Long Term Portfolio Stocks in India – Sure Shot Large Cap Bets

‘Growth or appreciation’ is the primary goal of any stock investment regardless of your time horizon and risk profile. Dividends, buyback opportunities, merger-demerger benefits etc are secondary, although still significant in providing additional advantages to your equity portfolio.

Just going by that primary definition of ‘appreciation’ let me explain an easy way of picking safe and sure-shot long term portfolio stocks. I have two objectives here – first, to explain this simple methodology of picking steady growth portfolio stocks and second, to share a portfolio of 12 solid large cap stocks that one can blindly invest and forget for the next 10 or 20 years to build massive wealth. Well, I am not talking about lump sum investment here but one can keep buying these twelve stocks at every market correction opportunity OR at regular intervals (SIP) in order to build long term wealth. This is also an attempt answer some of the queries that I keep getting from the readers of this blog regarding steady portfolio stocks for long term.

The Method of Picking Steady Growth Stocks or Long Term Portfolio Stocks

Now, over to the methodology – It’s actually a pretty simple technique and no rocket science. Please follow the following steps to arrive at your final list.

Step 1: First you have to make an initial list of about 50 stocks from multiple sectors/industries. This initial list can be easily made by taking all 30 Sensex stocks plus say 20 big names from the NSE Top 100 list. If you are confused here, start with the list of top 100 stocks in NSE itself.

Step 2: Now, since our aim is price ‘appreciation’ in the long term, we need to have a look at the long term chart of these companies. You can use Yahoo finance, Money Control or NSE / BSE charts to see the 10 year or 15 year chart of the companies shortlisted from Step 1. In this step, you have to pick all those companies which have a steadily upward going chart (which of course indicates price appreciation). E.g. the charts of HDFC Bank or Asian Paints look exceptionally good and not that of SBI or ONGC. Discard all those companies that don’t have a smooth upward looking price journey and you will be left with 15 or 20 good growth stories (price-wise or chart-wise)

Step 3: This list, of say 20 companies that have great looking charts, has to be further scrutinized for good growth parameters. Here, I simply look at the RoE (Return on Equity), RoCE (Return on Capital Employed) and Sales and Profit parameters of these stocks. I usually use the Screener site to check these parameters. For long term growth stocks, a steady RoE of say above 15 (preferably 20+), RoCE of above 20 (Preferably 25 or 30) and a positive sales and profit growth in double figures is more than enough. Don’t be surprised if you notice companies with an RoE of 50 or RoCE of 200 plus.

Step 4: Most of the stocks with from Step 2 and 3 may be having good growth parameters. Now, to drop a few more, please take a look at their Debt / Equity ratio, again using Screener. Here, for long term stocks, I would drop all those companies that have a Debt to Equity ratio of more than 25% (0.25). Ideally, one should pick zero debt companies here or the ones with Debt / Equity ratio as zero or nearly zero. Please note that in the case of Banking, Financial and NBFC stocks, one shouldn’t look at this ratio, as their primary business itself is borrowing and lending

The above four steps would leave you with a dozen or so stellar performers that you can invest in for solid long term gains.

Good and Not-So-Good long term charts

Here’re some examples of typical charts to go for, as discussed in Step 2. Please note that one has to look into the 10 or 15 year chart and NOT 2 or 5 year charts while hunting for potential long term portfolio stocks.

Exceptional growth stocks with great charts

Asian Paints

HDFC Bank

HUL

Pidilite

Decent companies with poor long term charts

Well, these are still portfolio stocks for historic reasons but they don’t necessarily fetch you the desired price appreciation. On the other hand, just by looking at their charts, one can figure out that they are good for medium term trading point of view whereby they offer many up and down cycles in the long term charts.

ONGC

SBI

My list of 12 Buy-and-Forget Long Term Portfolio Stocks

Based on the above screening, the following would be my list of long term portfolio stocks across industries. Ten of them are index stocks while two others are high growth non-index stocks with proven track record and continuous growth in the future as well.


1. Asian Paints Ltd
2. Bajaj Auto Ltd
3. Bajaj Finance Ltd
4. HCL Technologies Ltd
5. HDFC
6. HDFC Bank Ltd
7. Hindustan Unilever Ltd
8. Lupin Ltd
9. Maruti Suzuki Ltd
10. Pidilite Industries
11. Yes Bank Ltd
12. Zee Entertaintment Ltd

Now, all those who are looking for multibagger recommendations, from a few months point of view, may ask yourselves the following question. Would you put your hard-earned money in risky multibagger stocks OR in safe, established businesses that can return 10 or 15 times over a ten year period?

Happy Investing!

(Standard disclaimer: I am not a qualified investment advisor. Do your own research before investing or consult a certified financial advisor. I personally hold some of the above stocks in my long term portfolio)

3 Potential Multibagger Stocks that are Turn Around Stories

In the last bull run, so many Indian companies took their ambitions abroad in an effort to grow faster inorganically by acquiring foreign companies. Easily available loans and FCCBs made their dreams instant reality as lenders were ready to shell out money on these companies that had good brand value, niche technologies or product line up, steady revenue stream and consistent net profits too.

