Retail clients must not come to F&O

Every time stock markets get into a bull phase, new investors get in. But what happens when the markets turn bearish, when small-cap and mid-cap stocks take bigger hits and take longer to recover?  Satish R Menon, Executive Director, Geojit Financial Services shares his views.

What should those who took a hit in the recent price crash do?
The fundamental rule is that you should choose your portfolio depending upon risk profile. Unfortunately, no one sticks to that. If you look at 10-12 year return, small and mid-caps would have given an average 3 per cent CAGR (Compound Annual Growth Rate) over large caps.

If your risk appetite is not that great, better to stick to large-caps. Large-caps will make money. But, in mid-caps and small-caps, there could be multi-baggers if you are able to identify them. Even for the best of fund managers, two out of 10 stocks in portfolio may be dud, six average, two stocks is where he would make money. That is how money is made. If you are not able to digest losses, stay away.

The regulator has recently made some changes in derivatives. Do you see investors moving to the cash segment?
I am not sure. The first 30 or 40 stocks, no changes were made… Of course, they don’t have much volume. We need to understand the lot size. Here (cash market) somebody sells 50 shares, there (derivatives) someone has to sell 5 lakh worth of contract. Minimum lot size is 5 lakh. I don’t know how much this will succeed. Today, 65 per cent is rolled over, tomorrow 85-95 would be sold or squared off. Not sure this is going to push more volumes in cash markets, the reverse can happen.

I agree with the principle that retail client should not come to F&O (futures & options), because they tend to lose money. Unfortunately, they are all there, because leverage is a big poison.
Ninety per cent of them do not know the basics and they lose money. They think I am paying only a premium and that is my loss. Technically, the amount you are paying comes to 3-4 per cent a month. If you buy an option of `5,000, whatever upside is upside, otherwise you lose only `5,000. `5,000 on a portfolio of `1 lakh is five per cent. If you are going to lose it every month then it is 60 per cent. They will do it for a few months and then go away.

We don’t push F&O.
Many investors in the last one-and-a-half years have taken the mutual fund route.
When somebody comes to us, we tell them 60 per cent allocation should be in large caps, 20 in flexi funds and 20 in mid, small cap. Stay secure in larger portions, and take risk in smaller portions.
Thirty years ago, it was a bad market. Today, many investors feel it is very well regulated. Investor behaviour is also changing, thanks to SIP behaviour.

But, what about new SIP investors who may be seeing negative returns?
In the last three-four months, our job has been to go back to investors and show them the data — that in 2007, in the peak of the market, if you had invested in SIP, in the 2008 crash your value would have been -65 per cent. But, after three years, if you had continued, you would have had CAGR of 25 per cent. That is the difference. If you take a decision in a year, you are in loss, but if you continue, five-year loss probability is 40 per cent, 10-year probability 20 per cent, 15-year probability zero. More time in the market is better than timing the market. SIP can easily grow from `8,000 crore to `20,000 crore in three years.

What is your outlook for 2019 with elections on the horizon?
We are generally bullish, no matter which government comes in. If a stable government is not coming in, you will find some knee-jerk reaction. Otherwise, history has shown that in last 35 years, coalition government has given better returns. India structurally is a good country. Unless you do something drastic to affect growth, India will continue to grow. Infrastructure and private banks continue to rank high on our priority. What the government has done in last three-four years, the effect is still not be seen on the corporate balance sheet. It should be seen sooner or later.

First Published in New Indian Express Link


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