Despite the global economic gloom, demand for gold in India registered the highest growth of 66 per cent at Rs 30,600 crore in the third quarter of 2008 as investors sought a safe haven and jewellery buyers returned to take advantage of softer gold prices.
Demand in West Asia, Indonesia and China was up more than 40 per cent while it was down 9 per cent and 5 per cent in US and UK (declines of more than 25 per cent in tonnage terms).
In tonnage terms, demand in India increased to 250 tonnes in the third quarter 2008 from 190 tonnes during the same period in 2007, an increase of 31 per cent. Jewellery demand was up 78 per cent to Rs 21,900 crore against Rs 12,300 crore, while in tonnage terms it rose 29 per cent to 178 tonnes, according to Gold Demand Trends, launched by World Gold Council (WGC).
BOOST FACTORS
After a sluggish start to the quarter, gold jewellery demand surged driven by rural economic boom, urban consumers wanting to safeguard their investments. Much of India experienced a good monsoon rainfall, which resulted in a ‘feel good’ factor boosting rural spending on gold during the festive season.
Purchases of gold bars and coins by retail investors amounted to 71 tonne against 53.3 tonne registered in the same period last year, a rise of 36 per cent. At Rs 8,700 crore the growth in value is 72 per cent against Rs 5,073 crore recorded last year.
In certain areas, supply of small bars for retail customers reportedly dried up in the face of such unprecedented demand.
Mr Ajay Mitra, Managing Director, World Gold Council, said: “Looking forward, we believe the uncertainties in the financial markets will continue, therefore driving investors towards gold and its safe haven and insurance policy characteristics.”
RETAIL INITIATIVES
Retailers have taken initiatives to increase consumption by offering consumers gold accumulation plans (such as EMIs) and developing new modern designs to cater to the evolving consumer tastes, introduce gold to other retain formats like shop-in shop, kiosks and so on.
Globally, identifiable investment demand, which incorporates demand for gold through exchange traded funds (ETFs) and bars and coins, was the biggest contributor to overall demand during the quarter, up to $10.7 billion (382 tonnes), double year earlier levels.
Thursday, November 20, 2008
Tuesday, November 18, 2008
See longer, deeper global recession but India to cope: FM
Finance Minister P Chidambaram speaking on the effect of the current global crisis on
Chidambaram said that 60-65% of
Chidambaram is confident that
“In the last sixty days both the government and the Reserve Bank of India (RBI) have moved swiftly to take steps that will ensure adequate liquidity is provided to industry. “ However, Chidambaram said that providing liquidity is not the panacea for the current crisis. “Providing liquidity is only the first step, the second is ensuring appropriate price and the third step is ensuring that at that price credit is actually delivered to industry.”
Here is a verbatim transcript of P Chidambaram’s speech on CNBC-TV18. Also watch the accompanying video.
Tthe world economy has changed more rapidly in the last sixty days than it has over a long time. But this is not the first time in which industrialized countries are going into a recession. There have been recessions in the past in
This recession of course threatens to be a longer and deeper recession affecting more industrialized countries. We in
We are not the cause of the problem but we are being invited to be part of the solution to the problem.
The crisis will end some day. We must take note of the structure of economy and the manner in which most Indians live and work.
About 60-65% of
The total sown area has increased very significantly this year. The monsoon had been good, farmers are busy with their work, they do not look at the Sensex or the Nifty everyday and we will have a substantial bumper crop.
The services sector in
The section that is affected is the industrial sector; especially large manufacturing industry and the financial sector.
Newspapers are full of the problems faced by the financial sector and industry because it is people from these sectors who are readers of the newspapers and who advertise in the newspapers.
The media naturally focuses on the industry and the financial sector. These sectors indeed face problems.
We are extremely vigilant; we have been proactive. Infact, in the last sixty days both the government and the Reserve Bank of India (RBI) have moved swiftly to take steps that will ensure adequate liquidity is provided to industry.
But as I have said previously, liquidity alone is not enough. Providing liquidity is only the first step, the second is ensuring appropriate price and the third step is ensuring that at that price credit is actually delivered to industry.
I think these are not insuperable problems, these are not insurmountable problems. While the world output will decline and to that extent affect our exports, affect some capital inflows, affect external credits, we must be able to quickly substitute or compensate for that by stimulating domestic demand and providing liquidity in the domestic market.
The CMIE (Centre for Monitoring Indian Economy) captures data on investments. They say that inflation, rising cost of capital and fears of a global economic slowdown have not reduced the enthusiasm among Indian corporates to set up fresh capacities or expand the existing ones.
This is well captured in the data collected by CMIE.
We captured 557 new projects in the September 2008 quarter adding Rs 5,22,812 crore. This is the third largest quarterly investment captured in
So I think what we need now is to deal with each problem as it arises. Anticipate the problem, deal with it by using sound economic principles and a certain amount of courage and confidence. While there is a slowdown, what does a slowdown in
There will be a slowdown but the steps that we have taken and that we will take can to a large extent compensate for the factors that are causing the slowdown and I am confident that we will end this year with a very satisfactory growth rate.
I cannot put a number on the final growth rate. IMF’s (International Monetary Fund) estimate made last week places at 7.8% many analysts have said between 7% and 7.5%. The RBI has said 7.5% to 8%. If anyone can tell me that the worst is over for the world then I can confidently predict what the growth rate will be. But let us assume that for another month or two there will be further bad news; even then we will grow at a satisfactory growth rate. Next year we will bounce back to a much better growth rate.
What is required now is confidence, courage and taking the steps that are necessary to compensate for the ill effects of a world slowdown.
On Indian exports:
It is likely that our exports will dip and we may not reach the USD 200 billion but that was what I said last year as well but eventually we reached the target last year. We will be close to the target this year but we can compensate for that by stimulating domestic consumption.
On capital flows:
We have already witnesses some outflows as a result of Foreign Institutional Investors (FIIs) facing redemption pressures back home. But we are compensating for that. The World Bank has promised to substantially increase developmental assistance to
On depreciating rupee:
The rupee has depreciated because the dollar has shown an extraordinarily strong performance and so it’s ironical that money is flowing back to the country where the crisis originated but that is the complaint I have heard from every Finance Minister in the world. There is pressure on the rupee. But once the flows reverse as we believe it will, FCNR rates (Foreign Currency Non-Resident (Bank) {FCNR(B)} account have been revised, ECBs have been liberalized. Once the flows begin to come into
At the moment there is a huge demand for dollar coming mainly from oil companies and others who have to meet some payment obligations. It is quite possible that in about a month or two the direction of flows can reverse. FDI’s are still quite strong and the rupee will settle at an appropriate level.
Sensex and Nifty:
I think what is important is not to be focused on the Sensex or the Nifty everyday. If you look at that you suddenly feel you have become poorer, you have not become poorer or richer. This is simply an index which points to the estimate of investors of the potential of that company or that sector in the future. That one number should not determine all our actions. It should not determine what we have for breakfast and it should not determine whether we go to the gym or not or it should not determine whether we will take a walk in the park.
That is a number but there are many other numbers which I think will make for the totality of
At the end of the year, you will find that
G-20 summit: No happy ending
The eagerly anticipated G-20 meeting that was to have solved much, if not all, of the world’s problems has happened, with leaders of the 20 nations and international financial institutions all good intent about working together to restore growth.
The key ‘good intentions’ of the summiteers include:
Reform of international financial institutions such as the World Bank and the International Monetary Fund
An agreement by the end of 2008, leading to a successful global free-trade deal
Improvements to financial market transparency and ensuring complete and accurate disclosure by firms of their financial conditions
Making sure banks and financial institutions’ incentives “prevent excessive risk-taking”
Asking finance ministers to draw-up a list of financial institutions whose collapse would endanger the global economic system
Strengthening countries’ financial regulatory regimes, and
Taking a “fresh look” at rules that govern market manipulation and fraud.
But more than ‘good intentions’ these sound like political escapism to push problems away as far as possible even while appearing to be solving them.
The way global financial architecture has evolved over the last couple of decades, the pre-eminence of national and international institutions has been usurped by global financial corporations, many of which are even bigger than some nations. The World Bank and the IMF, which see themselves at the vanguard of capitalism, are actually perceived as the hand-maidens of the West and, by extension, of the TNCs.
The IMF’s conditionalities and prescriptions that harp on total privatisation, including of utilities, have done little to the popularity of the organisation in much of the developing and less developed world. So it is all very well to speak blithely of new Bretton Woods institutions but, when there is no acceptance of a world mediated by Western ideas, the move is doomed ab initio.
Set in their waysThe West’s stock in the world is perhaps at the lowest ebb as the financial crisis begins to bite and the pain is beginning to be felt in economies as far removed as South Korea and Ukraine. Till yesterday the champions of “light touch” regulations, today they want financial market transparency and accurate disclosures by firms of their financial conditions.
A look at the British experience suggests how much wishful thinking this is. None of the banks that took help from the British government to recapitalise has passed on interest rate cuts, despite firm suggestions from the Office of the Exchequer.
Nor do they plan to cut out bonuses to their management. In fact, one bank, to avoid such interference, preferred to go a West Asian country for the funds. Banks and financial institutions have got used to playing with other people’s money. They will not willingly kick this habit and will fight till the last man against any serious government intervention.
The global financial/banking set-up has grown too vast for governments to rein it in. The insidious capital is so networked and entrenched that disengaging is well nigh impossible and indeed not desirable even, as that could lead to more tragedies.
All that can be done is for countries to strengthen their financial regulatory regimes. But this, if the Western memory is not too short, is what countries like India and China were reviled for doing a while ago. There was unseemly pressure, no doubt initiated by market-hungry TNCs from the West, on Beijing and New Delhi to open their markets or free their currencies.
Even more disingenuous is the intent to conclude a free trade deal by end-2008, when the Doha Round has been festering. The stalled trade talks, according to some leaders, should be pushed forward so that a basic agreement is reached before the US President, Mr George Bush, demits office in January. But this very fact will tie Mr Bush’s hands. Nor may the new incumbent, Mr Barack Obama, want the US committed to something he will have to live with.
In fact, this is one of the key factors of the G-20 meeting not generating any thing concrete. It is transition time for the world’s biggest power — the US. There is a lame duck government in office. It cannot commit the new government to deals that the new regime may not want nor has any say in.
This is why, perhaps, the British Prime Minister, Mr Gordon Brown, sees an opportunity to assert the UK’s presence in the world political firmament by appearing to give the lead in matters economic.
