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Five trillion economy and opportunity in stock markets

In times when the world is fighting a battle against the coronavirus pandemic, stock markets across the world are rallying.  Famous quote from billionaire investor Warren Buffet  that be fearful when others are greedy and to be greedy only when others are fearful has more significance these days.   Investors who bought shares in these turbulent times are now in big profits. 

It’s more important to know ‘what not to do’ rather than knowing ‘what to do’. Recently market volatility was high and small investors without proper knowledge and study had to exit the markets when the fear factor was at its high in February – March month.   Financial decision making without back-up could be suicidal and may take up far away from prosperity. So investment decisions should be taken wisely understanding our risk taking capacity and the future fund requirements of ours.

There are several investment avenues available based on the risk we can take. Higher the risk, higher will be the return, so its always advisable to reduce investment in high risk instruments as the age increases.

For instance, if your age is 30, then the logic says you can invest 70 % of the amount in equities and balance 30 %  in debt instruments which gives fixed earnings

One general rule used to identify how much percentage we must invest in shares is the 100 minus your age rule.  Subtract your age from 100 to identify how much of your portfolio should be allocated to equities. For instance, if your age is 30, then the logic says you can invest 70 % of the amount in equities and balance 30 %  in debt instruments which gives fixed earnings.

There are two major investment avenues available to investors who are willing to take moderate to high risk . One is buying of company shares directly  through stock exchanges other is buying  Mutual Fund units.  

Mutual Funds

Mutual funds are suitable investment options for investors looking for liquidity and professional management. They offer better returns, diversification of the portfolio, and flexibility in investments. Investors can choose to put their money in debt funds, equity, or hybrid mutual funds, based on their investment objectives.   It is advised to start Mutual fund SIP- Systematic Investment Plans. 

Always remember that  investment in mutual funds  should only be done with a long-term time horizon

SIP is a method of investing a fixed sum regularly in a mutual fund scheme. It allows an investor to buy units regularly on a specific date of the month and help long term wealth creation. The SIP may not be very appealing initially but with time, the investment can grow multi-fold.  Best way forward is to seek the assistance of Mutual fund advisors to identify  funds based on ones risk appetite. 

Always remember that  investment in mutual funds  should only be done with a long-term time horizon.

Another option available is direct purchase of shares of companies through stock exchanges.

Equities

Equity investments can generate multi-fold returns in the long-term, but also possess a high-risk profile in parallel.  More than 10,000 companies are listed in the exchanges and will be very difficult for new investors to find out companies to invest.

Companies like Reliance Industries, Divis Laboratories,Infosys and Adani Green were the wealth creators whereas  DHFL,Jet Airways, YES Bank were among the major wealth destructors. So Equities are a popular choice of most investors but can erode your capital if company fails in its operations.  Therefore, investments in equities also be reviewed periodically and  should be made only after seeking expert advice. 

Compared to other world economies investment in equities  is much lower in India. But the numbers are quickly increasing and more new investors are coming into equity markets.  With complete dematerialization of shares, even one share of a company can be bought through stock exchanges.

Introduction of advanced trading platforms, low cost internet broking compared to traditional broking,Extensive Investor awareness programmes conducted by Securities Exchange Board of India (SEBI),National Stock Exchange (NSE),  Bombay Stock Exchange ( BSE) and financial intermediaries is bringing more investors into the equities.

Most economists, rating agencies and IMF is of the view that India will be the fastest growing economy in the coming years.  If economy  grows  companies profits will grow and so will stock prices.   So Investing in shares offers bigger opportunity to participate in the growth of Indian economy. 

Investors should first buy shares of companies who are market leaders in each sectors.  National Stock Exchange has introduced Nifty50 index which comprises of 50 stock that represent key sectors of the economy. Nifty50 is  trading 8.5 % higher compared to November 2019.

Investors should consider buying shares of companies in the index as these stocks are the most liquid, mostly researched and are the present segment leaders. NSE semi annually reconstitutes the index, adds new leading companies and removes the laggards. Exchanges also has introduced several sectoral indices which also can be tracked to understand the fundamentally good companies in the respective sector.

Investors can easily track the companies in the indices and remain invested with the market leaders.  Major Nifty50 companies and the weightage of the companies in the index is given below.

Indias is now in a comfortable position with higher foreign direct investments, foreign portfolio investments and reduced oil imports is helping india to keep its import bill low.  After the COVID-19, especially after the recent  border tensions between China India is planning  big to reduce dependence on China and become self reliant.

In order to attract investments into India, government is  incentivising foreign companies to start manufacturing base here.  In the last 6 months   Finance Minister has announced stimulus and production linked incentives worth more than 29 bln $  to  stimulate demand in the economy  and  attract  foreign companies into India.  More  measures to incentivize domestic manufacturing  and levying of basic customs duty  will made India self reliant.   With these measures India’s foreign exchange reserves is soaring to new record high of $568 bn and also will help Indian stock markets  to test new highs.  

We can participate in the India growth story by buying shares of leading companies with a long term view.  

India’s factory growth also had fallen to below 30 levels due to complete shutdowns but  we are seeing strong resurgence in the industrial  activity in the last few month.   India Factory Growth recorded highest growth in Over a Decade  and the latest reading pointed to the strongest improvement in the health of the sector in over a decade, amid ongoing relaxation of COVID-19 restrictions.   Investors  can  buy  shares of Automobile, Cement, Steel and Paint companies which will benefit from the revival of the economy.

Indian farmers are the backbones of our nation’s economy as Indian economy is primarily Agriculture based country. Statics reveal that Indian agriculture is sector accounting for 18% of India’s Gross Domestic Product(GDP) and provide employment to nearly 50% of workers. But surprisingly despite their huge contribution in economy of the nation no governments wholeheartedly tried to solve their problems of lower payment of crops and increase farmers incomes.

This government had boldly taken several steps to address the farmers problem, like Direct transfer of subsidy amounts to farmers bank accounts, direct cash transfers into farmers accounts like PM Kissan Samman Nidhi, Kisan Credit Cards and increase in the Minimum Support prices of crops.  These steps will help in improving farmers income and support them from spending more on fertilizers, crop protection methods and increase the crop yields.  

Investors can participate in the growth of this sector by buying shares of agriculture, fertilizer, pesticides, Chemical, agri input, agriculture finance and tractor finance companies.

Atmanirbhar Bharat announcements will boost the manufacturing sector and enable major MNCs to shift their manufacturing base from China to India and  make India the manufacturing hub of the world.  Production linked incentive scheme announced by Finance Minister for 26 sectors is the first step towards achieving this objective.

Generally stock markets will reflect the economic conditions of an economy but only difference is that it factors it early.  If the economy grows most companies should be experiencing increased profitability, dividends and will reflect in higher stock prices. 

If we analyze the recent events we can understand the volatility in the markets and the fact that market price discounts present information as well events and potential future information and events.   

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