Tag: india investing

For Long term investments start a direct market SIP

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This article has been updated. Click on this link to see the latest version.

March 2016 – A Superior Investing Process – Do a DIP SIP

 

Jan 2011

  • The market indices have fallen, and it seems like a good time to invest?
  • But you’re not sure what to invest in? Should you choose just one or two stocks with good prospects, and invest a large sum?
  • Or should you just choose a Mutual Fund, and invest in a lump sum, or even a SIP?

I have another idea for you. Invest in a direct market SIP !!

By this I mean, use your current Online Trading & Demat account to buy 5-6 shares yourself in a systematic manner every month.

Comparisons of direct market SIP with a Mutual Fund:

  • Only initial charges of 0.5 to 0.75% which are the brokerage commissions + taxes, compared to 2.5% per annum, which are the normal Mutual Fund charges. This really adds up over the years.
  • A quick look at equity MFs performance over 3 years (from Value Research) shows that only 15/57 MFs outperformed the Nifty’s 5% gains over the last 3 years.
  • Instead of a decision on which MF, you have to only make an initial decision on the bunch of 5-6 stocks. I will help you through this also :-)
  • Utilize your online trading account better, and gain control over your investments !!

Comparison of direct market SIP with a lump sum in 1-2 direct stocks:

  • The market indices can fall further. A systematic investment every month will help you gain more from falls in the market
  • Do not try to time the market. Instead by investing systematically, you can beat the Sensex in terms of returns !!
  • Just one or two stocks for investing heavily – this may be too concentrated a portfolio. Even the largest and most stable stocks (think Reliance or DLF) can be victims of pockets of non performance, or worse, large unpredictable swings.

Comparison of direct market SIP and Brokerage Equity SIP:

  • Several brokerages  – ICICI direct and ShareKhan for sure – have introduced Equity SIP facility for customers.
  • They can specify the stocks and purchase monthly of a specified Value (of portfolio) or specified quantity (of shares)
  • Initial and recurring charges are identical
  • There have been doubts expressed about the brokerage’s transaction –  Bad Trade Execution/ buying into morning spike, etc. as expressed in this article – http://shabbir.in/why-no-stock-sip/
  • My feel is a Do-It-Yourself approach removes these doubts and gives some satisfaction (while taking just 10 minutes a month).
  • See fig 1 for a tabular comparison of above options
Comparison of SIP Options, JainMatrix Investments

Fig 1 – Comparison of SIP purchase options  (click image to enlarge)

Checklist for a direct market SIP:

  1. You will use your current Online Trading account/ broker relationship for this SIP. If you have to choose among your options, choose the one with lower brokerage.  Could be ICICI securities, or Kotak securities, or whatever.
  2. Decide on the 5-6 stocks you will invest in.  My help here – see next section – Choose your stocks.
  3. Decide on the amount you will invest every month – here I would suggest you fix an amount such as Rs 10,000 or 20,000 and keep up this amount every month.
  4. Create a small calculation excel for helping you decide the actual number of shares to be bought. See section – Here’s an example.
  5. Decide on a date for investing. If you are salaried, perhaps 2nd or 3rd every month is a good date as it is right after you have received your salary. Or any other convenient date. Keep a self reminder for this date.

Choose your stocks

This is an important first step. My key principles in choosing the stocks are:

  • Choose large liquid blue chips.  They should be Nifty/ Sensex stocks. You do not want too much volatility in your mutual fund.
  • The 5-6 stocks should be from different sectors. Bad news in one stock / sector should not affect the other.
  • These stocks should be solid businesses that are going strong even 10-15 years from now, as your SIP and asset building is for long term

My recommended stocks – choose only one per sector:

  • Banking – HDFC Bank or SBI
  • Automobiles – Tata Motors or Bajaj Auto
  • Capital Goods & Engineering – L&T
  • Information Technology – TCS or HCL Technologies
  • Oil & Gas – ONGC or Petronet LNG
  • Telecom – Bharti Airtel 
  • FMCG/ Food – Hindustan Lever or ITC

Returns from this approach.

