Don't invest directly in markets if you can't analyse stocks, say experts

Last week was particularly volatile with the Sensex correcting 5.42 per cent. Year-to-date, the Nifty 50 Total Returns Index (TRI), the Nifty Midcap 150 TRI, and the Nifty Smallcap 250 TRI are down 11.9, 15.3, and 19.3 per cent, respectively.

Many retail investors who entered equity markets directly (and not via the mutual fund, or MF, route) after the crash of March 2020 are staring at losses for the first time in their portfolios.  

Should you invest directly?

During a bull run, many investors enter the equity market because they see others around them making money. But their knowledge of the fundamentals-based stock investing is often zilch.  

According to the end-2021 SPIVA report, 67 per cent of active large-cap fund managers failed to beat their benchmarks over 10 years. If these fund managers, with all their knowledge, expertise, and research resources fail to beat the indices, then retail investors need to evaluate their chances of doing so.

“Most retail investors will be better off being in a passive or active fund, rather than investing directly. If they wish to learn direct stock investing, they may try their hand at this in a limited portion of their portfolios, while investing the bulk of their corpus in MFs,” says Munish Randev, founder and chief executive officer, Cervin Family Office & Advisors.

Even those who know fundamentals-based investing must subject themselves to periodic reality checks. “If they are unable to beat the relevant benchmarks and MFs, then for them, too, it doesn’t make sense to invest directly,” adds Randev.

According to Ankur Kapur, managing partner, Plutus Capital, a Securities and Exchange Board of India (Sebi)-registered investment advisory firm, “Those who have been investing in stocks blindly should get their portfolios evaluated by an expert. If they are in poor-quality stocks, they should exit even if they have to book a loss.”

Are mid- and small-caps for you?

Most first-time retail investors favour mid- and small-cap stocks, since they tend to outpace large-caps during bull runs. But mid-caps tend to be more volatile than large-caps, and small-caps are even more volatile than mid-caps.

The bulk of retail investors can avoid small-caps altogether in their portfolios. Those who can tolerate volatility and have an investment horizon of 10 years or more may take exposure to mid-caps.   

“Especially among smaller mid-caps, the management can be dodgy, and there can be issues related to accounting practices. Most retail investors won’t be able to detect such problems,” says Kapur.        

Investors who have invested in stocks via smallcases or through algo strategies should also get an expert to evaluate their performance.

Stick to original horizon

At the time of entry, most retail investors would have known that equity investing is for the long term. A 12-19 per cent correction should not affect their resolve to stay invested for the long term.

If you can analyse stocks

Investors who know how to analyse stocks and are confident that the intrinsic value of the underlying businesses are intact, should ignore the drop in stock prices, treating them as mere paper losses. Stock prices bounce back when market sentiment improves.

“But keep revisiting your original investment thesis for each business and ensure it is intact. If it is not, you may consider exiting,” says Jatin Khemani, managing partner and chief investment officer, Stalwart Investment Advisors LLP - a Sebi-registered independent equity research firm.

According to Khemani, those who have idle cash should start deploying it as valuations have corrected, especially in many mid- and small-cap names.

Those who don’t have idle cash should use the current market conditions as an opportunity to rotate their portfolios by exiting weaker stocks.

“Rank all your portfolio businesses in terms of risk-reward. Start from the bottom of the list, that is, the least attractive portfolio business, and see if there are other businesses in the market whose stocks are beaten down and are more attractive than this one,” adds Khemani.

ROAD MAP FOR THOSE EXITING DIRECT STOCKS   

• If you have been investing blindly in stocks without the ability to evaluate stocks, exit, even if you have to incur a loss

• Pay a financial planner’s fee and get an asset-allocated portfolio built, tailor-made for your risk appetite and investment goals

• Once you have such a portfolio, continue with your SIPs and gain from lower equity valuations

• Markets could correct further, so avoid lump-sum investments; use systematic transfer plans instead

• Those who don’t have an advisor may go for a balanced advantage fund or a multi-asset fund