However, things began to go wrong for most of these companies as the perceived benefits of acquisitions didn’t really result in increased profits. On the contrary, adverse market conditions and integration issues played against them and they started piling up debts much faster than they could have ever imagined. Tata Steel, GMR Infrastructure, Suzlon, Lanco Infratech – the list goes on.

subex suzlon bilt

In this post, we will talk about three such companies (and their penny stocks) that made such oversees acquisitions. While they failed at that, they seem to have realized their mistakes, corrected them (or in the process of doing so) and now on the way to turn around themselves into profit stories yet again. Needless to say such company stocks can turn into multibaggers for any investor with high risk appetite! Of course, these are not portfolio stocks and hence one shouldn’t blindly invest all their money into them but a retail investor can consider a small exposure on risk-reward potential basis.

The stories of Subex, Suzlon and Ballarpur Industries

The turn around stories – and hence potential multibaggers in India – we are going to talk about today are Subex Ltd, Suzlon Energy Ltd, and Ballarpur Industries Ltd (Note: Read updates below).

1. Subex Ltd

Company website: http://www.subex.com/

History: Subex was founded by Subash Menon and Alex PJ (hence the name SubEx) in 1992. They initially dealt with fiber optics cables but shifted focus to niche Telecom software – primarily fraud management systems and revenue assurance software.

The company was steadily growing since its inception. However, in the boom that followed the DotCom fall they decided to acquire many small Telecom software companies abroad. Initially, all acquisitions were funded by cash and equities but then they started borrowing and raising funds via FCCB (foreign currency convertible bond) route as well. During this time, one of the founders and promoter left the company making it more like a family run company by promoters with questionable intentions. The debt of the company started piling up and the stock crashed from its high of 700+ to 20s in a matter of two years.

Investment rationale: After their original promoters were unceremoniously packaged out for all that went wrong in their hands, the new management took control over Subex in an attempt to clean up the company’s balance sheet. And they have been quite successful at that in just three years.

At the moment, the company is almost debt free and it’s on the growth path again. With a market cap of 500cr, annual sales figures or 300cr and a debt of just 50cr, and 100cr in free cash, it looks like an investment grade company again.

At the time of writing this post (May 2016), the stock is trading at around Rs. 10 and the book value is more than 5 rupees. The interest outflow is very negligible now and hence it really looks like a turn around story to me and a potential a multibagger.

Risks: With almost negligible debts, the only potential risk for this company is any adverse market conditions for Telecom players in Europe and Latin America.

2. Suzlon Energy Ltd

Company website: http://suzlon.com/

History: Suzlon is another great company that went from steady growth path to huge losses after their acquisition of the German company Senvion in 2007. This wind energy company reported their last profit in 2008-’09 and it has been steadily declining since then as they couldn’t manage their debt bill. The debt kept mounting at an alarming pace and when it hit more than Rs. 17,000 cr they had no other go but shelve off the German subsidiary, and it finally happened last year (2015).

Investment rationale: After exiting Senvion, the company still has a debt of around 8000Cr, however, only 4000Cr of this is long term debt an it’s payable only in 2019. There’re further FCCB bonds that may get converted into equities by 2023 and hence there’s no further equity dilution in the next seven years. Of course, there is still interest burden but it looks manageable as the company’s operating profit is steadily climbing since the Senvion sale. Further, the operating profit margin (OPM) on the standalone basis is climbing rapidly as there is no major expense or capital expansion taking place.

Last year, the Sun Pharmaceuticals’ Dilip Sanghvi acquired 23% stake in Suzlon Energy and this makes Dilip Sanghvi and Tulsi Tanti (original promoter and founder) – two big and reputed names – the main promoters of this company. With the NDA Government’s increased focus in the renewable energy (1,75,000MW in next 7 years) sector, Suzlon has also diversified into Solar Energy which is cheaper to produce and implement than wind energy. They intend to deliver 15,000MW installed capacity in India in the next five years, off which they already signed a 4000MW project recently with Andhra Pradesh government. The manufacturing capacity of Suzlon is now 4000MW per year with no new investment required. They now have enough working capital as well after exiting Senvion and hence there’s no need to borrow anything in the near future. Overall, things look great again for Suzlon and hence a potential multibagger over the next few years for patient investors.

Risks: While the company doesn’t need to pay off any of their debts in the next three years, they indeed need to pay interest on a regular basis and also maintain cash generation to pay off their loans in 2019. Another risk is any potential decision in favour of solar power vs wind power due to cost factors as Suzlon is still more than 75% a Wind Power company. The company’s book value is negative as of now and this is one of the biggest risks for any investor.

