NEW DELHI: Creating wealth in stocks is never an easy task, more so in a market like India.
There are instances where staying invested in stocks even for the long run has not grown wealth but has actually destroyed it.
The S&P BSE Sensex has risen over 70 per cent in last five years, but some stocks from the S&P BSE500 pack have seen up to 90 per cent erosion in their market-caps.
These stocks have wiped out over Rs 4 lakh crore in combined ..
“But such expansions were not done in the best of times and at the best of prices. Hence some of the companies saw cuts in credit ratings while others defaulted on debt repayments, forcing shareholders to salvage some of the money out of seemingly completely loss-making propositions,” he said. Stocks that are prominent in the list included those from power, real estate, telecom and metal sectors. Investors looking to exit or bring down their exposure to these stocks on any bounce could be led by any news, experts said.
“Uncertainty over fuel supply agreements, delay in project offtake and lack of demand for power are reasons that hit some of the power companies. Realty firm continue to reel because of issues like high-cost land acquisitions and over-acquisition of land,” Jasani said.
What should investors do?
The rule of thumb when it comes to holding on to an investment that has not fared well over a sustained period of time – in this case, 5-10 years- is to have a strong, fundamental reason to not sell the shares.
“For the same reasons it might be completely fine to hold on to a fundamentally sound, largecap company with strong management whose share prices might have fallen, the opposite is true when it comes to risky businesses that have eroded massive amounts of wealth,” Raghu Kumar, Director, Upstox told ETMarkets.com.
“There must be a fundamentally strong reason for an investor to hold on to such shares. This could include a strategic turnaround, a massive cost-cutting effort or a huge management overhaul,” he said.
More than the existing positions, one should be careful about not building any fresh positions due to any news or rumours as the possibility of extensive upside looks limited. But if there is a change in government policies, shift in tax structure or a reversal in cyclical trend, then stocks should be looked at from a fresh perspective.
Alok Ranjan, Head of Research, Way2Wealth Brokers, said, “Many of the stocks mentioned have extremely good pedigree; they witnessed wealth destruction over the past few years as a result of unfavourable cyclical trends. Once the cycle turns favourable, there could be remarkable improvement in performance and thereby market cap.”