Monday, 5 October 2015

Do Long Term Investments Really Need To Be Long?

Long term funds are invested in companies after a detailed research of the company's prospects, future business estimation, and detailed analysis of its Balance Sheet, Profit & Loss Account. But does this analysis guarantee safety of funds? Not always.
On June 5th 2015, Indian Government banned Nestle India's flagship product, Maggi. It contained 17 times more lead than permitted. Nestle is the 33rd largest company India in terms of market capitalization. Amid the controversy, Nestle India's share prices fluctuated from Rs 7246.5 on 31st March 2015 to going as low as 5574.87 on 8th June, 2015. Falling off 1700 points in just 9 weeks is unpredictable. The fact that Indians were manipulated to consume 17 times more lead than permissible limit, remained covered for years and years together. 

Or take the case of Amtek Auto, which has a fallout with CARE. On August 7th 2015, CARE suspended Amtek Auto of its AA- Investment rating as the company failed to furnish information for the monitoring of the rating. As a result of this controversy, the price of Amtek Auto tanked from Rs 350 on 13th July 2015 to Rs 100 on 17th august 2015. Its been on a continuous fall and closed at Rs 20.95 on 2nd October 2015. This is more than 90% erosion of investments. Unbelievable but true. 

These instances call for a need to revise the concept of being invested for a very long term. It also emphasizes on decision to dis-invest a part of portfolio. This actually would  help in more than one way. If proceeds from a stock are received after just one year of investment, it is treated as long term capital gain, which is tax free. It increases liquidity and funds can be deployed to safer investment avenues like Fixed Income, or if the sum received is large enough, it can be invested in property which in turn would fetch rental income.  
In essence now: 
It make sense to divest part of the portfolio, as all the scrips in the portfolio may not get impacted as above, and the value of the remaining part of the portfolio may increase in the due course of the time.

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