Tips for buying Stocks, Mutual funds

Investors often face this dilemma -- should they invest in equity (stocks) directly or should they opt for the mutual fund route. The answer to us is pretty simple, really. However, for starters, let us examine the various costs involved in adopting any one route.

Comparative Analysis between Equities & MFs

Transactions	Equities	Equity-based MFs
Purchase � Brokerage	Around 0.5%	Nil
Securities Transaction Tax	0.125%	Nil
Entry Load	Nil	Around 2%
Sale � Brokerage	Around 0.5%	Nil
STT	0.125%	0.25%
Dividend -- Income Tax	Nil	Nil
Distribution Tax	14.025%	Nil
Capital Gains -- Short-term	10.2%	10.2%
Long-term	Nil	Nil
Loads	Nil	Loads may be applicable on entry or early exits
Effect of Dividend on Price / NAV	Full Reduction	Full Reduction
Annual Recurring expenses of AMC	Around 1%	Around 2.25%
Risk	High	Medium

If you compare the two avenues, item by item, you will find at least on the cost front, both are more or less even:

1. No brokerage for mutual funds either on purchase or on sale. This is more than offset by the entry/exit loads and AMC fees of mutual funds.

2. No Securities Transaction Tax for mutual funds during purchase. This is compensated by double the STT at sale.

3. Mutual funds are exempt from Dividend Distribution Tax (DDT) of 14.025%! But let us not get lured by this. DDT is charged to mutual funds when they receive dividends on the shares they own in the portfolio. Charging DDT to you when you receive the dividend from the mutual funds would be double taxation.

So this brings us back to square one. What does the investor do?

As mentioned in the beginning of the article, the answer is simple and it doesn't depend upon the expense or the tax structure -- instead it depends upon you.

There are more than 5,000 stocks out there out of which around 2,500 are actively traded. If you know any of these 2,500 stocks in detail -- that is, if you understand the business dynamics and the prospects of any industry and the companies within that industry -- then by all means you should invest directly.

For example, a friend of ours works with a pharma company. He has had decades of experience within the industry and knows the positives and negatives of each company within the industry fairly well. He would be a fool to waste such knowledge, thus very appropriately most of his stock investments are in the pharma sector.

Incidentally, the returns on his portfolio beat any pharma fund hollow. However, for exposure to the rest of the industries in the economy, he opts for the mutual fund route. Needless to add, his portfolio is thriving.

Similarly, one may be working in the auto, cement, engineering or even IT, use your inside knowledge -- and by inside knowledge we don't mean inside information, we mean use your domain expertise of your industry -- to invest well. Do not touch any stock that you don't know the business of too well.

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Buy these smallcaps

1. Ratnamani Metals:

Ratnamani Metal is a manufacturer of tubes and pipes of stainless steel and carbon steel. These pipes are used in industrial applications, in crude handling industries like refineries and power. Looking at the capex that the refinery industry has lined up, around Rs 85,000 crore in the next 3-4 years, the investment scenario looks positive.

The company too is proactively expanding their capacity, almost doubling capacity of both of its segments, stainless steel and carbon steel. It has capex of around Rs 65 crore.

The first phase of the capex is already implemented and the next phase is expected to get over by this year end. This is expected to grow the revenues as well as the earnings.

Based on FY07 earnings, we expect the company to report an EPS of around Rs 46 in FY07 and around Rs 56 in FY08. Based on current valuations at current prices, the stock is trading at around 7.5 times FY07 and 5.5 times FY08.

We would value the company as a capex ancillary, and a fair comparison would be a company like Adore, which is also a capex ancillary and which is trading somewhere around 9-10 times FY08 earnings.

We have valued the company on the same basis and we have put in a price target of around Rs 520. So it's a substantial upside and even the order book at around Rs 350 crore is almost at an all time high and it's almost around 1.2 times FY06 sales.

