A very valuable lesson in investing I learnt was from the father of one of my friends. His basic advice was that I should buy two residential houses. One should be for living in and the other for getting a steady rental income. The logic was very simple—one cannot be very sure about any financial instrument or inflation. If inflation goes up, rentals will go up. When one stops working, there is a house to live in and another one that will fetch a rental income. He also mentioned that the second home should be in a good locality and command excellent resale value, while the first one can be in a poor area. This was in the early 1980s. In those days investment in real estate made sense.
Stocks were not very popular then; though, looking back; they were perhaps the best times to buy MNC stocks. Today, it is very tough to take a call on any company and expect it to deliver multiple returns. Going by pure faith, the choices get restricted to the HDFC-type of companies or MNCs. I expect more fairness from these companies than from family-owned Indian enterprises.
To me, the one big difference between family-owned companies and government ones is that the former are driven by profits and are aware of the need of capital markets to thrive, whereas government companies have no articulated profit-making goals.
Mutual funds as an investment vehicle seems okay to me, but one cannot expect anything spectacular from them. Over the long term, perhaps, the returns could be around 15% per annum. Of course, a lot will also depend on how, when and where I invest. Market conditions will have a lot to do with my returns as well, whether I adopt the SIP route or not.
Choosing between a mutual fund route and direct equities is a personal call. Mutual funds offer us diversification of portfolio and investing in many mutual fund schemes simply diversifies fund managers’ skills. I would rather pick on a basket of six to 10 companies and build up a portfolio of those.
The index, to me, is a very poor benchmark to aspire for. The making of an index is not based on quality or prospects but on other criteria that are irrelevant to returns. My basic expectation would be to get a bit more than the GDP growth (say 5% to 6% per annum over the long haul). Therefore, I will have to pick stocks from sectors that will grow faster than the GDP.
In terms of sectors, I will pick those which are driven by consumer spending. Logically, the choices would be sectors like automobiles, FMCG (fast moving consumer goods) and pharmaceuticals. I will avoid sectors which are dependent on government action or intervention as the risk is too high. Those are merely speculative opportunities and do not create wealth.
I am a big fan of cash flow analysis. I like companies that pay taxes (not merely make provision for deferred taxes) and generous dividends. Hence, I will not go near high-debt companies that show abnormal ‘profit’ growth, and engage in frequent dilutions. Take time off to read balance sheets, or be safe and stick to companies with the positive attributes, namely: no debt, normal tax payout and generous dividends.
An important avenue is the facility given by the Government of India to let us invest overseas. I believe that, over time, the Indian rupee is going to be a loser, unless we strike oil, and thus keeping some of our wealth in foreign currency should be a good defence. In this, I will go straight for the US dollar. No matter what happens to it, the world still has no option but to trust the greenback. It would provide me with a hedge against inflation as well.
Ultimately, each one has to be comfortable with the risk appetite he/she has. I am not a believer in creating an excel sheet to plan my savings and investments. I save what I can and invest what I wish to.