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Rasheeda Bhagat

GOING by the gyrations in the Sensex and Nifty over the last couple of weeks, it looks like the worst of 2001 is behind us. The outlook for 2002 is filled with hope, and the returns from the equity market could be substantial, provided investors have the good sense and the patience to adhere to the good old investment mantra — go in for quality, and have a long-term outlook.

Mr Shailendra Bhandari

"A look at the overall environment gives you the feeling that 2002 will be substantially better than 2001, which was a tough year in so many ways which had nothing to do with the economy at all," says Mr Shailendra Bhandari, Managing Director, Prudential ICICI. "There are signs that the global economy will pick up by the next quarter or half; interest rates — short-term in particular — are at an all-time low whether in the US and Japan. In India, even long-term interest rates are dropping; the 10-year bond is below 8 per cent."

Despite the slowdown, he says the growth rate was still 5.3 per cent. "If we compare to what we are used to, in excess of 6 per cent, is a bit of a letdown but in the global context, it is excellent."

In this background, the expected annual return on equity, at around 15-20 per cent, is quite good. "Overall, we are quite positive and believe there is a reason to increase one's asset allocation to equity."

On the strategy small investors should adopt, what with most rattled by their experience in the market the last two years, he says: "In investment, you do not have the concept of one-size fit-all. So every person has to look at his investment portfolio vis-à-vis his own risk appetite, his stage in life, age, and so on."

The important thing is to have a diversified portfolio. "Last year was great for debt, but this year is unlikely to be quite as good. Nevertheless, you do want to have some debt because interest rates are going to run away; also it gives you stability and predictable cash flows."

Except for people ten years past retirement and with a short investment horizon, even those with a reasonable three-four year time frame should have some exposure to equity "because at these low interest rates, the present valuations and a reasonably good outlook on the economy, you will possibly be missing out on a chance to improve your overall asset returns."

But he warns investors and asks them to avoid investing in a concentrated pocket, in fads, and urges them to buy only into quality. Those of the small investors who do not have the time or, and the expertise to "monitor the market directly, should have a mix of some diversified equity, debt and income funds and some in bank deposits. That would be a sensible mix."

Why he suggests mutual funds and not direct exposure to the market for such investors is because "unless you have the time and the resources and the expertise, entering into the market yourself directly very often misfires because you end up investing on tips; whether from stockbrokers or friends. For the average investor, I would recommend the MFs."And within the funds, says Mr Bhandari, if you are "reasonably savvy" choose a particular sector — pharma, FMCG or whatever. "But if you are holding a full time job and do not want to waste time trying to decide if technology or petrochemicals will do well this year, I would advise you to get into a diversified fund, and you will get a piece of all the sectors and your fund manager will hopefully have the good sense to be a little overweight in the sector which is doing better."

What should investors who had put in money in MFs at their highs do at this point and does it make sense to average out? He says, "First, leaving history aside for a minute, and though it makes sense to average and there is always an argument for systematically putting in more money, the investor should step back for a moment and ask himself, `I have already invested at Rs10, should I invest at Rs 3 or 4'?"To answer this question he should ask another: `Am I already over-concentrated there? Do I already have too much of my assets in that sector? If the answer is yes, it does not really make sense to average out. If the answer is no, do it. But do keep in mind that even in India, equity over a long period, gives an average return of 16-17 per cent. Or even 20 per cent. But do not invest saying `today something is 3; it used to be 10 so it should give me 10 in the next six months'. Expect it to give you 20 per cent per annum and if you go with those expectations and as long as you are not over-concentrated and go with quality, you will not go wrong."

On the strategy ICICI Pru is pursuing, Mr Bhandari said that though there was some uncertainty at the moment on the Indo-Pak front, "our feeling is that these things will not come to a head. Either they will resolve themselves over a period or people will get used to them. But there are other solid reasons for equity market to do well this year. So, we have been investing and looking at certain sectors we have been positive on, such as infrastructure — construction, cement, engineering — as also industries related to consumer durables, pharmaceuticals and auto. We are also positive on some segments of technology as well; frontline as well as those who are moving up the value-chain."

He said even last year money had been flowing in steadily, of course, more into debt funds. But even on equity "one has to give credit to the equity investors; at no stage did we see any panicky redemptions. But as you said, the average retail investor has to get his confidence back before he starts investing in equity in a large measure. So we are seeing investments coming in slow trickles; nothing like the craze during the 1999-2000 tech boom. But we are seeing money coming in and the overall outlook is quite positive."

Mr C.J. George

Echoing his sentiments, Mr C. J. George, Managing Director of Geojit Securities, says that in a lower interest rate regime, "equity will remain the most attractive investment option for investors currently confused about various investment options as the yield is less than satisfactory. This will lead to more enthusiasm in the equity market."

On whether the market was likely to see the volatility of the last two years, he says that long-term investors need not worry too much on this aspect as their aim was "growth over a reasonable period of time. A country of India's size and magnitude will always face one event or the other and the market will continue to reflect all those. Eventually, the long-term investor in equity will have the last laugh."

As for investors learning from past mistakes, Mr George says that in the last few years "especially after screen-based trading reached all corners of the country, many investors turned to trading which resulted in huge losses for investors. Operators and speculators who have the muscle to move the market always fooled these traders and small-time speculators. This class of people normally does not learn lessons, and it is the duty of financial sector intermediaries to advise them to invest sensibly and wisely."

But those people who took adequate safeguards and indulged in sensible behaviour were poised to get decent returns from the market. "Small investors should first understand the basic lesson that equity investment is inherently risky and should only invest for long term, using disposable surplus. They should neither borrow nor use short-term surplus to invest in the equity market. Only the smart traders should use options such as loans and short-term funds in the stock market. Small investors should increasingly look at MFs, portfolio managers, and the like for taking exposure in equity," he added.

Because of SEBI's initiatives, Mr George thinks the equity market will be a safer place in the years to come. "The single most important development in the stock exchanges is the transformation to safer and intelligent trading, thanks to derivatives. The MoF and SEBI deserve to be congratulated for taking this bold and timely initiative. After every scam, we seem to come out much stronger, stabler and cleaner."

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