This post-budget period has been the most worrying time for small investors. Risk-free small savings and regular income schemes like National Savings Certificate, Post-Office Monthly Income Scheme, Public Provident Fund, Bank Fixed Deposits, etc, have been made less remunerative by lowering the administrative interest on them by 1.5 per cent; the stock market took a tumble making investment in shares riskier than ever and even the less-riskier mutual funds plunged as the share prices nose-dived.Fund limitations have restricted small investors to mutual funds. The assured income schemes from these mutual funds provided investors a safe avenue to park their limited funds to gain a regular income. But, these schemes have since been withdrawn by mutual fund managers. So, small investors are left with a Hobson's choice of investing directly in shares or mutual funds.
But it is possible to organise one's portfolio so that your funds are exposed to the least risk. "A simple way to organise one's investment portfolio is to divide it wisely among the different available options considering the associated risk factor with each option," says RK Gupta, chief executive officer, Creditcapital Asset Management Company. "The thumb rule is, for an ordinary small investor, to keep 30-35 per cent of one's idle money in no-risk small savings schemes like bank fixed deposits, another 30-35 per cent in bonds, income or gilt funds with a mutual fund and the remaining of 30-40 per cent in equity or growth funds. Such a portfolio arrangement assures a reasonable regular return at a very low risk," explains Mr Gupta.
While investment in small savings/income schemes like bank fixed deposits or POMIS is a no-risk low-yield affair, investment in bonds or MF debt-funds like gilt, bond or gsec fund entails a reasonable annual return of 9-10 per cent and safety. Investment in equity-linked growth funds involves risk, but not as high as a direct investment in shares, but at the same time such investments stand the chances of reasonable capital appreciation. "With almost all the mutual funds in India having their own websites, now it has become easier for common investors to keep a day-to-day track of the performances of different schemes of a particular mutual fund or compare performances of the mutual funds across-the-board," Mr Gupta says.
However, Mr Gupta enumerates some parameters for judging a mutual fund or a scheme. First, one should check who is the registrar and transfer (R&T) agent of a mutual fund. For the R&T agent is the ultimate service provider to the investors. In this connection, one should also note who are the bankers for the scheme, for if the service provider and the bankers do not provide prompt services like pay the cash on redemption within 7-10 days then it is only the investor who will be in a position to lose by not capitalising on his money over the delayed period.
Second, one should keep a close eye on portfolio disclosures of funds. The more frequent a mutual fund discloses its portfolios, the better it is for an investor to understand the changes and performances of the scheme he has put his money in. Some MFs often don't update their portfolio disclosures on their respective websites for as long as a month. So, investors in those funds do not know the constituent stocks in the portfolio of their schemes and cannot readily exit from the scheme. Third, the quality of communication to investors. It is of immense importance how frequently a MF communicate with its investors, what information does it communicate and how transparent these information are. "Say, if the investors are told the criteria on the basis of which a MF selects the portfolio constituents for a particular scheme, the investors of that scheme can calculate themselves how strong the fundamentals of that particular scheme are and thereupon they can make decisions when to buy or sold," cites Mr Gupta.
He adds, "Now, when it comes to buy a particular MF scheme or a share, the most important element to keep in mind is the timing. Like most of the stocks are presently ruling close to their 52-weeks low and most of the MF schemes are registering their respective NAV (Net Asset Value) below or close to their par value. It is a good time to make a purchase." He continues, "within this fortnight neither the fundamentals of companies or those of MF schemes have changed. The market came down solely because of extraneous factors. So, you see, the whole market index instead of one or two particular share have fallen. If it is so, then look for a MF scheme with sound portfolio. Those MF schemes whose beta-value is more are likely to bounce back more rapidly once the market starts looking up."
For investors, not scared of the recent fall in stock markets, it is a good time to invest in shares, too. Now, the question is how to chose a good share that promises low-risk and steady return. For such a selection, Mr Gupta cites five criteria. "Choose those counters which satisfies the followings," he says:
Shares with price-book value ratio less than one-this implies that these category shares are underpriced. So they the most likely to readily bounce back.
Shares with a positive return on capital employed (ROCE)-shares which have a ROCE more than 10 are good for they assures a reasonable annual return in excess of 10 per cent.
Shares with a positive return on net worth (RONW)-shares with a more than 10 RONW indicate that their underlying financial fundamentals are strong enough.
Companies with sufficiently large equity base, Rs 5 crore can be taken as a benchmark-a large equity base ensures sufficient liquidity of its shares in the market.
Companies having a track record of paying dividend for the last two consecutive years.However, an investment option chosen on the basis of the above mentioned criteria are unlikely to become a highly remunerative. The investment will rather be a moderately remunerative one but a steady one with minimum downward risk.
Copyright © 2001 Indian Express Newspapers (Bombay) Ltd.
