Lure of Blue Chips: Why they Add Value in the Long Run?
Do you own blue chip stocks? You must have surely come across this question. Even if you do not know the origin of the usage “Blue Chip”, you must be aware that they represent the high quality stocks in the Indian share market. While there is no hard and fast definition of a blue chip, in the Indian context, stocks like Hindustan Unilever, Reliance Industries, HDFC Bank, TCS, Infosys and many more form a part of that list. It is not that these blue chips have not corrected. For example, post the 2001 technology meltdown, Infosys lost more than 75% of its value. Reliance Industries was almost stagnant between 2007 and 2016. So, it is not that blue chips don’t correct. They are identified by solid business models, visionary managements, a strong focus on growth and a commitment to profitability. Over and above all these parameters, most of these blue chips are custodians of an incomparable brand that positions them uniquely within their industry as well as in the market overall.
Why do blue chips make a difference?
Have you wondered where the term “Blue Chip” comes from? A blue chip stock is a nickname given to the stock of a company that has some of the unique qualities mentioned above. The term "blue chip stock" comes from the card game, Poker. In Poker the most valuable playing chip colour is blue. That is the analogy that we use for blue chips stocks in the market.
As mentioned earlier, there is no consensus on what constitutes a blue-chip stock. Generally speaking, blue-chip stocks have some visible features which makes them stand out in the share market.
Most blue chips have stable business models. Hindustan Unilever sells soaps day in and day out. HDFC just gives loans in the best possible way.
Normally, blue chips are preferred by wealthy investors (HNIs) and also by large domestic and global institutional investors.
Typically blue chips have a demonstrated record of high profitability over a long period of time and are consistent in growth and margins.
Most Blue Chips have been conservative on usage of capital and avoid diluting shareholder equity too much. That is one of the reasons they retail value.
Most blue chips are companies that are very conscious of their corporate governance standards and disclosure practices which sustains valuations.
Blue chips have sustained over the years due to very strong management bandwidth and a seamless succession plan.
Why Blue chips add value in the long run?
It is the term “long run” that is most important here. Blue chips have underperformed during phases but it is their ability to handle shifting market dynamics and competitive assaults that really sets them apart. Let us look at a few instances to underline this point.
In the 1980s and the late 1990s, Hindustan Unilever (HUVR) faced stiff competition from Nirma and later from P&G. But HUVR focused on its principle of value for money. HUVR was ahead of the curve to shift its strategy with the increased usage of washing machines. Over the years, it has beaten competition hollow.
HDFC Bank adopted a conservative strategy at a time when the likes of ICICI, Axis and SBI were chasing growth. When the economic cycle turned, it was HDFC Bank that was standing tall with the best asset quality. Becoming the largest private bank was a cakewalk for the company from thereon.
Reliance Industries is again a classic example of a company that invested in trends ahead of the rest of the market. Be it bets on polyester, petrochemicals, oil refining or even telecom; Reliance managed to create business models that were driven by cost effectiveness and futuristic technologies. As we write, Reliance Jio has touched 340 million subscribers in 3 years; something that took Bharti nearly 20 years.
Finally, we come to the case of Infosys and TCS. By early 2016, IT companies were in trouble. There was a global slowdown in technology spending and the US visa policy was getting inimical towards Indian engineers. Both TCS and Infosys have undergone a major shift since then. A focus on digital business, high value clients and a US oriented business model ensured sound growth even at higher costs. They did come out unscathed.
When you next invest in stocks online or offline, look out for Blue chip stocks. Not just because Blue chip stocks have consistent profits, solid growth and a strong balance sheet, but above all, they have management bandwidth and the ability to adapt. It is this adaptability that actually makes them blue chips.
Mistakes to Avoid in Making Investment Decisions
There are a whole lot of investment mistakes we tend to commit inadvertently. The idea is not that you don’t understand these mistakes, but just that you tend to overlook the same. Here are few tips on how to invest in share market while avoiding the common investment mistakes that you must consciously avoid.
Chasing too many stocks to buy
When you talk of a large unwieldy portfolio, we are normally reminded of the Morgan Stanley Growth Fund in 1994, which started off creating a mutual fund investment portfolio of nearly 450 stocks. When you either own too many stocks or try to track too many stocks you end up dissipating energies without adequate returns. Also, stocks help you in diversification only when you diversify across 12-15 stocks. Beyond that it is just risk substitution. Have a universe of around 30-40 stocks and don’t own more than 15 stocks at any point. Even for your mutual fund investment, you should restrict to 3-5 funds to ensure that you don’t over diversify.
