Oct 16, 2012 02:49 PM IST | Source: CNBC-TV18

Maintain investment discipline to ensure superior returns

A lot of companies are now taking initiatives for their employees and Sobha Developers is one among them. CNBC-TV18‘s series Informed Investor, which aims to help retail investors make better financial decisions, met employees of Sobha Developers to find out their investing patterns.

A lot of companies are now taking initiatives for their employees and Sobha Developers is one among them. CNBC-TV18’s series Informed Investor, which aims to help retail investors make better financial decisions, met employees of Sobha Developers to find out their investing patterns.

At the time of its IPO, Sobha Developers reserved a quota of 10 per cent of the total equity for its employees. Incentives and benefits upto Rs 50,000 were given per employee to participate in the company’s IPO where Rs 56 crore worth of shares were reserved for them.

Explaining its investment initiatives, JC Sharma, Vice Chairman & MD, Sobha Developers explained, "As and when the Budget comes in February, we ensure that all our employees are communicated with the kind of savings and what kind of instruments they should take to ensure that they can invest wisely on those schemes and save tax."

Also, given that the company is primarily into real estate, employees are given the maximum possible discount to buy a Sobha home.

An audience poll conducted by CNBC-TV18 suggested that almost 50 per cent of the employees are somewhat comfortable with stock markets or mutual funds. But an equal number said they are not at all comfortable while a minuscule 8 per cent said they are very comfortable.

Most people said they have most of the money still finding its way to traditional bank fixed deposit.  A mere 4 per cent invests in gold ETFs, which is in contrast with a whole lot of people interviewed so far, who are now beginning to favour gold ETFs.

Also, 16 per cent of people favour insurance investments. Currently, about 44 percent of people invest under one lakh, which ideally qualifies only a stack saving. The active wealth creation between Rs 1-3 lakh surplus annually is done by about 40 per cent and the real aggressive investors are about 8 percent.

CNBC-TV18’s expert panel consisting Ambareesh Baliga, Independent Analyst and Uday Dhoot, Deputy CEO, International, Money Matters, talk to Sobha employees to solve their investment queries.

Below is the edited transcript of the interview with CNBC-TV18.

Q: If you look at India as a whole, things seem to be on the mend. There is some amount of liquidity that is also coming in maybe because of global sources. Do you see the return of retail investors, therefore, into the equity market?

Baliga: I do see the return of retail investors but I don't expect them to come back in droves tomorrow just because things have changed. After this four year of bearish stage we have been in, it will take a while for these retail investors to come back.

Unless they see that the market holding up at higher levels, I don't expect them to come back so soon. But hopefully, if things look better, I suppose in the next 4-6 months, you should see retail investors back.

Q: If retail investors are not participating in the equity market, there are still investments that are being done. A lot of it would be finding its way into mutual funds or other products, can you take us through the other gamut of products that are available besides the very obvious choices that people are making?

Dhoot: If you look at any investor in India, typically it starts with tax saving. So when it is tax saving, the traditional ways are first you go in for insurance, you go for PPF etc but most of the people are basically stuck in insurance. There is a lot of money which goes in insurance. The recent RBI report said in the last few years, investor interest is more towards physical assets by way of real estate, by way of gold and not necessarily towards financial assets.

Retail investors typically go in when the party is getting over and then get stuck and move along. But I think what people need to do is to know one’s needs and then begin financial planning in terms of identifying what is the right product.

Q: Most investors following the traditional method of investment and choose to buy gold physically than invest in ETFs. Do you advise that ETF is the best form or to buy it in the physical form?

Dhoot: In India, gold has a lot of traditional value apart from the investment value that we have been talking about. Indians have been investing in gold for ages. But from purely an investment perspective, gold, for us, is nothing but like insurance in your portfolio. When will gold do well? Gold will do well when everything else around you is not doing so well.

Gold, otherwise, gives you no regular returns. There is no interest or dividend coming from gold. So, gold is purely a hedge against uncertainty. Now look at traditional investments, we have all been buying physical gold now. If you look at today's investments, you can buy gold through something called ETF, which is nothing but an Exchange Traded Fund (ETF), typically a unit of that gold ETF approximates to around 1 gram of gold.

You can buy even if you do not have a demat and trading account. You can buy gold through mutual funds as well by way of gold savings fund. Typically, these gold savings fund, in turn, invest in gold ETFs. In this way, you get exposure to gold from that. The good part about this gold is that all of this gold is backed by actual gold in banks. So, it is a fairly safe way of investing in gold.


The other advantage of having gold by this way is that the whole jewellery cost is not there. Typically, a lot of people go and buy gold from the bank. We have seen buying gold from the bank can be very expensive. Buying it from the financial market could be much cheaper for you. Taxwise, it is much more efficient.

If you sell this gold after 12 months, you typically pay a long-term capital gains tax. Otherwise, if it is physical gold you have to hold it for a period of three years, only then, it becomes long-term gains.

Q: Before the financial crisis, I had done a portfolio investment in one of the leading banks who is awarded many times in the private equity. I was under the impression that I would get decent returns. However, at maturity, what I got was a paltry Rs 5 lakh when I had invested Rs 12 lakh. It was disastrous. How can a retail investor read the news flow that's coming in and associate it with the equity that they own currently?

Baliga: One thing, which is normally said in the equity market is ‘buy low, sell high’, which also means that you need to time the market. But timing the market is next to impossible. I don't think anyone can really time the market and buy at the right time and sell at the right time. You are doing somewhere in between.

