High returns possible, but at very high risk

With a market that has halved in 2008, equities as an asset class suddenly looks attractive. More so for those who were disappointed that they could not invest in 2005 — at 9,534, the Sensex is exactly where it was three years ago. Sandeep Singh tells more...

With a market that has halved in 2008, equities as an asset class suddenly looks attractive. More so for those who were disappointed that they could not invest in 2005 — at 9,534, the Sensex is exactly where it was three years ago.

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According to experts, it could see a revival in 2009 and hover between 9,000 and 14,000. From its current perch, that’s an upside of about 47 per cent, enviable by any standards. But as with any high return investment, the risks are high too — thinning margins, low demand, production cuts.

Initial public offerings that were the flavour of investment in 2006 and 2007 have completely dried up and investors will have to focus on stocks and funds that have a consistent performance track record.

Experts believe that companies in metals, automobile, consumer durables and technology segment are likely to remain weak in 2009 led by low domestic demand, slowdown in the developed economies and falling commodity prices. “I think that there will be pain in the metals, automobiles and technology sector,” said Gaurav Dua, head of research, Sharekhan.

But it’s not all down. “In the defensive sectors, pharmaceuticals and FMCG (fast moving consumer goods) look good,” said Aseem Dhru, CEO, HDFC Securities. “Among the beaten down sectors, banking, infrastructure, power, capital goods and two wheelers look attractive. Investors, however, will have to pick stocks based on the company’s internal dynamics.”

A sector that most brokers are especially bullish on is banking. “There will be treasury income and growth in lending will continue,” said Dua.

But for retail investors, more than buying equities, they should seek an “equity exposure”.

This, according to financial planners, is best done through mutual funds. “Mutual funds give protection through diversification and prove god for investors who can’t track and monitor stocks,” said Veer Sardesai, a Pune-based financial planner.

While the Sensex generated a 3-year compounded annual return of 0.02 per cent, almost half of the equity diversified schemes having a minimum of three-year of performance track record have outperformed Sensex and thus look good.

ICICI Prudential Infrastructure tops the list with a return of 14 per cent per annum, followed by DSP BlackRock Top 100 Equity (10.1 per cent) and IDFC Premier Equity (9.8 per cent).