Most countries have no choice other than adopting the Keynesian revival model, but that has not stopped Mr Brown from claiming intellectual property rights for it. It is extreme irony that Mr Brown should be fount of wisdom when his economy is hurtling towards recession thanks to his ‘light touch’ regulation that gave banks the carte blanche to do what they wanted and they dragged people into the quagmire of easy, but dangerous, debt.
New power structureIt is obvious from the latest G-20 meet that the old lions may have lost their teeth but they are not going to vacate their place in the pride. For them the world remains frozen in 1944, at the time of the Bretton Woods conference.
If it can help it, the West will not countenance a new power structure beyond the G-7, never mind that this grouping no longer represents the world’s biggest. They do not, or at least pretend not to, see the impatience of the BRIC (Brazil, Russia, India and China) group in not getting a legitimate say in global affairs.
Only now does the World Bank chief, Mr Robert Zoellick, who in October said the G-20 was too unwieldy, think that a new grouping of nations must emerge. “We need to modernise the multilateral system to bring in the important developing country voices such as Brazil...” he said. But will this set him and his IMF counterpart thinking on re-working the quotas that determine the voting? Unlikely.
The more pragmatic leader in recent times, France’s Nicholas Sarkozy is suggesting bringing emerging economies on board as members of the club of industrialised nations, that is, expand the G-7. Possibly, he is eyeing the trillions of dollars in reserves that China and the Gulf states have that could help the developed countries as much as the smaller nations (via IMF) in the present turmoil.
But this storyline is about to change because, with oil prices dropping, West Asia may not, after all, be awash in dollars. The surpluses of China (and other Asian nations) depend on the splurging by the West.
With the West slowing down, Asia’s dollar riches may start to dwindle. Further, they may also need all the riches to stimulate their own economies in the face of the global slowdown.
Possibly, the only good thing about the summit was that it was of G-20, not the usual G-7. Maybe this is how it should be if there is to be a happy ending to the story. Of course, there will be many more twists and turns to it. Half has not been told.
Govt looking at measures to sustain export growth
The Government may come up with a slew of measures to sustain the current export growth on the back of apprehensions that the global economic slowdown may see India miss the export target of $200 billion set for the current fiscal.
The issue of measures needed to sustain export growth and a possible package for exporters is said to have been taken up at a meeting of a high-level committee appointed by the Prime Minister here on Monday evening.
However, there was no word on the decisions taken at the meeting, which was attended by senior Ministers and Government officials including the Finance Minister, Mr P. Chidambaram, and the Deputy Chairman of the Planning Commission, Mr Montek Singh Ahluwalia.
However, earlier in the day, the Commerce Minister, Mr Kamal Nath, told newspersons that the Government was now working on a package to help the exporter community and that it was looking at various measures that can help sustain exports.
“Exports have gone down. I will be reviewing the situation to see whether the export target can be met or not. Up till now we are on track. But the next five months will determine whether the target is met,” the Minister told newspersons on the sidelines of the India Economic Summit. The Minister said there was bound to be a slowdown in exports in sync with the downturn in the West.
Without getting into specifics of the package that could be offered to exporters, the Minister hinted that the Government could look at seeing how a level playing field can be provided to them – a move which could include measures such as doing away with duties and possibly local and state taxes.
Saturday, November 15, 2008
When the stock market crashes.........! Whats Next?
What next?
First, cut out all the noise and clutter around you and get back to basics. This is because 90 per cent of the people around you are as clueless as you are. So, when you let the facts speak for themselves, you have a better chance of eliminating ambiguities. Let's find out what these are.
Fact 1: The equity market is NOT a lottery ticket. Every share has a fundamental value and is based on the company’s performance.
First, cut out all the noise and clutter around you and get back to basics. This is because 90 per cent of the people around you are as clueless as you are. So, when you let the facts speak for themselves, you have a better chance of eliminating ambiguities. Let's find out what these are.
Fact 1: The equity market is NOT a lottery ticket. Every share has a fundamental value and is based on the company’s performance.
Fact 2: It is possible for share prices to be widely different from their intrinsic value.
Fact 3: In the long run, share prices always move towards their true value depending on the profitability and growth potential of the company.
Fact 4: Irrespective of whether the United States goes into recession or the sub-prime problem generates more losses, India’s economic growth rate will still be comparatively high.
Fact 5: Unless we have some serious calamity, a political crisis or poor monetary or fiscal policy, we may continue to see over 7 to 7.5 per cent growth rates over the next 5 to10 years.
Fact 6: If the economy continues to grow at such a healthy rate, it has to reflect in the corporate performance as well. This will lead to appreciation of the share price sooner or later.
Keeping these facts in mind, the long-term outlook for India still remains quite positive.
When the stock market crashes.........!
THE last three to four years have proved to be a roller coaster ride for the stock market.
The Sensex doubled from a level of 3000 on May 3, 2003, to 6000 in January 2004. When the Bharatiya Janata Party lost the elections in May 2004, the market plummeted to 4500 (a 25 per cent drop in just four to five months).
But within six months, the market recovered and again, the Sensex touched 6000 before the end of 2004. Thereafter it was almost a one-way journey right up to May 2006, when the market hit the 12,000 mark.
Later, the market saw a sharp correction when it dipped to 9000 level in June 2006. But pretty soon, it crossed the 21,000 mark by January 2008.
Since then, we have witnessed some pretty sharp falls. And the fact that it doesn’t seem to be bottoming out, is making investors a lot more nervous. Of course, volatility is not something new. But the sharp ups and downs are scaring even the old-timers who are in this business.
The Sensex doubled from a level of 3000 on May 3, 2003, to 6000 in January 2004. When the Bharatiya Janata Party lost the elections in May 2004, the market plummeted to 4500 (a 25 per cent drop in just four to five months).
But within six months, the market recovered and again, the Sensex touched 6000 before the end of 2004. Thereafter it was almost a one-way journey right up to May 2006, when the market hit the 12,000 mark.
Later, the market saw a sharp correction when it dipped to 9000 level in June 2006. But pretty soon, it crossed the 21,000 mark by January 2008.
Since then, we have witnessed some pretty sharp falls. And the fact that it doesn’t seem to be bottoming out, is making investors a lot more nervous. Of course, volatility is not something new. But the sharp ups and downs are scaring even the old-timers who are in this business.
Part 3: How PE ratio can reveal true value?
PE: an indicator of margin of safety
Let's assume you buy a share at Rs 550 whose EPS is Rs 50. In one year, you earn Rs 50 on an investment of Rs 550, that is, a return of about 9 per cent.
You can earn 8-9 per cent risk-free returns on bank deposits as well. So, the margin of safety in this case is practically nil.
To reduce the risk, we must have a higher gap.
Thumb rule: Warren Buffett recommends this gap to be at least 1.25-1.5 per cent.
Last word: During a bull run, investors pay a high price for any and every share. So, it becomes difficult to find stocks with a high margin of safety.
It is in bear markets, as the one we are in now, that there are opportunities to spot the gems.
Let's assume you buy a share at Rs 550 whose EPS is Rs 50. In one year, you earn Rs 50 on an investment of Rs 550, that is, a return of about 9 per cent.
You can earn 8-9 per cent risk-free returns on bank deposits as well. So, the margin of safety in this case is practically nil.
To reduce the risk, we must have a higher gap.
Thumb rule: Warren Buffett recommends this gap to be at least 1.25-1.5 per cent.
Last word: During a bull run, investors pay a high price for any and every share. So, it becomes difficult to find stocks with a high margin of safety.
It is in bear markets, as the one we are in now, that there are opportunities to spot the gems.
Part-2 How to find out a share's value?
How to find out a share's value?
To begin with, you can read financial statements and understand the nitty-gritties of stocks.
If you are willing to walk that extra mile, then pay heed to these valuation methods that Warren Buffet swears by:
Method 1:
Look at the net liquid assets per share.
Net liquid assets per share = Current assets (cash, debtors, liquid investments etc) - liabilities
Number of shares
Thumb rule: Warren Buffet prefers paying not more than two-thirds of such value for a stock.
To begin with, you can read financial statements and understand the nitty-gritties of stocks.
If you are willing to walk that extra mile, then pay heed to these valuation methods that Warren Buffet swears by:
Method 1:
Look at the net liquid assets per share.
Net liquid assets per share = Current assets (cash, debtors, liquid investments etc) - liabilities
Number of shares
Thumb rule: Warren Buffet prefers paying not more than two-thirds of such value for a stock.
Method 2:
Look at the PE (Price to earnings) growth ratio.
PE growth ratio = Market price/ Earnings per share
Annual EPS growth
where Annual EPS growth = Current year's EPS – previous year's EPS x 100
Previous year's EPS'
Thumb rule: A PE growth ratio of 1 indicates a fairly valued share; less than 1 means undervalued; and more than 1 means overvalued.
Buy low, sell high: How Buffet does it! Part 1
BUY low, sell high.
The key: Compare a stock's price with its ‘value’.
How is price different from value?
-- Price is what the market is willing to pay for the share at a given time. It fluctuates from minute to minute.
-- Value of a stock is the worth of its underlying business. It is more stable as fortunes of a company do not change overnight.
Buy when price is lower than value
If a share's value is Rs 150 and price is Rs 125, then you get the stock at a discount of Rs 25.
While there is no guarantee that the price will not go below Rs 125, the probability is low.
This principle is called the 'margin of safety' and finds it roots in the teachings of legendary investors -- Warren Buffet and Benjamin Graham.
Secrets to stock investing Lesson 3
Lesson 3
The moment people buy a stock, they expect it to double soon. They see the stock ticker 10 times a day. They call their broker a couple of times daily to find out what is happening.
I have one question for such people. Can you set up a steel plant in one day? Can you build a power plant over the weekend? Can you start a mobile company and expect to have 1 million customers on
Day 1? No.
Businesses take time to set up, acquire customers and generate profits. Only when the companies increase their profits will the share price also increase.
Therefore, having bought a good business and good management, give it time to prosper. If you don’t have the patience, you might as well go to a casino or call-up Shah Rukh Khan at KBC.
Moral: The stock market is a serious long-term business, not a make-money-overnight casino.
The moment people buy a stock, they expect it to double soon. They see the stock ticker 10 times a day. They call their broker a couple of times daily to find out what is happening.
I have one question for such people. Can you set up a steel plant in one day? Can you build a power plant over the weekend? Can you start a mobile company and expect to have 1 million customers on
Day 1? No.