Falling in love with a stock that you have owned for long
Falling in love with the stocks you own is a common problem in portfolio creation. Having identified a stock after a lot of effort and after the stock has given you returns for 4-5 years; investors refuse to accept that sector has structurally changed. We have seen such instances in blue chips like SBI, Sun Pharma and Tata Motors. When you fall in love with a stock either due to historical reasons or due to pedigree of the stock, you may end up ignoring the reality of the situation. Also be open about buying stocks where you have booked a loss. A bad decision does not mean that the stock is bad.
Buying without reference to your risk capacity
When we talk of risk capacity, it has a risk angle and also a time angle. Equities tend to outperform other asset classes over the longer term but in the shorter term they could underperform due to volatility. Buying a high beta stock when you have a low risk appetite is a classic blunder. Similarly, buying a stock hoping that it will give you returns in the next 1 year can also leave you disappointed.
Trying to time the market to catch the highs and lows
When you are investing don’t try to time the market. Buying at the bottom and selling at the top looks quite classy but it rarely happens in the real world. There are two problems with timing the market. Firstly, even the best of traders are not able to consistently catch the lows and the highs of the market. Secondly, the incremental benefit you gain by timing the market is almost negligible. In fact, by trying to time the market you end up overtrading and increasing your cost as well as losing opportunities.
Focusing too much on the past while investing
There is a joke in Wall Street that if investing was all about the past then historians and archaeologists would be the most successful investors in the world. Investing is all about the future and that is what you need to focus on. At best, the past can be a guide to your investments but you cannot predicate your investment decisions purely based on what has already happened. This logic also applies to your investment performance. Don’t focus on the performance of the past. Learn from your mistakes and just move on.
Diversifying without reference to correlations
While creating your portfolio, you need to spread your risk across sectors, across themes and even across asset classes. Putting all your eggs in one basket has never been a good idea. It, perhaps, never will be! But then how to invest in share market that your portfolio is diversified? The answer is to buy assets with low correlation. For example, if you own a banking stock and add an NBFC stock to your portfolio, then you are not diversifying because both the stocks are rate sensitive.
Not reviewing your portfolio regularly
It is not just enough to create a portfolio but you also need to regularly review the portfolio. Review your portfolio based on changing equity valuations, shifting macros, changing interest rates etc. Apart from the external review, also review the investments internally with reference to your return expectations, your long term goals and your risk appetite.Avoiding these mistakes may not make you a millionaire. At least, it will give you a better investment experience.
The Difference Between Regular and Direct Mutual Fund
Browse through the NAVs of mutual funds either in the pink papers or the AMFI website and you will find that the same growth or dividend scheme of a mutual fund is subdivided into Regular plans and Direct Plans. Have you ever wondered what are these Direct Plans and Regular Plans? Let us check out a live NAV table first.
Date Source: AMFI
In the above table, you will find that the DSP Top 100 Equity Fund is subdivided into Direct Plan and Regular Plan. You will also find that the Direct Plan has a higher NAV compared to the Regular Plan. Before comparing Direct Plans and Regular Plans, let us briefly dwell on the brief history of Direct Plans.
A Brief History of Direct Plans
Prior to 2009, fund houses charged investors entry loads on mutual funds to cover selling and distribution costs. In August 2009, SEBI banned the collection of entry loads from mutual fund clients. However, the official model of Direct Plan came only from January 2013 when SEBI asked all fund schemes to classify into Direct Plans and Regular Plans.
Currently, funds are allowed to debit their annual expenses up to a ceiling of 2.25% of the AUM in case of equity funds to the fund NAV. This is called the Total Expense Ratio (TER). The fund does not bill the distribution and trail commission costs to Direct Plan investors. Hence, Direct Plans are subject to lower TERs and the NAV are higher. Here are three key points.
Direct Funds Have Lower Expense Ratio
The TER on Direct Plans is lower since the distribution and trail fees are not billed to them. However, there are other costs too in a mutual fund. Mutual funds have to incur operational costs, fund management fees, auditor fees, registrar charges, execution costs, statutory costs and brand expenses, among others. Even if you are holding a Direct Plan, these expenses will still be charged to you. It is only the distribution and trail commissions that are not billed to your NAV. In a typical equity fund the regular plans will have a TER of around 2.25% while the TER for a Direct Plan will be 60-70 bps lower. This cost saving each year enhances your return over the longer period of time.
Direct Plan Does Not Involve Any Intermediary
Direct Funds are simple in nature and the process of investing, especially through an online platform is easy as you do not deal with any intermediary. You can invest directly and make your own investment choice. Just ensure that the NAV in your statement actually reflects the Direct Plan NAV as available on the AMFI website.
Choose Direct Plans If You Can Make Financial Planning Decisions Independently
The common question is - who should opt for a Direct Plan. There are no hard and fast rules. If you are savvy enough to manage your financial planning and investments on your own, then you can consider Direct Plans. When you invest via Direct Plans you do not get the benefit of the advisory services of a broker or financial advisor. Hence, you need to make your choice of Direct Plan after due consideration. Ensure that you have the time and resources to make your financial planning decisions independently.
