On CNBC-TV18's special show 'The Informed Investor', investment analyst Dipan Mehta and Radhika Gupta, director, Forefront Capital Management answer investors' queries.
Mehta says in the last five years, equities have gone nowhere. "My sense is that the next three-four years could be very good for equity," he adds.
He advises investors to build a bluechip portfolio.
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Below is the edited transcript of the interview on CNBC-TV18.
Q: I want to ask you that retail investors have been absent for so long from the market. But now with things looking good, what is your call on the market now?
Mehta: I think that typically, over a long period of time like 30 years or so, the Sensex has given returns of about 14-15 percent easily on a compound basis, plus the other dividends. In the last five years, equities have gone nowhere. So, my sense is that the next three-four years could be very good for equity.
Ofcourse there are a lot of challenges at this point of time. The sentiment certainly is not the very best. A lot of situations or problems are there because of which we ourselves feel that a bit of caution is required. But equities are the lead indicator. Although the economy may not be doing as well, the fact that stock market has rallied means that, at the ground level, slight improvement will take place. So, my sense is that this is a good time to increase allocation to equity.
Some of the investors, who have kept their portfolio and not looked at, it is in dormant position, should have a close look at it. Get out of all the stocks, which have not performed for them and get into some of the high-performing sectors and some of the bluechip stocks. Have a kind of a approach whereby they want to build a bluechip portfolio, which will deliver fabulous returns over the next three-five years or so.
Q: Is investing overseas a good idea for retail investors?
Gupta: Investing in international funds is generally a good idea for all investors regardless of the profile and the geography that you are in. We tend to restrict our investments heavily to India not realizing that we are taking a large amount of risk in the Indian market. There are markets beyond ours that are doing very well and that we should take advantage of whether it is developed or whether it is emerging.
There are two routes that one can use to invest in global securities; one is to invest in a range of international mutual funds that exist in India. So, a number of the global fund houses or the local fund houses like a DSP or Goldman or an ING offer funds that give exposure to international stocks. So, that is one popular route that one can use. Motilal for instance has a NASDAQ ETF, so there are many different vehicles that one can invest Indian rupees in.
The government has also given investors an LRS limit that is USD 200000 a year that one can use to invest in pure foreign assets. That process is a little more complicated in terms of setting up global accounts, working with the global brokerage, so both those options exist. Typically, 5 percent of ones portfolio can go at the beginning towards international investment.
Q: I wanted to know about the portfolio allocation: say at age of 25 what your portfolio allocation is, say at of 30 what your portfolio allocation and as age progresses?
Gupta: Allocation depends on two or three things. The stage in life you are at, the kind of cash flows and cash outflows that one is going to have.
So, typically when one is in their 20s, one can afford to be a lot more aggressive because you don't have too many liabilities. As you move into your 30s and 40s and you have children and their education and marriage to plan out, you have less liabilities.
As you move into your retirement you have further less liabilities, but your cash flow stream comes down. So, it is generally a more conservative approach as you grow older is advocated.
For a young individual who is 25, we typically recommend that 50-60 percent of your allocation sits in equities, 10-20 percent in commodities. The balance in debt and maybe a very small portion in alternative investments like international funds or more exotic funds. Real estate is a separate investment avenue.
As you grow into your 30s and 40s that allocation to equities reduces from 50-60 percent to 30-40 percent and as one moves towards your retirement, one should look at maybe 20 percent in equities and the balance in more fixed instruments with a little bit of gold in the portfolio.
As one moves into retirement in terms of allocation, one should also look at monthly income to match ones cash flow requirements.
Q: When one is investing equity what is the type of sector mix that one should go for?
Mehta: We are in a kind of in between phase at this point of time. Maybe a month ago or so everybody though that interest rates would come down and cyclicals would do well and this rally would continue, maybe another 4-5 percent, but it seems to be sputtering at this point of time.
We are seeing the money flowing back into the defensive sectors. My sense is that if one or two months ago we feel that they should get into interest rate sensitives or some of the commodity stocks or the cyclicals, I feel that again the bias is shifting towards the FMCGs and defensives like pharmaceuticals maybe even technology.
My personal bias or preference has always been for the non capital intensive industry. So, that comes to FMCG, technology, pharmaceuticals in these three sectors if you are about 70-80 percent, you are fine. Then the balance 20 percent could be in banks, especially, good quality banks or even an institution like IDFC.
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