Nov 13, 2012, 04.42 PM IST | Source: CNBC-TV18

If you are below 30, buy shares; not gold, land

Samvat 2068 ended on a cautious note. Concerns about sticky retail-level inflation, weak industrial output and high trade deficit triggered selling on the Dalal Street. Sensex lost 13 points and ended at around 18,670 levels.

Samvat 2068 ended on a cautious note. Concerns about sticky retail-level inflation, weak industrial output and high trade deficit triggered selling on the Dalal Street.

Sensex lost 13 points and ended at around 18,670 levels. The Nifty eased 2.55 points to close at 5,683 levels on Monday. Most market experts were expecting the Nifty to touch 6,000 by Diwali, but profit booking restricted the index to 5700.

According to Madhu Kela of Reliance Capital, 30-40 percent of the marketcap is at an all time high. There are stocks which offer bottom-up opportunities and should be bought on dips , he said in an interview to CNBC-TV18.

Likewise, member of BSE, Ramesh Damani is also of the view that a new bull market is underway . "Evidence suggests there is leadership in the market and the price action is very suitable," Damani added.

While foreign institutional investors (FII) have been heavy buyers and making good returns on their investments, retail investors have mostly kept away and that is a cause for concern.

Despite the market being just 10 percent away from making an all time high, retail participants are looking to plough money in other assets like gold or fixed deposits or real estate. "People are ready to buy a piece of land worth Rs 10 crore, but they don’t want to buy shares at half time book value," Kela said.

However, Manish Chokhani of Axis Capital is not so bullish on the Indian equity market. He feels that it would take longer for Indian equity market to convince retail participants to invest in the market.

Post reform announcements in September, the market has seen a net outflow of about USD 1 billion. If one makes 10 percent rally on fixed income over the next year as rates decline, it is not sufficient enough for someone to go whole-hog into equities. People come into equities towards the later end of bull stage, he elaborated.

Equities versus gold, real estate and fixed deposits

The Indian equity market is currently underowned. Young Indians should invest some part of their income in equities, suggested Damani. "If you are 25 years old and you are not looking into equities, you are doing a huge disservice yourself.

You are going to wake up at the age of 45 and 50 being very poor because you put your money into fixed deposits or bought property at the top of real estate cycle. We cannot have a trillion dollar economy in the next five-six years and have 25 percent savings rate and Indian equity percentage not move up; it just mathematically not going to happen," he explained.

In the longer term, price-to-earning ratios of good companies with high quality managements and great business models will expand dramatically. At that time, retail inventors who already own these stocks will benefit, he added.

Retail inventors always look at equities only from a 12 or 24 months perspective, which should not be the case. Despite ups and downs in the financial sector, Indian equities have managed to give return of 15.8 percent in last 25 years.

In the last five years, equities have posted zero or minus six percent returns from five years point-to-point. But, if one exclude these five years, the compounded returns (CAGR) from the first 20 years stand at 21 percent unlike other asset classes including gold, which even after a big run have posted only 11 percent returns, Kela highlighted.

From a year to date perspective, most of the good performing mutual fund schemes are up between 30-40 percent. But even then, in the last six-nine months, people have booked out from the equity market and invested in fixed deposits, he added.

Retail inventors can make the most of the bull market, which has already started and will last for quite some time, by picking up quality stocks in sectors like media, FMCG and other consumption themes. If that is done, then one can make money only by holding these stocks till the bull market lasts rather than trying to trade, Damani said.

Many Indian retail inventors keep flipping a stock idea, which will surely not lead to wealth creation. "Make Rs 10 flip out, get another idea, it is a sure way to the you and your house and making your brokers rich, it is not the way to make yourself rich," he added.

What is an ideal asset allocation strategy?

One should opt for a proper asset allocation strategy to get optimal returns. One should not put his entire income in equities, but atleast 5-10 percent should be allocated to equities. It is necessary to take a little longer term view when investing in stock market like the way one does while investing in fixed deposit, gold or real estate. One’s maximum allocation in gold can be only to the extent of 10 percent of their portfolio, Kela advised.

A 40 year old should have 40 percent in equity and 60 percent in fixed income. Within equities, one should have a basket of stocks, which represent the four big money making areas in India energy, consumption, exporters and cement. A portfolio with these four components is a balanced portfolio, said Chokhani.

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