For someone like you who cannot invest too much of time, the best way ahead is systematic investment plan. This actually helps you average out the ups and downs in the market. For example, if someone had done a SIP over 4 or 5 years, it actually balances out the investment. As far as the news flow is concerned, if you don't have a large portfolio, it is much easier for you to keep tab on your investments.

If you have a 50-stock portfolio, it is very difficult to keep a tab on news items and news flows on all 50 stocks. If you can't keep a tab on your stocks, you won't really know as to when could be a good time for you to exit.

Typically in equity portfolio, I don't think you should have more than 15-20 stocks, surely not more than 30, so that you can keep a tab on the news flow and act based on that.

Q: How is SIP better than lump sum investment?

Baliga: SIP averages out your investment either on the way up or on the way down. When you invest in a particular stock or in mutual fund, your expectation every time is that it will move up and you will get profits. But that may not be the case.

You could have the value or the stock price coming down. In that case, you are losing out if you have invested whatever you want to invest at one shot. By investing in installments, you are able to average on the way down. At the same time, if the stock moves up, you are also able to average on the way up. Anyway, your initial investment is making money plus your future investments also continue to make money because the stock is moving up.

Q: I have an investment of around Rs 87,000 annually in insurance and around Rs 25000 in infrastructure bonds. I am left with around Rs 5 lakh every year to invest. Can you give me a thumb rule in terms of the timing and may be the apportionment of the savings into various investments so that I can take care of my future plans, which may be marriage, taking care of my ageing parents etc?

Dhoot: It is very important to understand how and when do you need the money? When you say medical emergencies for my ageing parent, you need a kind of investment that can be made available to you readily in 1-2 days notice. You need to keep aside Rs 2 lakh kitty which is available at any point in time. For such an investment, choose something which is very safe, very liquid, not any long-term product.


As regards marriage, if you are planning for your wedding, which is 10 years from now then you can plan your investments accordingly. But if you are planning to get married two years from now, there is very little risk that you would like to take because you would not want to decide which hotel your marriage happens depending on your portfolio size.

SIP is a great way to building your assets. SIP is just a mode of investing, it is not about equity investments. SIP is just about bringing in the discipline in you. They say that you don't see it, you don't spend it. So let's say if the salary comes on 31st of every month, make sure on 1st, a good chunk of what you want to save gets stepped aside out of your bank account into your investments.

These can be liquid funds, debt funds, RD - everything is just an SIP. Put it aside and then plan depending on your time when you actually need the money, what kind of growth you need from that money.

Q: How do you choose the right equity mutual fund because currently there is a plethora of equity mutual funds? Is it advisable to diversify between the equity mutual funds? Should you stop investing in an equity mutual fund when a fund manager leaves?

Baliga: When the fund manager leaves, it is a very important criterion. If you will look back and see the performance of number of mutual funds, when the fund manager has left, the performance changes drastically. So, one of the important criteria clearly is the past performance, with that fund manager because a fund manager makes a lot of difference.

At the same time, I would suggest that you should look at more of a diversified mutual fund than sector specific or some theme based mutual fund. The theme just lasts for possibly a couple of years and does not really last beyond that.

Q: What happens when a fund manager violates the mandate of that fund? What does a person do then?

Baliga: If the fund manager is violating the basic principles, based on which you had invested, it is possible that it could be good for the fund but then ethically, it is wrong. In future, if he does something of that sort, it could be detrimental for your investment. In such cases, you should be moving out.

Q: My question pertains to the beginners in the age of 25 to 30 who are just starting their career and earning about Rs 5-6 lakh. Post monthly rental and the basic needs, how should one allocate to these funds?

Dhoot: Since you are with Sobha Developers, the first thing that you do for a strong good building is build a very strong foundation. Similarly, for an individual who is starting afresh, I would suggest take an insurance. Possibly you do not have dependents today but you will have dependents 3-5 years down the line. The younger you are, the cheaper is insurance. For a 25 year old, Rs 50 lakh cover would cost you Rs 500 a month. Take some amount of insurance by covering your life and then go about the SIP route of investment.

Typically, you are looking at investments 5 years down the line. So, it is possibly a good time to have some amount of equity exposure along with some amount of debt exposure also. The only thing apart from that one goal that you have five years down the line is to build yourself a small corpus, that is like a emergency corpus. You have around 2-3 months earnings or expenses kind of a corpus put aside just in case there is any emergency. Also, possibly put in your monthly investments, that is the best way to actually create wealth.

Q: Do retail investors actually make money in the capital markets? Over a period of time, the present idea will become outdated after two three years. As retail investors, are we fed with more information than what we can actually digest or should we stick to the conventional forms of investment like real estate, gold?

Baliga: Retail investor is just like a consumer. People go out and buy fairness creams thinking that they will become fair overnight so it is something similar. That's the reason I am saying that any investor, retail or otherwise should clearly have their objectives very clear. Once you have these objectives clear, have discipline. If you are a long term investor, remain a long term investor.

Generally what happens is a retail investor comes in for the first time, makes money in the next couple of months. After that, he gets more aggressive and wants to become a trader then he starts working on tips, which he keeps getting from the media and other places, and then finally, he loses. This is generally what happens to most of the retail investors. But if you maintain your discipline, you can surely make money in the longer term.

One need not be make money only as an investor. I have seen retail investors as traders making money but then traders have discipline, they don't become investors. As a trader, you need to keep stop losses. If you don't keep stop losses, you become an investor.

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