Q&A: Anand Rathi, Chairman, Anand Rathi Financial Services

'Evaluating small, midcap stocks can be daunting'

Anand Rathi, chairman, Anand Rathi Financial Services, tells Tinesh Bhasin and Dipta Joshi that while equities are likely to provide annual returns of 18-20 per cent in the next five years, investors need to keep faith even during corrections. Edited excerpts:

In the current market scenario, what will be your advice to retail investors?
Investment decisions by retail investors should not be based on daily, weekly or monthly market movements. An investor can expect 18-20 per cent annual returns from equity over the next five years.

Most investors think in terms of short-term highs and lows, but equity as an asset class is only for long-term investors. Such investors should not worry even during corrections. Despite the temporary blips, they need to stay committed. People tend to withdraw money when sentiments are low.

Investors also see variations when cycles change. However, one needs to remember that in the long term, cycles do not affect growth. Investing should always be a gradual process with a person investing surplus funds regularly to make money.

Should investors look at small and midcap stocks as well?
In general, smaller companies have a better chance of rising. But you should be sure about the management teams leading them. Evaluating small and midcap stocks can be daunting, especially for a retail investor. If there isn’t enough information on the management, one should desist from investing.

What is your take on recent initial public offerings (IPOs) and follow-on public offers (FPOs)?
If investors feel they are getting a good deal, I recommend them to invest. Although a number of IPOs have failed, if an investor had invested in these in the last seven years, he would have made money on most.

Do parameters like anchor investor, private equity investment or grading serve as indicators while analysing an IPO?
These do not help. There is an argument that these are calculated calls.

Private equity companies take bigger risks in expectation of higher returns. It works for them but not for retail investors. Despite credible institutional investors coming in as anchors, some IPOs have failed. As far as IPO grading goes, it still needs to evolve. I think a retail investor should not have expectations of above 25 per cent returns. He should go through a good advisory or a mutual fund firm if he cannot select the right stocks.

Is there any sector you are bullish on?
One should look at sectors connected with the domestic story and pick good companies. Sectors related to consumption will see sustained growth. Fast moving consumer goods, therefore, will continue to do well. Other sectors like banks, pharmaceuticals and real estate can also be considered. At present, realty companies do have issues with corporate governance, but the situation will improve soon. If these companies want to raise money, they will have to be transparent.