  • Lets say you chose 5 stocks for your SIP – HDFC Bank, Infosys, L&T, ONGC and Bharti Airtel.
  • If you invested in these five on a monthly basis over the last 30 months, following above approach, you will get returns per fig 2
Portfolio vs Sensex, Jainmatrix Investments

Figure 2 – Comparison of  SIP Portfolio with Sensex

Here’s an example

  • Choose your MF portfolio from above recommended stocks
  • Next you have chosen Rs. 20,000 per month for your SIP.
  • Create a small excel  – which can help you calculate the number of shares to be bought every month. See fig 3. This will help do this easily in a few minutes
SIP calculation tool

Fig 3 – Tool for SIP purchase

  • Decide the date of the month you want to invest every month – say 2nd. Very important – stick to your monthly investing routine as far as possible.
  • There you go – you are all ready.
  • Happy Investing :-)

Performancing Metrics

SCI FPO analysis – closing review on 6th Dec

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  • The FPO price fixed today is Rs 140 – high end of range
  • The Retail and HNI subscriptions piled up on the last day of FPO and surprised on the upside. Retail is 6.5 times over and HNI 3.7
  • Seeing the numbers retail investor can at max expect around 240 shares worth Rs. 31-33,000. Quite smaller allocation than our pre- FPO expectations
  • Retail over-subscription was more than HNI – this is a new trend.
  • Employee quota was very small and under subscribed, this may move to retail.
  • General market directions look positive, and I expect the price will rise slowly after FPO shares are allotted.
  • After this very successful FPO, SCI has promptly announced $3 billion worth of capital investments over the next 3 years. This will double the gross tonnage over next 7 years. Positive signs indeed !!

Also see Analysis of SCI FPO (click link)

SCI FPO analysis – closing 3rd Dec

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Key points

Business aspects

  • SCI commands 35% of the Indian flagged tonnage, which again is about 10-11% of India’s ports based import export. Foreign carriers dominate, but this may change soon.
  • Exports and imports are growing by 21.4 per cent and 23.2 per cent this year, which are largely executed through shipping. This indicates a robust demand. Coal & crude imports are expected to accelerate.
  • Key indicators of pricing are Baltic Dry Index and the Baltic Tanker Indices. These peaked in early 2008, fell to lows in 2009, are stabilizing in 2010, and are expected to recover in 2011 along with rebound in global economies and trade.
  • SCI profits also have shown a recovery trend in 2010.
  • SCI is seeing the need to invest in new assets to – replace an ageing fleet and – meet growing demand. This FPO will be followed by large order placements, both deploying FPO funds, cash from operations and raising debt.

Unique strengths of SCI:

  • A diversified fleet (bulk carriers, crude/oil products tankers, container vessels, etc.) that caters to all types of cargo for domestic and international markets
  • Relationships with PSUs like Coal India and SAIL – bhaichara – that can grow a lot
  • Cash on hand is Rs 49 per share (post FPO). This is a good statistic. It means you are paying only Rs 84 per share for the running business of SCI.

Pricing and key ratios

  • At today’s CMP, SCI is close to it’s 52 week low. Peak this year was Rs 192, on Oct 2. A fall of 30% in one month, perhaps on news of FPO pricing. Also dilution of equity in this issue by 10% only explains part of this fall.
  • SCI FPO pricing at Rs. 133 (for Retail with upper end of Rs 140 less 5%) is P/E of 8.5 times, which is favourable compared to current Industry P/E of 16.71 (all are ttm figures)
  • Dividend yield at 3.4% of CMP is attractive.
  • FPO offer is at P/B of 0.9 – which is attractive.
  • CMP today (2nd Dec) is 146.8, so FPO (at 133) is at a discount of 10.3%
  • Current D/E ratio of 0.43 is comfortable and will fall further post FPO. Then gain due to the expected investments in assets.

Conclusion and FPO investment expectations

  • The issue is attractive, and the CMP has dipped over the last month on FPO pricing considerations.
  • My feel is the stock should retrace to 165 range post FPO (25% up from 133), then move thereafter based on business performance and overall Sensex directions . (Which both look positive)
  • Overall it is a liquid, steady PSU stock with a good brand name. Good long term holding stock.

Subscription details and allotment possibilities

  • Subscription position as of 02 December 2010: QIB – closed at 4.2 times over subscribed; HNI at 0.28 times and Retail at 0.56 times – closing on Dec 2rd.  Looks like post CIL IPO, HNI has shifted to Retail .. :-)
  • My feel is given some Retail interest in MOIL (this being an overlap period – why cant these guys schedule their offerings better) the Retail should be in 2 – 3 times subscription range tomorrow.
  • This should give allotment of max Rs 80,000 worth shares on subscription of 2L.
  • To get firm allotment, invest in 1400 shares at cut off (140) for total investment Rs 196000.

(2nd Dec 2010)

Also see a post closure report – click link