Sameer Doctor

So the stock market has undergone a "correction", to put it in market parlance. Blue chip ICE (The Information, Communication and Entertainment sectors) stocks like Wipro, Infosys, Satyam, Zee Telefilms, SSI and Hughes Software have seen dramatic falls in value. Neither have conventional sectors been spared. And those who invested recently at phenomenally high levels have sworn never to dabble in equity again. But of course, we know how long such resolutions last.

When should you buy?

However, it is possible to pay too much for a good share as well. After all, a Mercedes may be your dream car, but is it worth Rs 2 crore? Some stocks are now undervalued and offer great scope for appreciation. Others may still be overvalued, and have a high risk of further depreciation. Now is the time you could make money. Or lose it.

A drop in prices does not mean that anything fundamental to the company has changed. The financial position and the future projections for most of these companies are as robust as before. Only the value that the market was placing on these future profit, revenue and other projections has changed, reflected in the lower prices. So now, we can buy the same company far cheaper. If a company is intrinsically worth, say, Rs 2,000 per share in two years, that worth stays despite the fact that today you can buy it for Rs 800 instead of the Rs 1,400 it was available at a couple of weeks ago. Therefore, the potential for long term growth is much more now than it was.

Can you determine whether the company is undervalued or not?

The fund is managed by professionals who constantly study the economy, the stock market, various industry sectors and specific companies. They identify high quality companies, decide what is a reasonable price to invest in them to ensure maximum potential for growth, what percentage of available funds should they invest in a particular stock and finally when is the right time to exit from that investment.

Choosing your fund

TYPE OF EQUITY FUNDS Equity funds are also called growth funds, as the aim is one of long-term capital growth rather than regular income. A diversified growth fund would have a portfolio not of scrips not covering different companies but a variety of sectors as well. Thus, if software stocks do not do well for a while, perhaps pharmaceutical stocks or cement stocks may show good growth, averaging out the returns, and giving greater stability and lower risk. This is what may be called a diversified growth fund. An aggressive fund would be one whose portfolio is structured with more weightage on high growth and less weightage for risk control (that should warn the investor not to go for pure returns, but to pay attention to the risk involved as well). However, some investors may want to invest in specific sectors such as IT (information technology) or FMCG (fast moving consumer goods). To suit their needs, sector specific schemes are launched, to enable the investors to decide just how aggressive or conservative they want to be. IT forms the most popular sectoral fund, although a variety of other funds also exist. Examples of these are the Birla IT Fund, Alliance New Millenium, Kothari Pioneer Internet Opportunities Fund and Prudential ICICI FMCG Fund. Birla MNC Fund invests across various sectors, focussing on the global scope of operations and world class management of Multi-national companies. This makes it a speciality rather than a sectoral fund. These funds run a higher risk than diversified general equity funds, but one can expect higher long term returns as well.