When Equities Are on Sale

The BSE Sensex crashed 2,919 points on a Thursday of mayhem. More than Rs 11.4 lakh crore of investor wealth was wiped out in a matter of hours. The spread of coronavirus across the world; a 45 per cent crash in oil prices, the biggest drop since the Gulf War; and the Yes Bank crisis led to panic selling in stock markets. So, is this the right time to buy select stocks?

The sharp market correction has made available quality stocks at attractive valuations. This is expected to continue, making it the right time to accumulate stocks. Buy these stocks and hold them for the long term. Analysts see the ongoing crisis as an investment opportunity.

But don't buy stocks blindly without doing ample research or try to time the markets. It's better to buy stocks at, say, 10 per cent higher price than move blindly.

Select the right stocks using financials and pick only those companies you understand. Look for an economic moat (a concept popularised by American business magnate and investor Warren Buffett), which is the ability of a business to maintain a competitive advantage over its rivals. Learn what a company is doing better than the competitors and find its unique selling point.

Pick companies with low debt and use financial ratios like return on equity (RoE) and return on capital employed (RoCE) as filters. RoE measures how well a company uses investments to generate earnings growth, while RoCE shows how efficiently a company makes use of the available capital. Look for an honest and competent management with a long tenure. Big debts in a company are like a hole in a boat. Read the financials carefully and avoid companies with huge debts or banks with high non-performing assets.

Invest in stocks and mutual funds for the long haul. You can invest in mutual funds through systematic investment plans or SIPs, which encourages disciplined investing to avoid timing the market. Invest in a time-bound manner without worrying about market dynamics. Understand the benefit of rupee-cost averaging and the power of compounding.

Investors dream of buying low and selling high to maximise returns. The problem is you never know when the market has hit the bottom or may plunge further. Studies show the best way to maximise wealth is by investing small amounts regularly over a period of time. This is why mutual funds promote investing through SIPs.

If you have got a bonus or a windfall and don't need the money immediately, invest a lump sum in equity or mutual funds, following the liquidity and longevity approach. Here's how:

• If you don't plan for liquidity needs, you would be forced to sell the high-potential investment at the wrong time. Create an emergency fund with 3-6 months of living expenses as a buffer against a financial emergency. The liquidity strategy is designed to satisfy short-term cash needs.
• The longevity approach is staying invested in stocks and mutual funds for the long term, based on risk appetite to meet financial goals.

Investing a lump sum may yield slightly better gains. But you must be comfortable with the market crashing even lower and not let emotions take control. Investing a lump sum can catch a high point or a low point. In a generally ascending market, like the one we had in 2003 to 2008, SIPs are a better choice. Lump sum investments tend to be better in a drifting equity market.

The author is CEO and Founder, IndianMoney.com