2. WS Industries

WS Industries manufactures porcelain insulators, which are used in power, transmission and distribution sector. The company has a very big plant at Chennai. They are about to set up a new plant for which they are looking at some locations in Gujarat and Andhra Pradesh. It will be a new plant, which will entirely manufacture the holocor insulator, which is a huge 20% margin business.

We have valued this company at around 8 times FY08 earnings, we expect an earnings of around Rs 7.5. So the business will be valued at around Rs 60, the company has lot of upside to offer from the potential realty venture.

They are developing around 15 lakh square feet of IT park near their current facility at Chennai, for which they have tied up with TCG. This 15 lakh square feet area will come up in four phases in the next four years. The first phase is expected to start around June 2007, the first phase will be around 2.5 lakh square feet.

Therefore, the land value itself is around Rs 100 per share and even if you discount it by 50%, the realty value per share works out to around Rs 50.

3. Transport Corporation of India

Transport Corporation of India or TCI has got an ideal strategy for its two businesses. The first business is Supply Chain Solution where it offers supply chain solutions to clients like Mahindra & Mahindra, Bajaj Auto, Cadbury's, Amul India.

This is an extremely higher margins business of around 10-12% on EBITDA basis as compared to 2-2.5% for the pure transport business. So basically the growth in this business will be exponential, of around 40-45% for the next 3-4 year.

The second business they are concentrating on is the courier division wherein they offer specialised services for the courier industry. So overall they have got a capex of around Rs 400 crore over next 4 years.

The company is also merging their group companies TCI Sea Ways, which is into coastal shipping. So on a historical basis, the merger is earnings accretive; for example on a standalone basis TCI has reported around Rs 14 EPS for FY06.

On a consolidated basis, after the merger of TCI Sea Ways the EPS works out to Rs 18. On an historical basis also, the merger is earning accretive by around 30%. They also have a dedicated capex for TCI. So going forward, they have got good amount of capex for both the transport as well as the shipping division.

We expect around Rs 25-26 EPS in 08 for the consolidated entity. But this company charged depreciation on an accelerated basis, so cash EPS is substantially high.

 

How to choose the right mutual fund

Mutual funds have emerged as the best in terms of variety, flexibility, diversification, liquidity as well as tax benefits. Besides, through MFs investors can gain access to investment opportunities that would otherwise be unavailable to them due to limited knowledge and resources.

MFs have the capability to provide solutions to most investors' needs, however, the key is to do proper selections and have a process for monitoring. Let us see how MFs can make a difference to an investor's financial planning and its results.

Planning for long term objectives

Many people get overwhelmed by the thought of retirement and they think how will they ever save the huge money that is required to lead a peaceful and happy retired life. However, the fact is that if we save and invest regularly over a period of time, even a small sum of money can suffice.

It is a proven fact that the real power of compounding comes with time. Albert Einstein called compounding "the eighth wonder of the world" because of its amazing abilities. Essentially, compounding is the idea that one can make money on the money one has already earned. That's why, the earlier one starts saving, the more time money gets to grow.

Through mutual funds, one can set up an investment programme to build capital for retirement years. Besides, it is an ideal vehicle to practice asset allocation and rebalancing thereby maintaining the right level of risk at all times.

It is important to know that determination and maintaining the right level of risk tolerance can go a long way in ensuring the success of an investment plan. Besides, it helps in customising fund category allocations and suitable fund selections. There are certain broad guidelines to determine the risk tolerance. These are:

Be realistic with regard to volatility. One needs to seriously consider the effect of potential downside loss as well as potential upside gain.

Determine a "comfort level" i.e. if one is not confident with a particular level of risk tolerance, then select a different level.

Regardless of the level of risk tolerance, one should adhere to the principles of effective diversification i.e. the allocation of investment assets among different fund categories to achieve a variety of distinct risk/reward objectives and a reduction in overall portfolio risk.

It helps to reassess risk tolerance every year. The risk tolerance may change due to either major adjustment in return objectives or to a realization that an existing risk tolerance is inappropriate for one's current situation.

