So the market is in a correction mode. The BSE Sensex is off by over 10 per cent from its recently scaled peak of 8,800. Analysts expect the index to consolidate between 7,600 and 7,800, before beginning to start the climb again.

The correction is excellent news for the average investor. As the market takes time off, you can pick up your favourite stocks at affordable prices, since they are all trading now below their all-time highs. For first-time investors, it's a perfect time to start creating a strong portfolio, while old hands can take this chance to churn their selection and get rid of all those laggards.

BT spoke to Dalal Street's shrewdest analysts to pick 20 stocks that can make up a dream portfolio today. The investment horizon is long-term, between two and five years. The risk appetite is moderate; we have taken only those stocks where the downside is low and the upside moderately high. All told, the portfolio we have picked will protect your capital and give you 25-35 per cent returns per annum-nothing to sneeze at.

First, some broad tips. Don't put all your money in one basket. Tejas Joshi, Head of Research at Mumbai-based Sushil Finance, has a formula: 40 per cent of your capital should go to very liquid large-cap stocks like Infosys, Reliance Industries, Tata Steel, ITC and SBI; 30 per cent to the next tier in large-cap stocks like Container Corp., BHEL, Honeywell, Gokaldas Exports and Cipla; 20 per cent should be in mid-cap stocks like Amtek India and Mawana Sugar, while 10 per cent goes to semi-liquid mid-caps or small-cap scrips.

The portfolio created here is a multi-cap one, with good picks from sectors where India has a long-term growth story to tell. Besides, the companies we have favoured are those with an edge over their peers in the same sector. For instance, we chose ITC over HLL in fast moving consumer goods. "ITC is in direct competition to HLL, and we prefer the former," says Shahina Mukadam, Research Head at IDBI Capital. It is a market leader in its traditional businesses of cigarettes, hotels, paperboards, packaging and agri-exports, and is rapidly gaining market share in new businesses like packaged foods, confectionery, branded apparel and greeting cards. In it, Infosys is the best bet and a proxy for the sector. If you want a second pick, TCS is promising, as its valuation at 27x looks cheaper than the 30x of Infosys. "Over a period of time, I don't see any difference between Infosys and TCS," says Mukadam. An added bonus is that Tata Infotech is going to be merged into TCS.

Pharma is another sector where India has a long-term competitive advantage. Here, we have stayed away from risky plays like Ranbaxy and Dr Reddy's and instead chosen Dishman Pharma (contract research and manufacturing company with good global presence) and Cipla (has the less riskier model of supplying to litigators rather than litigating itself). In textiles and garments, the best plays today are Aarvee Denim (valued at only one-third of competitor Arvind Mills, while in two years it will come close to Arvind's capacity) and Gokaldas Exports (restrictions on Chinese garment exports will earn it orders and good prices).

Finally, why Tata Teleservices (Maharashtra) and not Bharti Tele-Ventures? Analysts view the latter as fairly valued while the former (which has a restructuring exercise and a consolidation with Tata Teleservices on the cards) is yet to unlock its value. So, over to you. Take a look at our perfect portfolio, and see if you can spin some great returns out of it.

SMARTBYTES

Don't Lose Out On Capital Gains

Sure, there's no escaping taxes, but you can park any long-term capital gains you've earned in the last six months from sale of property or jewellery into capital gain bonds from financial institutions like NABARD, REC and NHB. Not only do you escape tax (Section 54EC), you also earn a decent interest. The caveat: the proceeds have to be invested within six months of the sale, plus your funds are locked in for three years. And in that period, you cannot raise a loan or other encumbrance on the bonds. But for 5.5 per cent assured returns and tax savings, who's complaining? Also check out SIDBI and NHAI bonds.

-Anand Adhikari

Women In The Markets

Traditionally, women have shunned the stock market. which is surprising given that one more survey (this from Merrill Lynch) finds that women make better investors. The survey points out that women take a "very deliberate approach to finances, need to understand how their money is being invested, and want to be actively involved in the process of building and executing a financial plan". It goes on to add that women aren't afraid of turning to professional advisors. Which is probably why securities company Geojit Financial Services has started branch offices exclusively for women (and manned by women) in Kochi, Mumbai and Chennai. Women can start investing with as little as Rs 5,000. If exclusivity is what it takes to encourage more women to bet on equity, may their tribe increase.

-Nitya Varadarajan

Bima Gold: All That Glitters...