Businesses take time to set up, acquire customers and generate profits. Only when the companies increase their profits will the share price also increase.
Therefore, having bought a good business and good management, give it time to prosper. If you don’t have the patience, you might as well go to a casino or call-up Shah Rukh Khan at KBC.
Moral: The stock market is a serious long-term business, not a make-money-overnight casino.
Secrets to stock investing Lesson 2
Lesson 2
Recently, I read that if you had invested Rs 1 lakh in Infosys at the time of IPO, it would be worth about Rs 64 lakh (Rs 64,00,000) now. But how many people made that kind of money? None, I guess, except the employees and a lucky few who bought the shares but forgot about it.
Answer honestly: wouldn’t you have sold the shares when it doubled or tripled or became a ten-bagger? How many of us would have had the patience to hold on?
The problem is, we watch stock prices, not businesses. If people had kept track of the business, they would have seen the company had the potential to grow at 30%-40% per annum. Then they would have never sold their shares.
I know many people who got out at 10,000 Sensex levels, thinking the markets will correct and they will re-enter at lower levels. They are now ruing their decision. The problem: they were so obsessed tracking the Sensex that they didn't see strong economic and business growth.
Moral: Watch business growth, not rise in stock prices.
Recently, I read that if you had invested Rs 1 lakh in Infosys at the time of IPO, it would be worth about Rs 64 lakh (Rs 64,00,000) now. But how many people made that kind of money? None, I guess, except the employees and a lucky few who bought the shares but forgot about it.
Answer honestly: wouldn’t you have sold the shares when it doubled or tripled or became a ten-bagger? How many of us would have had the patience to hold on?
The problem is, we watch stock prices, not businesses. If people had kept track of the business, they would have seen the company had the potential to grow at 30%-40% per annum. Then they would have never sold their shares.
I know many people who got out at 10,000 Sensex levels, thinking the markets will correct and they will re-enter at lower levels. They are now ruing their decision. The problem: they were so obsessed tracking the Sensex that they didn't see strong economic and business growth.
Moral: Watch business growth, not rise in stock prices.
Secrets to stock investing Lesson 1
AS an investment advisor, I get lots of queries from investors across the country. Here's a sample:
'I bought this scrip last week and it is down. Should I sell?'
'The markets are trading at a peak. Is it right to invest now?'
'I want to make maximum returns in minimum time. Suggest some stocks.'
'Which are the stocks worth buying with price less than Rs 50?'
'When will the market correct? I want to invest in some good shares.'
This kind of approach to investing in equity is a recipe for disaster.
There are some serious problems here. Let's pick up some important lessons.
Lesson 1
The moment the prices of scrips drop, say, by 5%-10%, we get worried. In that anxiety, we want to sell and get out.
Let's say the Reliance share you bought last week is down 10%. So what? Will Reliance business close down? Or will Mukesh Ambani run away with your money? No.
The movement in stock prices has no impact on the business. Reliance will continue to make profits and grow. Mukesh Ambani will continue to build world-class projects. If that is the case, Reliance shares will see new heights in future. Why bother about these falls which likely will only be temporary?
The problem is, we buy stocks, not businesses. The Tatas and Birlas have been around for over 100 years. Hundreds of successful companies have run for decades and continue to grow irrespective of the stock market volatilities.
Yes, some businesses succeed, some fail. There are ups and downs. That is the inherent nature of a business. But, in the long run, they will make profits and grow. That is where management counts. Good managements run profitable operations.
Second, that's why we diversify. Even if we lose money in a few stocks, we will still make lots of money in others.
'I bought this scrip last week and it is down. Should I sell?'
'The markets are trading at a peak. Is it right to invest now?'
'I want to make maximum returns in minimum time. Suggest some stocks.'
'Which are the stocks worth buying with price less than Rs 50?'
'When will the market correct? I want to invest in some good shares.'
This kind of approach to investing in equity is a recipe for disaster.
There are some serious problems here. Let's pick up some important lessons.
Lesson 1
The moment the prices of scrips drop, say, by 5%-10%, we get worried. In that anxiety, we want to sell and get out.
Let's say the Reliance share you bought last week is down 10%. So what? Will Reliance business close down? Or will Mukesh Ambani run away with your money? No.
The movement in stock prices has no impact on the business. Reliance will continue to make profits and grow. Mukesh Ambani will continue to build world-class projects. If that is the case, Reliance shares will see new heights in future. Why bother about these falls which likely will only be temporary?
The problem is, we buy stocks, not businesses. The Tatas and Birlas have been around for over 100 years. Hundreds of successful companies have run for decades and continue to grow irrespective of the stock market volatilities.
Yes, some businesses succeed, some fail. There are ups and downs. That is the inherent nature of a business. But, in the long run, they will make profits and grow. That is where management counts. Good managements run profitable operations.
Second, that's why we diversify. Even if we lose money in a few stocks, we will still make lots of money in others.
Make money when the markets fall
The stock market is an ideal avenue to make money in the long run, provided the money is invested in appropriate equities. At the same time, the markets can be destroyers of wealth in the short run, as many people would have experienced by now. There are few stories on how people have created wealth and held onto it through stock market investments. However, there are an equal number (or more) of stories about how people have lost their shirts and even had to go to the extent of committing suicide. This is not how equity investing is meant to be.
Most people only think of equity when the going is good and tend to ditch equity as fast as Ranbir Kapoor’s character dumps his girlfriends in the movie “Bachna Ae Haseeno”. This problem is witnessed more across the so called sophisticated Institutional and Ultra High Networth investors. However, just as solid relationships are the foundation of a good life, so are good quality stocks the foundation of an investment portfolio. And sticking around and building the portfolio when the markets fall delivers stellar returns over the long term. Equity returns are a function of the price that you pay for investments. Your investment returns are determined by the price that you have paid on a particular date.
Just like it’s easy to time the real estate market, it’s extremely difficult to time the equity markets, with the daily swings. In just 7 trading sessions the markets have the potential to go up or down by 40 per cent. So, buying at the lowest point might not be possible, however buying lower certainly is.
Instead of looking at this as a wonderful opportunity to buy, the same investors who were confident of making 15-20 per cent in just 2-3 weeks from equities have suddenly developed cold feet now. The logic is - I will jump in when the market bounces back. The market, however, is in no mood to tell anyone when the reversal will actually happen. Investors who sell out in bear markets tend to make their losses permanent. However, in reality all you have done is 'Sell Low and then Buy High' later, which is the exact opposite of what should be actually done.
Hanging on to fundamentally sound equity investments and infact buying more when the markets stink may sound stupid when lots of sophisticated investors are packing off and investment gurus are sounding off bearish tones. But these are precisely the times to make the best returns and in bearish times, even history has been on the side of bullish investors. Markets could take a few years to recover and there might not be anything to write home about in your equity portfolio as of now but the cheap prices that you will pay for good equity investments will compound tremendously in the next 10,15 and 20 years.
Most people buy gold and real estate and do not check the prices every day. A similar strategy of not looking at the prices or 'Buy it, Shut It and Forget It' can also go a long way for stocks. However, you should certainly review your asset allocation and every investment regularly to see whether the fundamentals of the investment still hold. But there is no point in checking the prices every day and then worrying about what it will do in the next 2 weeks.
Investors who resisted the urge to sell back in 1992, 2000, 2004 and 2006 have made stellar returns on their investments after the markets have bounced back. However, people might not like to wait for 2 years, but when you actually sell in this market, you never recover.
Just as an example, in 2006 when the index was at 9300 levels, Bharti was quoting at Rs 325. Today, even though Sensex is at 9700 levels, Bharti is still trading at Rs 600 plus. This shows that though index levels are the same, you would have still made money if you had held on to that stock. Returns are not a function of index levels but a function of valuations and the price that one pays for an investment. The strategy to adopt in such markets is to regularly invest and make one time contributions when markets overreact and correct sharply on the downside.
The cardinal rule to learn from this example and from several seasoned investors who have made money in equity markets is that “Emotions should not drive or should not be your investment strategy”.
Most people only think of equity when the going is good and tend to ditch equity as fast as Ranbir Kapoor’s character dumps his girlfriends in the movie “Bachna Ae Haseeno”. This problem is witnessed more across the so called sophisticated Institutional and Ultra High Networth investors. However, just as solid relationships are the foundation of a good life, so are good quality stocks the foundation of an investment portfolio. And sticking around and building the portfolio when the markets fall delivers stellar returns over the long term. Equity returns are a function of the price that you pay for investments. Your investment returns are determined by the price that you have paid on a particular date.
Just like it’s easy to time the real estate market, it’s extremely difficult to time the equity markets, with the daily swings. In just 7 trading sessions the markets have the potential to go up or down by 40 per cent. So, buying at the lowest point might not be possible, however buying lower certainly is.
Instead of looking at this as a wonderful opportunity to buy, the same investors who were confident of making 15-20 per cent in just 2-3 weeks from equities have suddenly developed cold feet now. The logic is - I will jump in when the market bounces back. The market, however, is in no mood to tell anyone when the reversal will actually happen. Investors who sell out in bear markets tend to make their losses permanent. However, in reality all you have done is 'Sell Low and then Buy High' later, which is the exact opposite of what should be actually done.
Hanging on to fundamentally sound equity investments and infact buying more when the markets stink may sound stupid when lots of sophisticated investors are packing off and investment gurus are sounding off bearish tones. But these are precisely the times to make the best returns and in bearish times, even history has been on the side of bullish investors. Markets could take a few years to recover and there might not be anything to write home about in your equity portfolio as of now but the cheap prices that you will pay for good equity investments will compound tremendously in the next 10,15 and 20 years.
Most people buy gold and real estate and do not check the prices every day. A similar strategy of not looking at the prices or 'Buy it, Shut It and Forget It' can also go a long way for stocks. However, you should certainly review your asset allocation and every investment regularly to see whether the fundamentals of the investment still hold. But there is no point in checking the prices every day and then worrying about what it will do in the next 2 weeks.
Investors who resisted the urge to sell back in 1992, 2000, 2004 and 2006 have made stellar returns on their investments after the markets have bounced back. However, people might not like to wait for 2 years, but when you actually sell in this market, you never recover.
