It's time to get out of FDs and invest in stocks

Ram Kamath is a senior executive in a large multinational. He earns a reasonable salary. Being prudent, he saves about 30% of his net pay. Till now he has been placing bulk of his savings in fixed deposits. However, with the fall in interest rates, he is being advised to place it elsewhere as the purchasing power of his money, with relentless inflation, is going down. The question is what should he do? Real estate is certainly an option. Adam Smith famously quipped, "If you want to become rich buy land. They don't make it any more." Smith notwithstanding, there has not been much demand in Mumbai. But as prices are not shrinking in concert with demand (the law of supply and demand is not working) no one is buying. I believe that Kamath can certainly consider is real estate as an alternative – either commercial or residential – as in time it will rise. However, real estate investment is not liquid and he would need to be patient. I recall an acquaintance who over two decades ago bought apartments at what would appear today to be throwaway prices. These were small apartments. And when he needed liquidity he'd sell one. As the apartments were small they were easily sold.

The economy has not been doing well recently. According to data from the Central Statistics Office, gross domestic product was 7% in the second quarter and the third quarter is not expected to be higher. Economic activities which registered a growth of over 7% are manufacturing, trade, hotels, transport, communication, financial, insurance and professional services. The profits of several industry leaders were lower than anticipated in the third quarter. Many banks are grappling with horrendous non-performing assets (NPAs). There has also been a slowdown in the core sector.

When one looks at the stock market it is interesting that in August and September while the foreign institutional investors (FIIs) sold (they were selling in most emerging markets), Indian investors were buying. The FIIs have now returned. The market this week was not good. It fell every single day. Yet, in this there is an opportunity if one buys selectively in good companies and stays invested for at least two years. The industries I am keen on are pharmaceuticals and financial services. Additionally, one should cherry-pick other good companies in manufacturing and services.

If you find this difficult then one could consider mutual funds. Choose the fund based on how large its assets under management are and how well it has done in the past. With regard to this type of investment, I tend to favour periodic investments – buying Rs 25,000 worth of funds every month for a number of months. This, to an extent, evens out the swings in market perception. The flaw in mutual funds, of course, is that the scheme you may have invested in would have investments in many sectors (as funds diversify their risk) and a sizeable investment may be in a sector that is not going anywhere but down. Additionally, mutual funds cannot give you the returns that a single share can give you (if chosen right) as there are expenses in mutual funds that would be deducted from your gains. When choosing a share always look at ownership and management. I believe that this is the most important aspect as the owners can milk a company dry and there is nothing a shareholder can do. Therefore, look at the perceived integrity, honesty and competence of management and their record.

Coming back to Ram Kamath, my suggestion would be that he should take out at least 90% of his investment in fixed deposits. He should place a good chunk of that in commercial real estate. The returns in this in Mumbai is about 10% if leased out. Of the remainder he should place the bulk in shares and the rest in mutual funds. This will ensure that he is ahead of inflation and his net worth will grow.

The writer is MD, Cortlandt Rand, and an author