Conservative equity investors seek to minimize investment risk as well as the time and effort devoted to portfolio management. What they want is peace of mind, not the adventure of aggressive investment. Satisfied with a reasonable return, they do not deliberately strive for spectacular gains.
In addition to the general guidelines for investment, conservative equity investors should also bear in mind the following guidelines especially applicable to them.
1. Avoid certain kinds of shares
2. Apply stiff screening criteria
3. Look for relatively safe opportunities in the primary market
4. Participate in the schemes of mutual funds
5. Join a suitable portfolio management scheme
6. Consult an investment advisor
7. Refrain from short term switch hitting
Avoid Certain kinds of Shares:
Experience suggests that the following kinds of shares are not suitable for conservative investors.
Shares of Unlisted Companies: There are more than 10,000 public limited companies in India. Only about 7,000 of these are listed on the stock exchanges, the rest are not. Do not buy shares of unlisted companies. There is no organized market for them and there is no reliable way of assessing their market price. How does one find out whether a share is listed or not? It is very simple: a listed share is included in the quotation list of the stock exchanges where it is listed; an unlisted share is not included in the quotation list.
Manipulated Shares: Some business groups resort to manipulation of the shares of their companies. This mostly is in the form of market support to boost share prices, particularly before a public issue or rights issue. It can take other forms as well. Besides manipulating share process, such groups also resort to ‘creative accounting’ meant to enhance reported profit artificially. As a general guideline, avoid such manipulated shares.
Cornered Shares: Stock market operates engage on cornering operations from time to time. While such shares may excite aggressive investors, conservative investors as a rule, should scrupulously avoid such shares.
Apply Stiff Screening Criteria:
The conservative investor should consider those shares in the secondary market which satisfy stiff requirements. The screening criteria that can be recommended are as follows:
Size: The Company should not be very small. Its turnover should preferably be greater than Rs 10 crore and its equity base larger than Rs 2 crore.
Competitive Position: The Company must have a reasonably strong competitive position. It should enjoy a respectable share of the market. Better still, it should have a market share that is growing.
Industry Prospects: The prospects of the industry to which the company belongs must be above average. It should certainly not be an industry that is stagnating or declining.
Price-earnings Ratio: The price-earnings ratio of the company must not be very high. As a general guideline one has to be very cautious if the price-earnings ratio is more than 15 and/or significantly higher than the industry average.
Dividend and Bonus Record: The Company should have a reasonably good track record of dividend payment and bonus shares. Such a record indicates that the management is investor friendly. And this should be an important consideration for investors.
Reputation of Management: The management of the company must have a reputation for competence, commitment, dynamism, and integrity. Remember that the ‘management’ factor often plays a decisive and critical role in the success or failure of a company.
Look for relatively Safe opportunities in the Primary Market:
If you are a conservative investor, you may be hesitant to buy shares in the secondary market. This may be partly because volatility bothers you and partly because you feel that locating good bargains may be very time consuming. So, you may turn your attention to the primary market, the market where the companies issue new securities. Here you may be interested in the following:
1. Public issues of equity shares and/or convertible debentures by established companies.
2. Rights issue of equity shares and/or convertible debentures by established companies.