3. Ballarpur Industries

Update on June 08, 2016): This recommendation has been discontinued as the BILT – Sabah Forest Industries didn’t go through as expected. Read the news at this link.

Company website: http://biltpaper.com/

History: I vividly remember myself investing in this stock (BILT) almost 15 years back and making some money when things were going good for Ballarpur Industries – an Avantha group (that owns Crompton Greaves etc) company and a leading name in the Indian Printing and Writing paper market. It was a very good dividend paying company too at 25-30% dividend paid every year (They still pay dividends, although much lesser).

However, things began to go wrong with the company when it acquired a Malaysian paper company namely ‘Sabah Forest Industries Sdn’ for $260 million. Like many other Indian companies that we discussed above, they too piled up debts that now stands at a whopping Rs.6000 crores.

Investment rationale: BILT has already taken the corrective measures and they are in the process of selling the Malaysian arm. A deal has been finalized with the buyer (Pandawa Sakti Sabah Sdn) for $500 million (Rs.3300 Crore). The sale date is due in May 2016 following which BILT can write off half their debts instantly. This would allow them to focus back on the Indian arm and be the leader yet again. With the interest outflow reduced drastically, I believe that this company will be back on track again and the stock can appreciate from here own and yield significant return for its investors. Further, the book value is still around Rs.25/- per share which is significant higher than it’s current market price (CMP).

Risks: The Sabah sale final date has been pushed three-four times already by the buyer while an agreement is in place. If the deal is called off, just in case, it may be bad for the company.

Disclaimer

I am not an investment advisor but just a retail investor and trader like most readers here. Hence, please take professional help before investing in the stocks discussed here. I have vested interest in most of the stocks that I write about and you can check out my equity portfolio as a disclosure. I am not responsible for any loss or gain that you may make in the stock market after following the articles on my blog. Also, it is recommended that investors take positions in a staggered manner than investing in one shot in any of the stocks for that matter.

(At the time of writing this post, I am invested in Subex since several months and accumulated Suzlon shares recently. I have interest in buying BILT based on the Sabah sale news)

Happy investing!

20 Midcap Stocks in India For Accelerated Wealth Creation

midcap stock in indiaIt is statistically proven that long term investments in equities (stocks) can outperform any other conventional form of investments or asset classes such as real estate, gold or bank/post office deposits. However, a lot of people hesitate to invest in the stock markets due to a number of reasons including risk of losing the capital, volatility in the stock market, confusion between speculative trading vs investment, and the uncertainty around the companies that they invest in or sheer lack of knowledge to pick the right stocks.

Investing in Mutual funds (Read Systematic Investment Plan or SIP) is probably the easiest and safest route to enter the stock market rather than going for direct stock investment. However, the return on investment can be much higher if you go for direct equities as long as you pick the right stocks and companies to invest in.

An ideal stock portfolio (Read my stock portfolio that I often update) should have a mix of large cap and midcap stocks across several sectors/industries to minimize your risks. However, if you are looking at a faster growth rate you can even think of a Portfolio that’s heavier on the Midcap side if not an All-Midcap Portfolio. Given below, is a list of 20 handpicked midcap stocks that I believe should offer significant wealth creation (at least four to five times, if not more) for investors in the next ten years.

My List of 20 Midcap Stocks in India

Most of the Midcap stocks in this list are those with the proven record of high return on investment (Based on the ROE, ROCE parameters, sales/profits growth numbers etc) over a period of time. I have also included a couple rather new players which I think will excel in their respective businesses and hence offer higher returns to investors. Further, these companies are run by excellent management and promoters too and hence the business health and longevity is not under threat.

Here’s my winner list:

1. Amara Raja Batteries
2. Apollo Hospitals Enterprises
3. Atul Auto Ltd
4. Aurobindo Pharma
5. Avanti Feeds
6. Bharat Forge Ltd
7. Britannia Industries
8. Cera Sanitaryware
9. Colgate Palmolive Ltd
10. Dewan Housing Finance Ltd
11. eClerx Services
12. IndusInd Bank
13. Kaveri Seed Company
14. Kitex Garments (Previously suggested)
15. Mayur Uniquoters
16. Motherson Sumi Ltd
17. Pidilite Industries
18. Torrent Pharmaceuticals
19. UPL Ltd
20. Zensar Technologies Ltd

(Some notable omissions include Page Industries, Eicher Motors etc which have run up quite a bit)

Investment Methodology

Since the markets have run up a lot, putting all your money as lump sum investment can be very risky at the moment. Hence the following is the methodology that I suggest.

  • Make a shortlist of 12-15 of the above midcaps for your investment. Give more weightage to sectors like Pharma, Banking and Auto ancillaries
  • Systematically buy these stocks either by putting a fixed amount per month into buying the shortlisted stocks or by adding these stocks at every market correction
  • Track your investment on a periodic basis for any change in fundamentals of the selected companies. You don’t need to track them on a daily basis as long as your choices are good and have a long term plan with them
  • Periodically (once a year may be) validate and check the sector-wise weightage of your holdings and readjust if required
  • Watch them grow! And do not let the market fluctuations affect your investment decision UNLESS the fundamentals of your invested companies change.

