Keen to invest in equities? These stocks will give you good returns

Shares of companies to be included in the India-related MSCI indices have outperformed the market, ahead of their inclusion in the index.

Except Lupin, Bharat Forge and Container Corporation of India (up less than two per cent each), all the remaining five stocks to be included in the MSCI India Index — Bharti Infratel, Shree Cement, UPL, Eicher Motors and Marico — have rallied between seven per cent and 14 per cent in the past two weeks on BSE.

In comparison, the BSE Sensex and the CNX Nifty have gained less than three per cent each during the same period.

On May 12, global index provider MSCI said these eight company's stocks would be included in its India Index.

The changes in the index will be effective from the close of trading on Friday.

These five stocks declined on Wednesday between three and five per cent on profit-booking and have touched their respective lifetime high market prices in the period.

Thus far in 2015, all these scrips have surged about 20 per cent each, compared to less than one per cent gain of the benchmark indices.

Of the 51 stocks to be included in the MSCI Small-cap Index, 28 have outperformed the S&P BSE Small-cap Index, that has gained 3.6 per cent since their inclusion in the said index was announced on May 12.

Dalmia Bharat, Century Plyboards India, Asahi India Glass, Union Bank of India, Bombay Burmah Trading Corporation and Ajanta Pharma have rallied about 16 per cent each in two weeks. However, PTC Financial Services, Ratnamani Metals & Tubes, Vinati Organics and Suven Life Sciences have fallen five per cent each.

Experts say passive funds usually buy into these stocks since they track the India-related MSCI indices to gauge overall sentiment.

Traders, too, accumulate these from a short–term profit making perspective.

Jagannadham Thunuguntla, head of fundamental research at Karvy, says, “Stocks that get included in the MSCI indices usually attract flows.

There are passive funds that keep tracking these inclusions to keep tabs on the overall market sentiment. So, this automatically attracts flows to these counters.”

Adds G Chokkalingam, founder & managing director, Equinomics Research & Advisory: “Most stocks get included in the model indices after their growth story becomes successful or evident.

Another good example of this is Bombay Burmah, which got included in the MSCI Small-cap Index recently.

Once included, one can expect the development to push the stocks higher where a lot of investors accumulate the stock for trading profit.”

Should you invest? 

Chokkalingam suggests long–term investors should not consider inclusion in model indices as the sole criterion, while investing in these stocks.

“Though the news of inclusion can see a short-term burst in these, long–term investors need to look at the earnings growth potential before taking an investment call.

Traders, however, can make some profit, given the short–term upswing,” he says.

Thunuguntla suggests one can buy these stocks at the time the inclusion news is announced, as a rally in these counters is expected.

“Those who are looking for short-term opportunities can invest before the rally starts, he says.

“For those who have a medium–to–long term horizon should concentrate on the fundamentals,” he adds.

Image: Onlookers outside the Bombay Stock Exchange building in Dalal Street.

Photograph: Sanjay Sawant/Rediff.com