How to get good returns from stocks

A rebounding and steady market is a good time to weed sectors and funds that tend to drag the portfolio.

You may have been hit by the stock market's performance in August when the Sensex dipped four per cent, and mid- and small-cap stocks were hit by a severe sell-off. But the market's bounce-back in September of six per cent till date should provide some comfort.

In the past year, the BSE's PSU index has lost the most (23 per cent) and real estate index has lost 22 per cent, while the information technology (IT) index has gained the most (26 per cent) and the FMCG index 25.50 per cent.

These are times when you should re-jig your portfolio from stocks and sectors that are under-performing to those likely to outperform. In fact, stock market rebounds are among the best times to undertake such an exercise. 

Says Nitin Jain, country head - capital markets (individual clients group) of Edelweiss Wealth Management: "You could look at adding some high-quality stocks systematically, even by way of blue-chip mutual funds."

Jain says one should not build a stock- or sector-specific portfolio, specially in these times, given there is a lot of pessimism in the market. "A good stock portfolio should have between 15 and 40 stocks (that are most likely to give good returns over three to five years) across sectors for a proper diversified portfolio."

Experts advise investors look at companies that have a long-term potential for growth and those generating higher cash flows. At a time when economic growth is lagging at 4.8 per cent, only companies that are well-grounded will be sought by the market. Among the key things to look at in this stock market are dividend yields and a higher return on capital employed, say experts.

Investors should also avoid penny stocks, as they may not be attractive, simply because they have fallen considerably. The market has hammered these stocks to lower levels for a reason, and unless their long-term prospects change, investors should avoid these. Says Jain: "Also, in such a market, people tend to buy stocks that have fallen to Rs 5 or Rs 10 like Suzlon or Kingfisher, just because these are cheap. However, these market conditions call for buying solid businesses and not those whose existence may be uncertain," he says.

At the same time, get rid of investments in companies from sectors like infrastructure (CNX Infra index down eight per cent annually), capital goods (BSE Cap Goods index down 21 per cent in the past year) and real estate, as most of the listed firms in these sectors aren't performing well. Infrastructure funds have been in the red for the past five years, according to mutual fund rating firm Value Research. Similarly, mutual fund schemes which have not been performing can be pruned from your portfolio.

On the other hand, investors should look at those mutual funds that have lagged the broader market. 

If your fund has dipped by more than 20 per cent in the recent past, it might just be the time to shift to a fund that has better risk-adjusted returns. Sandeep Sikka, chief executive of Reliance Mutual Fund, says investors should retain those funds in the portfolio that have a long-term track record of 10 years and above, and have performed over different market cycles.

Look for a steadier performance and lower swings in your portfolio. Experts advice investors should stay away from thematic funds like core sector funds and infrastructure funds, to a more solid portfolio that has a foreign earnings component. 

In other words, your funds should have a healthy blend of pharma, information technology and domestic growth stocks.