Disclaimer: I am not a qualified finance adviser or portfolio manager. Please consult the experts before taking any investment decision in the equity market. You may have to do further research on these stocks on financial portals, websites of these companies as well as mandatory filings by them before taking any positions. As a disclosure, I have investments in many of the stocks mentioned above at the time of writing of this post.

Related Posts

10 Multibagger Midcap Stocks in India
10 Small Cap Stocks with Growth Potential

Good luck with your investments!

10 Small Cap Stocks that offer Significant Growth Potential

About two years back, I had recommended some decent midcap stocks most of which appreciated big time even before the current bull run started. I have been, since, trying to dig out some value picks in the mid cap segment but unfortunately, most of them ran up big time – much beyond their fair valuations. Let me concentrate on some pure small cap stocks this time with their underlying businesses holding very good growth potential and stock appreciation for the future.

Important: You may note that many of the stocks listed below, while still offering value, have run up a bit as well. The markets are at near all-time-highs and hence some of these stocks can go down sharply at some point. Hence it would be ideal to buy them in the ranges mentioned or take a staggered approach. Further, never put a lot of money into small caps stocks – not more than 10%-15% of your overall equity portfolio

 

Small Cap Stock Picks

(Company Name, Price on 18/01/2015, Buy Price Range)


1. Chaman Lal Setia Exports (80, 50-60)

2. Gujarat Foils (70, 48-55)

3. Goodricke Group (152, CMP and at dips)

4. Goodyear India (624, 450-480)

5. Hinduja Global Solutions (629, CMP and at dips)

6. JVL Agro Industries (20, 15-18)

7. Jyoti Structures (39, CMP)

8. Noida Toll Bridge Company (35, 24-28)

9. Nucleus Software Exports (199, At dips below 160)

10. Stylam Industries (83, At dips below 60)

 

Criteria for Selection

Some of the criteria used to pick the small cap stock mentioned here are:

  • Industry (Excluded Oils, Chemicals, Steel, Textiles etc)
  • Promoters (How trustworthy are they?)
  • Age & Stability of the company
  • Growth Numbers (Top and Bottom line)
  • Dividend Yield (As applicable)
  • Debt on Book (Zero or Manageable debt)

As you know, the biggest challenge for most small cap companies is managing the debt as they usually avail high interest loans. A big chunk of their profit flows out as interest repayment and that’s probably the main parameter that would define the growth potential of many of them.

Disclosure: As of writing of this post, I am invested in JVL Agro Industries. I plan to invest in at least 3-4 of the above listed companies as and when their stock quotes reach the ranges mentioned.

Disclaimer: I am not a qualified finance adviser or portfolio manager. Please consult the experts before taking any investment decision in the equity market. You may have to do further research on these stocks on financial portals, websites of these companies as well as mandatory filings by them before taking any positions.

Good luck with your equity investments!

Updates

June 01, 2015:

1. Chaman Lal Setia Exports: Hold

2. Gujarat Foils: Hold

3. Goodricke Group: Avoid/Exit (Growth outlook not exciting, Exit on any rally)

4. Goodyear India: Buy in the initially recommended range only

5. Hinduja Global Solutions: Hold

6. JVL Agro Industries: Hold

7. Jyoti Structures: Avoid/Book loss (No debt restructuring seen, Interest coverage poor)

8. Noida Toll Bridge Company: Buy in the initially recommended range only

9. Nucleus Software Exports: Book Partial Profit

10. Stylam Industries: Buy in the initially recommended range only

August 13, 2015:

1. Chaman Lal Setia Exports: Book Partial Profit (Stock already doubled from the recommended date and tripled from the recommended price!)

2. Gujarat Foils: Hold

3. Goodricke Group: Exited (See previous update) (Growth outlook not exciting, Exit on any rally)

4. Goodyear India: Buy in the initially recommended range only, Hold if you already entered

5. Hinduja Global Solutions: Hold

6. JVL Agro Industries: Hold

7. Jyoti Structures: Exited (See previous update)

8. Noida Toll Bridge Company: Hold

9. Nucleus Software Exports: Booked Partial Profit (See previous update), Hold the rest

10. Stylam Industries: Buy in the initially recommended range only, Hold if you already entered (Stock more than doubled from the recommended date/price)

Note: Due to lack of time, I will not be providing any more update on this particular list. The readers are expected to take further research based action on their holdings.

10 MultiBagger Mid Cap – Small Cap Stock Ideas

If you are into Indian stock markets, here are some stock recommendations for you. I personally hold most of these stocks and hence your risk is mine as well. I am not providing detailed analysis of these companies but that’s out there for you to explore on websites such as Moneycontrol.com

Indian Stock Recommendations

Please note that, I am not talking about ‘trading’ here but long term investment here. Long term for me is at least a 1 year term.

