Even as high value blue chips are seeking newer lows, is it time for retail investors to shift the investment focus from mutual fund to direct equity investment at least for those who have some serious exposure to equity markets?
The reasons for this are many. The returns from mutual fund investments have remained stagnant, and in many cases negative, for the past two years and even dividend payouts from them has come down, partly because of SEBI diktat and partly because of their poor show.
MFs & Value picks
With many market intermediaries such as ICICIdirect.com and SBICapsec.com, introducing Equity SIPs, it is possible for investors to spread their direct stock investment risks and could cast their net wider to pick up a bigger basket of blue chips.
The advantage of such a strategy is that if and when the markets recover, the return from stocks could beat the returns from MF schemes.However, Mr D.K. Aggarwal, CMD, SMC Investments and Advisors Ltd, said that investors should utilise the expertise and experience of the fund managers.
In a falling market, generally investors tend to buy cheaply priced stocks (i.e. stocks which have fallen substantially) than the under-valued stocks and thus they are not able to reap the benefit of buying value stocks in a falling market.
But fund managers of mutual funds have the right acumen in value picks.
Adverting to the risk involved in the two approaches, and how the investors could guard themselves against any steep erosion in investment value, he said that though there was ‘extra cost attached in the first approach, where one buys stocks by putting money into equity MFs', the same is more than compensated by the value that a fund manager brings while picking stocks and also timing the entry and exit in stocks.
At the same time, if investors pick the stock, ‘there are very high chances of getting wrong in stock selection and any one mistake can erode the money to large extent'.
When pointed out that many market intermediaries have started equity SIPs, he said, under equity SIP, investment into equities were made at regular intervals in instalments which ensured that one can benefit even if market further slides down and the average buying price is normally lower.
New investors could better adopt the SIP route. The main advantage of it was that if the market went down, their next investment will buy more stocks and when the market goes up, investment will increase in value.
PE and investment
On whether the lower market PE was a credible guide for making investments, he said market PE ‘no doubt has come down to a level of around 16-17'. However, even now ‘these PE levels are higher than the last 5 years' average PE levels'.
Investing at a PE of around 13 with a long-term horizon in the Indian context seems to be a safe bet. However, lower market PE is no guarantee that the performance will be better in near future, he cautioned.
What is his advice to investors to distribute their investments in terms of percentage — directly in stocks and in MF schemes? Mr Aggarwal said, ”We advise at this juncture that 25 per cent of investments can be put into equities either directly or through mutual funds.”