Initial public offering
Rajiv Aggarwal, 32, a wealth management adviser, wants his investments to be driven by fundamentals and not market sentiments. He doesn’t want the market’s bull or bear phase to affect his investments. Aggarwal, therefore, invests in almost all good initial public offerings (IPOs) and sells them on the listing date. The strategy helps him earn around 10-20% average returns over the 20-day period, during which the IPO lists and closes.
How it works
“Digging out value-driven or undervalued stocks from the current soaring markets is not an easy task,” he says. “Investments through IPOs give you a better chance to pick up undervalued stocks and a chance to meet the management team.” Before investing in any offering, Aggarwal first reads the red herring prospectus of the company, goes through its financials, learns about the management and then takes a call.
Currently, Aggarwal has also parked his money in fixed monthly plans (FMPs) and stocks. FMPs are mutual fund schemes that invest primarily in fixed-return investments such as government bonds and money market instruments only for a fixed period of time. These could be for as short as 15 days or as long as five years. He says that one should not keep investments for the long term in the stock market unless one gets a good buy. “You should know how to rotate your portfolio,” he says.
This calendar year alone, Aggarwal has invested in 50 IPOs. While Power Grid Corp. of India Ltd is one of the stocks that gave him the highest returns, House of Pearl Fashions Ltd gave him heartburn. But, he says, investing in primary markets is still a safer way to make a profit than to buy from the secondary market. Retail investors are allowed to invest only up to Rs1 lakh in IPOs. Allotment of shares, therefore, is one issue that most IPOs subscribers have to grapple with. “I got full allotment for shares of DLF Ltd and ICICI Bank Ltd, but couldn’t get even a single share for Motilal Oswal Securities Ltd and Koutons Retail Ltd,” says Aggarwal. He has no regrets, though, because that’s the nature of the beast, he says.
Ashit Thaker, 47, a consultant-options trader, has been trading in the options market and says that unlike other tools, it can give higher returns. Nearly 80% of his total investment is in options trading, which gives an average return of around 10% every month. An option is a contract which gives the buyer the right, but not the obligation, to buy or sell shares of the underlying security at a specific price on or before a specific date. It is a contract between two parties in which buyers receive a privilege for which they pay a premium. The sellers accept an obligation for which they receive a fee. It may seem simple, but there is much more to understand beyond its narrow definition.
How it works
“I don’t like timing the stock market,” says Thaker. He adds: “To have guaranteed returns every month, I prefer hedging the market risks by using different options strategies.” Thaker admits that volatility is important to make profits through hedging in options. “The probability of not making profit is low—one in a 12-month period.”
Thaker buys a call of a particular strike and buys a put of a different strike price. When the markets go up, his call premium too goes up, but the premium in the put goes down. This way, from the day of entry in the contract, he would always be at a loss until the market as a whole either rises or falls beyond the certain point.
Another strategy works this way: Thaker goes short in call and put options and becomes a writer. Being a writer, Thaker doesn’t have to pay premium costs but only certain margins attached to the stock. This way, if the market flares up, he stands to lose an unlimited amount from the call, but he can earn only a limited profit in the put. “These strategies sound very complex but they can fetch you good returns,” he says.
Manoj Kumar Singhal
Systematic investment plan
Manoj Kumar Singhal, 31, a chartered accountant, is a happy man these days. He invests around 40% of his income in systematic investment plans (SIP). He started investing in SIPs three years ago and his portfolio has now risen by 50%.
Manoj Kumar Singhal
How it works
A SIP, also called rupee-cost-averaging, is a periodic investment vehicle offered by mutual funds to help investors invest a portion of their income in a disciplined way. The minimum amount to be invested could be as little as Rs500 and the investment frequency is usually monthly or quarterly.
Singhal still recalls the days when SIP was not common investment parlance or practice, and people preferred to put their money in Life Insurance Corp. of India policies or invest directly in shares. “It was not an easy decision when people around me were making a quick buck by directly investing in shares,” says Singhal. “But being a chartered accountant, I knew the strategy would give me safe returns over the longer term. In addition, I didn’t have enough time to keep track of stock prices on a daily basis.”
