The government has taken a lot of bold measures over the last many days. That has provided impetus to the Indian market.
On CNBC-TV18’s special show ‘Informed Investor’, Dipan Mehta, member, BSE & NSE says the economy will start improving gradually because of government’s actions.
According to him, over the next three-six months or so, banks will start doing well. “Banks may again regain their leadership position. Second, I think capital good manufacturers also may start doing better. So, it may be a good idea to buy stocks like Larsen and Toubro or even BHEL,” he adds.
Within the banks, he says, the preference should be for private sector banks like HDFC Bank, Axis Bank, Yes Bank, and IndusInd Bank. He also feels a large percentage of the portfolio still should be in the FMCG companies, software and pharmaceutical industry.
Below is the edited transcript of his interview.
Q: When first time investors want to enter equity markets, what is the good rule of thumb for them?
A: We suggest a rule of thumb to all our investors. It is devised by the founder of the Vanguard Mutual Funds, largest mutual funds. Subtract your age from 90, that percentage of amount should be invested in risk assets, mainly equities. That is a good thumb rule to start with.
I would like to add one thing before you start investing in equities, it is very important to be yourself financially secured. Peter Lynch who was the fund managers of Magellan Fund said, ‘Before you start looking at buying equities, buy a house atleast.’
Make yourself financially secured and make sure that all your immediate financial commitments are taken care of. You don’t require that money for three to five years. You should allocate that money towards equities and try and be committed to it. Buy equities through the ups and downs of the market and you will find that equity is a magic.
Q: Investor had stock of ITC and that was age old with my dad. What happened was, we saw that ITC was not moving ahead for quite sometime - 11 months and so and in this time real estate prices were going up. In 2010-11 the time came that the ITC hit the all-time high. I thought this is a good price to sell, maybe it will come down. I will invest this in real estate. While I did that, I sold the stock and immediately I saw that instead of going back the ITC went up. While I was trying to invest in real estate I again tried investing back in ITC. So, where do you see this stock going up awhile?
A: That’s a billion dollar question to figure out when is the top, when is the bottom. ITC has been a great performer. It generally delivers a 15-20 percent kind of an earnings growth, which means its profits grow by 15-20 percent at an average. It has been doing that consistently for 30-40 years now, because people keep on smoking and the younger generation keeps on growing and as affluence increases people move from beedis to cigarettes.
So, they have a fabulous business model which grows by 20 percent every year. Because the profits grow by 20 percent, as a thumb rule, whatever your profit growth is, that will be the increase in the stock price. That’s the thumb rule over 5-10-15-20 year period. So, ITC per se is like your fair weather friend or ultimate friend. You can keep on buying it whenever you have some money set aside. It could be among the top holding which has been for you in your portfolio. Although in some cycles you may see the stock price correcting, but by and large it is still on a fabulous upswing.
Q: I wanted to know about the economy as such in case if there is a point in time when the government wants to actually bring in FDI in aviation, basically increasing the percentage of FDI, media and any of these sectors. At that point in time what should one do as far as investing is concerned? Should we look at those kinds of sectors? Do you think there will be an upswing in terms of share prices going up in those sectors?
A: The sentiment is driven by what the government does. Sentiment is a very important thing in the stock market because if the sentiment is good then stock prices tend to move up and that has got some correlation with the economy also. But by and large, these are headline news which an investor can best avoid. So, if you read that there is FDI in aviation or FDI in retail, by the time you as an investor come to know, stock prices have already run up. So, Pantaloon or maybe a SpiceJet or Kingfisher has already run up so it doesn’t make sense chasing those stocks.
If you are a new investor, as a general rule, maybe go through a mutual fund. If you want to still try and do it by yourself, then try and buy the large companies which have got very large market capitalizations and which are representative of the economy. For example, banking sector is a good place to start with, because everybody uses banks. Banks are really large companies and they do well when the economy does well and they do badly when the economy does badly. So, if you believe in the Indian economy the best place to start is with the banks.
Next is all these fast moving consumer good companies maybe a Hindustan Unilever, ITC, Colgate or nowadays you have Marico or even Dabur. These are items of mass consumptions. Despite the ups and downs, people generally tend to consume all these various products. So, that could be a good industry to be invested in. But a good way to go about is not look at immediate headlines, but look at the larger picture that banks would do well if Indian economy does well. Even if the economy does not do well as well as you thought it would, at least the fast moving consumer goods, the companies which make food products and cosmetics and toiletries, they will continue to do well, so you could invest in them.
Also, because the rupee has been falling, technology companies also tend to do well. Allocate it more or less equally to these sectors and then look at the best companies in the sectors that you invest in. It is a good point to start getting yourself in sync with investing in the stock markets and then see how it goes.
Q: Every month, the investor saves a portion of her money from her salary account and shift it to another account. But she doesn’t know where she should invest it because she doesn’t want to lock it for a very long period. Also what can be done in emergency cases?
A: My advice to the investor would be to go for something like a balanced fund. What a balanced fund does is that it takes 50% of its money and invests in debt products and 50% it invests in equity products and that is a thumb rule. But depending on the markets circumstances, they change the ratio from 50 to 40: 60, even up to 70%. So, you could look at one or two balanced funds. All the major fund houses offer these balanced funds, keep on investing in it every month. They also offer SIP product which means that from your salary you can allocate every month without you actually cutting out a cheque, they can take the investment from your salary account or your bank account.
When you are investing in a balanced fund, you get the benefit of the upside whenever the equity market does well but there is no lock in. If you need the money for any point of time for some emergency or whatever, I guess within 48 or 72 hours you can liquidate the holdings and they would be more than happy to credit the same amount to your bank as well. So that way you can benefit of riding the upside which may come in the equity. At the same time the returns are steadier because large portion is also invested in debt products so that keeps on earning interest for you to the mutual fund. That will be a good idea for you.
