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Time to tinker

The recent crackdown on IPO scamsters has left many genuine investors in the lurch. Joydeep Ghosh looks at possible strategies.

india Updated: May 01, 2006 12:35 IST

Experts say given that the order comes on the back of stable economic growth & high corporate earnings, this is not the time to panic.

IPO scam, curbs on 12 depositories, 85 financiers barred, Karvy cannot act as registrars till further notice — These are troubled times in the market. Though the BSE Sensex closed 17 points higher on Friday last, there was widespread panic and wild swing in prices. In fact, the entire week has been a story of high volatility, with the market ending the week 161 points down from the previous week’s close.

The market regulator Securities and Exchange Board of India’s (SEBI) order will impact the retail investor directly and indirectly. For one, besides the ulcers that they will be getting because of a turbulent market, many will also need to change their account from the tainted depository participants (DPs) within the next 15 days. That means additional costs of at least Rs 300-600 for the investor, besides the hassle of closing one demat account and moving to another.

Market experts say given that the order comes on the back of stable economic growth (8 per cent), high corporate earnings and strong fundamentals, this is not the time to panic. However, most would be comfortable with a correction of 7-8 per cent. “Even a 5 per cent correction from the present levels would have a cooling effect on the market,” says a leading fund manager. Adds Ramesh Damani, Member, BSE, “The markets have been stretched for some time.” He feels that though the market closed on a high on Friday, there are chances of external shocks and some turbulence in the days to come.

So what should an investor wanting to enter the market be doing? – Says N Sethuraman, Chief Investment Officer, State Bank of India, “Enter the equity market with a longterm approach, that is at least for a period of two years.” Ac cording to him, the markets would definitely be doing better because of the strong fundamentals. Agrees Hemant Rustagi, Chief Executive Officer, Wiseinvest Advisors Private Limited, “You need to have the right timeline as well as invest in the right stocks and mutual funds.” However, what should you do if you are already in? – According to a portfolio manager, “ I am advising my clients, who have been investing for the last two three years to start realising cash.” He feels that since the returns during this period have been extraordinary, one could sell at least 15- 20 per cent of the portfolio. However, he says one should not do it at the same time. Instead, sell 1 per cent of the portfolio per day to keep a balance. Mukesh Dedhia, a certified financial planner, gives his strategy to manage your portfolio: “First decide the amount/percentage that you intend to invest in equities and plan out a strategy. So if you have decided to allocate 40 per cent of your assets in stocks then you should continue with that.” That means that if you have a total asset base of Rs 10 lakh, and it is divided between equity and debt in a 40:60 proportion, then you have Rs 4 lakh in equity and Rs 6 lakh in debt. Now, if the equity component has increased in valuation by say 100 per cent in the last one-year and debt has increased by say 15 per cent, then, your equity component is worth Rs 8 lakh and debt component is worth Rs 7 lakh. Since your total corpus is now worth Rs 15 lakh, in order to maintain the debt/equity ratio, take out Rs 2 lakh from equity and put it into debt. That means that you now have Rs 6 lakh in equity and Rs 9 lakh in debt in a 40:60 ratio.

Also, in a falling market, you can keep the ratio the same by diverting funds from your debt to equity as good stocks now come at a cheaper price. And once the market turns around you are sure to find the good stocks giving you great returns. Another strategy that one can use is that even if the portfolio is rising, you can put a stop loss at every level. Thus, if the portfolio has risen from Rs 4 lakh to Rs 6 lakh, then put a stop loss at Rs 5 lakh. In case of a sudden change, your broker will sell or buy to ensure your portfolio value does not dip below Rs 5 lakh.

In short, it is time to tread cautiously, be patient and wait for the cycle to change.

First Published: May 01, 2006 12:35 IST