Singhal doesn’t depend on expert advice to choose his funds. He prefers to look through personal finance portals, such as www.moneycontrol.com and www.valueresearchonline.com to learn more about the fund. He currently has a portfolio of about Rs60-70 lakh and almost 100% of his investment in mutual funds is through the SIP route. Apart from SIPs, he has also invested in shares and real estate. Singhal has also set aside some cash to meet contingencies. “Given the three to four days taken to liquidate your mutual fund earnings, it is a good idea to keep a portion of your savings in cash,” he says.
Although Singhal doesn’t depend on brokers’ advice when choosing funds, he uses their services for documentation and after-sales service. “Since I don’t have enough time left after work, I need a broker who can do all documentation for me,” he says. “Brokers don’t charge you anything for this service because they get commission from mutual fund companies to sell their products.”
But, the fact that he has changed three brokers in three years suggests that even after-sales service could be an important criterion while choosing a broker.
Alok Singh Negi
Fixed return products
Why fixed return products?
Alok Singh Negi, 26, an employee of Chilworth Safety & Risk Management Pvt. Ltd, a safety consultancy firm, takes extra precautions when it comes to investing. Negi prefers to invest in fixed-income instruments, such as public provident fund (PPF), national savings certificate (NSC) and postal savings because of his limited knowledge of the stock markets.
Alok Singh Negi
How it works
The PPF plan, a Union government scheme, seeks to help individuals save for their retirement privately in the form of an individual retirement account. A PPF account can be opened at post offices and branches of public sector banks throughout the country. The NSC is a post office savings scheme with minimum limit of Rs100 on investment but no upper limit.
“Although, a fixed instruments give you only 8% per annum, at least you don’t have the fear of losing the money,” says Negi. “I have seen many friends who make and lose thousands of rupees in the stock markets in a day and it’s not my cup of tea.” Negi does occasionally invest in the markets, but only in blue chip companies. The fact that no one in his family has ever invested in the stock markets adds to his fears.
Negi follows a simple strategy of putting 30% of his salary every month in fixed income instruments. Around 30% of his total investments are in PPF, 25% in NSC and 10% in other postal savings and the rest in insurance. Even the recent bull run hasn’t made him a believer.
Munish Nagraj, 45, knows how to make the most out of the current volatility in the bourses: arbitrage. “Instead of having your money lie idle in banks or wiped out because of one wrong investment decision, I find arbitrage a sensible decision,” says Nagraj. “It is one of the safest ways to earn an assured return of 15-20% on a monthly basis.” Given the time required to spot arbitrage transaction opportunities, Nagraj is involved full time in the stock markets.
How it works
Nagraj constantly tracks share prices of companies on the Sensex and the moment he spots any price difference in a stock traded, he locks in a transaction by buying from an exchange, where the rate is lower, and selling the same stock on the exchange, where the rate is higher. The transaction helps to lock profit from the difference because the higher price of the stock is guaranteed, which can be squared off any time before the expiration of the futures contract to realize the gain. Nagraj started trading in 1987 with a paltry sum of Rs50,000 and today he holds a sizeable portfolio. He doesn’t want to disclose the exact size of his portfolio but admits it has grown considerably.
Nagraj’s game plan keeps changing with the change of volatility in the markets. “Currently, when volatility is high in the markets, 70% of my portfolio money goes into the arbitrage business. The rest goes to long-term investment in stocks. But when volatility was low and markets were not so high, I had allocated equally to investments in shares and arbitrage,” he says. He admits that the success of arbitrage depends more on your ability to rotate a portfolio than to volume of transactions. “I am able to rotate my money around three times in a month,” he adds. Apart from stocks, he also engages in arbitrage in the commodities market.
But, Nagraj says that broker selection is a crucial decision. “I have been trading with SMC Global Securities Ltd, a New Delhi-based stock brokerage firm, for the past 10 years,” he adds.
Photographs by Madhu Kapparath; Abhijit Bhatlekar/Mint
Imaging by Malay Karmakar/Mint