Q: People keep on saying invest in right stock. What is the definition of right stock?
A: Right stocks differ from time to time. Sometime some industries do well and then they do not do as well and the companies over there tend to disappear or perform very badly. But as a thumb rule, what you can do is that look around you, what is doing well in this country. Different sectors will do better than other sectors. So, if you identify the right sector that 70% of your work will be done. Then you invest the best one or two top market leaders in that sector so you are completely fine with that.
Only one rule over here is that by and large, in your position, I would say go for the largecap companies, go for the index stocks. The mistakes people make is that they do one short in and one short out you should avoid that. Even if the stock price is rising try and average on the way up, try and average on the way down. Same should be done with your selling strategy - average on the way up, average on the way down. That way you tend to avoid having a situation where you buy and then in three days or one week the stock prices fall.
Q: What is the future of power sector in India?
A: Power has a brilliant future in India and it should do well. But ironically, it is one of the industries where there is so much of government interferences that the companies operating in the sector have not done very well. The projects have got delayed because of environmental clearances or because of other government related issues or they haven’t got the linkages for coal or gas or whatever. So, by and large in the stock markets, power utility companies have not done so well.
The capital equipment, the company which supply the power equipment, they also haven’t done well because power projects have not gone on stream or there have been delays over there. So, while it is a great sector and it has got a bright future, but because of the basic structure of the industry, it has tended to be a very poor wealth creator. My advice would be to avoid the power sector.
I can tell you one quick story. Over the past 100 years, across various geographies, across various economies, the companies which have created the maximum wealth are the ones which have been asset light, which have not taken too much capital, which have got some brand or which have got some technology or which have got some relationships, anything but capital. If you see in the US the biggest wealth creators were the Proctor and Gamble, maybe the IBM and now Apple we have seen.
In India the biggest wealth creators have been the ITC, Hindustan Unilever. Lately, we have seen the banks like HDFC, HDFC Bank doing well as well. If as a thumb rule, you avoid companies which require too much capital which take on too much debt, then over a five-ten-twenty-thirty year period you will easily have outperform the market. Power is one industry which requires a lot of capital and in India capital is scarce, interest rates are high so I don’t know how whether it will do even in the short or medium to long term.
Q: If somebody wants to invest consistently and continuously a small portion for a long period of time, let’s say for a goal of children education for 5-10 years, would mutual fund be the best option to invest?
A: You have answered your own question. Mutual fund is the right vehicle for you and SIPs is the right way to go about investing. It is only that I would just urge you to have the willpower to continue with the SIP through the ups and downs. The common mistakes that we have found is that when the markets are really tanking and there is complete gloom all around and there is absolutely complete desperation, then even the most hardened and the most loyal investors tend to feel a bit shaky.
Then they kind of stop their SIPs and don’t invest at the absolute bottom. Who knows when the bottom it, but if you continuously follow the SIP, you will catch the bottom at some point of time. That is the point of time which really delivers the return for you over the long-term.
So, go for an SIP but go with your complete resolve that come what may, even if there is worst case situation, if there is a famine, if there is a war, if there is deep recession, even if the euro breaks up, whatever be the circumstances, you will continue with your SIP. If you have that kind of resolve and conviction then there is no way that this stock market cannot earn money for you big time.
Q: A lot of people ask us that when I am selecting my mutual fund, they go through their ratings and stuff like that. But what option do they select? Do they go for dividend reinvestment, dividend yield or growth? For someone like him what would be a good option to choose?
A: I think dividend reinvestment. Typically he is putting aside a small sum for a large payoff 5-10-20 years down the line. So, why do you want the dividends as well. Let that also get reinvested.
Q: Investing in gold is good option now, because it is already on peak and since Diwali is on the way. So is it still expected to rise?
A: Gold has been a great investment for a long-term 5-10 years or thereabout. But I think in the immediate short-term, I would advise against investing in gold. By and large, with the way the developments have taken place in the global markets, some of the risk has gone out of the global markets, which means that break up of the euro or US defaulting or some run on major economies, those risks have come down. Therefore, the demand for gold or the importance of gold also has come down at least in the immediate short to medium-term.
So my view would be that just stay away from gold for the next maybe few months or so. But, at the same time I do feel that in a person’s savings basket, some amount of investment should be in gold, maybe 2-3-5 percent that’s up to you, because end of the day it is like an insurance policy. If something were to desperately go wrong in the financial world or in the global markets, gold will always do well. That will balance your returns which you were expecting from your savings pool. So, maybe not start investing right now, but just as you would try and invest in a SIP manner in equities, it would be a good idea to do that in gold as well, but when you have seen a slight correction maybe six-eight months from now.
Q: For last two years, since the market was in very bad shape, investor stopped investing. The investor wants to know which sector is going to be a hot sector in coming six months or an year?
A: Right now, if you see over the past 18-24 months or so, the consumer oriented companies have done very well. Over the past 6-12 months, the export oriented companies have done well. My sense is that gradually the economy will start improving because of all the various government actions which have been taken to get the economy going, to get the projects on stream and to get corporate sector to start investing in the capital expenditure. My sense is that over the next three-six months or so banks will start doing very well. The banks may again regain their leadership position and second I think the capital good manufacturers also may start doing better.
So, it maybe a good idea to buy stocks like Larsen and Toubro or even BHEL on the capital goods side. Within the banks, the preference should be for private sector banks like an HDFC Bank, Axis Bank, Yes Bank, IndusInd Bank. So, that maybe good sectors which may deliver some kind of outperformance. I do feel that a large percentage of the portfolio still should be in the FMCG companies in the export, software and pharmaceutical industry. Then some amount of percentage one could look at buying banks and capital good manufacturers.