What can help you build a profitable portfolio and contain losses? - Part 2

How to select a stock for investment?

“Asset Allocation & Risk Management play a crucial role in helping maintain a stable & profitable portfolio in the long term”, said Alok Saigal, President & Head, Private Wealth, Edelweiss Wealth Management.

They help in reducing volatility of portfolio returns and impacts of outlier events. Actively updating allocation in response to changing financial goals & investor’s age helps in aligning the portfolio to his needs.

It is also important to not invest part of the core portfolio in momentum stocks, FOMO investments & random share tips. “If an investor were to participate in these, ideally it should be done in a satellite where the investor is okay to lose major parts of this portfolio”, added Saigal. This helps in de-risking the portfolio which is going to be used to meet the financial goals.

Shrikant Chouhan, Head of Equity Research (Retail), Kotak Securities Ltd suggests that while selecting any stock for investment from a long term perspective, it will be prudent to check few parameters like

1. whether the company is having a leadership position in the particular segment or not, because companies with the largest market share can easily survive in the long run;


2. whether it is possible to keep track of the business of the company easily;


3. how much is the stake of the promoters in the company, as it indicates the promoters' interest in the business and


4. what is the percentage of shares pledged by promoters, as this indicates the financial strength of the company.

Now coming to the most important question which bothers every investor – when to exit?

Last but by no means the least, one needs to know exactly when to exit. “Most money by investors is lost because they do not know when to say - enough! Being fearful when the markets are greedy is very important”, said Jain from Ambit.

One should never try to stretch his risk appetite in the hope of earning more because that goes against the underlying investment approach and results in more losses than gains in most of the cases. As soon as the targeted return is achieved, it is imperative to come out of that investment, re-analyze the situations.

Saigal of Edelweiss categorizes exits from direct equities broadly into three categories

1) Macro Call on Broader Markets – where valuations are perceived to be expensive, under such situation’s monies should be held as cash or short term debt investments.

2) Fundamental Call on Specific Stock – where fundamentals have materially altered or the share has achieved the price target set, to mitigate reinvestment risk, investments can be done in broader market ETFs which help in gaining market returns until the next stock investment is identified.

3) Replacement Strategy – when an alternative stock has already been identified to replace an existing investment, this leads to no reinvestment risk.

Saluja from ASK Wealth suggests that, “it is equally important to monitor and keep an eye on market for new category of product introductions (e.g. REIT/INVITS) and /or tax changes which needs adjustments in portfolio (e.g. dividends getting taxed)”.

(REIT - Real Estate Investment Trust; INVITS - Infrastructure Investment Trust).

The advent of InvITs & REITs in India has increased investment options for investors beyond the traditional Equity & Debt products. These products are hybrid in nature giving a quasi-Equity & quasi-Debt investment experience to the investor.

“These products give higher returns than traditional debt products with the potential kicker of capital appreciation through price movement”, said Saigal.

Their risk profile is lower than traditional equity investments and these products can be invested with a view to earn higher returns than Debt with lower risk than Equities, he added. “However these are not replacements to Equity & Debt and should never be combined under the same category due to their fundamental differences”.

InvITs are largely power & road assets in India which give majority of the return in form of distributions & price volatility being relatively lower.

REITs are underlying commercial real estate where returns are in the form of distribution & capital appreciation through price movement being relatively higher to InvITs since the underlying is an appreciating asset. REITs would also have higher price volatility to InvITs.

Rahul Jain, President & Head, Personal Wealth at Edelweiss Wealth Management suggests that one can contemplate exiting a stock if

1. he has reached his goal of expected returns;


2. if there is underperformance in the profitability of the company since the returns are directly proportional to the company’s profitability;


3. if there are issues related to corporate governance and nothing is done to address them, it is a ‘red flag’. Fluctuating financial results, decisions benefitting only a few people in the management, etc., are signs of poor corporate governance, and


4. how the policies of the government are impacting the sector. On some occasions, they fail to strike a chord with the stakeholders and can have a negative impact.

Happy Investing!

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.