Personal Finance: Who Wants To Be A Millionaire?

You don't have to be on KBC. All you have to do is to invest in equities now, when markets are down.

Here's a hot tip for you long-suffering reader: this, the second half of October, could be when you, Dick Whittington-like, make your fortune. There are, of course, the usual caveats about the investment decisions being your own, and this article being merely that, an article, and not an attempt to influence you to invest in a particular scrip.

So, if you are the type who's going to sue this writer or this magazine, if things don't work out for you in the market, do us all a favour and skip the next few pages. If you aren't, come on right in. There's big money waiting to be made.

Given the uncertainty in the air, most people are content to let their money lie in deposits, earning a measly 8 per cent a year. And those who are inclined to invest in equities are probably waiting for the strike against Afghanistan, and the consequent plunge in the Sensex. After all, as the recent behaviour of the markets have shown, there is no 'psychological low'. The Sensex could touch 2000, and it could still be way away from the bottom.

We'd like to give you some sound reasons to invest in the market (See Reasons to Invest in Equities): the stockmarket is at an eight-year low; interest rates are likely to soften anytime now; and just as investors caught in a bull run wait and wait and finally enter the market at its peak, those caught in a bear trap, enter the market, not when it is at an all-time low, but when it is actually on its way back up.

There are probably a lot of sad stories out there-of people who've lost their shirts as the Sensex tumbled from over 6000 in February 2000, to just over 2600 in September 2001-but don't let these affect your judgement. Most of these investors are likely to have been caught up in the euphoria surrounding tech stocks that drove the Sensex to stratospheric highs. Unfortunately, like small investors are apt to, these people didn't exit the market at its peak, hoping against hope that their already overvalued tech holdings would appreciate some more. That didn't happen, and many investors, left holding duds in their portfolio, have taken it upon themselves to dissuade others from investing in equities. But investing when the market is where it is right now is a very different ball game. Things can't really get much worse than what they are.

In short, start investing now, and don't wait for the Senex to fall any further. It may. Or it may not. ''The valuations are compelling,'' admits Ajit Surana, the ceo of Mumbai-based brokerage Dimensional Securities, ''but, uncertainty runs high''.

Still, some experts believe the Sensex, quoting right now at a price-earnings multiple between 13 and 14, is bound to go up, not down. And even if it does fall some more, it is bound to rise in the medium-term. That means investors who buy stocks now, and hold them for at least six months to a year, can't lose. ''We expect increased savings and attractive valuations to lead to a broad-based recovery,'' says Devesh Kumar, Head of Equities, ICICI Securities. ''There may be some short-term hic-coughs as the market reacts to the US military action, but our recommendation is to buy stocks at every dip.'' You heard the man? Everytime the Sensex dips then, go out and invest in some equities.

You won't make a million by investing blindly in stocks quoting way off their peak. ''It's not right to rush to invest in stocks, just because they are cheap,'' warns John Band, CEO, ask Raymond James. ''Buy in small quantities, and look for companies that are not going to throw up nasty surprises in the next three to four quarters.''

The simplest way to start is by looking at the Sensex. Ajay Punjabi, Head of Sales at J M Morgan Stanley Direct recommends index-investing for the conservative investor. ''Refine the Sensex by removing the laggards, and invest in about 15 Sensex stocks in the same ratio as their market capitalisation.'' That way, an investor can gain from a bull run, while insuring himself, or herself, from a run in the other direction.

For instance, four of the top five Sensex stocks-Reliance Industries, Reliance Petroleum, ITC, and Infosys-were trading at their 52-week low in the last week of September (the only exception was HLL). In terms of weightage, these five stocks account for 28.5 per cent of the market capitalisation of the BSE.

But while an index investing strategy can insulate investors from the vagaries of the market, it limits their gains to those in the Sensex. A more aggressive stock-picking strategy would be to invest in specific stocks whose valuations make them attractive.

