Anand Rathi, founder of Anand Rathi Group, which is active in wealth management and brokerage and distribution in equities, mutual funds and other financial services, talks about the ongoing economic slowdown and the reforms that can reverse it. Highlighting the mistakes ordinary investors make, he argues that mutual funds are better options than stocks for most of them.
Equity markets in India have been suffering in the past 12-18 months. Factors behind this such as consumption slowdown or global trade wars are unlikely to be resolved quickly. Should investors lower their return expectations from equity then?
These types of patches have come several times in the last 35-40 years. They come and will keep coming. Interest rates are going down due to easing of liquidity in India and globally. A margin of 8-10% over the risk-free interest rate is good. Thus, if you can make 14-15% from equity, that’s a good return expectation.
Brokers often say buy bluechips and forget about them. But many blue-chips have failed over even long periods of time. So should the mantra be buy mutual funds and forget? Alternatively should it be: buy the index and forget?
Never say buy and forget. You can’t forget. You need to buy with a long-term view but your portfolio requires continuous review. A large investor should review the portfolio at least once a month, a smaller investors should do so at least once in three months. You need to review your portfolio whether you are invested in individual stocks or in mutual funds. Today’s bluechips were not bluechips 20-30 years ago and the bluechips of 20-30 years hence are not today’s bluechips. You don’t have to churn your portfolio and become a trader. However, between individual stocks and mutual funds, I would recommend the latter. Everyone talks of risk management but critical risk management requires quantifying risk. This will lead to a lot more objective decision making.
You need to see the amount of volatility in prices, measured by standard deviation (measures the volatility in returns). The volatility of an individual stock may be 20-30%. In Nifty, it is a lot lower. As you go into portfolios rather than stocks, volatility comes down. In the long term, investors should look at mutual funds or something based on the index. The effort needed to manage individual stocks is much higher than the effort required for funds.
Will the recent announcements on the FPI surcharge rollback and the loosening of FDI be enough to revive the market? What else is needed?
It is a good beginning. Some positivity has come. The market was very negative after the budget and as a result of global news. However, this is not enough. Many more things need to be done. Changing the FPI surcharge has given a good signal that the government is open-minded and objective-oriented. From a stock market angle, double taxation of dividends should go, which the committee on the Direct Taxes Code has also recommended, from what I understand. Similarly capital gains in equities should go. The securities transaction tax (STT) was introduced in lieu of capital gains in 2004. But today we have both capital gains and STT and STT is higher than what it was when it was introduced. Making the cost of transactions higher or having very heavy taxation on people capable of generating higher income is not a desirable sign. Globally, governments have brought down rates of tax. The prime minister himself said that wealth creators must be respected. From a macroeconomic angle, liquidity is the biggest challenge. The Reserve Bank of India (RBI) has taken steps to ease liquidity but liquidity remains with RBI. Some announcements such as vigilance cases to be determined at the bank level are good. The banking sector should not remain afraid of lending. Gradually that confidence has to be built.
Will ₹1.76 trillion transferred by RBI to the government have an inflationary effect?
I don’t think so. The amount is not that large and in fact we need more liquidity. Government payments to vendors are getting delayed over a period of time. The government should pay people faster and you will have more money circulating. An amount of ₹90,000 crore was estimated in the budget, while ₹1.76 trillion was actually given. I don’t think this will have an inflationary effect. At present there is a lot of unutilized manufacturing capacity. Hence, more money in the market is not likely to have an immediate inflationary effect.
With so much uncertainty, when should an ordinary investor buy a stock?
It’s a very big question. The only way the investor can go right in buying a stock, is with the right advisor. This is the disadvantage of the online system. To buy online, the investor should be very well educated and extremely competent. This is not easy in a complex market like India. My advice to people has all along been to invest in mutual funds rather than stocks, if you are not a trader. Second, I would say, go to a proper advisor.
When to exit? Who will tell the investor? When a stock falls, people keep on averaging their purchase price. In a falling market, never average down. Instead you should use a stop-loss system (a price at which an investor’s position is automatically closed).
Finally, our derivatives market is open to small investors although Sebi has gradually increased the lot size. It is very difficult to make money in the derivatives market. The problem in derivatives is that people lose money and the image of stock market gets spoiled.