1. Do you have confidence in stock markets?
July 27, 2008, ET- Mumbai
The five-day rally in the stock markets that bracketed the confidence motion in the Parliament must have excited investors. But it's the dips seen during Thursday and Friday that tell us of the uncertainty that still remains.
So please keep the following in mind before finalizing between debt and equities:
The stock market's troubles are far from over. The biggest concerns – inflation and high crude prices – continue to bog world economy, despite the latter now showing a downward movement.
A big challenge for the corporate sector is high input costs and, for the tech sector, the
In this background, short-term investors should invest in debt products as they give assured returns, in doubt-digits at that. On the other hand, if – and only if – investors are prepared to wait for at least three years, they can look at equity. But they need to invest in a staggered manner.
For instance, look at daily and weekly STPs (systematic transfer plans). Here, a lump sum gets invested in a debt fund with a fixed amount getting transferred from it to an equity or balanced fund regularly.
This will allow the investor to take advantage of market volatility by spreading his exposure. STPs are also cheaper as fund houses do not charge any entry fee for the transfer. However, STPs are applicable for investments of over Rs 50K as a smaller corpus can get invested in a
Investors with a long-term view can also look at accumulating stocks in sectors such as capital goods, construction, media and entertainment. In the case of construction, the investment would be 'contrarian', as the sector has been beaten down heavily in the last few months.
Aggressive investors can also look at banking and financial services as these could get a much-needed reform boost soon. But remember that these sectors are still not free from the problem of high interest rates. In the end, it’s you who will have to decide whether you have the confidence in the potential of the stock markets.
2. Long term investors have more choice
27 Jul, 2008, 0429 hrs IST,Srikala Bhashyam , ET Bureau
Many would call it a relief rally or some could dub it a short covering, but the markets managed to stage a smart recovery during the last week and have proved that all is not so bad with the domestic markets.
Though many things haven't changed fundamentally for investors, the near-2000 point rally in a matter of less than a week, has thrown up some interesting facts. The startling revelation was the active buying of domestic investors ahead of the UPA government's trust vote. Interestingly, the same fund managers resorted to profit booking in the following trading session.
The domestic institutional investors' investment strategy is a clear indicator of the continued uncertain mood which has continued to persist due to various factors. At the international level, though gold has begun to soften down, the financial crisis in the
Though oil has stopped its upward journey, it is still way above the comfort zone for international economies. As a result, most economies are still reeling under double digit inflation.
In the case of the domestic economy, new problems seem to be replacing the old ones. While inflation is showing signs of stability (at above 11 per cent) there have been fresh fears of drought which could have a huge impact over the next couple of quarters. In this background, it would be interesting to see the performance report cards of companies which till now have managed to be as per expectations.
Going forward, the market is likely to be range-bound with the index hovering in the range of 13,000 to 14,000. While long-term investors are likely to get plenty of opportunities at regular intervals, life is likely to get tough for those with a shortterm view.
In the current market scenario, it has become difficult for traders to pick stocks with sectors having shorter (uptrend) cycles than ever. For instance, the realty sector has shown signs of recovery though not many things have changed fundamentally.
For instance, there is not much respite on the interest front and on the contrary, the rate is likely to move up further in the short term with shortterm FMPs (fixed maturity plans) offering double digit returns.
On the demand side too, investors have turned cautious with property prices ruling firm. However, one can still accumulate stocks of bigger realty companies which have a track record of timely completion.
Besides stocks, you can also park a portion of your corpus in short-term FMPs where the yield has turned attractive.
Many FMPs with three-month records are offering an indicative yield of 10 percent with many even offering roll-over options. The time has come for investors to make better use of their liquidity, particularly in the short term as this gets more tax-efficient returns.
On the fixed maturity front, action has also gone up with the corporate sector resorting to aggressive borrowing. In the case of housing finance companies, the rates are touching the double digit mark. However, investors need to be cautious with their choice of company.
3. Market forces good for contra investing
27 Jul, 2008, 0435 hrs IST,V Ramesh, ET Bureau
Many investors are worried that their portfolios are bleeding. The thought, they say, gives them sleepless nights. While on the one hand there are people who suggest that the market is at an attractive level, there are others who still fear the doom. It's true. One must remember that the very basis for a stock market to function is such diverse views. At any point, when someone thinks that a share is priced enough and sells, another person thinks that there is steam left. If all think that the price will go down, then who will buy? Likewise, if everyone thinks that the price will rise, who will sell? Thus, both the views are needed.
The question now is how will one decide the right time to buy? The saying goes 'once bitten twice shy'. So, those who have lost money will swear not to invest again or to wait till the market finds the 'bottom'. But in a bear market, finding and knowing the bottom is an art in itself. You continue to get negative news one after the other. Predicting the market's direction itself will become difficult. Is this familiar? Yes. That is the situation now and many investors would have experienced it. Just when the market gets into a positive mode, you have the inflation number, IIP number or other things staring hard and we are again in the red.