Just as an example, in 2006 when the index was at 9300 levels, Bharti was quoting at Rs 325. Today, even though Sensex is at 9700 levels, Bharti is still trading at Rs 600 plus. This shows that though index levels are the same, you would have still made money if you had held on to that stock. Returns are not a function of index levels but a function of valuations and the price that one pays for an investment. The strategy to adopt in such markets is to regularly invest and make one time contributions when markets overreact and correct sharply on the downside.
The cardinal rule to learn from this example and from several seasoned investors who have made money in equity markets is that “Emotions should not drive or should not be your investment strategy”.
Can predictions make you rich?
The surest way in theory to become rich is to know tomorrow’s stock prices today. Moment we master the art and science of understanding market trends and harness our skills of accurately predicting the trends we will start rolling in wealth.
Once we acquire the skill, only thing we need to do is purchase stocks when they are going to be at its bottom and sell them at peak. If we keep repeating this again and again and again, we shall accumulate infinite wealth.
There are several things we can do to acquire this knowledge. To begin with we can purchase books on the subject. Bookstore shelves are full of titles on “how to beat stock market.”
Next consider going to individuals who draw lines. They can create logic and sense from any kind of chaos.
Another option is to speak to our friends, neighbors, colleagues who have ‘immense’ foresight about stocks. It is a known fact that once they predict something, even stock market will change its course and follow their prediction.
Lastly go to an astrologer. There is no better person than an astrologer who can predict future. There are varieties of astrologers. There are palmists. Then we have crystal ball glazers. We also have parrots that pick up cards and predict future.
Now obviously not everyone will be able to master this art of predicting future stock prices. However even if you cannot master the art do not lose heart. If you are unable to acquire the predicting skills follow the advice of legendary investors who have created ‘massive’ wealth for themselves.
Some of the well known investors and economists have said the following….
We've long felt that the only value of stock forecasters is to make fortune tellers look good - Warren Buffett
I never ask if the market is going to go up or down next month, I know that there is nobody that can tell me that. - Sir John Templeton
I don't know anyone who's ever got market timing right. In fact, I don't know anyone who knows anyone who's ever got it right. - John Bogle
There are two sorts of forecasters. Those who don't know, and those that don't know they don't know. - John Kenneth Galbraith
If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what`s going to happen to the stock market. - Benjamin Graham
So, choice is yours. Either follow the legendary investors who created immense wealth for themselves and their investors. Alternatively follow those who by predicating future prices have not been able to create good future for themselves also.
By the way until today nobody has got Nobel Prize in economics for a theory on “predicting tomorrow’s stock prices today.”
Once we acquire the skill, only thing we need to do is purchase stocks when they are going to be at its bottom and sell them at peak. If we keep repeating this again and again and again, we shall accumulate infinite wealth.
There are several things we can do to acquire this knowledge. To begin with we can purchase books on the subject. Bookstore shelves are full of titles on “how to beat stock market.”
Next consider going to individuals who draw lines. They can create logic and sense from any kind of chaos.
Another option is to speak to our friends, neighbors, colleagues who have ‘immense’ foresight about stocks. It is a known fact that once they predict something, even stock market will change its course and follow their prediction.
Lastly go to an astrologer. There is no better person than an astrologer who can predict future. There are varieties of astrologers. There are palmists. Then we have crystal ball glazers. We also have parrots that pick up cards and predict future.
Now obviously not everyone will be able to master this art of predicting future stock prices. However even if you cannot master the art do not lose heart. If you are unable to acquire the predicting skills follow the advice of legendary investors who have created ‘massive’ wealth for themselves.
Some of the well known investors and economists have said the following….
We've long felt that the only value of stock forecasters is to make fortune tellers look good - Warren Buffett
I never ask if the market is going to go up or down next month, I know that there is nobody that can tell me that. - Sir John Templeton
I don't know anyone who's ever got market timing right. In fact, I don't know anyone who knows anyone who's ever got it right. - John Bogle
There are two sorts of forecasters. Those who don't know, and those that don't know they don't know. - John Kenneth Galbraith
If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what`s going to happen to the stock market. - Benjamin Graham
So, choice is yours. Either follow the legendary investors who created immense wealth for themselves and their investors. Alternatively follow those who by predicating future prices have not been able to create good future for themselves also.
By the way until today nobody has got Nobel Prize in economics for a theory on “predicting tomorrow’s stock prices today.”
Plan your financial future now....
In the last couple of years, all we have seen in the media, at parties and at meetings are discussions and predictions about the future course of the stock market. It is always easy to make predictions, as you do not have to really press hard to ‘guesstimate’. However, we also know that predictions are like illusions. They have no resemblance to actual facts of life. Ideally, people should have been preparing rather than predicting.
My neighbour always believed in the saying, “Dream big dreams, they have a funny way of coming true.” Then one day, when he was scolding his younger daughter for not studying for her exams, she responded, “I’ve got a ‘big dream’ - of becoming a doctor and am waiting for some ‘funny way’ of becoming one – without studying!” My neighbour was dumbstruck. Yet, he has done nothing constructive (like planning) in order to achieve his dreams.
We all dream of a great future. In fact, every time we are alone, we have one predominant thought – that of a brighter future. Unfortunately, just like we cannot become a doctor by dreaming alone, similarly, we cannot create a brighter future by just dreaming it up.
There is another anecdote to this entire activity. We all have our respective professions. Unfortunately, many of us do not know what we are working on. Our dreams are not clearly defined. It’s like buying tickets at the railway station but not knowing where to go.
Like all other activities, if you want to achieve a great future, you need to plan. The first step is to clearly define “your” bright future. Secondly, quantify it. For example, it is not enough to say ‘I need a holiday home’. A proper approach is to state that I want to own a holiday home of about 4,000 square feet in a hill station and costing approximately Rs 35 lakh. Next, give yourself a time frame like, ‘I need that house in the next five years’.
Having quantified this dream, start working at it. Save regularly for it. While you are saving, give a name to that investment of your dream, something like ‘Holiday home fund’. Let me highlight the significance of this.
Assume you have Rs 28,000 lying idle in your savings bank account. You may have earned this additional money by way of dividend, sales incentive, etc. Your mobile phone has become old. You remember that newspaper advertisement of the latest mobile phone with swanky features, special introductory offer and to top it all, they will buy back your old phone. What are the chances that you will opt for the offer? In all probability, you will jump at the offer!
Now assume you have named that Rs 28,000 in your head. For instance, you have decided that this Rs 28,000 will go towards an ‘Annual family vacation fund’. What are the chances of you spending that money on the mobile now? Even if the family vacation is six months away and you are likely to earn additional income, you will not touch the Rs 28,000.
In all probability, you will use the future income for a mobile phone, but not the current savings. That’s why naming an investment helps you in staying focused.
Lastly, keep reviewing your dream and investments. Every three-four months, spend some time focusing on your dream and its investments. After all, as the Japanese say, “Vision without action is a daydream. Action without vision is a nightmare!”
My neighbour always believed in the saying, “Dream big dreams, they have a funny way of coming true.” Then one day, when he was scolding his younger daughter for not studying for her exams, she responded, “I’ve got a ‘big dream’ - of becoming a doctor and am waiting for some ‘funny way’ of becoming one – without studying!” My neighbour was dumbstruck. Yet, he has done nothing constructive (like planning) in order to achieve his dreams.
We all dream of a great future. In fact, every time we are alone, we have one predominant thought – that of a brighter future. Unfortunately, just like we cannot become a doctor by dreaming alone, similarly, we cannot create a brighter future by just dreaming it up.
There is another anecdote to this entire activity. We all have our respective professions. Unfortunately, many of us do not know what we are working on. Our dreams are not clearly defined. It’s like buying tickets at the railway station but not knowing where to go.
Like all other activities, if you want to achieve a great future, you need to plan. The first step is to clearly define “your” bright future. Secondly, quantify it. For example, it is not enough to say ‘I need a holiday home’. A proper approach is to state that I want to own a holiday home of about 4,000 square feet in a hill station and costing approximately Rs 35 lakh. Next, give yourself a time frame like, ‘I need that house in the next five years’.
Having quantified this dream, start working at it. Save regularly for it. While you are saving, give a name to that investment of your dream, something like ‘Holiday home fund’. Let me highlight the significance of this.
Assume you have Rs 28,000 lying idle in your savings bank account. You may have earned this additional money by way of dividend, sales incentive, etc. Your mobile phone has become old. You remember that newspaper advertisement of the latest mobile phone with swanky features, special introductory offer and to top it all, they will buy back your old phone. What are the chances that you will opt for the offer? In all probability, you will jump at the offer!
Now assume you have named that Rs 28,000 in your head. For instance, you have decided that this Rs 28,000 will go towards an ‘Annual family vacation fund’. What are the chances of you spending that money on the mobile now? Even if the family vacation is six months away and you are likely to earn additional income, you will not touch the Rs 28,000.
In all probability, you will use the future income for a mobile phone, but not the current savings. That’s why naming an investment helps you in staying focused.
Lastly, keep reviewing your dream and investments. Every three-four months, spend some time focusing on your dream and its investments. After all, as the Japanese say, “Vision without action is a daydream. Action without vision is a nightmare!”
Free and open market policy, surest path to grow
Saying that there is more work to do beyond the immediate crisis and the stakes are indeed high, the US President Mr George W Bush told the leaders of the Group of Twenty and other major actors in the global financial system that the surest p ath to grow is to continue policies of free and open markets.
“This problem did not develop overnight and it will not be solved overnight. But with continued cooperation and determination, it will be solved” Mr Bush said as he welcomed leaders of the G-20 at the banquet in the state dining room of the White House o n the eve of a one-day summit to discuss the crisis in the international financial markets.
The Indian Prime Minister Dr Manmohan Singh and a high powered delegation that includes Finance Minister Mr P Chidambarm are participating in the meeting. “There is more work to do beyond the immediate crisis and the stakes are indeed high,” the Presiden t said stressing that “developing nations need the assistance they have been promised - as well as additional foreign investment - to continue their journey from poverty to promise”.
“...We are here because we share a concern about the impact of the global financial crisis on the people of our nations. We share a determination to fix the problems that led to this turmoil. We share a conviction that by working together, we can restore the global economy to the path of long-term prosperity,” Mr Bush said.
“This problem did not develop overnight and it will not be solved overnight. But with continued cooperation and determination, it will be solved” Mr Bush said as he welcomed leaders of the G-20 at the banquet in the state dining room of the White House o n the eve of a one-day summit to discuss the crisis in the international financial markets.
