»5 Minute Wrap Up by Equitymaster

On This Day - 27 JUNE 2018
Quality Stocks Long Term Ke Liye Sahi Hai

Sarvajeet Bodas, Research analyst

Have you seen the latest Mutual fund Sahi Hai ads?

It's about an investor who has invested in mutual funds six months back. His portfolio hasn't seen any gain. In fact, he lost some money.

Highly contextual, right?

This ad gives some assurance to those who invested in mutual funds at the peak of the bull market.

Interestingly, the Association of Mutual Funds of India (AFMI), started its ad campaign when the stock market was going great guns. Due to the interesting ads, the mutual fund industry got good traction. We have seen a rapid increase in mutual fund flows in the last one year.

To be honest, it was crazy.

It went to such an extent that some mutual funds stopped lump sum investments in their mid and small cap schemes.

But when the greed is in the air, money finds alternatives.

Investments through portfolio management schemes (PMS) and alternative investment funds (AIFs) became popular.

Direct participation in the market went up a lot.

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The mood turned extremely buoyant and investors felt nothing could go wrong.

The market was injected with liquidity. Leveraged trades became common. It was easy money.

In 2017, it was all about returns.

But as they say, there are no free lunches in the markets. Or what goes up must come down.

Investors are now focusing on risks - rising crude and commodity prices, inflation, interest rates, and trade wars. These issues have taken centre stage.

The result?

Selling pressure.

Investors are pulling out money and the victims are mid and small-cap stocks.

In the first half of 2018, the BSE Mid-Cap and the BSE Small-Cap indices are down by 11 and 14% respectively. Whereas, the BSE Sensex index is up 5%.

And when the correction starts, companies with bad corporate governance suffer the most. Accounting manipulation, earnings management, doubtful related party transactions, undeserved monetary benefits for promoters, questionable sources of growth, poor capital allocation...it's a long list of misdeeds.

Stocks of companies with these attributes have become falling knives. 50% down. 70% down. 90% down...in no time at all. Many of these stocks were locked in lower circuits.

Nevertheless, something good happens when the market corrects.

Good quality companies become available at attractive valuations.

Just look at our latest Smart Money Secrets recommendation. It's a good company available at decent valuations. But it's only a partial buy with 50% exposure.

We believe, for the stock to become a strong buy, it requires another 10% correction. You can access the premium report here.

I strongly believe, in the long-term, good quality companies will surprise on the upside.

I agree with the latest mutual fund ad when it says, a mutual fund (i.e. the stock market) is like a cricket match. Sometimes, the run rate (i.e. stock prices) is up and sometimes it's down. But if you stay on the pitch (i.e. if you have a long-term outlook), the chances of your success will increase.

Chart of the Day

The market is facing a lot of selling pressure.

Foreign institutional investors (FIIs) have taken the lead in dumping stocks.

In 2018 till date, FIIs have pulled out nearly Rs 71 billion from the Indian stocks. Nevertheless, domestic institutional investors (DIIs) have supported the markets so far.

FIIs Pulling Out Money from the Indian Stock Market

The main reason is rising interest rates in the US. This tempts large foreign funds to move their money to the US.

This outflow impacts all emerging markets including India. We are also facing a weak rupee and high crude oil.

But remember, FIIs investing or taking out their money is a part and parcel of market activity.

You should not be overly worried about the buying and selling of FIIs. You should instead create a list of good quality stocks that you would love to have in your portfolio. Once the valuations of these stocks become reasonable, you could immediately start buying them.

And with the recent correction in mid and small cap companies, some good quality companies are available at attractive valuations.

In fact, in Smart Money Secrets, some of them have come in the buy range from an earlier hold view. Premium subscribers could consider buying them.

In case you don't have access to Smart Money Secrets, you can sign up here.


Sarvajeet Bodas
Sarvajeet Bodas
Research Analyst, Smart Money Secrets

PS: What are India's best investors doing with their portfolios in such a volatile market? Kunal Thanvi is on a mission to reveal their top picks to you. Follow India's top 40 super investors here.

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