Ensuring Equity Returns

I have been investing directly in equities for quite some time now. However, I end up using quite a bit of money every time the markets become volatile, making it a zero sum game for me. Can you please guide me as to the best approach for a person like me to invest in a meaningful manner, so that there are decent returns on a fairly long-term basis?

Answer:

Success in equity investing requires many parameters to be met. Given your situation, I think there are two issues to be explained.

1.    Investing calls for identifying the right companies, and having identified them, buying them at the right price. For investors, a ‘right company’ can have many interpretations. According to me, a right company for the common investor is one that has an established business model and a track record of generating profits for at least 5 years. The business should be one that is likely to have a continued demand for its products or services, and that has a management that can be trusted to take care of the shareholders’ interests. Consistency in generating an above-average or minimally an average ‘Return on Equity’ through different cycles of the economy is desired. A large market share or dominance in its industry will give it strength.

Once you have identified a set of such companies, you must wait to buy them at the right price. Buying the stock of a good company at a price less than or equal to its value is what will generate long-term gains for you. If evaluating individual stocks seems difficult, then one should simply opt for well-managed equity funds. Here, the probability of making errors is lesser, since the task of stock research is the responsibility of the fund management team, which is better equipped than the lay investor.

2.    The second issue is related to dealing with volatility. Volatility is in the nature of stock markets, and has always been there. If there was no volatility, there would be no gains. One way of dealing with volatility is to accumulate your target company over time, looking to buy on dips at various points of time. This period should be long enough for enough buying opportunities to present themselves. Having some cash in your pocket to pick up more of your favourite stock or fund during market falls helps price averaging. Even a simplistic model of buying on a random date every month, but for long enough, has been known to provide above normal rates of return. Hence, volatility helps averaging.

The time period that you would remain invested for is also crucial. Unless one allows a 5-year period, any judgement on returns is hasty.

To conclude, the right company plus the right price plus enough time to grow equals long-term returns.

Short-Term Investing

I am investing Rs 3000 in ICICI Prudential SIP. Now, I wish invest Rs 5000 every month in the short term. Will you please guide me about the best possible way of investing this money? I would also like to know whether this is a good time to venture into the stock market with small capital of Rs 10000-15000?

Answer:

I wish you had told us which scheme of ICICI Prudential you are investing in, for greater insight. However, for short-term investing, you could consider any of the following schemes.

Templeton India Low Duration Fund has a high YTM of 9.84%, with a modified duration of 0.25 years. The scheme has a 3-month lock-in period, and is convenient in terms of liquidity. If your investment horizon is for a longer term, i.e. more than 1 year, we recommend Templeton India Short Term Income Plan that has a higher YTM of 9.98%, but with a lock-in period of 9 months. As long as you are comfortable with the lock-in period, these are fine debt funds.