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PERSONAL FINANCE Do The Balancing Act Stocks look iffy, deposit rates are soft, and equity funds aren't making you leap with joy either. Maybe it's time you took a hard look at your portfolio of investments. By Shilpa Nayak
If Sharma's story sounds only too familiar to you, then may be it is time you put your portfolio again in the blender. The time is opportune. There is a lot of uncertainty in the stockmarkets; even mutual funds, once considered a safe haven for small investors, have proved that they are not immune to stockmarket's g-forces; the economy looks set for another six months of coasting (that is, if no big calamity befalls us); and consumers are cutting back on spending, preferring to save up for the rainy day. The net result is that there are a plenty of investment bargains to strike. Says Sanjay Suri, chartered accountant and an investment advisor: ''Given that the market is almost at the bottom, this is probably the best time to look for bargains and restructure your portfolio.'' Get The Mix Right
How you rebuild your wealth will be a function of your profile as an investor. For example, if you are an early-career executive, you should continue with a larger exposure to equity. A middle-aged investor, however, may want a slight bias towards debt-oriented instruments, and start thinking about investing in property. An older investor would prefer the comfort of monthly-income schemes, and not so much equity (see Where Do You Fit?). But then not all investors in the same age or income bracket may have comparable risk appetite or returns need. The point, however, is that no matter what your profile is, you still need to rejig your investments. Take, for example, Feroze and Lubna. As young software professionals, they were big believers in the software industry. Therefore, apart from the stock options they already had in their respective companies, they invested in three software scrips: Wipro, NIIT and HCL Technologies. Some money had also been invested in national savings certificate, life insurance, and medi-claim policies-a de rigueur small investors. Pick With Care Feroze believes, and rightly so, that his portfolio companies are fundamentally strong. Therefore, he is loath to sell any of these right now, especially since that would mean booking a loss. While, we believe what Feroze is doing is the right thing, a caveat is in order. When it comes to future investments, Feroze and Lubna must, first of all, diversify their portfolio. They should look to investing in some other fundamentally strong sectors such as pharmaceutical and fast moving consumer goods. Doing so will help offset the losses in one with the gains in another. So even if your portfolio doesn't appreciate significantly, it is more or less protected against a cave-in-just ask any fund manager. Some other investors may have chosen to play it a little more aggressively and picked up cheaper software stocks such as DSQ, Global Tele or RS Software. These investors have no choice but to take a hit and sell these stocks, since they don't seem to show any signs of a revival. Agrees Suri: ''That is part of the game. You win some, you lose some.'' One way to minimise chances of picking a lemon is to invest in market leaders. For example, in FMCG, HLL and P&G are strong stocks to have in your portfolio. In pharma, Dr Reddy's Lab, Cipla, and Hoechst are good picks. The rationale for investing in leaders is simple: when the market is booming, they are the first to make the most of it. But when markets hit a trough, they don't suffer as much because they have size, superior management skills, and a wider product portfolio (yeah, it works here too). This time round when you go sifting stocks, do some basic research, read up some (good) analysts reports on the Net, and look for something called the ''upside'' to a stock. For example, in pharma, some analysts believe that Knoll Pharma has more upside (that is stock price increase) than Pfizer or Wockhardt. Similarly, Cipla is said to have greater price increase potential than Dr Reddy's. If you read enough of good research reports, it should be fairly easy to figure out what stocks the marketmen are going to go after. Go out and buy a few yourself.
What About US 64? If you already own some units of the ill-fated US 64 scheme, hold on to it. Your investment may have a future still. Explains Abhay Aima, Investment Advisor, HDFC Bank: ''At least investors are getting 10 per cent assured returns, and that's not bad give the current market conditions.'' Should the net asset value (NAV) of the fund go up (it's unlikely, though), you will gain some bonus points. Every mutual fund scheme has a risk and return profile that is different from another. Take income funds, for example. The essential value of these investments comes from the dividend that the stock offers. Growth funds, on the other hand, seek capital appreciation of the stock. It's a no brainer, then, that the chances of a company with a proven dividend track record not paying out in the next quarter or year are fewer than that of a stock appreciating. Therefore, the returns on an income fund are lower than those on a growth fund. Points out Bharat Damani, a Mumbai-based investment advisor: "Be it US 64 or any other investment instrument that is linked to equity, an investor has to understand that more returns come only with more risks. Otherwise, it is best to stick to debt."
When you make the call on mutual funds, figure out how much risk you can afford to take. Sure, your returns need may be high, but your investment will pay only if you are able to optimise the risk-return equation. ''Investors have to realise that there are no free lunches,'' says Kirit Sanghvi, a Mumbai-based financial advisor. If you are not looking for above-the-market returns, then index-funds may just be the thing for you. Like the name suggests, the funds mirror the gain or fall in indices such as the Sensex and Nifty. Taxation is an issue that will crop up when you reconfigure your portfolio. Income tax rules prohibit investors from setting off their investment losses (for example, of the kind made by US 64 unit holders) against any other kind of income. In other words, investment losses can be set off only against investment income. Sanghvi, however, has a solution: ''Erosion of capital is one punishment that investors got for sticking with US 64. By giving a tax break, the government can help small investors.'' But given the government's empty coffers, such a break may not be forthcoming. Rues Vijay Galla, a store-owner in Mumbai: "I regret not having sold my US 64 units when I had the chance to." If like Galla you are fed up with the vagaries of the stockmarkets, try real estate. Property prices in all the metros-except Mumbai-are soft. According to Cushman & Wakefield, real estate consultants, values of Grade a (read: prime) properties in Delhi are down between 25 and 50 per cent of their November 1997 values. Once the economy picks up-something expected
by the end of this year-prices will go up. In any case, money invested in
land is rarely lost, unless the investment is made at peak rates. Says
Vikram Vora, a young software professional in Mumbai: ''My father sold all
his US 64 units about a month ago to part-finance construction of a house
on a plot of land he had bought 20 years ago. Today, he is a very happy
man.'' Like most things in life, smart investing-like the following story
tells you-is all about timing. |
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Last
week, when Nikhil Sharma went to meet his chartered accountant, he got a
rude shock. His networth-as calculated by investments in stocks, savings
schemes, mutual funds, and property-had taken a huge dive. The culprit was
easy to find: While his investments in stocks and mutual funds had
actually fallen, the one in property hadn't appreciated at all. It was as
if the past six months had just not existed on his investment calendar.
