On CNBC-TV18's special show â€˜The Informed Investors‘, Krishna Kumar Karwa, managing director of Emkay Global Financial Services and Harshvardhan Roongta, CFP of Roongta Securities answer investors queries.
The Indian market has been very volatile over the last few sessions. The Sensex was down 162.58 points and closed at 18,683.68 on Friday. The Nifty lost 52.50 points and ended at 5,686.25.
On CNBC-TV18's special show ‘The Informed Investors’, Krishna Kumar Karwa, managing director of Emkay Global Financial Services and Harshvardhan Roongta, CFP of Roongta Securities answer investors queries.
Karwa says it is important for retail investors to be consistently invested in the equity markets rather than trying to time their investments. “Over a longer period of time, they should be able to make decent returns,” he adds.
What's your pick this diwali: Gold ETF, coins or jewellery?
Below is the edited transcript of the interview on CNBC-TV18.
Q: What’s a good strategy now for a retail investor in general and a new investor in particular?
Karwa: Sentiments keep on changing. There are various reasons for that. But it is important for retail investors to be consistently invested in the equity markets rather than trying to time their investments. I think timing in the market is not so important as how much time do you spend in the markets. So, you will see positivity, you will see negativity. Today, the sentiment is good, it will go back tomorrow. But retail investors shouldn’t be so much worried about the sentiment, as far as looking to invest in the markets is concerned.
They should be looking at the fact that they have put an X amount of money into equity and consistently remain in the market. Over a longer period of time, they should be able to make decent returns. Just because the sentiment is up, you shouldn’t be so excited. Similarly, whenever sentiments are weak, I don’t think so you should be worried about notional mark-to-market losses on your portfolio.
Q: What exactly is retirement planning?
Roongta: The first and foremost is that you need regular income coming in, post your productive years of working. Once you start generating income, there has to be some source of income coming in. That is generally coined as pension. Hence, pension plans from insurance companies is one natural choice that a person has.
But if you look at retirement planning, we can break this up into two parts. One is the period in which you are going to be earning. If a person is of 30 years of age and his retirement age is 60 years, he has 30 years of working years and then he has post retirement years. If you take an average mortality of about 76 years of age or we take lifespan upto 80 years, he is going to live for about 16-20 years post retirement. For that he needs regular income coming in. So, we break this up into two parts. The first part is when you are earning. That is the period in which you need to save money and invest it in some form. That will generate the corpus at the age of retirement. You can deploy and park it in a fixed deposit or anywhere else, which will generate income for you.
Now, you don’t need to necessarily go through a pension plan offered by an insurance company only. You can accumulate corpus by investing even into equities. You can buy share. You can buy mutual funds, which have got equity as a base because you have a lot of time in your hand. Equities, over a longer period of time, give you the best returns. Then comes the time when you are at the doorstep of retirement. That is a time when you need to go safe with your investments. So, you do an asset allocation at that point in time. Decide where do I need to park my money and then start receiving income on that money. So, you could actually go and even buy an immediate annuity plan from insurance company at that point in time.
You do not need to commit yourself for an insurance plan for today itself. So, how do you accumulate the money is the point in question. That is where asset allocation needs to come in place. Considering how much time you have in hand, you buy either into equities or you buy into fixed return instruments. And then how do you distribute income is another step altogether. So, the myth that you need to go through only an insurance policy, which is termed and coined pension plan, doesn’t really hold good.
Q: How to select a sector to invest in, where to invest and what companies need to be selected for better returns in terms of equity markets?
Karwa: What is important, is that you should be having a balanced portfolio. Instead of which sectors to invest in, it is important that you are invested in two – four sectors. Your portfolio should not be overweight on a few sectors, because that could lead to negative returns if the sectors that you have selected are not the right sectors per se. So, most important thing is you should have a balanced portfolio across three-four sectors.
Another important thing is that when you are doing stock selection within sectors, it is best that you invest in the top two-three companies in those sectors being a first time investor. Choose one of those top two-three companies in the sector.
It is always very exciting to invest in the small caps and the midcaps, but please remember that when you invest in small caps and midcaps, the risks are also very high. Even if you have done a wrong sector selection, but if the company is the number one in that sector then it will be able to face the downturn and whenever there is an uptick in that sector, that company will be the first one to come up the curve.