LIC's new money-back policy, launched to celebrate its golden jubilee, is being touted as an economical one, with customers urged to buy in before the offer is withdrawn in March 2006. Should you hurry to get it? Not really. Take premiums: a 35-year-old will pay roughly Rs 3,800 per annum (for sum assured Rs 1 lakh and a 20-year term). True, this is much lower than the Rs 6,000-odd she will pay for similar money-back plans even from LIC, but that's because Bima Gold does not give a bonus, offering instead a loyalty-sum that's not guaranteed. Even after factoring in this loyalty addition and the periodic 10 per cent survival benefit payouts, the returns don't look hot; the overall figure the same policyholder can look at after 20 years is a little over Rs 1,10,000. If the argument is cheap cover, then term plans make more sense; and if the argument is investment, the returns don't seem worth it.

-Vaishna Roy

BANKING
Money In The Safe
Banks are riding high on a wave of strong credit growth.

Retail banking: Now non-urban India will drive growth

If you dig out the roots of Dalal Street's runaway growth today, you'll be surprised to find that it was banking that actually fuelled the stock rally in 2002. Banking stocks haven't lost steam since.

The P-E (price-earning) multiple in the sector has grown from 3.5 in 2002-03 to 6.5 in 2003-04, moving up to around 8 in 2004-05 and, as analysts point out, is still low while below 10. In comparison, the Sensex's trailing P-E is 16. What's keeping interest alive is banks' eagerness to acquire size, their booming retail business and the accelerated recovery of NPAs (non-performing assets) post the securitisation ordinance.

Credit growth has increased manifold, from 17.30 per cent in the quarter ended March 2004 to 30.60 per cent in the quarter ended March 2005. The credit-to-deposit ratio has risen from 53.5 per cent in March 2000 to 64.7 per cent in March 2005, while doubtful debts have fallen from 7.1 per cent in March 2000 to 3.1 per cent in March 2005. Banks are spreading to non-metro areas and players such as HDFC Bank are banking on this to fuel retail credit growth. "The explosion is going to come from non-urban India," confirms Aditya Puri, Managing Director, HDFC Bank. Deutsche Bank's re-entry into retail strengthens the belief in retail credit growth. "India is the only country in Asia Pacific where we are launching retail banking services," says Gunit Chadha, CEO, Deutsche Bank India.

The RBI's recent decision to allow banks to include securities in the Investment Fluctuation Reserve (IFR) as Tier-I capital will go a long way towards enhancing banks' capacity to lend more in a growing economy. "PNB has emerged as the biggest gainer due to this measure, which will result in a 240 basis points improvement in the bank's Tier-I capital," says an analyst at J.P. Morgan. According to ICICI Securities, SBI is the top pick in the sector, while J.P. Morgan sets a 12-month price target of Rs 1,223 for it and Rs 757 for hdfc Bank.

One word of caution: "In a rising interest rate scenario, banks may take a hit on their government securities portfolio," warns V.K. Sharma, Investment Analyst at Anagram Securities.

-Anand Adhikari

Dictate Your Terms
Step-up, step-down, accelerated EMIs... are the variants on loan repayment worth a look?

Brij Patil is 28 and has heard that he can save a packet on rent, not to mention on taxes, by buying a house on loan. The bad news: his salary isn't good enough yet for him to afford the equated monthly instalments (EMIs) on the loan he wants. The good news: loan products now have so many variants that he could still get the loan.

Banks are increasingly offering the step-up loan, which offers variable EMIs based on payback capacity. You would be wise to first check out if it is really worth your while.

Take Patil's case. For a Rs 10-lakh loan on a 20-year tenure, he is now offered the chance to pay a low initial EMI of about Rs 6,670 per month for the first two years, going up to about Rs 8,370 over the next five years. Then, since Patil's salary will presumably grow over time, his EMI will be increased to about Rs 9,000 for the final period. The step-up loan raises EMIs periodically, with a 20-year term typically divided into three stages.

But just what is Patil really gaining? For an ordinary Rs 10 lakh loan at the same 8 per cent interest, Patil would have paid EMIs of about Rs 8,400 for 20 years. The step-up loan reduces his EMIs for the first two years by a meagre Rs 1,700, but increases the cost of his loan to Rs 20,72,520-that's about Rs 65,000 extra (see table above). Despite his low payback capacity, Patil is able to get a higher loan because of the initially low EMIs. However, if he can stretch his EMIs those first two years, he can save a hefty Rs 65,000 overall.