It is time to do some contra investing. You must have heard the maxim 'buy low, sell high'. It is easier said than done. But such a philosophy works very well in conjunction with a philosophy of contra investing. One may ask, "What is contra investing?" It is an approach of investing where one takes investment calls contrary to the current trend. For example, when the rupee was appreciating, stocks of information technology (IT) companies were not favoured by investors. A contra investor would buy IT stocks at such a point in time. The benefit here would have been that when the rupee depreciates, the stock's flavour will come back. That is what actually happened in the last two to three months when the whole market was crashing, the IT stocks were generally falling by only around 3-5 per cent.
Coming to the current situation, one could say that banks and financial services is a good sector for contra investing. With inflation on the rise and carrying with it the interest rate, nothing seems right for the banks. There won't be much credit off-take, deposit rates will have to be raised and the margins will get squeezed, among other things. There seems to be only bad news for this sector. Banking, being an essential part of the economy and having an established business model, probably provides a great chance for contra investing. With interest rates and inflation currently standing at record high levels, one can visualise them stabilising at some time. After this, the banking sector would benefit.
However, contra investing is not easy. It needs careful consideration and understanding of those sectors. It needs substantial amount of research, coupled with loads of conviction and courage. Besides, it is also important to take bets on sectors that have an established and good business model. As you know, going the contrary way is not easy in any aspect of life. This includes investing.
4. Why things go wrong?
Sanjeev Sinha, ECONOMICTIMES.COM
Have you lately started falling short of your investment target or having difficulty in meeting your monthly expenses? Or have you been forced to take one credit card to clear the dues of another?
If yes, you’ve got some serious financial trouble ahead, which may be because of some simple financial mistakes you must have made in the past. Surprisingly, not only common but even seasoned investors make financial mistakes, which they sometimes find difficult to rectify.
"For many aspects of financial planning, there is no going back, at least without some sort of penalty," says Harminder Garg, CFP, Financial Planning Standards Board,
The good news, however, is that it’s never too late to learn from your own mistakes or those of others.
Here are the top 10 financial mistakes people generally make:
1. Putting off financial planning
Undeniably, the biggest mistake that people make is to ignore the value of financial planning. Financial planning, in fact, requires thinking and setting of lifetime financial goals which enable one to determine the appropriate asset allocation required for oneself and one’s family.
Without a plan, people tend to try and ‘maximise’ returns in each and every investment and take on more than commensurate risks, thereby endangering the meeting of the goals which ought to have been simple to achieve in the first place.
"It’s very much like driving at 80 km per hour in a 40-kmph speed limit zone because you just don’t know how far you have to go to your destination. While there is a chance that you may reach there early, there is a possibility that you may not reach there at all," says
2. Not starting early in life
People generally think that they need not plan early. Depending upon their individual time-frame, they do not like planning for more than three weeks or three months or, rarely, three years in advance.
"Let’s imagine that we are kicking off from the centre in the football match. We need to score a goal more than the other team to win. You can’t hope that you will defend your goal for 89 minutes and then attack in the last minute and score the winning goal," says Navlakhi.
According to him, this is just like planning funds for retirement about a year before actual retirement date. Or even taking a life insurance policy a month before one’s death. No need to say that having a goal and starting early to meet that goal are absolute musts.
3. Ignoring the power of compounding
Investors often overlook the power of compounding. After all, the first lesson in even the most basic investment guide is to let the ‘magic of compound interest’ work for you.
Compounding investment earnings, in fact, can turn your small investments into a whopping sum after a period of time. Its power is so immense that your investments will multiply 30 times in 30 years, assuming a nominal return of 12% per annum. And that is being a one-time investment only.
What if you are investing every month or at least a year? No wonder even Albert Einstein called the power of compounding ‘the greatest discovery of all time’, and Benjamin Franklin described it as ‘the eighth wonder of the world’!
A majority of investors, however, still believe that big money is made by big money only.
4. Living beyond one's means
Whoever advised the world to cut its coat according to its cloth was surely not an insane person. After all, people lose more than they ever gain, simply by living large or beyond their means.
Lots of people, in fact, generally get seduced by big-debt, big-ticket luxury items, sometimes going all the way into bankruptcy. "If you spend money on non-priority assets or other things, mostly under the pressure of today’s lifestyles or driven by heavy advertisements, there is something seriously wrong with the way you manage your finances," says Kunj Bansal, senior VP, portfolio management service, Kotak Securities.
5. No rainy day fund
The need for having an emergency fund, particularly keeping some cash at home or in a bank account, has always been emphasised by investment planners.
"Even standard financial principles suggest that you should keep aside cash to cover three to six months of living expenses, which would also be able to cover most emergency expenses," says Garg.
In real life, however, very few people see the importance of keeping an emergency fund in their portfolio. Forget those who can’t afford it. It’s true even for those who heavily invest in stocks, real estate and other assets - and sometimes pay heavily for their mistake.