Here is my list with their recommended entry prices in the bracket (In some cases it is my own entry price for these scrips).


1. Shriram City Union Finance (765)

2. Kitex Garments (58)

3. SpiceJet (38)

4. DQ Entertainment (18.50)

5. Escorts (64)

6. Acrysil India (80) – After Bonus adjustment

7. Kwality Dairy (31)

8. Manappuram General Finance (35)

9. NIIT (33)

10. APM Industries (13)

I shall keep updating on what am I doing with these ‘multi-baggers’ in the next months. Currently the target for each of these stocks would vary from 75% to 300% within a 12 to 24 months investment window.

Disclosure: I hold some of these stocks and I may have vested interest in these companies. Please do your own research before investing.

(I was staying away from the stock markets for a couple of years now but made a re-entry seeing some good opportunity in the recent bull run)

Update on January 02, 2014

It has been about 15 months since I recommended the above stocks. I still hold some of them while I have recently sold most of these stocks in the current fluctuating markets. I wouldn’t be tracking most of the stocks again but would like to provide the following update on how they fared.

Stock name (Recommended price, High since)

Shriram City Union Finance (765, 1230) – Still going strong

Kitex Garments (58, 83.85) – Still going strong

SpiceJet (38, 48.30) – Bound to various government regulations and recommend to enter only at very cheap levels

DQ Entertainment (18.50, 47.95) – Still going strong

Escorts (64, 145.15) – Still going strong

Acrysil India (80, 240) – Still going strong

Kwality Dairy (31, 38.70) – Hold

Manappuram General Finance (35, 46) – No more attractive due to gold woes

NIIT (33, 33) – So so

APM Industries (13, 28.85) – Still going strong

Those stocks that are marked as ‘Still going strong’ are good for holding for long term, in my opinion

Happy Investing!

Are you selling your stocks at the wrong time?

First of all, let me take disclaimer that I am not an expert in the equity markets nor a qualified personal finance professional to advise anyone. However, since I have been doing online share trading for almost 12 years now, I thought of sharing my experiences on how I could have made more profits by exiting stocks at the right time (By the way, I never made huge profits but fortunately I am not at loss)

Stock selling strategies and tips

Most people are good at making the right calls when it comes to picking the right stocks at the right time. However, more often than not, after they sell they will be shocked to see that the shares that they sold are moving up faster. This is because they never had a proper exit plan for that particular stock. The following are some tips for you to help you sell your stocks at the right time.

Have a target price when you buy

When you buy a particular stock or share, you should have a target exit price in mind already. This has to be arrived on the basis of the valuation of the stock, prevailing sector conditions, momentum etc. Even if you are investing for five days or five years, this is very important and more over you have to record that planned exit price.

Your first analysis is almost always the best

When you set a target price while buying, that exit price is probably based on thorough analysis and hence the best exit price. You should not keep changing that figure unless the valuation of the stock or the sector it belongs to dramatically changes. If that is the case, you have to re-rate the stock after further analysis and keep an additional exit point and make it a point to sell at this price. If there is no change in prevailing conditions around the stock or the company, it is always advised to sell at the original exit price.

Never sell a stock that is peaking day by day

If a stock is flying on a momentum and hitting 52-week highs day after day, then you may get a better price. Keep putting higher stop losses and change your sell price (above original exit price) to get maximum profits. As a thumb rule, never sell a momentum stock that has just hit the 52 week high.

Sell ASAP if the company falters

If there is negative news on your invested company, it is a call for immediate sell at whatever loss or profit. You have to always keep track of the stock news of your favorite companies via online stock news alerts and not through news papers. By the time you read your financial news papers, you are already very late.

Sell early to balance you portfolio

Another situation where you might exit a stock prematurely is to balance your overall finance portfolio or equity portfolio alone. In the first case, you have decided to keep say 30% in equities and due to several recent transactions if that proportion has gone way up, you may want to de-risk your portfolio by selling a few stocks. Similarly, within your equity portfolio, if a particular sector is over represented you may want to adjust it via further selling of some existing entities.

Sell early for any tax benefits

At times, especially towards the end of the financial or taxation year, you see that your capital gains may be offset via booking loss on certain non-performing or turtle stocks. This is sometimes good to reduce your taxes – based on the existing rules of course – as well as to give further and better buying opportunities in the next financial year.

…and finally…

Never listen to analysts on TV

These are the bunch of foxes who basically wants to play with the sentiments of investors and keep changing their stand from time to time. If necessary, you may have a paid financial adviser, who is interested in making money for you because he gets paid by you but never take those analysts’ free advice. But as I mentioned in one of the tips above, keep track of all news related to your stock and be smarter.

By the way, the tips mentioned here are applicable for those who are investing in stocks and not trading.

Happy investing!

