core fundamentals the demographic dividends, the fact that we have got to spend trillions of dollars building infrastructure, the fact that consumption continues to be a large part of our economy. I think are not trends that are playing out on a yearly basis, but on a decadal-basis. So the India story will play out albeit and we are a noisy democracy. It will play out with volatility, but I think the long-term trend clearly is up.
Q: Stocks do not perform in a linear manner. After the market crash we saw in the year 2008, some of the stocks have still not got back to the price they were before the market had crashed. They are not even at half the price they were at that point of time. So what is your advice for those stocks? Should we hold onto them? Should we buy them further and what is your advice for that kind of stocks?
Vora: I think that what has happened in the last 3 years is interest rates have been firming up. Typically, most of the midcap and small caps were the balance sheets are more leveraged and the businesses are not generating cash because they are in the stage where they are growing. The interest burden has really killed these companies’ profitability because of which they have not yet recovered in terms of their profits and their profit graphs has been declining. This is being mirrored by the stock prices.
Now it will be very difficult for me to give you a very generalised answer as to where you should hold on. But there will be pain for some more time before the interest rate cycle completely turns because right now we are not even seeing that inflation cycle is evening out. It’s after that that the interest rate cycle will fall and some of the mid caps will start to benefit, now this could be a wait of 3 months to 1 year, difficult to gauge at this point in time, depending on your urgency to encash you can take a decision. At the same time, if there are certain companies, which are in a very high debt-to-equity proportion you may shift them to a slightly better companies that will help you gain a bit of the appreciation.