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10 February, 2012

10 STEPS TO INVESTING IN EQUITY


Investments in equities, especially for longer periods of time, are more likely to yield higher returns. However while investing in the equity markets over the short term one is likely to witness some volatility. Therefore our endeavor in the following article is to highlight some basic steps one can consider before investing in the equity market. STEP 1: Identify your objective, given your needs, life stage and resources. If you want to increase the value of your investment in order to have a larger sum to spend at a later date, your main priority will be capital growth. STEP 2: Identify your risk tolerance and then invest appropriately. Young people at the start of their working lives will have a greater appetite for taking financial risk as compared to people at the end of their career who are looking forward to stable income and preservation of capital. These two extremes will exemplify the ability to take equity exposure. A young person is likely to be invested largely in equities because he can afford to take short term capital loss in anticipation of higher rates of return from equities. The elderly will be unable to take the risk of capital loss even in the short term as their ability to recover any losses will be limited by time and ability to earn. STEP 3: Categorize your stock: Cyclical, Growth or Defensive Investing in cyclical stocks, such as those in the cement or steel sector, requires an understanding of the economic scenario. An active involvement in the investment process is required in order to reap the maximum benefits of swings in economic cycles over time. The stock prices are likely to move through extreme highs and lows, and the ability to time entry and exit will be necessary. Growth investing refers to stocks in sectors where the future direction is clear for the medium term - such as technology. However even here, timing is key, for the stock may do nothing for a long time as momentum builds up and then move sharply thereafter. Defensive investing is that which is done from a long term viewpoint, where a stock is held on the premise that it will grow consistently and on a sustainable basis over time, such as those in the fast moving consumer goods sector. While the appreciation may, at times, not be as dramatic as cyclical or growth stocks, stocks that constitute defensive investments grow steadily over longer time periods. STEP 4: Analyze the technical position. Can you actually sell your investment when you want to? The liquidity of a stock is very important in taking an investment decision, for if there is very little free stock available in the market, buying and selling may well impact the stock price in an adverse manner. It is interesting to see what the price volume relationship is for a stock. So if a stock price is moving up or down on high trading volume, it is more likely that there is real interest in that price movement than if there is very little volume supporting the price move. STEP 5: Know what the company does. The fate of each stock is tied inextricably to the fortune of the underlying business, and the market's perception of the future prospects for that business. The industry's future potential in terms of projected demand-supply is key as is the company's competitive position in the industry. The business model of the company should be considered, as well as possible future changes, and the ability of the company to sustain growth and momentum well into the future. STEP 6: Know who runs the company. The capability and integrity of management is even more important in determining the future viability of your investment. A strong, credible, experienced and shareholder responsive management team is critical for operating and growing a successful company. In the newer areas of our economy, management vision is also of significant importance. STEP 7: Know the company's performance. The price earnings (P/E) ratio is the often quoted measure of a company's value. This ratio divides

10 STEPS TO INVESTING IN EQUITY contd.


the stock price by the year's earnings, and is useful in arriving at comparative valuation. But the tool that is quite prevalent in professional evaluations is the return on equity (ROE), which is the year's earnings divided by the net worth of the company. This, when compared to the cost of capital for the company allows the investor to gauge the company's wealth creating ability. Apart from the ratios the investor must also focus on the sustainability of earnings growth. STEP 8: Know the company's valuation. Two stocks may have the same EPS but different P/Es. This is because ROE may be different and its sustainability may be different. Broadly speaking, the higher the sustainable ROE is, the higher the P/E rating. A high P/E does not therefore necessarily imply an overvalued stock. Stocks with high sustainable ROEs are likely to trade at high P/E multiples. STEP 9: Know the price target. Having selected stocks and built a portfolio, it is now imperative to track these investments closely. One method of doing so is to set expectations, by identifying a target price, and to re-evaluate the stock when this target is reached. Here, it is important to consider opportunity costs. If there is a loss on a stock, should one realize that loss and invest in another stock, which has a greater potential, or should one wait for the loss to turn into a profit. By not selling out of low return stocks to get into higher return stocks, investors miss out on opportunities. STEP 10: Do you need a professional manager? Many investors mistakenly assume that they can purchase one or two stocks and they will do well. In the absence of good luck, this can be a dangerous strategy since there is always a risk of a stock declining in value or the business facing company specific problems. The more diversified the portfolio, lower is the risk of one poorly performing stock affecting overall performance of the portfolio. However, a good way of diversifying the portfolio is to invest through equity mutual fund schemes where the professional fund manager and the rigorous investment process is likely to limit risk while maximizing profit, depending on the risk profile of the fund invested in.

The growth which we see in the Indian economy is related to the growth of the business of the Indian companies. If the time horizon of your investment is long term, you can achieve your goals by investing in products like equity mutual funds which invest in the equity market. In India, mutual fund companies are regulated by SEBI and make available for the Indian investors, various types of mutual fund schemes which invest in the equity market. For a retail investor, it is difficult to invest in the equity market on his own because it is not possible to be completely informed about the activities taking place in the market and then take investment decisions. Therefore, it is necessary to invest in those financial products which are operated by a regulated and professional industry. As it is not possible to keep yourself informed about all the happenings of the equity market, it is necessary to choose a professional and reliable advisor. This person or institute can tell you about various plans of investment after understanding your future needs. Finally, we would like to say that the way you remain alert about your health and keep watch on the activities related to the education of your children, you should also understand the future requirements and estimate regularly to fulfill them. Mutual funds are a suitable investment option for the common investor for his investment needs.

DISCLAIMER
Statutory Details: DSP BlackRock Mutual Fund was set up as a Trust and the settlors/sponsors are DSP ADIKO Holdings Pvt. Ltd. & DSP HMK Holdings Pvt. Ltd. (collectively) and BlackRock Inc. (Combined liability restricted to Rs. 1 lakh). Trustee: DSP BlackRock Trustee Company Pvt. Ltd. Investment Manager: DSP BlackRock Investment Managers Pvt. Ltd. Risk Factors: Mutual funds, like securities investments, are subject to market and other risks and there can be no assurance that the Schemes objectives will be achieved. As with any investment in securities, the NAV of Units issued under the Schemes can go up or down depending on the factors and forces affecting capital markets. Past performance of the sponsor/AMC/mutual fund does not indicate the future performance of the Schemes. Investors in the Schemes are not being offered a guaranteed or assured rate of return. Investors in the Schemes are not being offered a guaranteed or assured rate of return. The Schemes are required to have (i) minimum 20 investors and (ii) no single investor holding>25% of the corpus of the Schemes. In case of non-fulfillment of the condition of minimum 20 investors, the investors money would be refunded, in full, immediately after the close of the New Fund Offer Period. In case of non-fulfillment with the condition of 25% holding by a single investor on the date of allotment, the application to the extent of exposure in excess of the 25% limit would be rejected, and the allotment would be effective only to the extent of 25% limit would be refunded/redeemed. The names of the Schemes do not in any manner indicate the quality of the Schemes, their future prospects or returns. For Schemes specific risk factors, please refer the relevant Scheme Information Document (SID). For more details, please refer the Key Information Memorandum cum Application Forms, which are available on the website, www.dspblackrock.com, and at the ISCs/Distributors. Please read the Scheme Information Document and Statement of Additional Information carefully before investing.

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