Investing in such sectors has its pitfalls, as evident from the quick rise and fall of the SKS Microfinance stock.
After 10 years of investing in the stock market and mutual funds, Durgapur resident Suniti Pal decided to be adventurous. A firm believer in the adage — benefit from long-term investing — Pal wanted to look at some multi-baggers in the short run.
“After I read about how investors were making a killing by investing in SKS Microfinance’s initial public offering (IPO), I decided to make a quick buck too,” confesses the 43-year-old school teacher.
Pal had reasons to feel buoyed. On August 16, SKS Microfinance listed on the National Stock Exchange at Rs 1,040 — Rs 55 higher than the issue price of Rs 985. But in three months since the listing, the stock hit a high of Rs 1,490.70 and a low of Rs 601.05.
In addition, SKS Microfinance has been mired in controversy. The removal of its managing director, followed by the Andhra Pradesh government’s tough stand on microfinance institutions (MFIs), caused the share price to vacillate sharply.
All of a sudden, the sunrise sector does not seem lucrative. Pal is still wondering if she should enter the stock at lower levels. Her argument was based on experts’ views in newspapers and television channels — how MFIs had a long-term growth story and could help create wealth.
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Upcoming sectors, or sunrise sectors as these are called, can give your overall portfolio a fillip because of high returns. Getting into stocks of such sectors in the initial years can be beneficial, as the business can deliver immense value over time. For instance, those who invested in the Infosys IPO would be gloating.
The hitch is that “the chance of such businesses’ survival and failure is equal,” cautions Jagannathan Thunuguntla, head (equity), SMC Capital. Importantly, a positive sector view alone doesn’t help the stock. One needs to take a stock-specific view as well.
No wonder why market experts unanimously advise retail investors against dabbling into an unknown territory, as it can cost them dearly. Stick to equity-diversified mutual funds investing in large-caps (annual returns of 19.57 per cent, as on November 22).
Says Akshay Gupta, CEO, Peerless Mutual Fund, “There is a risk associated with such sectors, as most new sectors do not have regulations in place, and hazards are discovered only after investing.”
For the likes of college student and new market investor, Akash Jain, investing his pocket money of Rs 2,000 is a big no. He wants to make a quick buck, but has a constrained budget. He, therefore, prefers cheaper stocks, especially in the IPO period.
However, experienced investors such as Pal can experiment with a small holding in such companies, say experts. “New sectors can be a risky proposition for typical retail investors, but there is no harm in holding up to five per cent in such stocks,” says an executive from a brokerage house.
But before you start, remember that sunrise sector does not have a clear definition. Motilal Oswal, chairman and managing director of Motilal Oswal Financial Services, in an interview to Business Standard had said, “Even oil marketing can be the next sunrise sector, considering the government is taking steps to deregulate oil prices.”
Typically, it means an absolutely new flavour such as nano technology, clean-energy technologies, genetic engineering and life sciences. The current flavour is the microfinance segment, with SKS being the only listed stock.
Many market experts also include education and tourism in the list. “In both the cases, stocks are trading above their issue price. And, tourism sector stocks, such as Mahindra Holidays, Thomas Cook and Cox & Kings, are backed by strong groups,” says the brokerage executive. Mahindra Holidays closed at Rs 370.55 on November 22, as against the issue price of Rs 300 (listing price = Rs 315). On the other hand, Career Point closed at Rs 409.95 on November 22, as against the issue price of Rs 310 (listing price = Rs 461).
But how do you choose? Begin with the credibility of the promoters. Check the company’s offer document (in case of an IPO) and annual report. This gets tough with new businesses, as these may not have a financial history. Stick to the widely traded and credible B-group stocks. T-, S- and Z-group stocks, or penny stocks, are riskier. Typically, companies need to have a stable track record of three-five years.
Another way to judge these is by finding whether private equity (PE) and venture capital (VC) companies have invested. Mostly PE/VC firms invest in sunrise stocks after thorough research. This, in a way, proves the stock’s popularity.