Your best investment bet in India!

Name a single stock in the Indian stock market that you would invest in, to gift to your grandchildren?

This was a question posed to 25 investors on a WhatsApp group. Most of the group participants are in their mid to late 30s and some have children already. The question seems simple at first (one stock only), however, I found answering it pretty challenging for multiple reasons:

1. We always insulate our portfolios through diversification. This in practice is very healthy, however it always provides a cushion to making investment decisions. Investing in a single stock is a massive restriction and hence has to be thoroughly researched in order to have the highest conviction.

2. Base the bet by thinking long term. Talking about grandchildren, we are easily looking at an average holding period of approximately 30 years. This further increases complexities as several crucial factors need to be considered, most importantly, consistent stock performance and company survival. With the rapid evolution of technology in every industry and sector, there is a high possibility of many companies being disrupted across the board in the near future.

3. Asset Size. Go with a blue-chip that would give decent returns over the years or a small-cap that has a chance of outperforming and becoming a heavy weight? The latter from an alpha perspective is preferable but we all know that greater reward comes with greater risk.

4. Industry. Do we go with tech that is scalable and can have global reach or bet on India's domestic consumption story?

The below were chosen and are sorted by highest weightage (number of participant recommendations) and then, alphabetically.

(4) Infosys

(3) CDSL

(3) HDFC AMC

(2) Reliance Industries

(2) Tata Motors

(1) Asian Paints

(1) Avenue Supermarts

(1) Deepak Nitrite

(1) HDFC Bank

(1) HFCL

(1) Hindustan Unilever

(1) ITC

(1) Kotak Mahindra Bank

(1) L&T

(1) Piramal Enterprises

(1) Trent

What immediately caught my attention is that majority of the selected are large and mid-caps. Moreover, some major industries/sectors are missing such as insurance and real estate.

Everyone had their own reasons for their respective picks. I recommended 'Trent' and the reasoning behind it is:

1. Leadership, dependability, and trust. Having to think that long out in the future, I'd rather go with a brand (Tata Group) that I believe will survive. It will also have the financial backing to change (digitize) whenever needed.

2. It is a mid-cap and has massive room for growth.

3. If we are talking of India, we want to play India's consumption story and Trent fits the bill real well with Star Bazaar, Landmark, Westside and more.

4. Lastly, as of today, the technicals are sound.

Another observation was that, more than 55% of the above portfolio of stocks are in Nifty 50. Hence, if someone is to invest in the above portfolio of stocks, would it outperform Nifty 50 or would investors be better off saving effort and buying a Nifty 50 ETF instead? The only way to find out was to plot the performance of the above portfolio vs Nifty 50. Although past performance is not a guarantee of future results, it definitely helps in getting an idea.

The above is a 2 year chart (maximum data that could be sourced) of

- Nifty 50 (red line)

- Adjusted Average (blue line); without stock recommendation weightage

- Weighted Adjusted Average (green line); with stock recommendation weightage

Both the averages are adjusted to the price of Nifty 50. There are several regions where there is a steady outperformance of the weighted average (green line) against Nifty 50 (red line). Towards the end, the weighted average is outperforming Nifty 50 by over 10%, which is a significant amount given the fact that Nifty 50 has done very well over the last year. If I were the investor, I would definitely go with the weighted portfolio instead of a Nifty 50 ETF, not only because of the additional 10%; but also because of analyzing charts and trends of this sort for quite sometime now and can safely predict that there is a higher chance of the portfolio outperforming Nifty 50 in the longer run.

So how many of the above stocks do you hold in your portfolio? Are you holding any other stocks with your grandchildren in mind? What if the question was asked to you? Which would be that one stock that you would invest in? Ever thought about it? We would love to know your pick and thought process in the comments section below.

All the best and happy investing!

Ali Godrej Patel

Special thanks to all on the WhatsApp group for contributing to this article/blog.