Banks are fairly choosy about extending this facility and it's usually offered only to professionals whose earning potential they expect will grow exponentially, for instance an MBA or a ca graduate, or a salaried executive in a good position whose income can be predicted to grow at a CAGR of 10-15 per cent.

Loan variants come in other forms as well. Take the step-down loan, offered by some banks on a case-to-case basis, which works in exactly the opposite way, with EMIs high in the initial stage and getting progressively lower. For instance, if you are nearing retirement, but your spouse or adult children are working, banks could offer you the step-down option as part of a joint loan. Says Rajan Ghotgalkar, Corporate Head (Retail Banking), IDBI Bank: "The most important aspect in loan repayment, apart from the ability and willingness of the borrower to pay, is how much surplus income the customer will have, after subtracting emergency funds, to repay his loan."

Options like HDFC's accelerated repayment scheme, which allows you to repay the loan faster by increasing the EMI after a certain period, make more sense. If you get an increment or a hike in disposable income, you can opt to pay higher EMIs, thus accelerating the repayment and saving on interest costs. This option helps you avoid the 2 per cent foreclosure charge, which most banks charge on full prepayment. According to Ghotgalkar, research shows that borrowers tend to repay home loans in half the total tenure. Thus, if someone takes a loan for 20 years, she usually repays it by the 10th or the 12th year.

Before you choose a loan, explore all the options and decide if you want to make the pay-off in terms of a slightly costlier loan. Your first move right now, with interest rates looking set to rise, should be to lock in to a fixed rate loan.

-Mahesh Nayak

Surprising Zs
Dig. There might be gems in the dirt.

Imagine suggesting that you buy z group stocks. Are we quite insane? Not really-we snooped around and found that they are not all bad apples. Although stocks are categorised Z when they breach provisions of the listing agreement, a couple of them have landed here on technical issues. Both Tamil Nadu-based Karur KCP Packaging and Pune-based Sudarshan Chemicals are in the Z group because although BSE stipulates connectivity with both the National Securities Depository and the Central Depository Services, they had connectivity with only one. Karur KCP's fundamentals are strong. Net profits for 2004-05 were Rs 5.07 on revenues of Rs 205 crore and it paid a 5 per cent dividend. The company recently joined CDSL and is contemplating an NSE listing. It will likely exit the Z group when BSE next revises the list. Says Ashish Chugh, Stock Analyst, Valuenotes.com: "Once Karur KCP is off the Z list, it's going to be a multibagger." The stock trades at Rs 55 levels (equal to its book value of Rs 55). Sudarshan Chemicals (Japan's Dainippon Ink & Chemicals has a 10 per cent stake) has reported revenues of Rs 370 crore and net profits of Rs 14.79 crore for 2004-05. Says Tejas Doshi, Research Head, Sushil Finance: "It has put up consistent performance and paid 30 per cent dividend." Increased pigment exports and product ramp-up make it worth a look at Rs 208. Both are good picks, but only if you have a strong heart and have a long-term horizon.

-Sahad P.V.

Value-picker's Corner

MINDA INDUSTRIES; PRICE: RS 190

Minda industries is a leader in automotive switches and lighting with a 60 per cent market share. With major two-wheeler and tractor OEMs among its clients, revenues should surge following the recovery in the tractor and two-wheeler market. Minda's JV with global automotive horn leader Fiamm SpAv of Italy should see exports rise. Net profit rose 145 per cent over the previous corresponding period to touch Rs 2.47 crore in the first quarter this fiscal, while revenues at Rs 56.27 crore gained 47 per cent. On a trailing 12 month basis, Minda's EPS is Rs 11.2, with P-E multiple of 16.9 (industry average: 19.3). A good long-term buy.

-Mahesh Nayak

Trend-spotting

Contra schemes are becoming fashionable. Tata Mutual Fund becomes the third to launch one after Kotak and the much older SBI Magnum Contra. If you're looking forward to some radical stock picking, pause. Although SBI Magnum has returned 45 per cent over the last five years, the fact remains that 'contra' is just another label. As financial planner Gaurav Mashruwalla says: "I always recommend a plain diversified scheme with a long performance record." Analysts point out that picking undervalued stocks with strong fundamentals is expected of funds anyway-the contra label just makes a virtue of it. Says portfolio manager Farid A. Husain: "It's just old wine in new bottles; your best bet remains the flagship diversified scheme of an AMC."

-Vaishna Roy