So, it is very important that initially, when you are a new investor, you should always stick to the top two-three companies in that sector. These are the two important things as far as your initial portfolio creation is concerned.
Beyond that, it is very important to get into a regular habit of monitoring your portfolio and spending some time on a weekly basis trying to understand the stocks that you are invested in. You cannot create wealth over a period of time without putting hard work into it.
Q: I am married and have two kids. In next six- seven years, I don’t foresee any heavy liability. I stay in a rented house and I have purchased a house in other town for which I am paying the EMIs and that should continue for next five-six years. So, what should my strategy be for next five-six years with whatever disposable money I have?
Roongta: We have two-three parameters on which we request all our investors to put some mind upon. One is the risk of living too short. You have two dependents, your children. Now, if in case of some eventuality say, untimely death, how does your family take care of themslef? That is the risk of living too short, which is taken care of in the form of buying an adequate life insurance coverage. That is one thing you need to address.
Another risk is of living dead. Now suppose that eventuality was to happen, you meet with an accident and are completely disabled. The accident has not led to death. So, it has led to a situation which has rendered you completely disabled. In that case also, there is going to be a loss of income. How do you take care of yourself and your family during that period? So there is that event which you need to plan for. The third risk is of living too long, menaing retirement. That is a risk of living way beyond your earning age.
The fourth risk is of contingency and other moral obligations. You are duty bound as a parent to ensure that there is good education given to your children. So, you need to make some provisions. You need to first identify what do you want to save for; their education or marriage. Second, you need to know how much time doyou have from here on to save for that requirement. Third is, how much do you need to save.
Financial planning is when it is more specific to individuals. What may suit you,may not suit the person next to you. So, these are the broader parameters on which you need to see and evaluate your own finances. And then specific to your requirements, you need to put numbers and products to it. So that is how you should start moving from here on.
Q: My financial advisor advised me to invest into few mutual funds like ICICI Prudential Focused Bluechip, DSP BlackRock Equity. In blue chip, I am investing Rs 5,000 per month, in DSP BlackRock Equity Rs 3,000 per month. In Franklin India Prima Plus I’m investing around Rs 4,000 per month and HDFC Mid-Cap Opportunities around Rs 3,000. It is overall around Rs 15,000 per month since the last 3 years. So any changes required into this portfolio? How are they performing? Do I need to get out of something or put in something new?
Roongta: The schemes that you have selected, those schemes are good in their own category. Your funds are diversified, you have some money going into the large cap, you have a diversified equity, you have two mid-cap funds.
Now in mutual funds also, there are two kinds of funds broadly. One is an actively managed fund- all your investments that you are doing currently are going into actively managed funds. In actively managed funds, the fund manager actually chooses the companies that he needs to invest into and it is based on the objectives of the fund.
Another form of investing that specifically goes for a person who is probably new into equity investments is passively managed funds. These are called indexed funds. If you are investing in index fund, it will buy stocks that are exactly as per what is in the Sensex or the Nifty.
So, if there are 30 stocks comprising in the Sensex in a particular weightage, exactly that is what will be replicated in the mutual fund schemes itself. If there are 50 stocks in the Nifty, 50 stocks in that same proportion will be reflecting in your scheme. So, there is one portion of investments that you should always have into a passively managed fund, because you don’t have to track their performance.
If you are putting into Sensex you know that a Sensex since its inception has given about 17 percent returns. There is also a study, that says that less than 50 percent of fund managers can actually beat the Sensex or the benchmark index over a five year and above period. So, whether your fund manager is going to be able to do that or not, that you will realise only five years from now. What if he has not been able to? So you don’t want to be on the wrong side of the fence.
I very strongly recommend you to add one scheme that invests into an index fund. The total weightage of the investments that you are making, around 20 percent of that can be allocated to that. As India as a market develops and we become more mature market, you can increase the allocation into the index fund. You want a 14-15 percent return, which the index fund is giving you, so that will help you build your corpus.
Q: I recently read that new investors are being encouraged by the government not to go for gold and go for equity. I just wanted to know more elaborated information on that?