How Can You Invest In Direct Mutual Funds?
Direct plans of mutual funds enable the investor to save on costs. Direct Plan investors are not charged the distributor and trail commissions. For an average equity fund, this reduces the Total Expense Ratio by 60-70 basis points. This makes a big difference over longer periods.
The KYC process remains the same, irrespective of whether you opt for the Direct Plan or the Regular Plan. Also you have to register with the AMC or the aggregator once. The investor can either do a lump sum investment or follow SIP route through the Direct Plan. Once your SIP is registered as a Direct Plan, then it continues that way. You can convert a Regular Plan into a Direct Plan by writing to your fund. How do you invest in Direct Mutual Funds?
Direct Plan Investing Through AMCs
Walk into the nearest office or Investor Service Centre of the AMC of your choice. If you are a first time investor, then you will have to complete your KYC and you will be allotted a ‘Folio Number’. Once folio number is allotted, subsequent investments can be done online. Ensure that you specifically check the Direct Plan box in your application. The only challenge in this approach is that you will have to obtain a distinct folio number for each AMC.
Direct Plan Investing Through Fund Registrars
Registrars are the record keepers and folio managers of all mutual fund accounts. There are two key players viz. Karvy and CAMS. You can register with either registrar online to invest in Direct Plans. Of course, when you approach a registrar, you can only invest in funds for which they are the registrars. In fact, when you submit an application to your AMC, it is processed by the registrar only. So, this is an extension of the first method.
Leveraging MFUs and Fund Aggregators
Mutual Fund Utilities (MFU) or aggregators are an agnostic platform to invest in mutual funds. You will have to take a one-time registration and obtain a Common Account Number (CAN). Once the CAN is obtained, you can map all your existing folios to that particular CAN and they would be treated as Direct Funds. The advantage is that you don’t have to interface with multiple AMCs and the MFU aggregates and gives you requisite analytics for better decision making. The challenge is that you can only deal in the funds where the AMCs have tied up with the MFU. This platform is convenient and centralized.
Direct Plan Investing Through Investment Advisors, Online Direct Investment Portals
The challenge in the above 3 methods is that you still have to be self-driven. As an investor you need to take all the decisions including screening, selecting and ensuring that funds are in sync with your long term goals. One alternative is to go through on online platform of Registered Investment Advisor or through a Robo Advisor. These platforms provide investment recommendations to investors on the basis of certain details keyed in by the investor.
Direct Plans Of Mutual Funds – How To Make The Choice?Investing through Direct Plans requires that you are comfortable with a self-driven approach to investing in mutual funds. While mutual funds offer diversification and professional management, they are also exposed to the vagaries of the markets and macros. You must be confident to handle these gyrations. Ideally, Direct Plans are for investors who have the time, wherewithal and resources to spend in making investment decisions. Otherwise, you are better off opting for a Regular Plan and letting your broker advice you appropriately.
Sensex Breaks Below 38,000. Is This Time To Be Cautious?
Between May 6 and May 8, 2019 the Sensex lost nearly 1,200 points in a vertical fall. It was triggered by an exasperated Donald Trump tweet on his intent to raise tariffs on Chinese imports from 10% to 25%. Global markets reacted in unison as nearly US$13 billion was wiped out for every word that Trump tweeted. India was not spared as the Sensex dipped below the psychological level of 38,000. What should investors really do?
Source: BSE (May 9, 2019)
The one-month chart of the Sensex is quite revealing. After crossing the 39,000 mark multiple times, the Sensex had faced tremendous pressure before it ascended further. Should traders and investors be cautious at this point?
A. There is a global angle to this correction
The big trigger for the correction was an escalation of the trade war. By now it is clear that this is not just a war over import duties, but a much bigger war of two of the largest economies trying to assert their economy supremacy. The US remains the market that every country looks up to and China is the only country that can absorb all the minerals and metals produced in the world. China is unwilling to commit anything on intellectual property rights and that is the bone of contention. A prolonged trade war will mean that there could be an impact on growth in US and Chinese GDP. That will surely rub off on global demand. Secondly, there is a limit to which China can retaliate because they run a trade surplus in the range of $400-500 billion with the US (as per US Census). The other option is to devalue the Yuan. That could have a weakening impact on currencies including the rupee. Hence the trade war will continue to be an overhang on the Sensex.
B. Domestic macros are a challenge too
There are a number of domestic challenges too. Despite two rounds of rate cuts, there has been little impact on lending rates. The rupee has been extremely volatile and the RBI has been using swaps to infuse domestic liquidity into markets. There is the more immediate challenge on top line growth in consumer sectors like FMCG and auto where the slowdown is obvious. Despite all the efforts of the government, farm incomes have not improved and weak rural demand is putting a limit on growth.