The Indian Prime Minister Dr Manmohan Singh and a high powered delegation that includes Finance Minister Mr P Chidambarm are participating in the meeting. “There is more work to do beyond the immediate crisis and the stakes are indeed high,” the Presiden t said stressing that “developing nations need the assistance they have been promised - as well as additional foreign investment - to continue their journey from poverty to promise”.
“...We are here because we share a concern about the impact of the global financial crisis on the people of our nations. We share a determination to fix the problems that led to this turmoil. We share a conviction that by working together, we can restore the global economy to the path of long-term prosperity,” Mr Bush said.
We are confident we can weather the crisis: Chidambaram
Here are excerpts from Mr Chidambaram’s interaction with journalists:
Question: Are we talking of a new mechanism for fund flows?
Finance Minister: That depends upon where the resources would be found. If the resources can be found and channelised through the existing multilateral institutions, that would be good. But if you find resources that cannot be channelised through existing financial institutions, then we have to find another mechanism through which these resources can be channelised to developing countries. We have to talk to others about this.
Can you tell us about the outcome of the G20 Finance Minister’s meeting?
I’ve hinted at a number of ideas that came up in Sao Paulo to which we were a contributor. We hear others’ suggestions also. We have many ideas and suggestions but we don’t yet have a plan. A plan is what has to be devised in Washington and subsequently.
Are we talking about a global regulator?
Regulation, in the present context, is a function which national regulators will be loath to give up. That is why regulation must be national. If we can agree on common prudential and regulatory standards, and then ask national regulators to apply those standards, there can be some kind of global oversight [over] whether the national regulators are doing their job. I don’t think regulation can be raised to [the level of] a global regulator. That’s too ambitious, perhaps not possible in today’s circumstances.
Are we talking about a global oversight body?
I didn’t use the words, ‘global oversight body.’ I said there must be some way in which there can be global oversight over whether the commonly accepted regulatory and prudential standards are being applied by national regulators. These are things that have to be talked over. These are ideas, formative ideas.
What kind of prudential norms are you looking at?
These are the well-known norms to regulate financial institutions, capital adequacy, risk-assessment…what all bankers do, what the BIS is supposed to be doing.
What might have happened if we had surveillance and early warning mechanisms?
In retrospect, it is clear that if there had been an effective surveillance mechanism, that mechanism would have identified the huge risks that were being taken by some international financial entities. Absent such a surveillance mechanism or an oversight mechanism, these financial entities, some of which have collapsed, took unacceptable risks. They caused a crisis in the United States, which is the epicentre of the crisis. So what we are talking about, what we talked about in Sao Paulo and we will talk about in Washington is: can we agree upon such a global oversight entity? I don’t know what shape it will take. But we need to talk about it.
What will be the impact of the financial crisis on India?
We can’t measure the impact. We have said we would be indirectly impacted. It will impact, to some extent, on our growth, our exports, and it will also impact the currency flows, as it has already. But we are confident that given the underlying strengths of the Indian economy, we can weather the crisis and still return a decent growth rate for 2008-2009. Even the IMF’s last week assessment places India’s growth rate for the current fiscal, 2008-2009, at 7.8 per cent. We’ll still return a decent growth rate but we will suffer an indirect impact.
Is there not a contradiction between the need for regulation and free market reforms?
There is no contradiction. That is why the Prime Minister has emphasised that the answer to the crisis is not to adopt protectionist policies.
Is the creation of another Bretton Woods institution on the agenda?
Very difficult to say we can invent another Bretton Woods institution. What we’re trying to do is improve global governance and global oversight over these financial institutions. I don’t expect that we will have another Bretton Woods type of institution. That’s my view.
Given global trends, aren’t Indian interest rates too high?
That’s a question that the Governor of the RBI has to answer. And I think he has given his answers on October 6, October 10, October 24, and October 31. He will respond as the situation develops. I can’t give an answer to that.
And about India’s credit growth rate?
I’m not targeting any growth of credit. It is growing at 29 per cent today. If it is non-inflationary growth, we don’t have to worry about the credit growth rate. That is what Dr Bimal Jalan said in a recent interview. We have to juxtapose the rate of credit growth with inflation. If the growth is non-inflationary, then we can accept the current credit growth, but it depends upon its impact on inflation. The [RBI] Governor will have to take a call on that.
The British press is saying India’s GDP growth rate will be less than what is being projected.
I said the estimates vary between 7 and 7.8 per cent. IMF 7.8, RBI 7.5 to 8, Prime Minister’s Economic Advisory Council 7 to 7.5. We still have a very decent growth rate. What do I have to tell the British? All I can say is it’s still higher than their growth rate!
Can you tell us more about the agreement being sought on international accounting standards?
That was one of the points agreed in São Paulo. We have agreed to go to international accounting standards, IASB or something. Now there is another standard, which the US and some other countries are inclined to adopt. What we agreed in São Paulo was to have common accounting standards, so we have to work a bit for that. Even if there are two accounting standards, we can still arrive at a common standard.
Question: Are we talking of a new mechanism for fund flows?
Finance Minister: That depends upon where the resources would be found. If the resources can be found and channelised through the existing multilateral institutions, that would be good. But if you find resources that cannot be channelised through existing financial institutions, then we have to find another mechanism through which these resources can be channelised to developing countries. We have to talk to others about this.
Can you tell us about the outcome of the G20 Finance Minister’s meeting?
I’ve hinted at a number of ideas that came up in Sao Paulo to which we were a contributor. We hear others’ suggestions also. We have many ideas and suggestions but we don’t yet have a plan. A plan is what has to be devised in Washington and subsequently.
Are we talking about a global regulator?
Regulation, in the present context, is a function which national regulators will be loath to give up. That is why regulation must be national. If we can agree on common prudential and regulatory standards, and then ask national regulators to apply those standards, there can be some kind of global oversight [over] whether the national regulators are doing their job. I don’t think regulation can be raised to [the level of] a global regulator. That’s too ambitious, perhaps not possible in today’s circumstances.
Are we talking about a global oversight body?
I didn’t use the words, ‘global oversight body.’ I said there must be some way in which there can be global oversight over whether the commonly accepted regulatory and prudential standards are being applied by national regulators. These are things that have to be talked over. These are ideas, formative ideas.
What kind of prudential norms are you looking at?
These are the well-known norms to regulate financial institutions, capital adequacy, risk-assessment…what all bankers do, what the BIS is supposed to be doing.
What might have happened if we had surveillance and early warning mechanisms?
In retrospect, it is clear that if there had been an effective surveillance mechanism, that mechanism would have identified the huge risks that were being taken by some international financial entities. Absent such a surveillance mechanism or an oversight mechanism, these financial entities, some of which have collapsed, took unacceptable risks. They caused a crisis in the United States, which is the epicentre of the crisis. So what we are talking about, what we talked about in Sao Paulo and we will talk about in Washington is: can we agree upon such a global oversight entity? I don’t know what shape it will take. But we need to talk about it.
What will be the impact of the financial crisis on India?
We can’t measure the impact. We have said we would be indirectly impacted. It will impact, to some extent, on our growth, our exports, and it will also impact the currency flows, as it has already. But we are confident that given the underlying strengths of the Indian economy, we can weather the crisis and still return a decent growth rate for 2008-2009. Even the IMF’s last week assessment places India’s growth rate for the current fiscal, 2008-2009, at 7.8 per cent. We’ll still return a decent growth rate but we will suffer an indirect impact.
Is there not a contradiction between the need for regulation and free market reforms?
There is no contradiction. That is why the Prime Minister has emphasised that the answer to the crisis is not to adopt protectionist policies.
Is the creation of another Bretton Woods institution on the agenda?
Very difficult to say we can invent another Bretton Woods institution. What we’re trying to do is improve global governance and global oversight over these financial institutions. I don’t expect that we will have another Bretton Woods type of institution. That’s my view.
Given global trends, aren’t Indian interest rates too high?
That’s a question that the Governor of the RBI has to answer. And I think he has given his answers on October 6, October 10, October 24, and October 31. He will respond as the situation develops. I can’t give an answer to that.
And about India’s credit growth rate?
I’m not targeting any growth of credit. It is growing at 29 per cent today. If it is non-inflationary growth, we don’t have to worry about the credit growth rate. That is what Dr Bimal Jalan said in a recent interview. We have to juxtapose the rate of credit growth with inflation. If the growth is non-inflationary, then we can accept the current credit growth, but it depends upon its impact on inflation. The [RBI] Governor will have to take a call on that.
The British press is saying India’s GDP growth rate will be less than what is being projected.
I said the estimates vary between 7 and 7.8 per cent. IMF 7.8, RBI 7.5 to 8, Prime Minister’s Economic Advisory Council 7 to 7.5. We still have a very decent growth rate. What do I have to tell the British? All I can say is it’s still higher than their growth rate!
Can you tell us more about the agreement being sought on international accounting standards?
That was one of the points agreed in São Paulo. We have agreed to go to international accounting standards, IASB or something. Now there is another standard, which the US and some other countries are inclined to adopt. What we agreed in São Paulo was to have common accounting standards, so we have to work a bit for that. Even if there are two accounting standards, we can still arrive at a common standard.
Friday, November 14, 2008
Mutual fund terms involved
Assets Management Company: A highly regulated organization that pools money from many people into portfolio structured to achieve certain objectives. Typically an AMC manages several funds –open ended/ close ended across several categories- growth, income, balanced.
Balanced Fund: A hybrid portfolio of stocks and bonds.
Close Ended Fund: They neither issue nor redeem fresh units to investors. Some closed ended funds can be bought or sold over the stock exchange if the fund is listed. Else, investor have to wait till redemption date to exit. Most listed close ended funds trade at discount to the NAV.
Open Ended Fund: A diversified and professionally managed scheme, it issues fresh units to incoming investors at NAV plus any applicable sales charge, and it redeems shares at NAV from sellers, less any redemption fees.
Entry/ Exit Load: A charge paid when an investor buys/sells a fund. There could be a load at the time of entry or exit, but rarely at both times.
Expense Ratio : The annual expenses of the funds, including the management fee, administrative cost, divided by the fund under management.
Growth/Equity Fund: A fund holding stocks with good or improving profit prospects. The primary emphasis is on appreciation.
Liquidity: The ease with which an investment can be bought or sold. A person should be able to buy or sell a liquid asset quickly with virtually no adverse price impact.
Net Assets Value : A price or value of one unit of a fund. It is calculated by summing the current market values of all securities held by the fund, adding the cash and any accrued income, then subtracting liabilities and dividing the result by the number of units outstanding.
