Investors should build a balanced portfolio across sectors and companies, rather than betting too heavily on a single stock. Diversification isn’t just about spreading investments across sectors or asset classes. It’s also about understanding the inherent risks and potential of each investment in your portfolio.
I have no idea where the Paytm story is headed. As you know well, even without the regulatory troubles, I didn’t have a high opinion of Paytm, either as an investment or as a business. Now, with the RBI coming down like a ton of bricks on Paytm Bank, things are much worse. In the first three days of the RBI’s action, the Paytm stock dropped by a cumulative 43%. For a widely held stock with a large market capitalisation—Rs.42,000 crore before the drop—that’s a huge wipeout. Despite widespread scepticism about Paytm, as many as 70 equity mutual funds, and many other institutional investors as well as individuals own a part of it. A 43% drop in three sessions is probably quite rare for such a stock and, in fact, may never have happened earlier except in case of a general marketwide rout.
Even so, this column is not about Paytm, but about what investors should do when a stock they have invested in is Paytm-ed, a new way to use ‘Paytm’ as a verb. On the face of it, this theme is deceptively similar to what I wrote last week, which was based on the (much smaller) drop in the stock price of the HDFC Bank. The bank’s stock fell a total of 15% in mid-January and has since settled at this lower level. Of course, since HDFC Bank is a giant, its 15% market drop amounts to Rs.1.77 lakh crore, far more than Paytm’s entire market cap.
The two cases are fundamentally different. In HDFC Bank’s case, I had essentially said that established companies build significant business momentum over time. Their size and success are no accident, stemming from deep strengths that take years to erode. Market leaders are resilient; a cyclical decline does not negate their intrinsic advantages and capabilities to eventually bounce back and thrive again.
Does this apply to Paytm? Clearly, it does not. ‘Market leader’ does not quite hold the same meaning if a company has never made a profit and, in fact, is in a business in which no one has ever made a profit. Besides, when a regulator shifts the ground from under your feet, investors need to take a long, hard look at the investment. What is the solution for sudden shocks?
The answer is old and boring: diversification. Investors should build a balanced portfolio across sectors and companies, rather than betting too heavily on a single stock. This cushions the impact when one company faces trouble. That’s not all. Diversification isn’t just about spreading your investments across different sectors or asset classes. It’s also about understanding the inherent risks and potential of each investment in your portfolio. This is evident in the exposure of the 70 mutual funds that hold Paytm. The median holding in Paytm is less than 1%, while only eight funds are above 2%. At a time when the rest of the market is booming, even a severe fall is well cushioned by the rest of the portfolios.
It’s only the individuals who are influenced, or finfluenced, by lucrative tales and lose sight of the underlying principles of safe investing. Based on some examples of investors, they were the ones holding 10-20% because they believed that Paytm was on the mend as a business and was good for big gains.
However, as mentioned earlier, this is not about Paytm at all. One can never ignore diversification, nor other investing basics like asset allocation, rebalancing and cost averaging. It’s times like these— when the markets are zooming—that are the most dangerous. Now is the time when we are most prone to becoming careless. Whatever happens with Paytm will happen. Make sure the basics of your investments are in place.
(The Author is CEO, VALUE RESEARCH)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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