Market cap of a company signifies its market value, which is equal to the total number of shares outstanding multiplied by the current stock price. The market cap has a role to play in the kind of returns the stock might deliver and the risk or volatility that one may have to encounter while achieving those returns.

For example, large companies are usually more stable during the turbulent periods and the mid cap and small cap companies are more vulnerable.

As regards the allocation to each segment, there cannot be a standard combination applicable to all kinds of investors. Each one of us has different risk profile, time horizon and investment objectives.

Besides, while deciding on the allocation, one has to keep in mind the fact whether the allocation is being done for an existing investor or for a new investor. While for an existing investor, the allocation that already exists has to be considered, for a new investor the right way to begin is by considering funds that invest predominantly in large cap stocks. The exposure to mid and small caps can be enhanced over a period of time.

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Tags: mutual funds, liquidity, investors, gain, investment, retirement, long term, planning, market cap, risk profile, portfolio, invest funds, large cap, middle cap, small cap

2 stocks you could buy

Investment analyst, Ashish Chugh recommends Deccan Gold Mines to the long-term investor, who has an appetite for high risk.

He also likes Shalimar Paints because he sees the 100-year-old company sitting on assets, which are valued at historical cost. The replacement value of these assets can benefit the company going forward, he predicts.

Excerpts from CNBC - TV18's exclusive interview with Ashish Chugh:

Why do you like Deccan Gold as a prospect?

Deccan Gold Mines is a speculative pick in the gold mining sector. It has got no revenues as of now. With a marketcap of Rs 80 crore, it may look to be highly expensive. But if you see the potential of the sector, it maybe an interesting story going forward.

This company has been promoted by Australian investors through a Mauritius subsidiary, where the promoters hold about 70 per cent stake.

If you see the gold mining business now, it is like the oil exploration business, where there is a high degree of uncertainty involved. Nobody knows whether the amount that is being spent for the exploration process will really yield any results or will have to be written off. So from that perspective, this is a stock for the long-term, high-risk investor.

The advantage Deccan Gold has is that it is the first listed company and the first private sector company in the gold mining sector. It is sitting on some of the most prospective blocks in the country.

This company has got close to about 10,000 square kilometer of blocks in different states like Karnataka, Andhra Pradesh, Rajasthan and Kerala. The company has also done a lot of exploration for the past four years. It has received encouraging results from its blocks in Karnataka, particularly the Hutti block and the Shimoga belt block.

Gold mining is a business, which still is in its infancy in India. India produces just 3 tonne of gold per annum as compared to 300 tonne, produced by Australia. So there is a huge unexplored potential in the sector. And with Deccan Gold being one of the first players, sitting on the most probable blocks, has got a first mover advantage.

Shalimar Paints is your other recommendation. How does it compare to the rest of the listed stocks and why do you like this one?

If you see the paints sector, there are five major players there. The largest, of course, is Asian Paints , which does a turnover of close to Rs 2500 crore and commands a marketcap of Rs 6200 crore. Then comes Nerolac Paints, Berger Paints, ICI and Shalimar Paints.

If you see the valuation of these companies, there is a huge valuation gap between the fourth and the fifth largest player, even though there may not be such huge differences in the size of their business. Berger does a turnover of Rs 1000 crore and has a marketcap of Rs 1500 crore, while ICI does a turnover of close to Rs 950 crore and has got a marketcap of Rs 1250 crore.

Shalimar does a turnover of close to Rs 220 crore and has a marketcap of just Rs 60 crore. There is a huge valuation gap between the fourth and the fifth largest player in the sector, which I believe should narrow down.

Shalimar Paints has got three manufacturing plants, which are located in Howrah, Buland Shaher and Nashik. They are putting up another greenfield facility in Tamil Nadu, which is expected to go on stream in the next six months.

Not many people are aware of the fact that this is a company, which belongs to the Delhi-based Jindal group. This is a 100-year-old company, which was acquired by the Jindals along with an NRI investor in 1989. Since the company is 100 years old, it is sitting on assets, which are valued at historical cost.

