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Concept Investing: A new way to manage your portfolio

Last updated on: May 17, 2012 14:32 IST

Concept Investing: A new way to manage your portfolio

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Yogini Joglekar in Mumbai

In the past year, investors have been lured by some new concepts on investing. So, if your broker was earlier asking you to invest in equities as these were value picks, today he could pitch the same as it was 'good & clean'. This is called concept investing or picking stocks based on a study or a concept. It can be confusing.

The likes of value, growth and dividend payout are now old. Broking firms like Ambit Capital have launched some new concepts.

They say these are different and are not built on the traditional ones. The concepts include, 'ten baggers', 'good and clean' and 'good governance'.

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Here are the meanings. Ten baggers are stocks whose prices are expected to rise 10 times in the next 10 years. In 'good and clean', 'good' means companies with good cash flow and 'clean' means companies with no political connections. Good governance, as the name suggests, talks about companies with good corporate governance.

Some feel the new concepts are an extension of the traditional ones. But, you can't blindly follow your broker's advice. You need to think twice if the same stock is recommended under different concepts.

According to an official from a financial services company, "Not all concepts launched are different. And even if one is different, the basic fundamentals cannot be detached from the traditional ones.

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For instance, 'ten baggers' is more-or-less a mix of both value and growth, because when you anticipate that a stock price will go up 10 times in 10 years, it means you are advising to get locked in it at a lower price. This is how value investing works." Value investing means picking cheap or beaten-down stocks.

Traders opt for growth investing, where they look at stocks whose share prices grow quickly, typically in a day or two.

And, a dividend payout concept tries to identify stocks paying a regular dividend and, hence, are meant for those who want a regular income, like retirees. These are typical traditional concepts followed by people like billionaire investor Warren Buffett.

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Pankaj Pandey, head of research at ICICI Securities, advises individuals to be careful while falling for such concepts and invest heavily.

"An investor should know the reason for buying a stock. If a concept recommends pharmaceutical stocks, he/she should check if it suits his/her risk appetite and time horizon, instead of blindly buying it," he says.

Investors tend to mistake these concepts for themes (like infrastructure or contra), cautions Sudip Bandyopadhyay, managing director and chief executive officer of Destimoney Securities.

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Themes usually play according to the flavour of the market and suggest a sector which is doing well in those market conditions. Whereas, concepts are free from such trends and recommend a style of investing.

Given the rise in corporate governance issues with many companies, concepts like 'good and clean' and 'good governance' can be worth looking at.

Says Saurabh Mukherjea, head of equities at Ambit Capital, "If you adopt concepts like 'good and clean' which works neither on value nor on growth, it's possible to beat the returns generated by BSE 100." 'Good and clean' has beaten the market by 20 per cent since March 2011, while in the past one year, the Sensex has lost almost 12 per cent.


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Pandey warns of associated risks with trying a new concept over traditional ones. "These are pure marketing gimmicks and investors shouldn't fall for these without analysing with respect to his/her requirement and horizon," says Bandyopadhyay.

Broking houses launch such concepts when investor sentiment is low, political condition is not conducive and investment cycle lingering.

There is a list of recommended stocks with each of these concepts, which broking firms pitch to attract investors at a time when buyers are shying away from markets. Add to that a risk of manipulation and bias in recommending.


Photographs: Illustration: Dominic Xavier/Rediff.com

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