C. Banking holds the key for now
We have seen in the past that if the Sensex has to go up decisively, then banking stocks have to perform exceptionally well. That is hardly surprising considering that banking and financials account for 38% of the Nifty basket. Amidst this, PSU banks are struggling to recover from the NPA pile accumulated over the years. Then, there are the potential NPAs pertaining to IL&FS, ADAG group and sectors like power and telecom that are not yet accounted for. When you add these up, the question “where is the trigger for a market rise” continues to haunt.
D. You can sense the market risk in the VIX
The volatility index is also called the Fear Index as it is indicative of the caution in the markets. Historically, VIX and Sensex have had a negative correlation. This time around, the VIX has moved up from 14 levels to 26 levels over the last couple of months and shows no signs of abating. That is a clear indication of high levels of risk that markets are assigning at current levels. When the VIX is elevated at higher levels, each bounce is met with aggressive selling. VIX also reflects that the rupee is coming under pressure due to a consistently widening current account deficit.
What should investors really do at these levels?
While caution is warranted, the Sensex has shown a tendency to bounce each time the trade war has tampered. Once the rattling gets subdued, we could see the Sensex bouncing again. Other than the weakening consumer demand, all the other factors are temporary. Weak consumer demand appears to be the only structural issue and that may predicate on how the new government that assumes office deals with demand push. While traders can be choosy about timing, investors should stick to quality stocks and adopt a phased approach to investing. The more these things appear to change, the more they happen to remain the same!
Top 6 Equity Investment Myths That You Must Overcome
In a way, investing myths are perpetuated over the years; partly by history and partly by your conditioning. There are some popular myths that almost all traders and investors appear to be victims of. Let us look at 6 such popular myths about investing that need to be debunked.
Myth 1: In long term investing, returns matter more than risk
Back in 2007, Nokia was a world leader in mobile phones and Forbes had even featured Nokia in a cover story calling them “invincible”. The same year, Apple launched its i-Phone and was followed by Samsung’s smart phone. In less than 4 years, Nokia was on the verge of bankruptcy. Imagine what would have happened to an investor who had ignored risk while investing in Nokia. The reality is that more investors made money in the equity markets by focusing on risk than purely on returns. Once you are able to measure and control risks, the returns will automatically follow. You invest with finite capital and that is why risk matters.
Myth 2: Equity investing is more risky than debt; so stick to bonds
This statement is technically correct because as an asset class equities are riskier than bonds. But there is a time definition that comes in here. In the short to medium term equities are definitely riskier than bonds because returns on equity can fluctuate. But let us talk about the longer term. In the long term both equity and debt carry risk. Look at the number of bond issuers who have defaulted in the last 1 year and you will understand the risk in debt. Secondly, when you are looking to create wealth in the long haul only equity investing can get you to your goals. In the long run, the risk of not taking any risk is much more for your portfolio. That is why equities automatically become low risk over the long term. Of course, you need to stick to quality equity stocks in this case.
Myth 3: I am a long term investor so charts are not for me
There is a general myth that fundamentals are for long term and technicals are for the short term. While that could be intuitively correct, it risks missing the wood for the trees. Charts are the key to any long term investor because it gives two very important signals. Firstly, even if you have identified a fundamentally strong stock, the timing of entry does make a difference to your returns and charts can help here. Also, charts can identify breakouts, which can be useful for long term investors.
Myth 4: Large caps are a better bet than mid caps
That is not necessarily true because some of the large caps of today were mid caps a few years back. There are examples like Lupin, Sun Pharma and Bajaj Finance. You can actually make big profits in equities if you identify a quality stock when it is still a small cap or a mid cap. Once it becomes a large cap there are scores of analysts and fund managers chasing the stock and it becomes overcrowded. Also, mid-caps create wealth because of more focused business models and lower levels of debt.
Myth 5: A great company can be bought at any price
That is not correct. A great company can be awesome at a certain price but can be expensive at a higher price. If you had bought L&T in 2011 or SBI in 2010 it would have taken you ages to recover your price. Both are outstanding companies! However good the company, if you are looking for stock market outperformance then the price of entry matters! That is why investing requires that you keep looking out for bargain sales in the stock market. Investors who bought quality stocks in 2009 or 2013 would have surely done a lot better than the others.
Myth 6: Investing is all about complex black box strategies
Black box strategies can give you better execution. You make big money by identifying a stock with great potential and holding on for a long time. Legendary investor Peter Lynch used to say, “A great idea should be so simple that you should be able to illustrate it with a piece of chalk”. Take Eicher Motors in 2009. A growing market, hardly crowded, low capital requirement and a high ROE was a classic combination to create wealth. That is how simple it is! Just keep your eyes and ears open.
Before you start investing, try to drive these myths out of your mind. It will make investing a lot simpler!