The Hindu Business Line : `Most delicate time in investment climate'

You may be an engineer or an IT professional - you have to learn about investment because it's a necessity. Whether you are a finance man or not, you have to understand what financial parameters mean.

Mr Hemang Raja, MD & CEO, IL&FS Investsmart

Recently in Mumbai

EVEN though the equity markets have run up substantially, and "this is the most delicate time in the investment climate of India", falling interest rates have made it mandatory for Indian investors, including retired people, to put at least a portion of their money in equity, Mr Hemang Raja, Managing Director & CEO, IL&FS Investsmart, told Business Line in an interview.

Excerpts:

What is the general outlook for the equity market vis-à-vis retail investors?

Whatever the index, the long term India story is absolutely intact. If you look at it objectively, all the corporates we talk to are very bullish about their operations over the next few years. They estimate a growth between 30 and 100 per cent.

Today's reality is that the retail customer will have to go in for an asset shift. A lower interest rate scenario has set in over the last two years... even two years ago, 8 per cent RBI relief bonds were available and people invested in them. Those who invested in these bonds even earlier will now have that money maturing. What will they do with that money? You earn 5.5 per cent tax-free income in debt funds. But is that kind of return going to satisfy your investment objective?

Equity offerings in mutual funds such as Fidelity or Templeton or even Kotak had a very good response, indicating people are seriously contemplating shifting from debt to equity.

And this is the most delicate time in the investment climate in this country. But my worry is that today, the shift is going to take place in a gradual manner in the next 12 months when the market is at an all-time high and the earnings multiples are at reasonable levels.

So people will be entering at very high levels...

They are high levels from our perspective because we have not seen such high levels ever.

But the time has gone when one can look at the rise in the market in a general way. Every fund manager and investment advisor will now have to be very selective and make recommendations based on fundamentals; suggestions based on pure sentiment or momentum will not work. So retail investors have to diversify.

And now I'm talking about any age; previously I used to say that if you're above 50 and your investment objective was not equity, fine. Take a call and live without it. Today, even if a person is 55 and his bonds are maturing, he has to decide on equity because he cannot survive on 5.5 per cent. If he is 30, then I'd say put 75 per cent into equity.

But today I find retired people putting their money... even PF money.. into equity. Is that not dangerous?

At the end of the day, you have to look at the returns from the debt market; forget about the abnormal returns you got for two years in `01 and `02, such as 15 to 20 per cent. That is no longer possible. But a reasonable return of 8 to 10 per cent is today necessary... so a break of 70:30, 70 in debt and 30 in equity, can give an average return of 8 to 10 per cent to this group.

What are the fundamental principles of investment that people should keep in mind?

Very simple. Don't listen to somebody saying yeh accha lagta hei, le lo (this looks good, buy it). The media should explain to the people in simple terms the basic financial parameters... what is price earnings, how to pick the winners or judge a management. Whether you are a finance man or not, whether you can yourself calculate a P/E multiple or not, you have to understand what it means.

I might not know how to cook, but when I don't have anything to eat and have to make something, I'll jolly well do it. The same principle applies in investment In our country, 75 per cent of the people, including my own family, says we don't understand investment, you do what you want. You're there, why should I worry? Should students invest in equity if they have some money?

Of course. I started investing in equity when in I year Commerce. I used to go to the BSE, fill up forms and got shares in companies such as Colgate, Leyland, Philips.

What about expectation and fighting greed?

When you buy a stock, you should determine your exit price. And don't worry after that. There's a saying in the stock market that only fools and the luckiest get the highest and lowest prices.

How do you decide on an exit price?

(Mr Sandeep Presswala, Retail Head of IL&FS: This price should be based on the business growth of the company. If the business growth is 20 per cent, you can't expect your return to be 30 per cent. As an investor, you should understand the company's business and realise that your Rs 100 or Rs 1,000 is a partnership in the company, so you should know what its business is all about.)

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