Should you listen to SEBI chief & not invest in equities? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Should you listen to SEBI chief & not invest in equities? 

A  A  A
In this issue:
» Mid-caps stole the show in March quarter
» PSU disinvestment - retail investors may not get any share of the pie
» Shouldn't life savings drugs be more affordable?
» Ability to service debt at a 5-yr low for India Inc
» ...and more!

----------------------------------- Learn at Home and Earn in the Market place -----------------------------------

We've initiated a new way to add to your income from the comfort of your home.

This Online Course will teach you how to analyse market trends... how to pick up winning trades...

how to create your own trading strategy so you can earn regular double-triple digit profits.

Thousands of our subscribers are already benefiting from this.

To know more, click here...


In the recent Union Budget, there was a lot of emphasis on increasing retail participation in the stock markets. The Finance Minister introduced a new tax saving scheme for smaller investors. The idea was to lure retail investors into the markets.

But in a recent announcement the chief of Securities And Exchange Board Of India (SEBI), Mr UK Sinha, has asked retail investors to stay away from investing in equities. He says that investors should participate only through the mutual funds. He has a reason behind saying this. In his opinion, retail investors have very little knowledge of the markets. As a result, they do not have adequate resources to make informed decisions and are at significant risk of losses. Hence, it would be better for them to invest through mutual funds.

We do agree with Mr Sinha's comments on informed decision making. There are cases wherein retail investors blindly follow their broker's or peer's advise when it comes to stock investing. More often than not such advices lead them to hold on to dud stocks or end up with huge losses. However, it does not mean that investing in mutual funds would do away with this risk. Large mutual funds do help in diversifying your portfolio but investing in them just for their size and expertise is not the right thing to do either. Understanding the fund manager's investment philosophy, the fund's expense ratios, portfolio of stocks, etc are some important things that also need to be considered when investing in a mutual fund.

It all boils to the same thing. As an investor you have to do your homework when it comes to investing. It is irrelevant as to which option you are choosing. Be it stocks or be it mutual funds, an investment based on external advise rather than your own understanding, is destined to doom. For long term returns, you have to do the hard work of studying the underlying fundamentals and relating them to the asset's valuations.

Do you think retail investors should only invest in mutual funds and not in equities? You can also share your comments with us or post your views on our our Facebook page / Google+ page.

01:20  Chart of the day
The fact that the national carrier Air India is in trouble is not really news. The recent strike by its pilots on training issues has just added to the company's woes. Therefore it would not come as a surprise that the airline had the maximum number of flight cancellations in the month of April 2012. As per a leading daily, the cancellation rate for Air India stood at 5.2% during April 2012. It was closely followed by Kingfisher Airlines (KFA), another troubled carrier. The other airlines managed to keep their cancellation rates under 1%.

Source: Financial Express

The year 2011 turned out to be disastrous for Indian stock markets during which the benchmark BSE-Sensex was down by 25%. The year 2012 started out with a bang with BSE-Sensex gaining 11% for the month of January. The rally continued in the month of February. However the markets took a breather in March. For the month of March 2012, the BSE-Sensex returned -2%. It even breached the psychological level of 16,000 points. The European debt crisis, weakness in US recovery and policy paralysis in India has led to decline in the stock markets.

In-spite of the market downturn, mid-cap stocks have done better on the bourses than their large cap peers in the first quarter of the current calendar year. The associated mid-cap category of mutual fund schemes has clearly turned out to be the show stoppers for the quarter ended March 2012. However, the recent upswing in performance of mid-cap funds was due to the extreme low valuations of mid and small-cap companies in December 2011. Now the gap between the valuations enjoyed by large-cap indices and mid-cap indices has been reduced after this rally. Thus, an investor should remain cautious before investing in mid-cap mutual fund schemes.

Desperate times call for desperate measures. One entity who is taking this statement rather seriously is the Finance Ministry. What else could explain its decision to rule out any more follow on offers of state run companies? Instead, the ministry has chosen to take advantage of SEBI's recent decision of allowing share sale through institutional placement and offer for sale. Indeed, we cannot blame the finance ministry for this. The current market environment is such that the Government may not get the deserved valuation of its stake in state run companies through a follow on issue of shares. An institutional placement or an offer for sale through the auction rate could not only prove more remunerative but also save considerable time.

One could argue that such a decision is not in the favour of retail investors. The alternative routes deprive them of a chance to lap up more shares of PSUs. However, it is not entirely true we believe. Retail investors will certainly benefit if rich valuations are given to shares bought through the institutional placement or auction route. Besides, they always have the option of buying from the market if they are almost certain of this. Thus, follow on or no follow on, there are gains to be made by a rational investor if he identifies the value correctly.

Shouldn't life saving drugs be more affordable? The question is not just rhetorical. It is powerful enough to bring down governments and entail corporate policy changes. Economies in the West have been struggling to bring down healthcare costs. But to no avail. Their resistance to unbranded generic drugs from India and developing countries is a major hurdle. More than safety, it is the profitability of drug majors that is at stake. Unwilling to compromise on the profits of patented versions, pharma majors have refused to liaison with cheap drug makers. Result being that most patients have been able to ill afford life saving drugs. The debate has now been ranging for some months in India too. The government and corporate have locked horns on the pricing policy of drugs. What is certain is that drug makers cannot afford to lose money on life saving drugs. If nothing they need to be compensated for the losses through better pricing of other drugs. Else, there will be no incentive for conducting new drug research. It is time the government reviews such policies more proactively. The sector deserves at least a fraction of the attention that the government showers on sectors like telecom, we believe.