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Tags: investment, gold mines, CNBC TV18, deccan gold, oil exploration, stocks, high-risk investor, long term, paints sector, nerolac, shalimar, asian paints, berger paints, ICI, manufacturing plant, NRI investment

Why MFs score over bank deposits

Equity markets may have rebounded smartly after the dramatic fall in May. But fixed-income instruments seem to be stealing the show these days.

After wrecking havoc in stock markets around the world, the tight liquidity scenario is finally playing to small investors' advantage. After several years, investors are finding that fixed deposit rates are climbing to respectable levels.

While 90-day bank deposits are offering around 5 per cent returns, one-year deposits are yielding 7-8 per cent. As far as mutual funds are concerned, though the future of income funds, which invest in medium-and long-term debt papers, seems to be uncertain, short-term debt funds are giving returns in excess of 6.5 per cent.

On a post-tax basis, debt schemes - fixed-maturity plans in particular - seem to be the best option for investors looking for steady returns.

Funds beat banks

Even as banks are luring investors with higher fixed-deposit rates, mutual funds seem to be steeling a march over them with FMPs. The total assets under management under these schemes have nearly doubled this year.

At the end of July, these schemes had a combined corpus of Rs 28,571 crore (Rs 285.71 billion). According to industry sources, in August alone, 14 FMPs have so far been launched with varying maturity and the total collection is expected to be at least around Rs 4,000 crore (Rs 40 billion).

The AMCs that have launched FMPs this month include Reliance, ABN AMRO, Principal, HSBC, UTI, HDFC, LIC, Prudential ICICI, JM Financial, DBS Chola and SBI.

Essentially targeted at corporate and high networth investors, FMPs combine the tax efficiency of mutual funds with the safety of fixed deposits.

The tax edge

As dividends of mutual funds attract only a dividend distribution tax of 22.44 per cent for corporates and 14.03 per cent for individual investors vis-�-vis interest on deposits and corporate bonds, charged at the marginal income tax rate, mutual funds give better post-tax returns.

"High networth individuals have a lot of appetite for these schemes as they generate significantly higher post-tax returns," says Sameer Kamdar, national head - mutual funds, Mata Securities.

Furthermore, income from mutual fund units - held for more than a year - is deemed to be 'capital gains' and, hence, qualifies for indexation benefit. This reduces the tax incidence even more.

Thus, while a 8.1 per cent, one-year FMP would yield a post-tax return of 7.2 per cent for an individual investor in the top income tax bracket (if he opts for the growth plan), a bank fixed-deposit offering a similar rate would yield only 5.37 per cent net of tax.

The risk factor

Though FMPs are projecting fairly high yields, these are only indicative returns. They produce predictable returns over the desired timeframe since the maturity of the portfolio matches the tenure of fund schemes.

Unlike other schemes that suffer from volatility and, hence, risk of erosion in asset value, an FMP - structured as closed-end funds - carries no interest rate risk. Whether yields rise or fall, the asset value of these schemes is protected as deposits/ bonds are held to maturity.

Still, they do not guarantee returns as bank deposits - where the interest is assured - do. Though FMPs have delivered the returns they have indicated so far, there could be a risk of asset-liability mismatch, and the investor may not finally get exactly the indicated yield.

Other debt funds

With uncertainty on interest rates receding, debt markets have rallied over the past one month. The 10-year benchmark yield has declined from 8.5 per cent in mid-July to 7.91 per cent now, and this has propped up the returns on debt fund schemes.

Most categories of debt funds have delivered returns in excess of 6 per cent. Particularly, medium-term gilt and debt funds have generated over 10 per cent returns. Should you then begin to relook at income funds?

May be, not yet.

Fund managers warn that this kind of returns may not be sustainable. On the contrary, the debt market rally looks overdone and the market may be in for some correction.

And if that happens, income funds may be back to square one. Moreover, the risk-return factor, today, is strongly in favour of short-term funds.

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