It is advisable not to invest too much in multiple companies under the same umbrella.By Sunil K Parameswaran
When we invest, there is a tendency to wonder which sectors of the economy are important, and which stocks in a sector are attractive. Investments in equity have picked up tremendously post liberalisation in 1991. The setting up of NSE, and its consequent fallout on the BSE, and the introduction of scripless trading, has revolutionised equity investments in India, even in tier-2 and tier-3 towns and cities.
Prior to that, the focus of every investor was on gold and land. The former is debatable as an asset in our culture. Of course, gold ETFs nowadays offer an attractive alternative to those who want to speculate on the yellow metal. Real estate will appreciate in the long run in India, because land availability is limited, and the population is steadily increasing.
Growth of mutual funds, insurance
Certain sectors have to do well in the medium to long-term. For instance, food products and pharmaceuticals are safe bets. However bad the state of the economy, people have to eat, and some will always be falling ill. In India, insurance and mutual funds are two financial products that are seeing rapid growth that is likely to be sustainable. India is an under-insured country. Healthcare costs are spiraling, and people have understood the need for health insurance. Hence, insurance company stocks are likely to do well over time. Given the growing mutual fund investments, stocks of listed asset management companies are likely to do well. At the moment there are not too many choices in India in this regard, but that is likely to change.
It is advisable not to invest too much in multiple companies under the same umbrella. Just the way an investor would have a mental limit for investment in a stock, it is prudent to have a limit for the parent conglomerate as well. Also, while we should not put all eggs in one basket, the basket ought to be diversified across industries as well. For instance, 75% of your investment in IT stocks is not a good idea.
Global diversification
There are avenues for investing in foreign stocks these days, particularly US stocks. While the US market is a steady performer, an advantage for Indian investors is the rupee is likely to depreciate steadily. Thus, while overseas investments inject an additional dimension of risk, in the form of foreign exchange risk, it is likely to work in favour of Indians, particularly with respect to investments denominated in USD and Euros. Investments up to $250,000 per year are allowed. If you invest in US stocks, make reasonably large investments at a time since banks charge a significant commission for converting Indian currency to foreign currency.
The writer is CEO, Tarheel Consultancy Services
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