Why should we welcome the stock market crash

Economics assumes that human beings are rational. But human reactions to stock market movements are utterly irrational. When markets rise, everybody cheers. When markets crash — as has been the case for two weeks — everybody moans. A hunt for culprits often ensues. No such hunt is ever announced when the markets are rising. In past scams, when manipulators like Harshad Mehta and Ketan Parekh sent share prices through the roof, they were hailed as geniuses and became celebrities. Some market experts cautioned that the markets had shot up to insane levels. But this plea for sanity was widely dismissed as stupid, and ordinary housewives and college kids bought frenziedly in the belief that share prices could only go up.

However, when the markets inevitably fell, the hero-manipulators were suddenly denounced as villains. They were accused of the dreadful sin of rigging markets, and thus misleading small investors. Ironically, no investor complained as long as the manipulators rigged prices upward.

The complaints began only when the manipulators were unable to rig markets any more, and prices crashed. Truth be told, the real public complaint against Harshad Mehta and Ketan Parekh was not that they manipulated prices upward, but that they failed to manipulate it upward forever. For that, this could not be forgiven. The underlying assumption of small investors is that share prices should rise forever. Now, if the price of rice, sugar or petrol rose forever, the small investor would complain bitterly. Yet he seems to think it perfectly fair that share prices should go up forever, and very unfair if share prices crash. How greedy and hypocritical humans are! Consider the current moaning over the stock market crash. The fall of the sensex from 12,624 to 10,400 represents a sharp 20% decline within two weeks. But few people seem to remember that sensex was at just 9,390 at the start of 2006. So, even after the crash last Monday, the sensex was still up 10.5% since the start of the year. No bonds or fixed deposits could give such a high return within five months. This point escapes the CPI(M), which sees the market crash as reason enough to stop pension funds from investing in equities.

Remember that the sensex was around 5,000 during the last general election in 2004. It then slumped to 4,282 on panic selling. From that low point, the sensex tripled in two years to 12,624 on May 10, 2006. That has been a bonanza, fuelling speculative frenzy. So, the 20% correction is to be welcomed. Stock market valuations remained stretched by historical standards, though not by developed market standards. If the sensex falls all the way to the 9.390 level at the start of the year, the market would still have yielded enormous gains to investors since 2004. The long run prospects of the economy are excellent. So, some investor exuberance is understandable. Yet such exuberance needs to be tempered by sharp corrections from time to time. This sends the valuable message that exuberance is no substitute for judgement. Human beings quote many aphorisms that they seem to forget when they enter the stock market. All that glitters is not gold. Don’t be penny-wise and pound-foolish. Look before you leap. There is no such thing as a free lunch. Better safe than sorry. A fool and his money are soon parted. All who invest in markets must remember these aphorisms. Risk and reward go together. If there were no risk, there would be no market reward. Share prices represent subjective judgements of the day, so bouts of euphoria and depression will necessarily drive share prices up and down.

Marxists find this terrible. They deplore “casino capitalism”, and lambaste foreign institutional investors (FIIs). Marxists cannot bear to acknowledge that FII pressure has sparked capital market reforms that have made Indian markets among the best in the developing world, far ahead of China or South Korea. FIIs were earlier reluctant to invest in a market where one-tenth of all paper share certificates were forged, settlements were delayed for months on end, and thin turnover facilitated rigging by big brokers (and by companies before every public issue). But after capital market reforms, FIIs have flooded in. They have invested in all emerging markets, but disproportionately more in India. They have favoured companies with good governance and transparent accounting, rewarding these traits for the first time (earlier, the ability to rig markets was rewarded most). Stock market reforms and FII inflows have hugely improved the ability of Indian companies to raise equity finance for expansion. This has reduced their dependence on debt, thus reducing interest rates as well as over-leveraged balance sheets. The CPI(M) can see none of this. It believes only that foreign devils are making millions and paying no tax. So it demands a capital gains tax and an end to the Mauritius treaty that has been used as a tax loophole by FIIs. The CPI(M) seems unaware that Mr P Chidambaram is in fact taxing dividends and capital gains in ways that have made the Mauritius loophole irrelevant, and so ensured that FIIs are indeed taxed. Dividend tax is now paid by companies rather than recipients; so FIIs cannot avoid it. A transactions turnover tax is being collected in lieu of capital gains tax. This brings all investors including FIIs into the tax net, and the Mauritius route has been rendered irrelevant. Domestic crooks used to avoid capital gains tax through benami small accounts, but now cannot escape the transactions tax. Thus Mr Chidambaram has ended tax avoidance and evasion, brought FIIs and Indian crooks into the tax net indirectly, and created a level tax playing field between domestic and foreign investors.

That is a considerable achievement. So, our problem today is not untaxed FIIs. It is the notion that markets should rise forever. They will not, and should not. We need sharp dips, not Marxist controls, to remind investors from time to time that stock markets have risks as well as rewards.

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'value investing' - Happy investing!

