Next 3-4 years good for mkt; bet on blue-chips: Dipan Mehta

The Indian has been rangebound over the last many sessions. However, yesterday was a good day for the Indian equities as benchmark indices, Sensex and Nifty, closed up 1%. The Nifty ended at 5,695.55, up 50.50 points or 0.89%. The Sensex ended at 18,755.45, up 93.75 points or 1.04%.

On CNBC-TV18's special show 'The Informed Investor', investment analyst Dipan Mehta and Radhika Gupta, director, Forefront Capital Management answer investors’ queries. Mehta says in the last five years, equities have gone nowhere. "My sense is that the next three-four years could be very good for equity," he adds. He advises investors to build a bluechip portfolio. Don't miss: Destimoney Securities suggests value buying, picks stocks Below is the edited transcript of the interview on CNBC-TV18. Q: I want to ask you that retail investors have been absent for so long from the market. But now with things looking good, what is your call on the market now? Mehta: I think that typically, over a long period of time like 30 years or so, the Sensex has given returns of about 14-15 percent easily on a compound basis, plus the other dividends. In the last five years, equities have gone nowhere. So, my sense is that the next three-four years could be very good for equity. Ofcourse there are a lot of challenges at this point of time. The sentiment certainly is not the very best. A lot of situations or problems are there because of which we ourselves feel that a bit of caution is required. But equities are the lead indicator. Although the economy may not be doing as well, the fact that stock market has rallied means that, at the ground level, slight improvement will take place. So, my sense is that this is a good time to increase allocation to equity. Some of the investors, who have kept their portfolio and not looked at, it is in dormant position, should have a close look at it. Get out of all the stocks, which have not performed for them and get into some of the high-performing sectors and some of the blue-chip stocks. Have a kind of a approach whereby they want to build a blue-chip portfolio, which will deliver fabulous returns over the next three-five years or so. Q: Is investing overseas a good idea for retail investors? Gupta: Investing in international funds is generally a good idea for all investors regardless of the profile and the geography that you are in. We tend to restrict our investments heavily to India not realizing that we are taking a large amount of risk in the Indian market. There are markets beyond ours that are doing very well and that we should take advantage of whether it is developed or whether it is emerging. There are two routes that one can use to invest in global securities; one is to invest in a range of international mutual funds that exist in India. So, a number of the global fund houses or the local fund houses like a DSP or Goldman or an ING offer funds that give exposure to international stocks. So, that is one popular route that one can use. Motilal for instance has a NASDAQ ETF, so there are many different vehicles that one can invest Indian rupees in. The government has also given investors an LRS limit that is USD 200000 a year that one can use to invest in pure foreign assets. That process is a little more complicated in terms of setting up global accounts, working with the global brokerage, so both those options exist. Typically, 5 percent of ones portfolio can go at the beginning towards international investment. _PAGEBREAK_ Q: I wanted to know about the portfolio allocation: say at age of 25 what your portfolio allocation is, say at of 30 what your portfolio allocation and as age progresses? Gupta: Allocation depends on two or three things. The stage in life you are at, the kind of cash flows and cash outflows that one is going to have. So, typically when one is in their 20s, one can afford to be a lot more aggressive because you don’t have too many liabilities. As you move into your 30s and 40s and you have children and their education and marriage to plan out, you have less liabilities. As you move into your retirement you have further less liabilities, but your cash flow stream comes down. So, it is generally a more conservative approach as you grow older is advocated. For a young individual who is 25, we typically recommend that 50-60 percent of your allocation sits in equities, 10-20 percent in commodities. The balance in debt and maybe a very small portion in alternative investments like international funds or more exotic funds. Real estate is a separate investment avenue. As you grow into your 30s and 40s that allocation to equities reduces from 50-60 percent to 30-40 percent and as one moves towards your retirement, one should look at maybe 20 percent in equities and the balance in more fixed instruments with a little bit of gold in the portfolio. As one moves into retirement in terms of allocation, one should also look at monthly income to match ones cash flow requirements. Q: When one is investing equity what is the type of sector mix that one should go for? Mehta: We are in a kind of in between phase at this point of time. Maybe a month ago or so everybody though that interest rates would come down and cyclicals would do well and this rally would continue, maybe another 4-5 percent, but it seems to be sputtering at this point of time. We are seeing the money flowing back into the defensive sectors. My sense is that if one or two months ago we feel that they should get into interest rate sensitives or some of the commodity stocks or the cyclicals, I feel that again the bias is shifting towards the FMCGs and defensives like pharmaceuticals maybe even technology. My personal bias or preference has always been for the non capital intensive industry. So, that comes to FMCG, technology, pharmaceuticals – in these three sectors if you are about 70-80 percent, you are fine. Then the balance 20 percent could be in banks, especially, good quality banks or even an institution like IDFC.

