Festival of Diwali has always been considered auspicious in the Hindu mythology calendar as a festival of lights and invitation to Goddess of wealth to make life joyful and prosperous. Wealth and investment go hand in hand and channelization of funds into equity markets on this religious day is considered auspicious for the people in India. While, this Samvat 2077 is different in terms of volatility and sector selection as the pandemic of Coronavirus has halted the working culture of the people and total productivity. People have been seen shifting their occupation as pandemic of virus has claimed for no growth rate or degradation in their financials. So, investing is not an easy job now as cumbersome financial scrutiny has been coupled with tedious stock selection.
No matter how old you are, which salary class you belong, which kind of investor you are, which sector you melt for, investing on Muhurat trading day is considered to bring wealth and prosperity in your life. And what could be a better option than investing in a stock which is clean due to its strong parental control and free from promoter’s pledge. Think tanks in the investment field always believe that an investor can compromise with excess debt in the capital structure keeping in mind that the company has good growth prospects but one should not compromise with the company whose promoters have pledged their shares to avail loan.
Benefits of investing in clean stocks?
Less Cost of Equity: Usually, the weighted cost of capital is a mix of equity and debt and cost of equity is highly affected by unsystematic risk. Pledging of shares by promoters raise concerns for the equity shareholders and they demand more return in order to compensate the risk increased. Hence, it increases the cost of equity that pushes the weighted average cost of capital and affects the investment decisions and profitability of the company.
Less affected in turbulent times: In times, when whole equity market is affected by the systematic risk, companies whose promoters have pledged their shares to dilute their other liabilities are hammered to ground while clean companies plunge less.Investors tend to invest in clean companies in order to avoid any risk exposure.
Share pledging carries high interest rates: Pledging of shares by promoters to avail loan from the banks and other financial institutions brings an obligation of high interest rates thatdisplay ineffectiveness of the promoters in availing loans at cheaper rates. Higher interest rates raise questions on complete payout after few years and increase the risk of bankruptcy and affect the intrinsic value of the share price.
Investing in equity markets has always been laborious as involvement of numbers crunching in the associated financials and projected growth rates affects the selection process. One has to go through various filters to select a stock for portfolio but this Diwali don’t forget to add the ‘clean’ filter in scrutiny.