People living in big cities and metropolis spend their major time in commuting. It is inevitable to travel to reach your destination. It is true especially if you have long hours of work then commuting back in public transport could be tiring with all the rush and crowd. So, today every person, who lives in these crowded places, plan to purchase his own vehicle once he has settled well with his expenses. To plan to purchase the desired car, the most popular route is to make down payment for the purchase and buy rest of it on loan. This is fine if you really need on urgent basis and have no arrangements for payment. However, if you plan well ahead then you can save for your car purchase as well.
Fix your budget
- Fix the upper limit of your required car purchase. Do a proper market research regarding the kind of car you are looking at- like say compact car, MUV or SUV. If you are planning to buy a particular fuel efficient car with additional fittings like CNG or diesel then the kit comes with an additional cost. So plan for it as well.
- Once, you have identified the car type. Shortlist the company and model of the car.
- Also, understand since you are planning to buy this some time away, it could be possible that the required model is no more available, in that case adjust with an alternative or settle for a second hand car of your required model.
Select your Investment type
- Define the time you want to wait for your desired purchase. If the tenure is less than 3 years, then saving in a bank savings product like monthly Recurring deposit is suitable. If you have good lump sum amount then you can put it in a bank FD or liquid Funds.
- If you desired time is beyond 3 years then you can look to save your required money in equity product. It can be done via an SIP route in equity mutual funds or by doing stock trading on regular basis on stock exchange.
- Although, it is true that mutual funds gives you guidance of a professional fund manager but what is lacks to understand is your willingness to give you the extra mile of risk to meet your goal even faster or earn higher amounts beyond the listed objective.
So, how do you select the stocks to meet your goal of car purchase?
- Revenue Growth – Any business can survive the race only if it is fit and can stay put in long run. To realize this dream it needs to have strong revenue growth. This growth is achieved either by commanding a high price for product sold or by revising the contract prices for services provided or by higher volumes. It is thus, necessary to see if the stock market listed company has in past been able to maintain a consistent performance ratio. If it has not grown much in volumes but only survived with price trends then it is worrisome situation. Also, the ongoing capex plans suggest growth prospects for the company. So please verify if the company has got its cash flow projections in place to match the expansion. Usually companies in high capital intensive industries don’t have good revenues in past all years. But when the particular projects are running at its full capacity then there is usually significant spike in revenue. Purchase of stocks for midterm goal like car purchase, it is recommended to avoid companies with huge long gestation period.
- Debt in books – let me just start by asking you a simple question. If you have already given some loan to your friend and he has not been paying you anything back or neither giving you interest on it. Would you loan him more amounts? No, similarly in stock market when a company has huge debt in its books of accounts and has yet not delivered any successful expansion, then it is not advised to invest in that company. Of course there is no common rule for all kind of companies but it always best to compare the debt levels within the industry parameters. If the company has huge debts it increases the interest costs lowering the return on equity. It will not be able to share complete benefits with the shareholders.
- Operating Margins – the profitability is also important to study as it states whether company is running its operations efficiently and is able to pass on the benefit to its shareholders. If the company has low operating margins then it is not possible to have any distributable wealth. Also, it shows if the costs are controlled well and there is no wastage of resources.
- Simple business model – In stock trading, it is always recommended to invest your money in the company, where you understand the company’s revenue model. If the company has shifted its focus from core business or has multiple strategic business units, it is not easy to calculate individual profitability. If you invest in an unknown domain, it is possible that you could suffer losses. Since car purchase is an important goal, it is better to invest in simple manufacturing or export sector.
- Future business prospects – it is necessary to study the expansion plans of the company. It is necessary to know if the company is just sitting idle on large cash deposits or is investing it in some kind of capital research or investment. If there any joint venture or acquisition possibility in near term, it could dilute the profitability ratios and bring huge debts in books of accounts.
- Ratios to analyze – the main ratios to be studied include the profitability ratios, return on capital, assets turnover ratio and even study the dividend payout ratios. Also, check the percentage of cash to total assets or even if there high inventory in the books. This comparison is usually with oneself and industry peers. If the ratios are looking in healthy, then is always best to check the price to confirm the price stability. If the ratios are not visible good then it is best to leave the company.
- Dividend History – if you are looking at capital growth, then it is necessary to look at dividend history of any company. If the company has not made any dividend payment regularly in the past, the possible reasons could either be capital reinvestment or poor results. If the dividends are not declared due to capex growth, then it is good sign for capital appreciation. However, on the other hand if the company completely distributes the profit as dividend, there can be no expansion in hand.
- Look at stock liquidity and fluctuations – for making a huge profit over time, it is necessary to have good trading volumes and price movements on the National or Bombay Stock exchange. If there are poor volumes, you might not be able to get the desired price at redemption. Also, there are high chances of company delisted in case of poor liquidity. The price movements also indicate if the stock is vulnerable to external factors. This data of vulnerability is studies well by the BETA of the stock. If the beta of the stock is high then it is better to ignore the stock.
- Analyst recommendations – although it is not 100% secured and foolproof method, it is recommended to study the research analyst ratings for the shortlisted stocks. Also, check the target prices set by them with the current market price. This method helps to check the authenticity of the analyst and see the success ratio of his ranking from the past reports.
Beyond the above points, it is necessary to understand well the shareholding pattern of the stock. If the promoter stake in the stock is high it gives you trust on the performance of stock. Also, if the value of the car is not fixed and you are ready to budge from your budget, you can select a high risk volatile stock, which is a market leader, high P/E ratio from TOP 500 stocks index. But this could lead to a situation where the stock might fluctuate frequently and not give you the desired results. So, whatever you decide it is necessary to make your choice in the ambit of your need and suitability.