The interest coverage ratio (EBIT/ Interest expense) is an important parameter in financial analysis. It is used to determine how comfortably a company is placed in terms of payment of interest on outstanding debt. The lower the ratio, the greater are the risks. If you apply this parameter to Indian companies, the result is quite dismal. About 241 Indian companies of the BSE-500 index that have announced their March quarter results so far. On an average, these companies were able to cover interest expenses just 4.9 times. This is the lowest level in the last five years. Slowing economic growth and high interest rates are the main reasons for this. There are fair chances that this will worsen even further. In fact, as per ratings agency Crisil, Indian lenders are likely to restructure a further Rs 1 trillion worth of loans in the current financial year. Even worse, poor interest coverage has a direct impact on capital spending. In other words, companies may postpone their projects and investment in order to maintain their financial health. This could further slow down growth of the Indian economy.

In the meanwhile, after opening the day in the green, the Indian stock markets continued to trade in the positive territory. At the time of writing, BSE Sensex was up by 114 points (0.8%). Stocks in the capital goods and banking space are witnessing maximum gains. The other major Asian stock markets have closed the day on a mixed note with Korea and Taiwan closing in green while markets in Indonesia and Hong Kong have closed the day in the red.

04:50  Today's investing mantra
"Having a large amount of leverage is like driving a car with a dagger on the steering wheel pointed at your heart. If you do that, you will be a better driver. There will be fewer accidents but when they happen, they will be fatal." - Warren Buffett

  • Test Your Warren Buffett Quotient Now!
  • The 5 Minute WrapUp Premium is now Live!
    A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

    Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

    Latest EditionGet Access
    Recent Articles:
    You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
    August 19, 2017
    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
    Why NOW Is the WORST Time for Index Investing
    August 18, 2017
    Buying the index now will hardly help make money in stocks even in ten years.
    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
    August 17, 2017
    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
    This Company Beat the Business World's 'Three Killer Cs'
    August 16, 2017
    And what it has in common with beating the stock market too.

    Equitymaster requests your view! Post a comment on "Should you listen to SEBI chief & not invest in equities?". Click here!

    7 Responses to "Should you listen to SEBI chief & not invest in equities?"


    May 21, 2012

    SEBI chief must not make such statement. It is individual decision. Even BIG MUTUAL FUND houses have collapsed, so how SEBI chief can guarantee the benefits from mutual funds. In case of mutual funds you are entrusting your money in somebody else's hands, whereas when you invest in stock market you are responsible for your money.

    Like (1)


    May 21, 2012

    mr uk sinha has no business to give advice to investors to invest in mutual funds .he is not fully awrae of market fund mangers rogue activities and again as a so calles protector or educator of investors hwta he has done .when ministry of corporate affairs has stopped in indirect way of not sending balnce sheet to the investors
    sebi did not intervene and on the contarray he kept mum.when questioned in his recent meeting with investors at chennai on the pricing of shares he had stated that when you buy anything in mkt one always enquires ten people in the same way the equity investor should enquire .this was the reply given .so in effect alicense was given to sebi to loot the poor public by pricing public sale of shares at any price .again why aregulator should have 2000 crores of money like sebi it is unwarranted thats is why they go on buying all flats and buying places for sebi oofices in all parts of india .a day will come when they will buy even abroad it is a shame for senbi when a companylike mother son systems group company is failing in the capital mkt to get funds and whereas a restaurant company although not subscribed by public but subsribed by all institutions see the tamasha when we invest in mutual funds this is what happens so let sinha need not advise us the public will support what they feel right he need not do apropaganda for mutual funds

    Like (1)


    May 21, 2012

    I think investors should subscribe to equity advisory services and invest in equities. I lost more money in mutual funds than equities.

    Like (1)

    Agnel Pereira

    May 21, 2012

    Agreed that retail investors do not have the knowledge, but then mutual funds also have the problem that their investments no saints either. So a retail investor need to learn from switching between markets. One of the way is to shift between equity and bank deposits.
    Since higher interest rates are an indication of inflation, and higher inflation results in poorer stock market performance, the investors can gain more consistent returns (and guard against inflation) by taking fixed deposits at around 10% as are available now (when stock markets are dicey). If and when interest rates fall below say 7.5%, it would indicate lower inflation, then the markets may offer a significantly greater return, above 10%. Whoever says to the contrary, timings of these investment steps is important.

    Like (1)

    R V Iyengar

    May 21, 2012

    The matter is very straight forward.
    If you invest in MFs there is automatic diversification of investment . If one invests in Equity directly say Rs 50000/- which is allowed, one could hardly spread it out between various entities.
    Hence investing in MFs is a better alternative.

    Like (1)

    Sunil Bhagat

    May 21, 2012

    your observations on what the SEBi chief has said is more or less true except on the following:
    'Be it stocks or be it mutual funds, an investment based on external advise rather than your own understanding, is destined to doom. For long term returns, you have to do the hard work of studying the underlying fundamentals and relating them to the asset's valuations'. The mutual funds investment should be done on advise of registered ARN holders, who also aid the client in financial planning , asset reallocations. Fund selection is done by the advisor.What you say is true of stocks where study of the factors mentioned is required - but there if we have people like equity master ( for stocks selection) I am sure it is NOT DESTINED TO BE DOOMED.

    Like (2)


    May 21, 2012

    All said and done, if we see the record of mutual funds,
    the present scenario indicates that mutual funds have not paid much to the investors either. They have been under performing the market and have fared badly too. In such case, we should use our own resources and do our homework properly, before investing our hard earned money in to equities, yes fundamentals are must.

    Like (1)
    Equitymaster requests your view! Post a comment on "Should you listen to SEBI chief & not invest in equities?". Click here!


    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

    Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

    This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

    This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

    This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

    As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: Website: CIN:U74999MH2007PTC175407