Investment strategy in a volatile market

Indian bourses have been setting new and new index highs every other week amidst heavy volatile trading. There are many arguments in favour of the Indian growth story. Some believe that what we are seeing here is a fundamental move where as some others swear that India is a special case compared to other emerging markets and we will keep going up. Some wisemen and analysts even predict targets for the ‘Sensitive Index‘ for not just 2008 but for 2010 and 2020 as well. The weakening dollar combined with the huge market capitalization gains have made Mukesh Ambani the richest person on earth in less than two months time. However, it may be a matter of couple of months before 9 out of 10 retail investors loose out in the market after being exposed to the high-risk game in the volatile market. Having seen and experienced three huge market falls in my investment life, I would like to advise the inexperienced retail investors to be very cautious at this point of time.

Good, bad and ugly…

There are a couple of things that are going really good in India recently. The first and foremost thing is the consistent economic growth rate of 8% and above that the country has been achieving of late. The other good thing (which resulted in the first one) is that there are couple of wise men sitting on top
who are driving the Indian economic story – P, Chidambaram and Y.B. Reddy being the prominent ones supported by other organizational leaders of SEBI etc. Strengthening rupee, low inflation rates, increase in foreign exchange reserve, turned-around PSUs, focus on futuristic infrastructure planning etc are some of the positive results of good overall leadership. The current Indian finance ministry, Reserve Bank of India and SEBI are almost always prompt in rolling out policies for positive growth and also to curb abnormalities like credit or sub-prime issues and indirect FII inflows.

However, there are couple of other things that are not really in favour of a stable economy – the first being the fact that we are having a very unpredictable political alliance at the center that can fall anytime. Many of the economical reforms, tie-ups with developed countries and global capital institutions etc are often thwarted by one or the ally. Secondly, the inability to manage (appreciate/depreciate rupee!) the rupee value at an optimum level against the US dollar has badly affected the export houses and industries like Software, textile and jewelry. Third biggest factor is that the huge FII money that is coming as foreign exchange is not really used for any long term planning. Due to the high volatility, this kind of money is not being used for developmental activities.

Some myths associated to the volatility

India is a special case and the bull run has to continue: Wrong! I personally believe that the fair value for the sensex should be around 13000-14000 at the moment as compared to the PE multiples of other stable emerging markets. The market has been fueled by the FII inflows and it can reduce anytime and India is
not really a special case.

Sensex is so high that I cannot enter now!: Wrong! Sensex is only an indicator of a small set of 30 stocks. At any point of time there are enough value stocks available in the market that you can buy.

PE valuations don’t apply any longer: Stupidity! If a few stocks are shot up because of momentum, it doesn’t mean that we are in a special situation and we can forget the valuations. If Educomp and RNRL are currently being traded at 400 or 500 times forward earnings, they are dangerously risky trading bets and not
any good for investment. Another example: Majority of IT stocks used to trade at 30 to 40 PE multiples for almost ten years now. This does not mean that, going forward Infosys is still fairly valued and be a multibagger!

Momentum trading is better than value buying in a volatile market: Wrong! Value buying is always the best mechanism to invest. Momentum trading may not be there for ever and can wipe out your money at any time.

It’s better to keep booking profits regularly to reduce risk: Wrong! If you have done your homework about your investment portfolio (See long term portfolio below) you don’t need to do this. In fact, booking profits at regular intervals will badly affect your returns. However, it is also a good option if you maintain your investment portfolio and trading portfolio altogether separated. For fun and high risk gambling you could use the trading path while the investment portfolio is probably for your retirement life.

I should book profit on my mutual funds now: No, unless you are in urgent need of money. Mutual funds are long term instruments for wealth accumulation and an ideal way to enter them is via Systematic Investment Plans (SIPs). It is not investor’s job to time the market for MF investment but your fund manager will take care of that part. So never trade a mutual fund.

A few investment tips

If you are in doubt whether you should enter the market now or not, opt for the SIP route of investment via mutual funds. Ideally SIPs should be for subscribed
for a longer investment period of say greater than two years.

Never buy your stocks in bulk: The self managed SIP route can be taken for buying even stocks. ie. You buy larger quantities when the prices go down and smaller quantities when you feel that the prices are a big high. In other words, build your portfolio over a number of months and years and not overnight. Please note that this rule is applicable only to fundamentally strong long term portfolio stocks.

Avoid playing momentum stocks. 8 out of 10 traders make losses on such trading opportunities.

If you want to play volatility then opt for some of the best exchange traded index funds. One great example for the same is Benchmark Nifty Exchange Traded
Scheme. This is a fund that invests in NIFTY stocks and is pretty much reliable in terms of low tracking error.

Don’t buy a stock due to market or analyst pressure or rumours. Do your homework before entering each and every counter.

Avoid having more than 25 or 30 percent weightage on mid and small cap stocks in your long term portfolio.

