Check Fundamentals Before Investing In Stocks

Queries

I bought 20 stocks from three companies for Rs 30,000 in 2009. The stocks from two companies have given me 60 per cent returns overall till date. How long should I hold them, and what should I do with the underperforming shares, where I lost 50 per cent of their value?

For stocks which have performed well, as well as those that have underperformed, check what all has changed over time, namely, the company’s earnings, i.e., whether sales and/or profits have increased or the company’s valuation has jumped sharply with respect to its earning. Lastly, check the future estimation of the company and the sector.

To decide on the timing of sale, do a technical analysis, which can be gleaned from investor behaviour, such as observing how investors have reacted in the past. Check if the stock has broken its 52-week lifetime high, which is generally a bullish signal reflecting more people are buying, or if the stock is falling below its 52-week lifetime, indicating more seller and fewer buyers. A combination of these parameters can help you arrive at a better decision.

I am planning to build a corpus of Rs 5 crore for my retirement. I am 35 years old. Is it a good idea to invest in stocks? Should I invest only in blue-chip companies or also in mid-cap and small-cap companies?

Typically, one must follow the concept of asset allocation, which means investing in a combination of equity, debt, gold and cash. To choose from large-, mid- or small-cap stocks, the first thing you should consider is your risk appetite.

Do note that small-caps are greatly volatile and the stock could fall by as much as 50-60 per cent. Also, you must check the fundamentals of the stock, such as how much you know about the company and whether you want to hold it for long. If you are unsure about these, it is better to stick to large-caps, which are relatively less volatile over the long term.

Is it possible to invest in stocks through systematic investment plans (SIPs)? How are they different from mutual fund (MF) SIPs?

The key difference between the two is that MF SIPs invest in MFs, which is basically in 40-50 stocks through MFs. In comparison, in stock SIPs, investors themselves create a small focused portfolio of say, 5-6 stocks and typically have an SIP in each of them. Also there are no asset management company charges in stock SIP. Furthermore, for stock SIP, investor makes investment decision, while for mutual funds, it is the fund manager who decides and invests in 40-50 stocks on behalf of the investor.

Answers by: Saurav Sultania, VP, Equity Product Group, ICICI Securities

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