Nilesh, a friend of mine working at a senior position with an MNC, called me last week. He said enthusiastically without much introduction: “Hey Rishabh! I want to invest in the stock market, can you please suggest some good stocks to invest in?”
I was surprised. “Why do you want to invest in the market? Is it a recommendation based on your financial plan and risk assessment,” I asked him.
“Risk Hai To Ishq Hai,” Nilesh quoted a trending dialogue from a recently-released web series on the Harshad Mehta scam. He added that he was fascinated by the returns his friends managed to pocket by investing in some mid cap and small cap stocks in the past few months. He also informed me that he is willing to take some risk now.
“You should not invest in the stock market because your friends have made quick money, or you find the market exciting because of the recent run,” I told him. “The stock market can thrill you with the promise of great returns, but it can also kill your hard-earned money, especially if you invest in mid-cap or small-cap stocks without careful analysis.”
“Hmm, you are right, but what if I were to invest in famous stocks like HRITHIK stocks (an acronym used for HDFC Bank, Reliance, Infosys, TCS, HDFC Ltd., ITC and Kotak)? There won’t be any risk then. Most of these stocks have also given great returns, like Reliance or Infosys,” he argued.
“HRITHIK never comes alone, he is always accompanied by ROSHAN”, I said. ROSHAN stocks are stocks like Reliance Capital, ONGC, Suzlon and so on; stocks which were great performers at one time. “Look where they are now. Some more recent examples are Yes Bank or Jet Airways, which were darlings of the stock market.”
“Do you mean to say I should not invest in the stock market?”, Nilesh asked.
“I am not saying that. I am just presenting the other side of the coin.”
I told him I would encourage him and everyone to invest in the equity market directly, provided they have the necessary expertise and are ready to spend time in deciding what and when to buy and when to sell. “The darling of the stock market today may become its worst enemy tomorrow.”
“What is the ideal strategy then?”
“There is no one-size-fits-all formula. You need to decide based on your risk profile and financial goals. A simple yet effective strategy for a retail investor interested in direct stock market investing would be to invest in the stock market via mutual funds and restrict their stock investments to the top 10 to 15 companies from the NIFTY universe by covering 5-6 sectors,” I told him.
“You may pick the top 2 companies from every sector and start an SIP as you do in Mutual Funds. TCS, Infosys, HDFC Bank, ICICI or Kotak Bank, HUL, Dabur, ITC, Reliance, Bharti Airtel, HDFC Life, SBI Life, Asian Paints, Berger Paints, and Bajaj Finance can be some good options. You need to plan based on your risk profile and conviction.”
“Can you suggest some good mutual fund schemes,” Nilesh asked.
“That should be decided on the basis of your risk profile. You may look at Canara Robeco Bluechip fund, Axis Bluechip, Mirae Large Cap, Axis Mid Cap, DSP Mid Cap, Kotak Emerging Equity, SBI Small Cap, Canara Small Cap, Parag Parikh Long Term Equity Fund, Axis Multicap, or an index fund. However, you should select a fund based on your risk profile.”
This strategy works best because a retail investor has his or her job to take care of or business to run, and they are not an investor like Messrs Warren Buffett or Jhunjhunwala, whose main job is to invest. This strategy will get you a fund manager to look after your investments apart from your financial advisor if any. Restricting your stock market exposure to top companies of our country and 10-15 stocks would make sure that your maximum exposure to a particular stock would not be more than 7-8%, and ensure a well-diversified portfolio.
Rishabh Parakh is a Chartered Accountant and founder of Money Plant Consultancy.