Karwa: Yes, this is the Rajiv Gandhi Scheme for promoting investments and it has recently been notified. So, I think there will be more details coming about in the various forms in which you can invest. So, I believe there will be some mutual fund schemes, which will be notified as being eligible for investments under the scheme. Then, there are also going to be some public sector divestments which will be routed through ETF route. It is a very good step to encourage first-time investors, below Rs 10 lakh of gross income to invest in equities.
Roongta: Basically, this scheme is for people who have never invested into equities at all in their entire life. So, the scheme is designed in such a form, that says that if your gross income is less than Rs 10 lakh and you can invest Rs 50,000, which will be given to you as a tax benefit. A 50 percent of that will be eligible for tax benefits. So, if you are falling into a 30 percent tax bracket, on Rs 25,000 you will save 30 percent tax.
Now you can’t just go and buy any stock of your choice. So,there is going to be probably an PSU ETF, which is going to be launched through the disinvestment proposal that the government is considering. There are going to be mutual funds, which are going to be coming out specifically offering this scheme. You need to be invested for three years into equities. Whenever you buy what you need to be invested for three years, within one year you cannot even sell what you have bought. So, whatever you have invested into, for one year you cannot move out of that scheme, you cannot sell that share also.
After this first one year gets over, then in second and third year you can sell. However, you will have to buy again into another stock or a mutual fund. And this benefit is going to be available only once in a lifetime because if you become an equity investor in year one, year two you are already an existing equity investor. So, this benefit is available only once in a lifetime of an investor.
Q: Even within an equity allocation, should there be any strategy on stocks that are paying dividends consistently or stocks that are growing well over a period of time?
Karwa: Dividend paying companies are an important criteria when you are creating a portfolio, because sometime it might happen that the stock prices may come off from what levels you have bought. But if a company is consistently paying dividends then atleast there is some income which is coming in. Over a period of time, such companies will make a comeback.
So yes, you should be doing the right balance between dividend paying companies. Even you are looking for growth. Initially, the companies may not be paying dividends because they plough back all their income for their growth purposes. So, it is also important to have allocations to high-growth companies. But yes, if you can do right balancing between dividend-paying companies and growth companies over a period of time, the portfolio will deliver good returns to you.
Q: I want to know the strategy to invest in equity sector-wise. And how to spot the growing sector?
Karwa: Economies go through cycles and at various points of time, there will be sectors that will be in flavour and that will not be in flavour. However, there are some sectors which inherently throw up a lot of cash flows for the companies that are in those sectors. So, if you look at FMCG sector, that’s a sector which is perennial at one level. Most of the companies because of the power of their brand throw a huge amount of cash flows and pay huge dividends. So, from a longer-term perspective if you have invested in a sector like FMCG sector, you will possibly see hardly any dilutions and probably more of bonuses and dividend etc.
Similar is the case with many of the pharmaceutical companies. Again, that is a sector which is more consistent in terms of growth. Currently the need of the hour for a country like India, is infrastructure. So, from a top-down basis, the sector looks very interesting. But the challenge in this sector is that companies in this sector continuously require huge amounts of debt and equity infusions. So, from a sector perspective, this sector looks very exciting. But from an equity investor perspective, will it continue to give you good returns over a longer period of time; the answer could be a yes or a no. Taking sector-wise calls, requires a lot of sophistication. So, we always try to advice our investors that instead of trying to figure out which sectors to be in at any point of time, it is better to be reasonably well diversified across sectors, so that over a period of time your portfolio gives you very good returns.
Q: How to select a good advisor who will give me good returns?
Roongta: There are two kinds of advisors in the market available today. The first one is the one who represents the manufacturer. This is the one who calls himself an advisor but is actually getting paid by the company in which you are going to be investing. There is a term for those kind of advisors- he is a broker of that company. This broker will be selling a product of that company to fit into your scheme of things and he has been remunerated by the manufacturer.
There is another set of advisors who are independent, who charge you a fee and recommend products to you. Now, having been into corporate world you would certainly know who is going to work in your favour. So, if there is somebody who is going to charge you a fee, he is going to talk about your interest. If a person is going to be paid through other sources, he is going to talking about their interest.
So, be open to the idea of paying for what you get. If you want good advice, be open to paying for that advice and the person will surely think in your favour. So, that is one criterion. You have to identify whether he is associated with some other company or is he going to be charging you for his remuneration.