5 common investment mistakes

Retail investors tend to be burdened with information on how they should go about investing their monies. Distributors, agents and fund houses all play their part in “educating” investors on this front. Our experience with investors suggests that apart from the aforesaid, there is also a need for investors to be aware of a few common and frequently committed mistakes. We present a checklist of 5 common investment mistakes that investors need to steer clear of.

1. Not setting an investment objective
A large number of investors are habituated to carrying out their investment activity in a haphazard and sporadic manner. Very often they fail to set an investment objective which is a basic tenet of financial planning. Investors should adopt a more systematic approach to investing by creating distinct portfolios for all their needs i.e. short-term (planning for a vacation), medium-term (buying a car) and long-term (planning for retirement) needs respectively. Setting of investment objectives also incorporates a degree of discipline which is a vital ingredient for the success of any the investment activity.

2. Not doing your homework
Investing like any other serious activity needs a fair degree of preparation at the investors’ end. Investors need to gather information and acquaint themselves with all the options available to them. Investing in a given asset class (for example fixed deposits) simply because you have conventionally done so is inappropriate. Investors have a plethora of options ranging from mutual funds, fixed deposits, and bonds to small savings schemes to choose from. After getting the facts in place, investors should select instruments that are best equipped to fulfill their investment objectives.

3. Succumbing to the “noise”
Every time the equity markets hit a purple patch, investors come face-to-face with a lot of “noise”. Fund houses go on an IPO (Initial Public Offering) launch spree and distributors do their bit by convincing investors that the recently lunched scheme is the place to be. For example recent times have seen a surge in interest in funds of the flexi cap and mid cap variety. Investors tend to succumb to the noise and get invested simply because everyone else is doing so. The trouble is that investors could discard their pre-determined asset allocation and make investments contrary to their risk appetite.Investors must exercise a lot of discretion and resist falling prey to the herd mentality, especially at a time when everyone around them is busy painting a rosy picture of the investment scenario.

4. Getting attached to investments
Investors must remember at all times that investments are a means to achieve ends (financial goals) and not goals by themselves. If investments have failed to perform their requisite task, then investors should be flexible enough to act on the same. Investors should never get attached to their investments and stubbornly cling on to them. Assess at regular intervals how well your investments have performed and initiate the necessary corrective measures.

5. Timing the markets
A large number of investors like to believe that they can time the markets; nothing could be farther from the truth. If this notion was correct, we would have experienced a surfeit of fund managers and investment gurus. Instead of trying to outsmart the markets and failing in the process, adopt a more scientific approach. Use the SIP (Systematic Investment Plan) route and invest regularly to benefit from the markets.

Don’t try to beat the markets, join them instead.

Ultra mega power projects (UMPP) under way

Lanco Infratech and Tata Power emerged as lowest bidders for the first two UMPPs

The bids for two ultra mega power projects (UMPPs) atSasan and Mundra were opened today. A total of 16 bidswere received for the two projects. Ten companies had bidfor the Sasan project, which will be based on pithead coal, and six had bid for the Mundra project, which will be basedon imported coal. The investment per project will be in therange of Rs 16,000 - 20,000 crore.

The companies in the race for constructing India's largestpower plants of 4,000 MW of capacity each were Tata Power, Larsen and Toubro, Reliance Energy, Essar Power and SterliteIndustries. All these companies had bid for both the projects.

The other bidders for the Sasan project were National Thermal Power Corporation (NTPC), Torrent Power, Jindal Steel & Power, Jaiprakash Associates and Lanco Infratech (with British partner - Globeleq). The only other company that had bid for the Mundra project was Adani Enterprises.

And the winners are... Hyderabad-based Lanco Infratech, in association with theSingapore-based Globeleq, has won the bid for the country'sfirst UMPP coming up at Sasan in Madhya Pradesh.

Recommended Stock - Tata Elxsi

Tata Elxsi
Recommendation: BUY
Price target: Rs 320
Current market price: Rs 232
Key points

  • Niche player with distinct competitive strengths: Tata Elxsi Ltd (TEL) has built the required scale of operations and established strong client relationships with leading global companies to effectively tap the huge opportunity emerging in the niche segment of product design and engineering space.
  • In this space, the size of the opportunity for the domestic companies is estimated to more than double to $6.6 billion by 2010.
  • TEL also has the advantage of having developed reusable components (intellectual property to provide faster and more valuable proposition to the customers) and is investing to boost its delivery capabilities in the high-end services like VLSI and chip design.
  • Aggressive expansion plans: TEL has aggressive expansion plans in terms of the capital expenditure on physical infrastructure and employee addition. This clearly reflects the management's growing confidence in the revenue growth visibility over the next few years.
  • Improving margins: The shift in the revenue mix in favour of the high-margin software development service business has significantly improved the company's operating margins in the past two years (up by 490 basis points to 19.8% in FY2006).
  • The trend is expected to continue and further boost margins by 250 basis points during FY2006-08, in spite of the aggressive expansion plans and rising wage inflation.
  • Attractive valuations and decent dividend yield: Revenues and earnings are estimated to grow at a robust rate of 26.8% and 34.5% respectively, during the period FY2006-08.
  • Moreover, the company offers a decent dividend yield of 2.8% (based on the 65% dividend given in FY2006), which is likely to limit the downside risk.

I recommend a BUY call on TEL with a one-year target price of Rs 320.

Recommended Stock - Fem Care Pharma

Fem Care Pharma
Recommendation: BUY
Price target: Rs 500
Current market price: Rs 358
Key points
  • Leadership position in a niche category: Fem Care Pharma Ltd (FCPL) has a dominant market share (around 65%) in the niche segment of bleach cream. It is also among the leading players in the liquid soap and hair-removing categories.
  • To boost its overall growth, the company has introduced several product variants at various price points to effectively tap the expected growth in the FMCG industry, especially the fast growing beauty treatment and skin care segments.
  • Incremental growth from exports: In FY2006, FCPL acquired a US-registered premium bleaching cream brand, Jaquline, which has an established presence in the UAE and Middle-East markets.
  • The company plans to utilise it as an umbrella brand to introduce skin care and beauty products, and boost the overall growth of its export business.
  • Margins to firm up: The introduction of high-margin premium products has positively affected its operating margins. The company has also commissioned a new manufacturing facility in the tax-blessed region of Baddi, Himachal Pradesh.
  • The fiscal incentives in the form of income tax and excise duty exemptions are further boosting its overall profitability.
  • Consolidation of its marketing arm: The distribution of FCPL's products is done exclusively by its 60% subsidiary, Mirasu Marketing.
  • FCPL is expected to acquire the remaining 40% stake (held directly by the promoters) in Mirasu Marketing over the next one year. The consolidation is likely to result in marginal dilution in its equity base (about 1-1.5% on the higher side) but would be earnings accretive.
  • Attractive valuation: The consolidated revenues and earnings are estimated to grow at a CAGR of 17.5% and 48.3% respectively during FY2006-08. Currently the stock trades at 9.9x FY2007E and 8x FY2008E earnings.
  • I recommend a BUY on FCPL with a price target of Rs 500.

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