By Vikash Agarwal
After all, life itself is risky. Be mindful of risk and find out about the effects of risk on your investment and personal financial goals. The financial risk of stock investing is that you can lose your money if the company whose stock you purchase loses money or goes belly up. This type of risk is the most obvious because companies do go bankrupt.
You can greatly enhance the chances of your financial risk paying off by doing an adequate amount of research and choosing your stocks carefully. Financial risk is a real concern even when the economy is doing well. Some diligent research, a little planning, and a dose of common sense help you reduce your financial risk.
Interest rate risk may sound like an odd type of risk, but in fact, it’s a common consideration for investors. Be aware that interest rates change on a regular basis, causing some challenging moments. Banks set interest rates, and the primary institution to watch closely is the RBI, which is, in effect, the country’s central bank. RBI raises or lowers interest rates, actions that, in turn, cause banks to raise or lower interest rates accordingly. Interest rate changes affect consumers, businesses, and, of course, investors.
Suppose that you buy a long-term, high-quality corporate bond and get a yield of 6 percent. Your money is safe, and your return is locked in at 6 percent. Whew! That’s a guaranteed 6 percent. Not bad, huh? But what happens if, after you commit your money, interest rates increase to 8 percent? You lose the opportunity to get that extra 2 percent interest. The only way to get out of your 6 percent bond is to sell it at current market values and use the money to reinvest at the higher rate.
Rising and falling interest rates offer a special risk to stock investors. Historically, rising interest rates have had an adverse effect on stock prices. Rising interest rates have a negative impact on companies that carry a large current debt load or that need to take on more debt because when interest rates rise, the cost of borrowing money rises, too. Ultimately, the company’s profitability and ability to grow are reduced. When a company’s profits (or earnings) drop, its stock becomes less desirable, and its stock price falls.
A company’s success comes when it sells its products or services. But what happens if increased interest rates negatively impact its customers? The financial health of its customers directly affects the company’s ability to grow sales and earnings.
When interest rates rise, investors start to rethink their investment strategies, resulting in one of two outcomes:
- Investors may sell any shares in interest-sensitive stocks that they hold. Interest-sensitive industries include electric utilities, real estate, and the financial sector. Although increased interest rates can hurt these sectors, the reverse is also generally true: Falling interest rates boost the same industries. Keep in mind that interest rate changes affect some industries more than others.
- Investors who favour increased current income are definitely attracted to investment vehicles that offer a higher rate of return. Higher interest rates can cause investors to switch from stocks to bonds or bank certificates of deposit.
High or rising interest rates can have a negative impact on any investor’s total financial picture. What happens when an investor struggles with burdensome debt, such as a second mortgage, credit card debt, or margin debt? He may sell some stock in order to pay off some of his high-interest debt. Selling stock to service debt is a common practice that, when taken collectively, can hurt stock prices.
Because of the effects of interest rates on stock portfolios, both direct and indirect, successful investors regularly monitor interest rates in both the general economy and in their personal situations. Although stocks have proven to be a superior long-term investment, every investor should maintain a balanced portfolio that includes other investment vehicles, such as money market funds, savings bonds, and/or bank investments.
A diversified investor has some money in vehicles that do well when interest rates rise. These vehicles include money market funds and other variable-rate investments whose interest rates rise when market rates rise. These types of investments add a measure of safety from interest rate risk to your stock portfolio.
Stocks you can think to invest in
Caprihans India Ltd.
It is one of the largest manufacturers of PVC Films with expertise of over 35 years. It manufacturers a wide variety of PVC films, both flexible and rigid, and also sheets/boards made from other polymers like ABS, PP, HDPE and rigid PVC. CIL is currently a part of the Bilcares Solutions Division. With an equity base of Rs 13.13 crore and reserves of Rs 99.93 crore (7.61 times higher than equity), its share book value works out to Rs 86.09. The price to book value ratio is just 0.85 which is highly impressive. The promoters hold 71.93 per cent with foreign promoters hold 51 per cent and DIIs hold 3.72 per cent, leaving the investing public with 24.35 per cent stake in the company. The scrip looks highly attractive at the current level for investment. Further, decreased crude prices will boost profitability in the coming quarters.
Rashtriya Chemicals & Fertilizers Ltd.
This public sector undertaking is a leading fertilizer and chemical manufacturing company with about 80 per cent of its equity held by the government of India. The GoI has accorded ‘Mini-Ratna’ status to RCF. It manufactures urea, complex fertilizers, bio-fertilizers, micro-nutrients, 100 per cent water-soluble fertilizers, soil conditioners and a wide range of industrial chemicals. It produces 23,00,000 TPA of urea, 6,50,000 TPA of complex fertilizers and 1,60,000 TPA of industrial chemicals every year. RCF is a household name in rural India with brands such as ‘Ujjwala’ (urea) and ‘Suphala’ (complex fertilizers) which command high brand equity. The company has a marketing network countrywide in all major states. It also produces about 20 industrial chemicals that are used in the manufacture of dyes, solvents, leather, pharmaceuticals and a host of other industrial products. RCF produces chemicals that are essential for every industry from foods and drugs to synthetic fibres, from textiles, cement to pesticides and paints from explosives to speciality solvents and dye stock. It also pioneered the manufacture of basic chemicals such a Methanol, Ammonia, Ammonium Nitrate, Sodium Nitrate, Sodium Nitrite, Ammonium Bicarbonate, Methylamines, Dimethyl Formamide and Dimethyl acetamide, Formic Acid and Argon in India. It is the only manufacturer of Dimethyl Formamide in India. To promote a balanced use of fertilizers for improving farm productivity and help maintain the soil health, RCF has established 12 static Soil Testing Laboratories (STL) at strategic locations, namely Mumbai, Kolhapur, Nagpur, Ahmednagar, Hassan, Vijaywada, Chandikhole, Kolar, Suryapet, Raipur, Nanded and Satara covering the soil testing activity in the districts around these STLs. RCF is developing a project for 1.27 million MT urea plant at Thal and also a 1.27 million MT urea plant based on coal gasification at Talcher. The RCF share looks attractive for buying. Moreover, it owns 785 acre land at Chembur in Mumbai which could be developed for future expansion. The current valuation of this land is way higher than its market capitalisation.
(The writer is an investment consultant based in Rourkela. Stock recommendations are personal views of the writer. Investors are requested to do their own due diligence before taking investment decisions)