Q: Considering the policy uncertainties surrounding the telecom sector, what is the outlook for the sector? Are the negatives already factored in or there is something more? Mehta: For the telecom sector, the major event which is coming up is the auction of 2G spectrum as per the Supreme Court direction. A lot of clarity would come through after that. There is some pressure in the short-term. But, a lot of issues in the sector are getting resolved gradually. A lot of competitive pressures are also going to come down; call rates are certainly going to go up. There is going to be some kind of an adjustment, which will be of one time nature for the industry. Thereafter, the industry could do very well. So, if you are truly a contrarian investor, with a three-four kind of  view, then you should look at telecom sector, quite seriously and gradually acquire good quality telecom stocks at every decline. A point will come where there will be two or three large operators in the entire country. They will be able to raise their tariffs as and when the cost increases take place or as they try to cover their cost of funds or the cost of operations. That point maybe as early as six to 12 months down the line. That could be a very outperforming industry with good growth rates. In any case, it is within our entire consumption kind of investment theme. Gradually, I am getting bullish on telecom. But, there are certain two-three important events which one needs to get over and done with. Within the sector, you are better off trying to buy the companies which are totally focused on India, rather than ones, which have acquisitions abroad. You do not know what kinds of challenges exist there. So, you need to keep that in mind. These are companies, which will grow at the GDP growth rates or slightly higher. They have good business models, whereby you can benefit from the effect of compounding of profits. _PAGEBREAK_

Q: As a retail investor how do I play the commodities theme considering the recently announced quantitative easing?  Do I invest in listed companies? Is there any kind of a collective investment like mutual fund which is a sector specific investment? Gupta: It is a great asset class that you bring up. Commodities, as an asset class are an important part of one’s portfolio. Ten to 20 percent should certainly be in commodities. There are three or four ways that one can play the commodity markets. I will quickly outline them. One is to invest in commodity stocks or mutual funds that hold commodity stocks. There are a number of them without taking exact names. The issue with that is traditionally; those behave more like stocks than commodities. So, you are really investing in stocks. Better way to invest in commodities, which requires a little more sophistication, are the three large commodity exchanges in India. One being the MCX, another being the National Commodity & Derivatives Exchange Limited (NCDEX) who offer a whole basket of commodities. It is about 30 commodities in the agricultural, precious metals, industrial metal space. So, one can buy individual commodity futures. It is a task. But, it will give you clean, pure exposure to commodities. The third, is to hold a gold ETF. That is a very restrictive commodity investment, because you are just holding one commodity. We think the outlook on commodities in general is very positive. If we had to name a couple, we would say gold certainly. Some of the industrial metals will benefit in this period. Agricultural commodities are something to be very bullish on. Inflation is only a growing problem. Some of the individual agricultural commodities in the grains and species space are also very interesting. Q:  Can you tell how does the systematic transfer plan (STP) work briefly? How are the returns given by STP compared to SIP and is that advisable for retail investors to go through this route? Gupta: An STP is very similar to an SIP in concept. The idea is that one is investing in a fund at gradual intervals. An STP differs is that an STP is valuable for people who have a large amount of money, say I had a sell of a property that someone mentioned and I got Rs 10 lakh corpus or Rs 20 lakh corpus, but I do not want to deploy it in one go, I want to deploy it gradually. What an STP will do is the money will be sitting in a liquid funds, you are earnings interest and then it will be moved out of that liquid fund into an equity fund or a gold fund or whatever it is. Whereas an SIP is for someone who does not have the cash today and is earning a monthly income and that income is going into it. In that sense the returns are very similar to what one would expect from an SIP, except that you will also on the interest on that cash. So, you are not worrying about when should I do this and it is automatically done for you. It is certainly the best way to invest if you have done a property sale or if you have got large lump sum cash and want to build your portfolio gradually, so highly recommended. _PAGEBREAK_ Q After all these SEB restructuring of loans and everything, what is your outlook on power sector and which specific stock you think will outperform the market in next three-five years? Mehta: Broadly, power sector comprises of two types of stocks. Ones, which are into power equipment and then the utility companies, which are setting up power plants. For the utility companies our outlook is negative. I would not advise you to invest in them at all because their returns are far too dependent upon lot of variables like raw material costs and what price increases they are able to get from the government. There is far too much of regulation and government interference in the operation of the utility companies. But with all the various reforms taking place and these recent measures taken by the government to restructure the debt of state electricity boards, there is a good chance that the capex cycle in the power industry will again pick up with a lag of 6-12 months or so. My sense is that the power equipment companies will gradually see very good order flow. The preference is for good quality transmission equipment companies, the likes of KEC International or Kalpataru, they are the top picks with usual disclosure. Investors who are looking for more safety then even a BHEL looks very interesting at this point of time. One needs to have two-three year kind of an outlook because as of now the industry is struggling for orders, but the order flows will start coming through. Typically, what we see in equipment manufacturers is that these stocks start rallying as soon as the news of the order flows starts trickling in and not necessarily when the revenues start percolating from those orders. Keep an eye on the newspaper. As and when you see that more and more orders being placed for new power plants and new transmission lines, you will see that these stocks will immediately start doing well. What certainly is in the favour of power equipment manufacturer at this point of time is that valuations are very attractive. There is a dearth for investment in the sector considering that there are any power cuts and there is a shortage of energy at this point of time. So, this is a sector where there is going to be long-term growth. It is just that there are aberrations at present and what we have seen over the past couple of years or so. If one has a long-term outlook then power equipment certainly is a good industry to be.

Q: If one wants to start his own venture maybe 6-7 years down the line, what should be his investment or saving strategy in order to arrange a corpus of maybe Rs 15-20 lakh? Gupta: There are one-two things to keep in mind. If one is looking to build a corpus of Rs 15-20 lakh over a period, the good thing is you have a six-seven year period, so one can even invest in instruments like equities, which perform over a five-seven year period. Right now you should be a little more aggressive and then as you come closer to start a venture become more conservative. You can be 40-50 percent in equities right now and then gradually bring that down to 5-10 percent closer to when you are looking to start the venture. One thing I would be very careful about if the corpus is so important that you need to start a venture is, definitely not investing in very speculative stocks, midcaps or taking too much unnecessary risk in equities. You just need simple largecap equity, mutual funds, gold ETFs. If you are looking to start a venture, you have to be a little bit more conservative in terms of saving and saving a lot more aggressively because you need that corpus, a large corpus six-seven years down the line.