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Why you must invest in stocks
Larissa Fernand
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April 17, 2006

Tridib Pathak became Chief Investment Officer, Chola Mutual Fund, in 2004.

In this interview, he tells readers why they should invest in stocks even now and why stocks must be an essential part of every investor's portfolio. He also reveals his stock picking strategy.

His advice to investors

1. Don't have unreal expectations

Today, expectations are unreal. People are being influenced by the returns attained over the past three years.

I definitely agree that individuals have made phenomenal returns over the past few years. But that was only natural as the bull run picked up in momentum.

November 2004 saw the Sensex touch 6000. By September 2005, it had reached 8000. February 2006 had the Sensex touch 11,000. Investors made a lot of money.

But you cannot expect such high returns going forward.

People have to be more realistic. I think one can expect 15% per annum over the next three to five years.

It may not seem as alluring as the past returns, but when one compares it to the other alternatives, it is a good return. You will get around 6% to 8% in other investments like bank deposits, National Savings Certificate and Public Provident Fund.

Another good aspect of investing in shares is that if you sell them after one year of buying, you end up paying no tax.

2. Don't avoid equity

Retail investors should increase their investments in equity. Investors must buy shares and not shirk away from them in fear. 

But they should be cautious; do not invest with a short-term perspective in mind. Investing in shares must always be done with the long-term perspective in mind.

When investing in equities, you should be ready to keep the money invested for at least three to five years.

Which brings us to the question: How does one invest in equity when they have no idea about stocks? That is why I recommend a mutual fund.

You go to a doctor for your medical needs and a builder for your housing need. Similarly, opt for professional help when investing.

There are a wide variety of mutual funds available in the market from various fund houses; pick up a fund that suits your investment needs.

3, Don't invest in lump sum amounts

Don't just make a one-time investment and forget about it. Be consistent. Investing via a Systematic Investment Plan is the best way to go about it.

This makes you a disciplined investor as you end up putting away fixed amounts every single month.

Also, this works for your benefit over the long term; you end up buying units at high levels and low levels so it evens out.

But never take an SIP for just a year. Here too you must opt for around three to five years. This will enable you to ride the entire stock cycle of high and low fluctuations.

The kind of investor he is

I don't believe in putting investors in various categories like aggressive or conservative. The definitions are very relative.

If someone defines an aggressive investor as one who churns his portfolio often (keeps buying and selling shares) or buys momentum stocks, I would not fit into his definition of an aggressive investor.

But if someone defines an aggressive investor as one who looks at stocks that nobody else is considering and buys them simply because he believes they are sound companies that will deliver huge returns in the coming years, then I am aggressive.

I like to define myself as a disciplined investor who follows a stock-specific approach.

How he picks stocks

We follow a different strategy for large-cap and small-cap stocks.

Large-caps

When picking large-cap stocks, we first look at the sector. We look at all the sectors and narrow down on a few. The sectors that we are bullish on, we give more weightage to.

Within a sector, we identify stocks.

So we follow a top-down method by picking up an industry and then looking for the company.

We have a list of stocks for each sector. These stocks are all ranked according to our preference and based on these rankings, we invest.

Mid-caps

We follow five attributes when picking mid-cap stocks.

1. Sunrise industry. Does the company that have the right strategy in such a sector that will help it do well in the future?

An example here would be one of our picks in the retail industry way back in 2004.

2. Niche business. Does the company operate in a niche area and is not affected by other players?

An infotech stock was one such example. The company focussed on particular locations in Europe, where it has become the market leader and operates in human resources and IT services.

3. Market leaders. Is the company a leader in its own businesses?

We selected a leading courier company here. 

4. Large-cap proxies. Is the company a proxy to a large-cap? In the sense that they are from the same industry and, because this is a mid-sized company, there is a discount in valuation (stock is going cheaper than what it is actually worth). The company's fundamentals do not merit the discount.

We bought stocks of a cement company which was hugely profitable and was available cheaper by 40% to 50% than to the rest of the industry.

5. Globally competitive. A company doing big things outside India and looking at a wider canvas than India only.

Unlike large-caps where we follow a top-down strategy, over here we follow a bottom-up strategy.

We will not pick up a stock which is doing well simple because the business cycle is doing well. We will invest in a mid-cap because we believe that it has the potential to be a large-cap tomorrow.

Chola Mutual Fund currently has six equity funds: Chola Opportunities Fund, Chola Multip Cap, Chola Midcap, Chola Growth, Chola Global Advantage, Chola Tax Saver.


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