PF corner: Harshvardhan Roongta's mantra of investment

Roongta says, "From an investor’s perspective, when he is starting to invest, if he is a new investor it is more advisable that he starts in a descending order."

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Below is the verbatim transcript of the interview

Q: We have got a lot of retail investors asking us what really are they getting when they say it’s a largecap fund, this is midcap fund, this is a smallcap fund. There are even confusions between NAV and market cap. So, to just get to brass tags market cap and how should a small investor understand it?

A: If I put it in very simple, layman retail investor understanding terms, the top 100 listed companies in India would be classified as largecap companies. Broadly we can say all companies which have a market capitalisation of Rs 10,000 crore going up to Rs 2.5 lakh crore which could be ONGC, Reliance, TCS, and Coal India, these are the top listed entities. If you come down up to Rs 10,000 crore, all companies in that category which are roughly about a 100 of them would be classified as largecap funds.

Now, if you take a total market capitalisation of all listed entities in the country today, it would be about Rs 60,80,000 crore. It is interesting to note that these top 100 companies constitute to about 70 percent of the total market capitalisation. So, from an investor’s perspective, he needs to understand that he is investing into a largecap fund, he is investing into companies which are very large in nature in terms of their dominance, in terms of a customer base, in terms of capitalisation.

When you come to midcap category definition, it would be easy for an investor to understand that he is investing into companies with a market capitalization of between Rs 2,500-10,000 crore. Now, if I have to throw some names so that a person understands what exactly we are talking about, they could be Gillette India, Berger Paints. These are companies which are between Rs 2,500-10,000 crore.

Smallcap companies by definition would be all companies which have market capitalisation up to Rs 2,500 crore. Raymond Limited would be about Rs 2,300-2,400 crore as of present date so that would also be classified in a smallcap. Going down further, you could have SKS Microfinance which has Rs 900 crore market capitalisation.

From an investor’s perspective, when he is starting to invest, if he is a new investor it is more advisable that he starts in a descending order. First he goes and concentrates his portfolio into a largecap fund so that he is investing into very strong large companies. He can have moderate exposure to midcap companies because you have some really nice names in that category as well but avoid a smallcap for sure if he is a beginner. If he understands market going down the way then he can probably have small exposures into the smallcap fund as well.

Q: Necessarily, this cut off of Rs 10,000 crore or Rs 2,500 crore that you are talking about would be a moving target, when the Sensex shrinks to 14000 it’s a different target when it is at 20000 it’s a different cut off?

A: Basically, instead of thinking of a cut off, we would say some companies move into the midcap categories. Like I mentioned, Raymond, which is in the range of about Rs 2,300-2,400 crore, the moment it crosses Rs 2,500 crore probably it would move into the midcap category.

Likewise, if some company is at the brink of Rs 10,000 crore would fall down to say Rs 9,000 some crore, so it would probably come into the midcap. So, it is the broader perspective. There’s no defined line. But going by the understanding, this is generally the methodology to define what are largecap, midcap and smallcap.

Q: Is it better to buy a smallcap fund or is it better to invest in a smallcap stock? I have some exposure in midcap and large cap via SIP?

A: It is important for an investor to understand that if he is buying something cheap, the chances of that doubling are no greater than buying something else which is say more expensive. Let me use an example, in investment parlance, you always look at the returns. Suppose, you buy into Rs 10 NAV fund and if there is a 10 percent return that the industry has given, Rs 10 NAV will move to Rs 11. If there is Rs 100 NAV fund, if 10 percent is the return, that will move to Rs 110. So, returns, if its 10 percent, it is going to be applicable whether it is a low NAV product or a large NAV product.

So, in the same parlance if there is a stock which is Rs 20 in price and if you think that there’s going to be a 100 percent rise, from Rs 20 it will move to Rs 40. On the other hand, you have another stock which is priced at about Rs 1,000 and if also has to double it will got to Rs 2,000. So, it is not right to think that an Rs 10 will become Rs 11 faster than what an Rs 100 will become Rs 110 - that’s not the understanding which an investor should have. Investors should keep in mind that its returns that matters onto your base so base could be anything.

Q: Would you prefer him buy stocks or midcaps, smallcap fund? Should he go with a fund, should he go with just stocks?

A: Whether he is investing directly into stocks or your going via mutual funds entirely depends on your capability of understanding and tracking the markets. If you are capable of how a particular stock is going to perform, you may invest directly into stock markets.

If you are not able to do, that then you will have to rely on the expertise of the fund manager whose full time profession is to track the stock market. So, you give your money into a fund only if you know that you cannot handle your money directly into stock market.