Take a long shot in such choppy markets. Investors tend to forget that equities deliver only in the long term

Take a long shot in such choppy markets
24 May 2010, 0501 hrs
IST,Nikhil Walavalkar & Prashant Mahesh,ET Bureau

Increased volatility in markets has made life difficult for equity investors in India. The risk that some European governments may default has thrown a scare into equity markets globally. Though domestic economic fundamentals are sound, flight of some foreign funds has eroded value of companies on Indian exchanges.

A look at indices’ movement shows that S&P CNX Nifty has lost 5.43% since January 2010 whereas Nifty Mid-cap 50 index lost 2.21%. But this is rather deceptive. If one looks at the fall from the highest point, the indices (the Nifty level of 5374) in the current calendar year, the Nifty lost 7.94% in 30 sessions and Nifty Mid-cap lost 7.32% in 14 sessions, as on May 20, 2010. This has confused retail investors. Now, the million-dollar question that haunts all of them is — “What should I do with my equity investments?”

QUICK ACTIONS

Though often repeated, investors tend to forget that equities deliver only in the long term. So, if you are there with your short-term resources for some quick buck, just follow the classical advice and get out of equities. This applies to even the best of the conviction ideas you have. “Though there is some global uncertainty, there is no crisis. The current correction is a good buying opportunity, as markets have corrected 10-15%, and we are positive on mid-cap stocks as valuations there are at a discount to large caps,” says K Ramanathan, chief investment officer, ING Mutual Fund.

Leverage can be disastrous when equities obey the laws of gravity. In volatile times, futures, too, may emerge as the weapons of mass destruction, as envisaged by legendary investor Warren Buffett. Given the circumstances, it’s better to cut down naked derivative exposures and avoid taking any positions using borrowed money.

If you are not sure of the equity markets’ future in the near term, change all your lump-sum investments in mutual funds and other vehicles into systematic investment plans (SIP) to ensure that you don’t commit the mistake of trying to time the market. If you need some time to think before you act, you can consider buying insurance by way of purchasing index ‘put’ options. Of course, there is a cost attached to it.

THINK BEFORE YOU JUMP

Equity investing is an art as well as science. Especially in cases, where you decide it on your own, it becomes a tight-rope walk. “One should stick to strong conviction ideas with strong fundamentals. Fundamentally, strong companies are last to fall and first to bounce back when the environment changes,” asserts Vinod Ohri, president-equity, Gupta Equities. It makes sense to revisit the portfolio with a single question in mind — If I am given money, will I buy the share I am holding now? If the answer to this question comes positive, your investment deserves a place in your portfolio. If you are not sure if you will buy it at the current price, probably, it’s the time to bid adieu to that stock.

“Retail investors need to at least check business performance of companies in which they have invested, by going to the exchange website,” says Sunil Shah, director-equities, Indsec Securities & Finance. This is even more important in case of small-, and mid-cap companies, where there is no or limited research coverage. “As a broad rule, one can decide to stay with mid-cap stocks, enjoying single-digit price earning multiples and book profits, where the mid-cap stocks quote at price multiple of more than 20,” adds Mr Shah.

If you are not sure as to how the global crisis will unfold, you can choose to convert some of your equities into short-term fixed income instruments to earn decent ‘return on capital’ without compromising on ‘return of capital’.

Strategies

As of now, the domestic economy is in shape. Some experts prefer to restrict their equity exposure to ideas that revolve around domestic themes such as consumption and infrastructure. One can cut his exposure on export-oriented companies.

There is another advice to stick to companies with least leverage. This may come handy if the credit crisis spread beyond European countries. Look at only those companies with no or nominal debt on books. To play safe, one can avoid companies that are still in the capital expenditure mode and are expected to guzzle a good amount of cash.

Looking for price supports is a very much a normal act of savvy equity investors. Some call it special situations-investing. Investing in fundamentally strong companies where due to open offer or some other corporate action there exists a safety net is a good bet in weak markets. Delisting offers also can be considered here.

Ultra-conservative investors looking at equity can resort to a capital protection strategy. If you have, say Rs 5 lakh, to invest with a three-year time-frame, invest Rs 4 lakh in fixed deposits, earning an 8% return and invest the rest in diversified equity funds with a good track record using systematic investment plans. Here, your investments in fixed deposits will ensure that you get Rs 5 lakh back at the end of three years. At the same time, your equity investments will earn superior returns for you.

Ultimately, investors will be better off sticking to their asset allocation. Of course, one can take tactical calls of moving from one type of equities (such as mid-caps) to another type (large-cap). One should never forget that all bear markets start with correction. Greed leads to investors throwing good money after bad ideas. It is time to have some conviction in the Indian growth story and buy quality businesses at attractive prices slowly and steadily.

http://economictimes.indiatimes.com/articleshow/5966749.cms