6. Ability to pay is ability to afford
People start living on borrowed money once they confuse their ability to pay with their ability to afford. And the availability of easy money - particularly plastic money and the growing EMI culture - fuels their dream. So if today it’s a Santro, it must be a Honda City tomorrow and a BMW the day after. Thus, "people get into plastic money’s revolving credit trap as they don’t understand that it provides them just the ability to pay, not the ability to afford," says Sunil Kakar, senior director & CFO, Max New York Life Insurance.
It’s also because they don’t assess their long-term ability to pay before taking readily-available loan.
However, paying interest as a result of failure to pay off credit card bills makes the price of the charged items a great deal more expensive, sometimes taking decades to clear the dues.
7. Inadequate insurance cover
Insurance is surely an asset because it works as a safety net in case of an unfortunate event. However, besides having no or inadequate insurance cover, people in today’s scenario are buying insurance as investment which may not be appropriate.
"Clubbing investment with insurance involves binding oneself to pay big amount of regular insurance premium, leading to a fixed liability," says Garg.
For best cover, individuals should take insurance on the basis of human life value (the quantum of money required by the family in case of death of the bread winner) with the advice of a qualified professional, if required.
8. Relying on tips
Too much relying on tips or on even educated professionals in a public forum (like TV channels) is another big error that people make. No expert can profess what every individual who is hearing the channel needs to follow.
"Beware of the glib helper who fills your head with fantasies while he fills his pockets with fees," warns Warren Buffett, world’s greatest investor.
"You should, therefore, never invest on recommendations alone. Instead, always has proper analysis before investing," advises Sameer Bhargava, regional VP, north, Principal PNB Asset Management Company. If you are unable to do that, you can take the help of a qualified financial planner.
9. Putting all eggs in one basket
Instead of putting all your eggs in one basket (which means that a major part of the portfolio is invested in a single or same type of financial instrument which increases risks, resulting in high losses/ profits), you should always try to diversify your portfolio as possible.
This way you could earn optimum returns with minimum risk - a strategy not commonly followed by investors. Investment portfolio, however, should be diversified in accordance to one’s risk appetite.
10. Having Unrealistic Expectations
There’s nothing wrong with hoping for the ‘best’ from your investments, but you could be heading for trouble if your financial goals are based on unrealistic assumptions.
For instance, if your property prices more than doubled during 2004-2007, it doesn’t mean that you should expect 30% annual return from real estate in future also. The bursting of stock market bubbles is a case in point.
Therefore, when Warren Buffett says that earning more than 12% in stock is pure dumb luck and you laugh at it, you’re surely in for trouble!
5. Are the markets out of the woods?
27 Jul, 2008, 1530 hrs IST, ET Bureau
The domestic stock markets had a great rally last week after the government won the trust vote in the parliament, as it kindled hopes for a revival of stalled economic reforms. For the first time in four years the government has the freedom to push through its reforms agenda.
Traders felt the government may now try to push through banking, insurance and pension reforms such as easing foreign investment limits and allowing higher private participation.
So the stock market gave its vote of confidence in favour of the government in the form of an 850-point rally. The markets had more reasons to cheer. Further good news came in as oil prices fell sharply on Wednesday on the fears of waning energy demand.
In fact, this rally was very much on the cards from the last week because of a sharp sell-off in crude. Rising crude oil prices was the biggest bugbear for the stock markets - such that the slightest indication of weakening crude prices led to a sharp rally in equity markets globally.
Will the rally continue?
The question on everybody's minds is whether this rally indicates the resumption of bull markets and the days of sharp declines are over. The scenario looks temptingly so. With crude prices falling and reforms on the anvil the picture seems rosy enough for the rally to sustain.
Uncertainty about the government is out of the way. The all-important crude is cooling off. Reforms could be accelerated. Indeed the negatives are slowly fading away. But it may not be so.
The government's new partners are such a diverse group with different ideological thinking that pushing through reforms may not be so easy. Further, the basic problems like the deficits; high commodity prices and food crisis are continuing to stoke inflation.
Concerns remain
While the oil prices have come down from their highs and provided some sort of relief to markets around the world, the food crisis just refuses to go away. According to the United Nations Food and Agriculture Organisation, the rising prices of basic foodstuffs have pushed 50 mn more people into poverty and this number is likely to go up to 100 mn.
According to the World Bank, grain prices have more than doubled since January 2006, with over 60 per cent of the rise in food prices occurring since January 2008. Rice prices more than tripled between January and May 2008, with a slight price reduction in June.
So far,
The markets have, to some extent, factored in crude prices, inflation, and slowdown, but most estimates of GDP have been based on a normal monsoon. Hence, any change in the monsoon's behaviour could be negative for the stock markets.
Currently, we are in the amidst of a strong rally which may last for some time. In fact, each rally looks like a genuine rally and the start of a new bull market. But sharp rallies sometimes do not sustain, indicating that markets are not out of the woods yet.
Hence, it could be too premature to assume that this is the turning point in the markets. The inflation rate is way above the comfort zone of regulators.
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