Interest Rate Risk: The risk borne by fixed-interest securities, and by borrowers with floating rate loans, when interest rates fluctuate. When interest rates rise, the market value of fixed-interest securities declines and vice versa.
Credit Risk: Credit risk involves the loss arising due to a customer’s or counterparty’s inability or unwillingness to meet commitments in relation to lending, trading, hedging, settlement and other financial transactions.
Capital Market Risk : Capital Market Risk is the risk arising due to changes in the Stock Market conditions.
Balanced Fund: A hybrid portfolio of stocks and bonds.
Close Ended Fund: They neither issue nor redeem fresh units to investors. Some closed ended funds can be bought or sold over the stock exchange if the fund is listed. Else, investor have to wait till redemption date to exit. Most listed close ended funds trade at discount to the NAV.
Open Ended Fund: A diversified and professionally managed scheme, it issues fresh units to incoming investors at NAV plus any applicable sales charge, and it redeems shares at NAV from sellers, less any redemption fees.
Entry/ Exit Load: A charge paid when an investor buys/sells a fund. There could be a load at the time of entry or exit, but rarely at both times.
Expense Ratio : The annual expenses of the funds, including the management fee, administrative cost, divided by the fund under management.
Growth/Equity Fund: A fund holding stocks with good or improving profit prospects. The primary emphasis is on appreciation.
Liquidity: The ease with which an investment can be bought or sold. A person should be able to buy or sell a liquid asset quickly with virtually no adverse price impact.
Net Assets Value : A price or value of one unit of a fund. It is calculated by summing the current market values of all securities held by the fund, adding the cash and any accrued income, then subtracting liabilities and dividing the result by the number of units outstanding.
Interest Rate Risk: The risk borne by fixed-interest securities, and by borrowers with floating rate loans, when interest rates fluctuate. When interest rates rise, the market value of fixed-interest securities declines and vice versa.
Credit Risk: Credit risk involves the loss arising due to a customer’s or counterparty’s inability or unwillingness to meet commitments in relation to lending, trading, hedging, settlement and other financial transactions.
Capital Market Risk : Capital Market Risk is the risk arising due to changes in the Stock Market conditions.
Point to remember while investing in mtual funds
Points to Remember
Do not speculate: Always evaluate risk-taking capacity.
Do not chase returns: Because what goes up must come down.
Do not put all eggs in one basket: Diversification reduces the risk.
Do not stop working on Mutual Funds: Continuous evaluation of funds is a must.
Do not time the market: Every time is good for investments.
Mutual Funds are subject to market risks and there is no assurance that the fund objective will be achieved.
NAVs fluctuate depending on forces affecting the Capital market.
Past performance may or may not be sustained in the future.
Do not speculate: Always evaluate risk-taking capacity.
Do not chase returns: Because what goes up must come down.
Do not put all eggs in one basket: Diversification reduces the risk.
Do not stop working on Mutual Funds: Continuous evaluation of funds is a must.
Do not time the market: Every time is good for investments.
Mutual Funds are subject to market risks and there is no assurance that the fund objective will be achieved.
NAVs fluctuate depending on forces affecting the Capital market.
Past performance may or may not be sustained in the future.
How to calculate the growth of your Mutual Fund investments ?
Let's assume that Mr. Gupta has purchased Mutual Fund units worth Rs. 10,000 at an NAV of Rs. 10 per unit on February 1. The Entry Load on the Mutual Fund was 2%. On September 15, he sold all the units at an NAV of Rs 20. The exit load was 0.5%.
His growth/ returns is calculated as under:
1. Calculation of Applicable NAV and No. of units purchased:
(a) Amount of Investment = Rs. 10,000
(b) Market NAV = Rs. 10
(c) Entry Load = 2% = Rs. 0.20
(d) Applicable NAV (Purchase Price) = (b) + (c) = Rs. 10.20
(e) Actual Units Purchased = (a) / (d) = 980.392 units
2. Calculation of NAV at the time of Sale
(a) NAV at the time of Sale = Rs 20
(b) Exit Load = 0.5% or Rs.0.10
(c) Applicable NAV = (a) – (b) = Rs. 19.90
3. Returns/Growth on Mutual Funds
(a) Applicable NAV at the time of Redemption = Rs. 19.90
(b) Applicable NAV at the time of Purchase = Rs. 10.20
(c) Growth/ Returns on Investment = {(a) – (b)/(b) * 100} = 95.30%
His growth/ returns is calculated as under:
1. Calculation of Applicable NAV and No. of units purchased:
(a) Amount of Investment = Rs. 10,000
(b) Market NAV = Rs. 10
(c) Entry Load = 2% = Rs. 0.20
(d) Applicable NAV (Purchase Price) = (b) + (c) = Rs. 10.20
(e) Actual Units Purchased = (a) / (d) = 980.392 units
2. Calculation of NAV at the time of Sale
(a) NAV at the time of Sale = Rs 20
(b) Exit Load = 0.5% or Rs.0.10
(c) Applicable NAV = (a) – (b) = Rs. 19.90
3. Returns/Growth on Mutual Funds
(a) Applicable NAV at the time of Redemption = Rs. 19.90
(b) Applicable NAV at the time of Purchase = Rs. 10.20
(c) Growth/ Returns on Investment = {(a) – (b)/(b) * 100} = 95.30%
How to choose the right mutual fund?
How to choose the right Mutual Fund scheme
Once you are comfortable with the basics, the next step is to understand your investment choices, and draw up your investment plan relevant to your requirements. Choosing your investment mix depends on factors such as your risk appetite, time horizon of your investment, your investment objectives, age, etc.
What should be kept in mind before investing in Mutual Funds ?
Mutual Fund investment decisions require consistent effort on the part of the investor. Before investing in Mutual Funds, the following steps must be given due weightage to decide on the right type of scheme:
1. Identifying the Investment Objective
2. Selecting the right Scheme Category
3. Selecting the right Mutual Fund
4. Evaluating the Portfolio
A) Identifying the Investment Objective
Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments, level of income and expenses, among many other factors. Therefore, the first step is to assess you needs. Begin by asking yourself these simple questions:
Why do I want to invest?
The probable answers could be:
"I need a regular income"
"I need to buy a house/finance a wedding"
"I need to educate my children," or
A combination of all the above
How much risk am I willing to take?
The risk-taking capacity of individuals vary depending on various factors. Based on their risk bearing capacity, investors can be classified as:
Very conservative
Conservative
Moderate
Aggressive
Very Aggressive
To ascertain your risk appetite, try out our Risk Thermometer.
What are my cash flow requirements?
For example, you may require:
A regular Cash Flow
A lumpsum after a fixed period of time for some specific need in the future
Or, you may have no need for cash, but you may want to create fixed assets for the future
B) Selecting the scheme category
The next step is to select a scheme category that matches your investment objectives:
For Capital Appreciation go for equity sectoral funds, equity diversified funds or balanced funds.
For Regular Income and Stability you should opt for income funds/MIPs
For Short-Term Parking of Funds go for liquid funds, floating rate funds, short-term funds.
For Growth and Tax Savings go for Equity-Linked Savings Schemes.
C) Selecting the right Mutual fund
Once you have a clear strategy in mind, you now have to choose which Mutual fund and scheme you want to invest in. The offer document of the scheme tells you its objectives and provides supplementary details like the track record of other schemes managed by the same Fund Manager. Some important factors to evaluate before choosing a particular Mutual Fund are:
The track record of performance over that last few years in relation to the appropriate yardstick and similar funds in the same category.
How well the Mutual Fund is organized to provide efficient, prompt and personalized service.
The degree of transparency as reflected in frequency and quality of their communications.
D) Evaluation of portfolio
Evaluation of equity fund involve analysis of risk and return, volatility, expense ratio, fund manager's style of investment, portfolio diversification, fund manager's experience. Good equity fund should provide consistent returns over a period of time. Also expense ratio should be within the prescribed limits. These days fund house charge around 2.50% as management fees.
Evaluation of bond funds involve it's assets allocation analysis, return's consistency, it's rating profile, maturity profile, and its performance over a period of time. The bond fund with ideal mix of corporate debt and gilt fund should be selected.
Once you are comfortable with the basics, the next step is to understand your investment choices, and draw up your investment plan relevant to your requirements. Choosing your investment mix depends on factors such as your risk appetite, time horizon of your investment, your investment objectives, age, etc.
What should be kept in mind before investing in Mutual Funds ?
Mutual Fund investment decisions require consistent effort on the part of the investor. Before investing in Mutual Funds, the following steps must be given due weightage to decide on the right type of scheme:
1. Identifying the Investment Objective
2. Selecting the right Scheme Category
3. Selecting the right Mutual Fund
4. Evaluating the Portfolio
A) Identifying the Investment Objective
Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments, level of income and expenses, among many other factors. Therefore, the first step is to assess you needs. Begin by asking yourself these simple questions:
Why do I want to invest?
The probable answers could be:
"I need a regular income"
"I need to buy a house/finance a wedding"
"I need to educate my children," or
A combination of all the above
How much risk am I willing to take?
The risk-taking capacity of individuals vary depending on various factors. Based on their risk bearing capacity, investors can be classified as:
Very conservative
Conservative
Moderate
Aggressive
Very Aggressive
To ascertain your risk appetite, try out our Risk Thermometer.
What are my cash flow requirements?
For example, you may require:
A regular Cash Flow
A lumpsum after a fixed period of time for some specific need in the future
Or, you may have no need for cash, but you may want to create fixed assets for the future
B) Selecting the scheme category
The next step is to select a scheme category that matches your investment objectives:
For Capital Appreciation go for equity sectoral funds, equity diversified funds or balanced funds.
For Regular Income and Stability you should opt for income funds/MIPs
For Short-Term Parking of Funds go for liquid funds, floating rate funds, short-term funds.
For Growth and Tax Savings go for Equity-Linked Savings Schemes.
C) Selecting the right Mutual fund
Once you have a clear strategy in mind, you now have to choose which Mutual fund and scheme you want to invest in. The offer document of the scheme tells you its objectives and provides supplementary details like the track record of other schemes managed by the same Fund Manager. Some important factors to evaluate before choosing a particular Mutual Fund are:
The track record of performance over that last few years in relation to the appropriate yardstick and similar funds in the same category.
How well the Mutual Fund is organized to provide efficient, prompt and personalized service.