Identify sectors that have long term value and those sectors and companies that are often affected by government policies, weather, margin pressure etc. For example, textile stocks and software companies are affected big time by the rising rupee and hence they may not yield the same kind of returns as in the past. Another sector which should be almost always avoided is the airlines which are always under margin pressure.

Periodically (every three months or so) inspect your long term portfolio for any fundamental changes or external parameter influence.

Try to diversify your investment across at least four to five sectors and six to ten different stocks. Never put your bulk investment into one or two stocks alone.

Try to diversify in terms of investment instruments. One should have a good mix of Post Office deposits, equities, mutual funds, fixed/term deposits, gold and real estate in their long term portfolio. For long term, gold may be an excellent investment. Again Benchmark’s gold exchange traded fund (ETF) and DSP Merril Lynch’s World Goldfund are excellent picks for low risk investments.

My long term portfolio picks (In the order of portfolio weightage and large cap to small cap order)

L&T
Grasim
BHEL
Punj Lloyd
Reliance Communications
Crompton Greaves
Tata Steel
Bajaj Auto
ACC
SBI
NTPC
HCL Technologies
Voltas
Britannia Industries
Cipla
Kesoram Industries
Bharati Shipyard
EIH Ltd
Apollo Hospitals
NIIT Technologies
Glaxo Smithkline Consumer
Ballarpur Industries
Orient Paper
City Union Bank
Hanung Toys

Note: Some of the above stocks are already fairly valued while some others should be entered during the next correction.

Disclaimer: As a retail investor I may or may not have vested interest in some of the scrips mentioned here. Readers are advised to do their homework and exercise discretion before attempting any investment.

Investment strategy for 2007 and beyond

The jittery that the Indian equity market is offering right now might make one wonder as to what instruments are right for this kind of conditions. A lot of people had hope in the real estate and infrastructure until the middle of 2006. This does not seem to hold good anymore with the financial minister rolling out a very ordinary Union Budget 2007-08. Interest rates are further heading northward and cement sector has been hammered with additional excise duties stamped on them.

The Indian market, unlike the not-so-recent-past, seems to be reading and vigorously reacting to the global cues. Earlier the upcoming economies and bourses were generally driven by one or two major factors such as global crude prices, local agricultural and manufacturing growth predictions, monsoon/rain forecasts etc. Nowadays FII (Foreign Institutional Investors) activities, far eastern market movements, US employment rates, terrorist threats, Greenspan’s untimely statements (and may be even George Bush’s mother-in-law catching a mild cold) etc seems to be taking the Indian market for a roller coaster ride. The volatility is so high that small-time retail investors are the worst suffered in most cases.

(Before trying to analyze what is the best form of investment going forward, let me put forth a disclaimer. Here I am going to talk only from the view point of young – includes middle-aged persons like me – investors. I cannot really talk on behalf of the older and matured lot of investors.)

Equities for long term

I still believe that equities are the best instruments to meet your long term financial needs. This is because of the fact that no other options could yield good enough returns to beat the high inflation rates. With proper planning it is possible that the equities can yield upward of 12% annualized returns in long term. No other instruments can possibly guarantee this kind of returns on investment. So if you are below thirty or thirty five, it may be a good idea to expose 50% of your portfolio to equity market (stocks or equity oriented funds – both with long term horizon in mind). Now I am sure that most of the youngsters out there have already taken care of this aspect. The missing trick could the ‘long term’ factor. Most of the younger lot that I interact with want fast money that matches their fast lifestyle – This does not quite work with equities. Long term investment is preferred (Tip 1) over risky trading. Also, stock or fund picking becomes easier in this case.

The most critical aspect is in picking the right stocks with long term (10-20 years) value in mind. If you look at the past performance of certain blue-chip companies this may not be all that difficult. But any portfolio will get some extra punch (Tip 2) if it has one or two mid-caps that offers greater mid-term growth. Most of the time the difficult part is picking these strap-on boosters that mostly keep changing in your portfolio every other year or so. In this case one might need professional advice (and not rumours) and help from company research reports. One can afford to have one or two such scrips (Max 15% of your equity exposure) in a portfolio of 12-15 pure long-term plays. If you are sure about your long-term picks, don’t let the market fluctuations affect your decisions. Ups and downs are common in the market and you never loose in holding a good long term play that temporarily goes down. In other words, even if the current market price (CMP) is less than your purchase price, it is only notional. i.e. You don’t loose anything unless you sell them. So never sell your shares at loss (Tip 3)!

Mutual Funds

Equity oriented mutual funds are for those who don’t want to take risks on which stocks to pick. If one goes for a mutual fund he/she is basically delegating this management risk to the fund managers those who have better insights and scientific research capabilities and tools to analyze potential companies to invest and their shares better. This is always a wise choice for long term growth.

