AskBQ: Time To Invest In Equities? Sell Mid Caps? SIP For Small Caps?

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Seeking Financial Independence

Name: Pratik Dogra

The Query: The 33-year-old, who lives in New Delhi, is considering investing in equities with the objective of attaining financial independence in seven years. He initially planned to start in April but put it on hold when the markets crashed after the Covid-19 outbreak. Should he start investing in equities now? And how can he achieve his goal?

Portfolio Information: Dogra has a recurring deposit to take care of a near-term goal of migrating to Canada, and transfers roughly a third of his salary every month to his parents who are retired. After expenses, he’s left with roughly 30 percent of his monthly income, which he’s willing to invest. He also anticipates that he will get married at the end of this year or beginning of the next.

Expert View: BloombergQuint took Dogra’s query to Harshvardhan Roongta, financial planner and founder of Roongta Securities.

“If the investor is planning to use the SIP route, then he shouldn’t worry about the recent crash in the market. Now is as good a time as any to start,” Roongta said. “The amount that is invested would depend on whether he has made adequate provisions for the higher expenditure he will have once he gets married.”

He advised Dogra to put 60 percent of his investible surplus in another recurring deposit for the next 12 months. This, Roongta said, would ensure that if he does have a career opportunity in Canada, he won’t have to give it up because of a lack of funds. After a year of recurring deposits, Dogra can shift the entire investment surplus into equity.

Roongta said he usually advises clients who are similar to Dogra to invest 50 percent of money meant for equity into large caps, 30-40 percent into multi-cap mutual fund schemes, and 10 percent into either an international fund or an FMCG-focused fund.

Time To Sell Mid- And Small-Cap Investments?

Name: Nishant Sharma

The Query: Sharma is faced with a conundrum just like many investors in India. After a precipitous fall in the equity market, he is wondering whether to sell some of his mid-, and small-cap investments and shift them to large-cap funds.

Portfolio Information: As much as 60 percent of Sharma’s equity portfolio is in large caps, while the remaining 40 percent is invested in multi, mid and small-cap funds, which also includes a value fund. He said the debt component of his portfolio accounted for roughly 40 percent and was in the form of his provident fund.

Sharma’s equity investments are meant for the next 15-20 years.

Expert View: BloombergQuint spoke to Arvind Rao, certified financial planner and founder Arvind Rao & Associates, about Sharma’s query.

“First, I’m assuming that Nishant has his need for liquidity taken care of by some other instruments because as we know provident fund is not liquid,” said Rao. “Specifically on whether mid- and small-cap investments should be sold, the answer is no.”

The widespread contention, Rao said, was that when the equity market bounces back after normalcy is restored, the large caps would recover the fastest. With that in mind, someone who has a requirement for funds five years from now should probably look at shifting from mid caps and small caps to large caps because it will likely take longer for them to recover.

Because Nishant has such a long time horizon, even if he switches to large caps now, he will eventually want to capture the growth opportunity in the mid- and small-cap space, and by then it is quite likely that valuations will not be as attractive as they are now, according to Rao.

Rao advised Sharma to stay invested and continue any systematic investment plans that he has running.

Is It A Good Time To Invest In Small Caps Via SIP?

Name: RV Rishabh

The Query: Rishabh wants to know whether this is a good time to invest in small caps through a systematic investment plan or SIP. He’s not sure this was the best idea because he felt such companies would take much longer to give returns and risk would be comparatively higher than investments into large- and mid-cap stocks.

Expert View: BloombergQuint reached out to Abhimanyu Sofat, head of research, IIFL Securities, to get a response to Rishabh’s query.

“It’s not a good idea to invest in small caps through the SIP route,” said Sofat. “Information on these companies is not as easily available as the large caps. So, SIPs into stocks directly would be a better approach for the large-cap stocks.”

Sofat suggested that a better strategy at this point would be to focus on mid- and large-cap stocks. Over the last year, a large part of the rally in the equity benchmark was led by a handful of large-cap stocks, he said. Now, most of those have fallen substantially and are available much cheaper.

“We are positive on insurance and pharma sectors because in light of the Covid-19 breakout they are more insulated,” said Sofat. In the pharma space, he recommended investing into Sun Pharmaceutical Industries and Ipca Labs. Lupin would be an alternative to Sun Pharma. In the insurance space, he prefers ICICI Lombard and SBI Life.

“In the mid-cap space, there are a few companies that will benefit structurally from the fall in manufacturing in China. Deepak Nitrite and Navin Fluorine would be our picks in the space,” Sofat said.

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