In a young investors mind……

One good question on Quora that interested me and for which I wrote a lengthy answer, it can be helpful to many small investors who think Mutual funds are not good investment assets.

Venkat Chitteti

Hi Deiva Ramesh, Today you answer my question 25 years IT employee from middle class family investment. One of my friend suggest me this, Kotak Mahindra Bank (3 in one) Savings Account cum Trading Account. It has a good research team. Every month save some amount from your salary and deposit in Kotak Mahindra Bank. Slowly buy 4 SBI shares every month. Later if you get a promotion you can start investing in Mindtree and ITC. L&T is also a good stock. Do not invest in Mutual Funds.

Answer

Deiva Ramesh

Mr. Venkat,

At first, thank you very much for your compliments.

Why do we invest, any investment for that matter?

To grow our money right?

We go to stocks assuming that we will be able to grow it much faster and know that there is a little higher risk involved to attain this goal.

Now comes the quantification of the risk. How much risk you are willing to take?

At the most about 10% of your capital or a little stretched up to 15%. Assume that you have invested 25k on a slow process and you find your investment value is 20k, will you still have the same enthusiasm to put the next month’s investment into the same stocks?

I doubt.

Mind will naturally check to see other alternatives, probably another stock or maybe even other asset class. Once a person reaches this stage, his tracking of the previous investments will fade and over a period, it will be junk investments.

And in case of employed people, no one can guarantee that they can give the same attention to the events in their life as they give at any particular period.

Again even this is pretty much natural for any human being.

After a certain period, you will lose interest and the investment will be losing more due to loss of time value.

One can just not park money into something without knowing how it will be 6 months down the line, a year from now etc., if there is no clarity, he will end up losing the investment.

I have a client of mine; he is emotionally connected to investing in L&T and SBI. For the past 8 months, he has been buying both these stocks; L&T from it was 1850, now it is 1450. SBI from 280 and now it is 240.

Of all the stocks why these two?

On the back of the mind, there is a thought, these are pretty good companies, even if India has to collapse, these companies won/t collapse.

He used to regularly put 10K each month, now he has slowed down.

Having investment in few companies is more higher risk, and in today’s context there are retail investors coming to the markets to buy large cap stocks, just because they feel that the valuation is pretty low than what they had seen just a few months ago.

For some companies that have good fundamental strength it is true, they are available cheap now. While it is not the same for many front line companies.

Anticipation & caution as markets go volatile.

lower-interest-ratesAfter the August sell off post China Crisis, September began with a consolidation while our PM met with the Industry leaders, bankers and economist to get ideas on managing the prevailing global turbulence. He had requested the industry captains to increase their risk and step up investments. The industry leaders used this opportunity to ask for policy actions that will improve the ease of doing business and the need for the interest to be reduced at the earliest.

This action brought strength into the markets which got supported by the European and Asian markets showing recovery along with some strength in the Indian Currency. Following which Government approved several reforms including the allowing of telecom companies to sell radio waves, added as a booster to hold support for the strength in the markets. The European markets charged further following the rise in exports and imports in Germany.

However there was still a lot of caution in the markets as investors were anxious on the outcome of the US Federal Reserve policy, which turned to be subtle as the cut was postponed. There is expectation that the strong fundamentals of India will provide enough protection from the global developments.

Then came, the sudden news of Volkswagen cheating the US markets with a fake emission report which shook the automobile stocks worldwide, Volkswagen lost 48% of its stock value in 2 days, which also impacted many of the prominent Indian companies having big presence in the European markets like Motherson Sumi, Bharat Forge, Bosch etc.,

The reports that the inflation went down to 3.66% and the Wholesale Price Index being negative at -4.95%, was a good stimulus to the markets and then followed the surprise from the RBI with a 0.50% interest rate cut, after which markets went into rally mode.

The ambitious goal to have the inflation at 6% by January 2016 looks like an achievable target. The RBI has now started working towards having the inflation at 5% in 2016-17. All these developments will take our economy to levels which we haven’t seen so far in our life.

Even after all these developments FII’s were net sellers while the Mutual Funds kept continuing with their buying spree in the markets. There are fairly high chances that the FII’s will return back and with a higher allocation for India.

In the meantime, Saudi Arabia withdrew about $70 billion from global asset managers to bring down the widening deficit & reduce exposure to volatile economies as their economy is going into a recession. On the other side of the globe Prime Minister Naredra Modi’s bilateral meet with the US president Mr. Barrack Obama concluded on a high note. Among the countries present like Pakistan & China, India became the centre of attraction. Business captains in the US committed to more investments in India which is a very nice development for our economy.

What was done on the portfolio?

There were 5 exits, 2 reduction of exposure, 6 additions and 2 increases in exposure. Our portfolio is going through a dramatic shift. In the first week of September we moved out of MM Forgings and Bharat Forge well before the Volkswagen news hit the markets, thus saving bigger losses. SKS Micro was exited after the company missed the Small Banking license. Schneider and Sun Pharma Advanced Research moved out of our portfolio. We brought down exposure in Cadila and Welcorp by 100 basis points following their ratings coming down on our ranking tables.

MaduraBrandsOn the additions side, we had 0.50 basis points increase in exposure to Aegis Chemicals and Cosmo Films and have added 100 basis points new exposure to Britannia Industries, Himatsingka Seide, JMC Projects, FDC, Aditya Birla Nuvo and Deep Industries.

Auto sector exposure is getting reduced considerably and is getting replaced with companies having good exports revenue and consumer centric businesses. Weakness in the Rupee is an advantage for companies having export revenues.

This festive season, as you shop for your Van Heusen, Louis Philippe, Allen Solly, Peter England and Planet Fashion for your clothing needs, you will be making a small profit to yourself due to your ownership in Aditya Birla.

Britannia has made a packaging change and has gone into a new promotion, its business is growing, and so, the next time you pick a ‘GOOD DAY’ biscuit pack in the store, you will be contributing a small profit to yourself.

We also have exposure in Hindustan Petroleum, every time you fill gas at the HPCL bunk, you make a small profit.

Feels good that our portfolio owns companies that produce most of the daily use products, just our consumption will not have an impact on the profit of the company, while we can take pride that we are using the products of companies that we own, is it not a good feeling?