Picking an equity oriented fund is far easier than picking a stock. Most of the fund performance data (as well as fund manager’s reputation and profile) is published on various portals and is available for your reference. One needs to consider at least past three years’ – preferably more than 5 years – performance of a fund before making a decision. One might want to pick a mix of funds than just one to make sure that the equity exposure is spread across a good blend of large cap stocks of huge companies and mid cap stocks of upcoming companies. One should take care not to invest all the money in mid cap oriented funds

Systematic Investment Plans (SIPs) are very good for those have as steady income and who don’t want take decisions on when to invest. This is indeed a very good mechanism to make sure that investment as a ‘systematic’ habit is built into an individual. But please remember that SIPs are only worth if you have a longer investment horizon. Ideally, one should think of investing in SIPs if you opt of 2-5 years (or even more) of monthly recurring investment. If you don’t want to commit for a systematic plan and you are an adamant investor, you could still invest systematically by entering your selected funds on low market days of every month. But then you should stick to your own resolutions and plans. Go sip is my tip 4 for you.

SIPs can be really good for entering mutual funds. But why not SIP or similar approach for buying stocks? Say, you want to purchase 100 shares of ITC this year. Why not buy 10 each every month at possible dips? It is always better to buy shares in smaller quantities (Tip 5) over a number of times until you acquire as much as you want.

All that glitters is GOLD!

As long as the Indians have their craze for the yellow metal, investing in gold is a very effective mechanism for wealth creation. If you see the way the gold prices have been shooting up for the past six years you will realize that purchasing gold is a lot better option than investments such as bank deposits or post office schemes. So whenever the gold prices are having minor dips or if it is non-wedding seasons in India, make it a habit to buy some gold (Tip 6). One can have as much as 15% (ideally 10%) gold in his portfolio. Also, never buy gold as jewelery but buy them in the form gold bars or coins which is easier to sell and will not have any depreciation or making charge related issues. The purity of the gold should be confirmed before buying the same. A good bet could be purchasing the same from banks like ICICI that offers 99.9% pure gold bars at market rates. Those who travel via gulf countries like UAE may make it a habit to buy gold abroad which is probably 10% cheaper than Indian gold prices. Also purity is guaranteed in that case.

Another excellent way of investing in gold is via the newly launched Gold Exchange Traded Funds (ETF). This option also provides you the protection that comes along with the dematerialized form of investing – you don’t need lockers and strong rooms in this case. Systematically adding a few units every month to the gold scheme may help in the long run.

Plan your Provident Fund

One of the other ways to passively invest for long term is via additional contribution to your provident fund. Why is this important? It is important because it is the only guaranteed mechanism towards your retirement planning unless you opt for some pension funds. Also, I personally believe that it is meant for the times when India becomes a developed nation (20-25 years from now) where interest rates are below 2.5% or 3% and inflation is almost nil. You will realize the value of money that you saved then. However, it is not a good idea to put more than 10% of your monthly income into PF in addition to what the employer contributes. From time to time the government will announce additional interest towards PF contributions. One needs to exploit these grace periods by adding more contribution to his/her PF whenever these offers are valid (Tip 7).

Commodities

Commodity trading is the other form of strap-on boosters that one can experiment to make short term money out of price variations in the commodity market. The commodity market in India is huge now since the government allowed the trading of the same via exchanges since 2004. Earlier only bullion trading was possible. However, I do not have any tips to pass on here as I am yet to experiment trading in commodities. But I am told that it is a very good money making mechanism in India where there are predictable patterns on the price movements as we have hundreds of festivals and seasonal events.

Real estate

25 years from now, having own land on earth may become a luxury. That will be the time when part of the human crowd will be living in other planets or may be living in one of the closets in a 250 storied apartment complex. So investing in real estate (not apartments but land) is a vise choice any day. As an investment, one does not need to be in the look out of prime locations or within city limits. Grab whatever you can (Tip 8) at throw away prices in remote areas or mountains or marshy lands or wherever. The land that comes at Rs 10 per sqft in timbuktu will be fetching you Rs. 5000 per sqft in another 20 years. Also technology will be developed to convert even wastelands into attractive home or business areas. But beware, if you want to lead a very peaceful retirement life, real estate may not be the long term thing for you.

Managing and looking after real estate in itself is a physically tiring and highly demanding activity that might deny you sleep. But it will always remain an ever-appreciating asset. Lastly, if you want to accumulate assets that will appreciate, you should also cut down on your ‘early spending’. The current consumerism and youth’s lifestyle is such that they want to be the first one to buy a new model of mobile phone, mp3 player, plasma TV or a better car as soon as it hits the market. The cost of an early buying could be double compared to differing that decision by six months or an year – especially when it comes to buying electronics. The more you cut such expenses the stronger your wealth creation path is.

Happy investing!

(Personal note: With the above words on investment wisdom one would naturally think that a seasoned investor is sitting at the other end. I should apologize that I am one of the losers on the bourses thought the blame goes to Harshad Mehta, Ketan Parekh, dot com fall or World Trade Centre attack 🙂 But the good news is that I have started thinking long and the bad news, I am yet to put some of these thoughts into practice)