How to maximize return on equity investment?

Equity has proved itself to be the best investment instrument as far as the returns are concerned provided that one has a medium to long term horizon. After a turbulent 2011, the equity markets did very well in 2012 and are continuing the momentum in 2013 owing to reform drive by the Government.  While, equity markets are up, most investors are complaining of being left out or being trapped at wrong basket of stocks. Today, we will focus on things to consider while investing in any stock.  While there cannot be any hard and fast rule to maximize returns on equity investment, the following top down approach will enable the investor to gauge the potential of an investment opportunity. In this approach, we need to focus on economy, industry and the company in order to establish the suitability of any investment.

Economy

The first step is to study the macro and micro economic indicators such as GDP, inflation, unemployment, demand & supply etc. in order to be assured of the feasibility of the economic environment where the company is operating.

Industry       

It is important to study the various features of industry in which the company is operating such as intensity of competition, bargaining power of buyers, threat of new entrants, Govt regulations etc.

Company

Last but not least one must analyze the company in detail using various parameters such as financial statement analysis, corporate governance, company’s track record etc. It is imperative to gauge the competitive ability and scalability of the company which will play a key role in the market performance of the company.

Apart from the aforesaid analysis, one must also look at the price value divergence.  Even if a business possesses all the above characteristics but is not available at favorable valuation then it is prudent to avoid the stock as the valuation may not leave much upside for the stock. 

Conclusion

Although, volatile environment tends to keep investors away from this instrument, we feel that if one has a longer horizon, equity still remains the best investment instrument considering its ability to generate returns far superior than any other. However, due care must be taken while investing in equity and for retail investors Mutual Fund remains the best mode of investing in equity. At the same time, HNIs must consider investing in equity through PMS route which will enable personalized monitoring of their investments. 

By Rajat Gupta – Research Analyst – Concept Securities Private Limited