The degree of transparency as reflected in frequency and quality of their communications.
D) Evaluation of portfolio
Evaluation of equity fund involve analysis of risk and return, volatility, expense ratio, fund manager's style of investment, portfolio diversification, fund manager's experience. Good equity fund should provide consistent returns over a period of time. Also expense ratio should be within the prescribed limits. These days fund house charge around 2.50% as management fees.
Evaluation of bond funds involve it's assets allocation analysis, return's consistency, it's rating profile, maturity profile, and its performance over a period of time. The bond fund with ideal mix of corporate debt and gilt fund should be selected.
Types of funds
There are a wide variety of Mutual Fund schemes that cater to your needs, whatever your age, financial position, risk tolerance and return expectation. Whether as the foundation of your investment program or as a supplement, Mutual Fund schemes can help you meet your financial goals. The different types of Mutual Funds are as follows:
Diversified Equity Mutual Fund Scheme
A mutual fund scheme that achieves the benefits of diversification by investing in the stocks of companies across a large number of sectors. As a result, it minimizes the risk of exposure to a single company or sector.
Sectoral Equity Mutual Fund Scheme
A mutual fund scheme which focuses on investments in the equity of companies across a limited number of sectors -- usually one to three.
Index Funds
These funds invest in the stocks of companies, which comprise major indices such as the BSE Sensex or the S&P CNX Nifty in the same weightage as the respective indice.
Equity Linked Tax Saving Schemes (ELSS)
Mutual Fund schemes investing predominantly in equity, and offering tax deduction to investors under section 80 C of the Income Tax Act. Currently rebate u/s 80C can be availed up to a maximum investment of Rs 1,00,000. A lock-in of 3 years is mandatory.
Monthly Income Plan Scheme
A mutual fund scheme which aims at providing regular income (not necessarily monthly, don't get misled by the name) to the unitholder, usually by way of dividend, with investments predominantly in debt securities (upto 95%) of corporates and the government, to ensure regularity of returns, and having a smaller component of equity investments (5% to 15%)to ensure higher return.
Income schemes
Debt oriented schemes investing in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments.
Floating-Rate Debt Fund
A fund comprising of bonds for which the interest rate is adjusted periodically according to a predetermined formula, usually linked to an index.
Gilt Funds - These funds invest exclusively in government securities.
Balanced Funds
The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. They generally invest 40-60% in equity and debt instruments.
Fund of Funds
A Fund of Funds (FoF) is a mutual fund scheme that invests in other mutual fund schemes. Just as fund invests in stocks or bonds on your behalf, a FoF invests in other mutual fund schemes.
Diversified Equity Mutual Fund Scheme
A mutual fund scheme that achieves the benefits of diversification by investing in the stocks of companies across a large number of sectors. As a result, it minimizes the risk of exposure to a single company or sector.
Sectoral Equity Mutual Fund Scheme
A mutual fund scheme which focuses on investments in the equity of companies across a limited number of sectors -- usually one to three.
Index Funds
These funds invest in the stocks of companies, which comprise major indices such as the BSE Sensex or the S&P CNX Nifty in the same weightage as the respective indice.
Equity Linked Tax Saving Schemes (ELSS)
Mutual Fund schemes investing predominantly in equity, and offering tax deduction to investors under section 80 C of the Income Tax Act. Currently rebate u/s 80C can be availed up to a maximum investment of Rs 1,00,000. A lock-in of 3 years is mandatory.
Monthly Income Plan Scheme
A mutual fund scheme which aims at providing regular income (not necessarily monthly, don't get misled by the name) to the unitholder, usually by way of dividend, with investments predominantly in debt securities (upto 95%) of corporates and the government, to ensure regularity of returns, and having a smaller component of equity investments (5% to 15%)to ensure higher return.
Income schemes
Debt oriented schemes investing in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments.
Floating-Rate Debt Fund
A fund comprising of bonds for which the interest rate is adjusted periodically according to a predetermined formula, usually linked to an index.
Gilt Funds - These funds invest exclusively in government securities.
Balanced Funds
The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. They generally invest 40-60% in equity and debt instruments.
Fund of Funds
A Fund of Funds (FoF) is a mutual fund scheme that invests in other mutual fund schemes. Just as fund invests in stocks or bonds on your behalf, a FoF invests in other mutual fund schemes.
Why choose mutual funds?
Investing in Mutual Funds offers several benefits:
Professional expertise: Fund managers are professionals who track the market on an on-going basis. With their mix of professional qualification and market knowledge, they are better placed than the average investor to understand the markets
Diversification: Since a Mutual Fund scheme invests in number of stocks and/or debentures, the associated risks are greatly reduced.
Relatively less expensive: When compared to direct investments in the capital market, Mutual Funds cost less. This is due to savings in brokerage costs, demat costs, depository costs etc.
Liquidity: Investments in Mutual Funds are completely liquid and can be redeemed at their Net Assets Value-related price on any working day.
Transparency: You will always have access to up-to-date information on the value of your investment in addition to the complete portfolio of investments, the proportion allocated to different assets and the fund manager's investment strategy.
Flexibility: Through features such as Systematic Investment Plans, Systematic Withdrawal Plans and Dividend Investment Plans, you can systematically invest or withdraw funds according to your needs and convenience.
SEBI regulated market: All Mutual Funds are registered with SEBI and function within the provisions and regulations that protect the interests of investors. AMFI is the supervisory body of the Mutual Funds industry.
Professional expertise: Fund managers are professionals who track the market on an on-going basis. With their mix of professional qualification and market knowledge, they are better placed than the average investor to understand the markets
Diversification: Since a Mutual Fund scheme invests in number of stocks and/or debentures, the associated risks are greatly reduced.
Relatively less expensive: When compared to direct investments in the capital market, Mutual Funds cost less. This is due to savings in brokerage costs, demat costs, depository costs etc.
Liquidity: Investments in Mutual Funds are completely liquid and can be redeemed at their Net Assets Value-related price on any working day.
Transparency: You will always have access to up-to-date information on the value of your investment in addition to the complete portfolio of investments, the proportion allocated to different assets and the fund manager's investment strategy.
Flexibility: Through features such as Systematic Investment Plans, Systematic Withdrawal Plans and Dividend Investment Plans, you can systematically invest or withdraw funds according to your needs and convenience.
SEBI regulated market: All Mutual Funds are registered with SEBI and function within the provisions and regulations that protect the interests of investors. AMFI is the supervisory body of the Mutual Funds industry.
What are mutual funds?
We have been discussing about mutual funds for long time.
But its time to get strong with fundamentals of mutualfund ,
for better understanding.
Mutual Funds are among the hottest favourites with all types of investors. Investing in mutual funds ranks among one of the preferred ways of creating wealth over the long term. In fact, mutual funds represent the hands-off approach to entering the equity market. There are a wide variety of mutual funds that are viable investment avenues to meet a wide variety of financial goals. This section explains the various aspects of Mutual Funds.
But its time to get strong with fundamentals of mutualfund ,
for better understanding.
Mutual Funds are among the hottest favourites with all types of investors. Investing in mutual funds ranks among one of the preferred ways of creating wealth over the long term. In fact, mutual funds represent the hands-off approach to entering the equity market. There are a wide variety of mutual funds that are viable investment avenues to meet a wide variety of financial goals. This section explains the various aspects of Mutual Funds.
MF NAVs end with negative returns
Equity diversified NAVs continued to remain under pressure and ended lower with negative advance:decline ratio of 4:213 as markets closed deep in the red amid extreme choppiness. Both the benchmark indices --Sensex and Nifty -- slipped below their psychological 9,500 and 2,800 mark respectively. All the sectoral indices closed in the red with realty, banking, metal, capital goods, oil and gas, and power seeing heavy selling pressure.
The Sensex was down 303 points or 3.08% at 9536.33, and the Nifty down 90.20 points or 3.07% at 2848.45.
Among the equity diversified funds, the top gainers were Tata Growing Economies Infrastructure Fund - Plan A (G)
up 2.14%, Franklin Asian Equity Fund (G) up 0.69% and Escorts Growth Plan (G) up 0.39%. The top losers were JM Small & Mid-Cap Fund - Regular Plan (G) down 3.76%, LIC MF Equity Fund (G) down 3.51% and SBI Infrastructure Fund - Series I (G) down .49%.
Among the tax saving funds, the top losers were JM Equity Tax Saver Fund - Series I (G) down 4.05%, JM Tax Gain Fund (G) down 3.38% and Sundaram BNP Paribas Tax Saver (OE) (G) down 3.23%.
Among the sector funds, the top losers were Lotus India Banking Fund - Retail Plan (G) up 3.58%, JM Basic Fund (G) up 3.48% and Sundaram BNP Paribas Select Thematic Energy Opportunities Funds (G) up 3.44%.
Among the balanced funds, the only gainer was Escorts Opportunities Fund (G) up 0.41%. The top losers were Sundaram BNP Paribas Balanced Fund (G) down 2.52%, ING Balanced Portfolio (G) down 2.31% and ICICI Pru Child Care Plan - Gift Plan down 2.14%.
The Sensex was down 303 points or 3.08% at 9536.33, and the Nifty down 90.20 points or 3.07% at 2848.45.
Among the equity diversified funds, the top gainers were Tata Growing Economies Infrastructure Fund - Plan A (G)
up 2.14%, Franklin Asian Equity Fund (G) up 0.69% and Escorts Growth Plan (G) up 0.39%. The top losers were JM Small & Mid-Cap Fund - Regular Plan (G) down 3.76%, LIC MF Equity Fund (G) down 3.51% and SBI Infrastructure Fund - Series I (G) down .49%.
Among the tax saving funds, the top losers were JM Equity Tax Saver Fund - Series I (G) down 4.05%, JM Tax Gain Fund (G) down 3.38% and Sundaram BNP Paribas Tax Saver (OE) (G) down 3.23%.
Among the sector funds, the top losers were Lotus India Banking Fund - Retail Plan (G) up 3.58%, JM Basic Fund (G) up 3.48% and Sundaram BNP Paribas Select Thematic Energy Opportunities Funds (G) up 3.44%.
Among the balanced funds, the only gainer was Escorts Opportunities Fund (G) up 0.41%. The top losers were Sundaram BNP Paribas Balanced Fund (G) down 2.52%, ING Balanced Portfolio (G) down 2.31% and ICICI Pru Child Care Plan - Gift Plan down 2.14%.