Punjabi has some words of advice regarding this approach, too. ''Right now, you could pick up stocks in two broad sectors-defensives like pharma, FMCG, and cyclicals like cement, refineries, and finance.'' That makes sense: in the last one year, when the Sensex fell by 35 per cent, FMCG and cement stocks fell by just a third that number. Pharma was up by 12 per cent, and refining companies saw their stock prices increase by 50 per cent.

If most analysts agree that pharma and healthcare (DRL, Ranbaxy, Cipla, Apollo, Nicholas Piramal), FMCG (HLL, SmithKline Beecham Consumer Healthcare, Nestlé, ITC), oil refineries (HPCL and BPCL), and cement (acc) stocks are hot, then what about yesterday's favourite sector, technology? ''What worked in the last bull run, may not work in the next,'' says Sandeep Bhatia, Head of Research, UBs Warburg Dillon Reed.

Most brokerages have issued sell reports on tech bell-wethers like Infosys and Wipro in the expectation of poor third and fourth quarter results. However, some analysts including Surana of Dimensional believe NIIT could, with its part-education and part-software services, emerge as a good long-term bet at its current price of Rs 110 and a PE multiple of 3.5.

Stock-pickers would do well to avoid small or mid-cap (market capitalisation less than Rs 250 crore) stocks. These stocks move up only in the course of a bull run, and the market isn't really in that mode yet. ''Look for large cap companies that are leaders in their domain and have a proven earnings track record,'' suggests Ramdeo Agarwal, Joint Managing Director, Motilal Oswal Securities. More important, buy these stocks at reasonable valuations, and in smaller lots.

There's no telling whether this approach can make you a millionaire (not unless you start off with at least half that amount), but it surely won't leave you any poorer. ''You can expect to double your money in three to four years in stocks (if you get in now),'' claims Agarwal. But it may make sense to get a foot into the market now; the last time a bull run happened the Sensex moved from the 4000s to the 5000s in a week.

A final word of caution before you begin your quest for untold riches: if you do wish to play the market, we'd suggest you stick to the game of stock-picking than the one of spotting the bottom of the market. The first may seem difficult, but as market-guru Warren Buffett once said: ''The best time to buy stocks is when it is the hardest to buy them.''

SNIPPETS

The Standard Connection
Reliance capital asset management has forged a partnership with the Standard Chartered Group, to distribute its mutual fund offerings. In effect, Reliance is leveraging Standard Chartered's retail base of 24 lakh customers and network of 50 branches to reach out to more investors.

To Protect And Shield
The Securities and Exchange Board of India (SEBI) has made it mandatory for all agents and distributors of mutual funds to obtain a certification from The Association of Mutual Funds in India (AMFI) by March 31, 2003. Mutual funds will also need to file a list of agents enrolled with them as on October 31 with SEBI. SEBI has also urged mutual funds to post their half-yearly results on the AMFI web site (www.amfindia.com) as well their own web sites.

Another Bank, Insurer Alliance
IDBI Bank has tied-up with Tata AIG to offer insurance products. The product to be offered has been branded Future Guard. The scheme provides protection for the entire family by way of offering 50 per cent cover (of the policy amount) for the spouse of the policy-holder and 10 per cent cover for two dependent children. IDBI claims policies will be issued, and claims settled in seven days. In the first phase the product will be introduced through IDBI Bank's ATMs at Nariman Point and Prabhadevi respectively. Subsequently, the product will be available to account holders across branches and ATMs.

Picking The Right Fund
If you are confused over which asset management company to invest in and which scheme to opt for, you are not alone. Currently, India has over 36 asset management companies offering 340 different schemes. Worse, this number is growing at 10 per cent every year. Now, Parag Parikh Financial Advisory Services (PPFAS) has launched ''Progeny'', a Portfolio Management Scheme for investing in Mutual Funds. Analysts at PPFAS will identify schemes and monitor their performance. And the financial advisory will recommend a portfolio to investors depending on their investment goals and risk-appetites. Since all funds pay a sales commission to financial intermediaries, PPFAS will charge retail investors nothing for the services. But one has to invest atleast Rs 5 lakh to be a part of the Progeny scheme.