Below is the verbatim transcript of Roongta's interview with CNBC-TV18.
Q: What are the key differences between top down and bottom up approach of investing?
A: We do come across a lot of investors who wish to start investing in direct equities, but given the number of listed entities, which is more than 5,000; they do not know where to begin from.
There are two basic methods which will help one to start research as to in which company to invest if it is direct equity. The first method would be a top down approach. In top down approach one begins with looking at the broader economic factors and situation. Look at the gross domestic product (GDP) numbers, look at interest rate scenario, the exchange rates, inflation and then see how these factors are going to affect a particular sector.
We have seen depreciation of the rupee in the last one month to the extent of about 7-7.5 percent. In this scenario one should evaluate what is the impact of this weakening of the rupee and which sectors are likely to benefit out of it, for example, all the export oriented IT companies are likely to benefit with the weakening of the rupee and on a contrary the companies which are import oriented are likely to be affected negatively with this development.
So, that is a first step and then see IT sector, if one identifies to be benefiting out of this then go a step further to see which IT company in the sector is going to benefit and which has good management, which has the fundamentals in place. This is a top down approach wherein one goes from step one, which is the broader economic situation and boiling down to the company management and the market share that it enjoys.
The other method is a bottom up approach. In this, one goes exactly the reverse; first identify some companies which possibly are investors using products or has heard name of, for example Colgate Palmolive (India) is a household name. It is one of the leaders in the oral healthcare segment. So, pickup a company, look at the management and look at the market share it enjoys, see the debt that the company has, see the performance of the company; the financials and fundamentals then go a step ahead and see what is the standing that the company has given the economic circumstances.
The idea and the thought behind this process is that the investor feels that a company can independently function irrespective of whatever the external factors are.
So, these are two methods wherein one can look at companies and evaluate whether to invest. There is no right and wrong method. Whatever one is comfortable with, should choose that method and begin. An investor could possibly start looking at two different companies with two different approaches. So, this is one of the methods which the investor can use to start thinking which company to invest in.
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