Thursday, November 13, 2008
Fund-of-funds: Can it offer tailored investment solutions?
This article discusses fund-of-funds and shows how the structure adds value through manager selection process. It also discusses how such funds can offer better investment solutions and urges asset management firms to offer more such products in the future.
According to the Web site of the Association of Mutual Funds of India (AMFI), there were 1,043 funds in the country as on September 30, 2008 with assets under management totalling Rs 4,20,862 crore. With 280 equity funds and 471 debt funds, it is small wonder that investors find it difficult to choose appropriate funds to construct an optimal portfolio.
That is why fund-of-funds becomes a valuable vehicle for investors.
Paradox of choices
Fund-of-funds, prima facie, appears a redundant investment vehicle. Such funds after all take exposure to other equity and bond mutual funds — a process that can be easily replicated by investors themselves. The problem is that investors are not as competent as professional money managers at identifying style cycles and manager skill.
Suppose a person wants to invest Rs 10 lakh today to pay off a certain liability in five years. How should she construct her portfolio of mutual funds? What if she chooses an infrastructure fund when the sector is at its peak?
Selecting underperforming funds could prove disastrous because the investment will not be able to pay off the liability structure at the horizon. That is why identifying style cycles are important.
Now, take a discerning investor. Suppose she wants some exposure to large-cap value, mid-cap growth, long-term bond fund and a money market fund. As there are many funds available, the investor has to develop some criteria to choose a fund in each category.
Often, this means choosing the best performing fund in the last one, three and five years. This is not an optimal selection process because no money manager can consistently beat the market.
Manager Selection
Assume that the market has only 25 professional money managers. If five of them beat the market, it means some others underperform while the rest form the market average. The next year, these five portfolio managers may generate average returns. Later, they may grossly underperform the market.
Some of the best-performing portfolio managers in the US before 1997 underperformed the Nasdaq during the dotcom era when they failed to ride the technology cycle.
Selecting portfolio managers who have performed well in the last three years could, hence, be optimal only if their investment style is in vogue in the future as well.
And that is difficult to forecast. That is why selecting funds that can consistently generate excess returns over the benchmark index (alpha returns) is not so easy.
A fund of funds structure helps in this regard. The manager of such a fund is expected to have better manager selection skill than an average investor. She also understands style cycles and can, therefore, engage in tactical asset allocation.
This involves switching from, say, mid-caps to large-caps and from one sector to another to generate excess returns.
The additional layer of cost (MER of 0.75 per cent) that fund-of-funds charge is a compensation for adding value through the manager selection process.
Offering investment solutions?
Currently, there are not many fund-of-funds available in the market. Of the ones that are available, some invest only in their own family of funds. Such exposure may not be optimal. The reason is not far too seek.
The best performing mid-cap style, for instance, may be a fund from a competing asset management firm. Taking mid-cap exposure within the family of funds would then be sub-optimal.
But why not use fund-of-funds structure to offer investment solutions to people? This can be achieved using fund-of-funds as a conduit and single asset-class funds as the building blocks.
Take children’s education fund that some asset management firms offer. Such a fund invests in both equity and bonds and sometimes engages in tactical asset allocation.
The manager risk is high, as the portfolio manager takes exposure to both asset classes within one fund. Manager risk is the risk that the portfolio manager may underperform her style benchmark.
An optimal alternative would be to offer such exposure through the fund-of-funds structure. Such a fund could take exposure to large-cap index fund, mid-cap active fund and a gilt fund. This reduces manager risk as all managers will not underperform at the same time.
Index funds vs diversified funds - Ways to beat market
The steep decline in the equity market in 2008 has wiped out a large part of investors’ wealth, irrespective of whether they took the direct investment route or went through mutual funds. In a volatile market such as the present one, predicting short-term movements and timing the market, despite the steep corrections already witnessed, remains a challenge.
In uncertain times investing through index funds may be a better option if one prefers to go with the market tide. The one-year return clocked by the index funds is between -41.5 and - 47.5 per cent, as against BSE Sensex and S&P Nifty decline of 54.7 per cent and 54.3 per cent respectively.
Index funds are passively managed funds and mirror the index by holding the index stocks in similar proportions. Being passively managed, index funds have lower expenses than diversified funds. On the other hand, active calls taken by diversified funds can work against them in unpredictable markets in the short-term, resulting in higher declines.
Diversified fund managers tend to take aggressive or contrarian strategies to outpace their respective benchmarks. Over bullish phases an active fund manager seeks to score a high beta over the benchmark, while also generating consistently superior risk-adjusted returns (called alpha) over the long term.
Over three- and five-year periods, diversified funds outpaced the index funds by a huge margin. Magnum Contra, an open-ended diversified fund with a good track record, generated a compounded annualised return of 31 per cent over five-year period and outpaced the HDFC Index Fund Sensex Plus Plan by 16 percentage points. However, these funds have outpaced the benchmark BSE Sensex and S& P CNX Nifty over the same time-frame.
Selecting an index fund requires less effort than choosing a diversified fund. An individual can choose a Sensex or Nifty fund based on his/her risk appetite. However, in diversified funds one has to look out for various aspects such as the fund’s long-term track record, investment style and objectives, along with the fund manager’s ability to produce positive alpha.
RBI aid puts mutual funds on recovery road
Almost one month after the RBI stepped in to help the mutual fund industry out of its liquidity problems, it does appear that they are on the road to recovery, said mutual fund officials.
RBI had for the first time on October 14 introduced a 14-day liquidity window to provide credit to mutual funds in need. This measure has greatly helped the mutual fund industry, which is now returning to normalcy as redemption pressure has eased considerably and inflows have started to come in, said Mr A.P. Kurian, Chairman, Association of Mutual Funds in India.
The mutual fund industry has borrowed close to Rs 20,000 crore from RBI, out of which about Rs 9,000 crore has been paid back, said Mr Kurian.
While the borrowing was much less than the limits provided by RBI, the announcement of the measures was made at the most appropriate time. Else there was a possibility of three or four fund houses going bankrupt, said Mr U.K. Sinha, Chairman & Managing Director, UTI Asset Management Company.
The first liquidity measure, which was introduced on October 14, just four days ahead of the monetary policy, came as a complete surprise as far as its timing was concerned.
Woes of industry
The problem of the mutual fund industry was a mix of liquidity crunch and credit aversion. While the liquidity issues have been dealt with, the credit aversion is easing off slowly, said Mr Ramkumar K., Head-Fixed Income, Sundaram BNP Paribas Mutual.
In October, redemption requests from corporates were unusually high because of the lack of confidence and the liquidity crunch, said Mr Sinha. With the money market having dried up and banks not trusting each other, corporates felt it safer to withdraw their cash from mutual funds and park it with themselves, Mr Sinha said.
In October, no institutions, including banks, were willing to buy any papers (CDs or CPs), said Mr Badrish Kulhalli, Senior Fund Manager-Debt, Principal Pnb Asset Management Company.
While banks were not willing to lend, RBI indicated to the banks and corporates that the Government would lend support to the mutual fund industry, which helped improve the scenario, said the mangers.
The response to RBI measure was lukewarm in the first phase. Continuous dialogue and easing off of higher interest rates helped improve the issue. While banks had agreed to lend to mutual funds, the cost of borrowing was high for the funds, who in most cases do not make much money on their liquid schemes, said Mr Waqar Naqvi, CEO of Taurus Mutual Fund.
RBI’s relief measures have helped the industry considerably, to the extent that earlier while CDs were being borrowed at interest rates as high as 13-14 per cent, they are now at 10 per cent, said Mr Ramkumar.
It would have helped mutual funds better if the tenure for the liquidity window was flexible as some mutual funds were reluctant to borrow on a 14-day lock-in period and would have preferred a lesser time span, said the head of a mutual fund house.
However, the problem will be permanently addressed only when the mutual funds’ sources of funds, namely the corporate houses and investors, start investing in the usual way, said Mr Naqvi.
RBI had for the first time on October 14 introduced a 14-day liquidity window to provide credit to mutual funds in need. This measure has greatly helped the mutual fund industry, which is now returning to normalcy as redemption pressure has eased considerably and inflows have started to come in, said Mr A.P. Kurian, Chairman, Association of Mutual Funds in India.
The mutual fund industry has borrowed close to Rs 20,000 crore from RBI, out of which about Rs 9,000 crore has been paid back, said Mr Kurian.
While the borrowing was much less than the limits provided by RBI, the announcement of the measures was made at the most appropriate time. Else there was a possibility of three or four fund houses going bankrupt, said Mr U.K. Sinha, Chairman & Managing Director, UTI Asset Management Company.
The first liquidity measure, which was introduced on October 14, just four days ahead of the monetary policy, came as a complete surprise as far as its timing was concerned.
Woes of industry
The problem of the mutual fund industry was a mix of liquidity crunch and credit aversion. While the liquidity issues have been dealt with, the credit aversion is easing off slowly, said Mr Ramkumar K., Head-Fixed Income, Sundaram BNP Paribas Mutual.
In October, redemption requests from corporates were unusually high because of the lack of confidence and the liquidity crunch, said Mr Sinha. With the money market having dried up and banks not trusting each other, corporates felt it safer to withdraw their cash from mutual funds and park it with themselves, Mr Sinha said.
In October, no institutions, including banks, were willing to buy any papers (CDs or CPs), said Mr Badrish Kulhalli, Senior Fund Manager-Debt, Principal Pnb Asset Management Company.
While banks were not willing to lend, RBI indicated to the banks and corporates that the Government would lend support to the mutual fund industry, which helped improve the scenario, said the mangers.
The response to RBI measure was lukewarm in the first phase. Continuous dialogue and easing off of higher interest rates helped improve the issue. While banks had agreed to lend to mutual funds, the cost of borrowing was high for the funds, who in most cases do not make much money on their liquid schemes, said Mr Waqar Naqvi, CEO of Taurus Mutual Fund.
RBI’s relief measures have helped the industry considerably, to the extent that earlier while CDs were being borrowed at interest rates as high as 13-14 per cent, they are now at 10 per cent, said Mr Ramkumar.
It would have helped mutual funds better if the tenure for the liquidity window was flexible as some mutual funds were reluctant to borrow on a 14-day lock-in period and would have preferred a lesser time span, said the head of a mutual fund house.
However, the problem will be permanently addressed only when the mutual funds’ sources of funds, namely the corporate houses and investors, start investing in the usual way, said Mr Naqvi.
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