After the carnage witnessed on the first trading session of the week, the markets displayed immense volatility yesterday, yet managing to close in the positive. The pressure was triggered by apprehensions regarding the Fed continuing with its stance of raising rates, which could have a restrictive effect on global economic growth.
This makes us reaffirm our belief that investing is a long-term game that requires not only skills but also patience. The factor, which separates investing from speculation, is the well thought out planned approach for deploying funds which speculation lacks. Speculation is about maximizing your return in the shortest time (though undertaking high levels of risk), while investing is all about garnering adequate returns from a well thought out investment strategy.
Various investment styles have been popularized to beat the street in the past. One of the most popular styles, which date long back, is 'value investing'. Benjamin Graham, the father of investing, popularized this style of investing, which is the method of picking up undervalued stocks and holding them over a long-term. The value of the stock is worth the future cash flows (that can be taken out of business) discounted to the present value. Simply put, value investing means (attempting) to buy 'something' for less than it is real worth.
Parameters of value stock selectionGood value means buying of shares of companies, which have low price earnings ratio, high asset backing, high dividend yield, robust business model and clear and visionary business mission. The management creates value through its policies. Thus, value investing dwells into all aspects of business and tries to visualize the impact of business policies on the earning potential of the firm.
Value investors also look for bargain prices (priced low for temporary or irrational reasons, under-priced in relation to the company's potential). According to Benjamin Graham, value investing consists of patience, common sense and in-depth analysis of published information. It also involves contrarian investing, which says - 'hunting when hunters have left.' Value investors look at margin of safety. They look at buying stocks at maximum discount possible on their intrinsic value. Though the subject of intrinsic value is a matter of subjectivity. Value investing involves separating emotions from investing and investing on a common-sense basis. The investors following value investing ignore market sentiment, short-term swings and other factors affecting stock prices.
Thus in conclusion, you, as an investor, need to compare intrinsic value of the company as a whole to its current market capitalization. Success will, however, depend on skill in accurately determining the intrinsic value. It can also be said that to be a good value investor, one needs to harness the qualities of a contrarian investor, a patient investor, a rational investor, an analytical investor, and above all, a long-term investor.

The fact that the Indian stock markets, and for that matter even the global markets, have had a very volatile week is not a news to anyone. From our perspective, falling stock markets offer significant buying opportunities for long-term investors. It is time to take a long-term call and invest.
Instead of focusing on the gainers and the losers in the last one week, in this weekly round up, we have focused on macro issues and how they will impact the stock market performance over the next two to three years. We have consciously stayed away from sounding ‘we said so’.
Random thoughts on the current trends…On Thursday, the benchmark BSE Sensex fell by over 826 points. Investors attribute the same to largely three factors.
The recent inflation report in the US and the Federal Reserve’s stand on interest rates did raise concerns among the global investing community with respect to whether there is a possibility of interest rates rising much faster. Commodities, including crude oil and gold, witnessed significant correction.
Secondly, domestic investors were ‘concerned’ about the prospects of new tax being imposed on select FII trades, which the Finance Minister later denied.
Significant unwinding of open interest position in the futures and options market.
If the proposal to tax FIIs was the reason for the Thursday fall, even after the FM clarification on the issue on the same day, what triggered the fall yesterday? We do not have answers to that and neither do the market participants. But one thing is for sure. It is time investors in India recognize the fact that global factors can have a dramatic impact on the Indian stock market performance. Till now, the increase in interest rates, including US, was sidelined with a view that the ‘India story’ was on a strong footing. Indeed, we subscribe to the India story. But we also acknowledge the fact that the investment decision of FIIs depends on their evaluation of ‘India’ and its valuation in relation to other emerging markets.
Valuation conundrum…As our subscribers are well aware, we have recommended a Sell on stocks from sectors including engineering, power and cement purely based on fundamentals. Why should a ‘X’ cement company (and that too, a regional one) trade at a EV/tonne (enterprise value per tonne) of US$ 200 when the best of cement companies in the global markets are trading between US$ 125 to US$ 150 per tonne.
Similarly, why should an engineering company trade at a price to earnings multiple of over 40 times trailing twelve months earnings when the best of the engineering companies globally are trading at less than 15 times trailing basis. Yes, growth is robust, but we do not wish to upgrade our valuation multiple just to make sure that we have a ‘BUY’ rating on a stock. But yes, we have reviewed our valuation metric and wherever it was necessary, we have upgraded/downgraded our valuation multiple to reflect the fundamental change in the sector.
We continue to believe that certain stocks from sectors are trading at rich valuations and we see downside risk outweighing the upside potential. That said, even at these levels, we do recommend our subscribers to invest in stocks from a long-term perspective, provided the valuations are justified.
Where to from here?As we mentioned in our view on the market after the Thursday fall, this decline should be taken as an opportunity to invest and build a long-term equity portfolio. Needless to say that the equity component of the overall asset allocation should be in line with one’s risk-return profile. We would also like to remind investors that with the rise in interest rates (and prospects of further increases), debt is becoming attractive.
Therefore, we suggest investors to invest in short-term fixed deposits or floating rate funds that further invest in shorter duration government securities. Overall, you, as a retail investor, should not shy away from equities given the recent decline in the stock market. Invest in good companies with a sound business models (i.e. ability to ride through cycles) from a two to three year perspective and one need not worry about the day-to-day market movements. Happy investing!

MF investing in these testing times

Over the last two years, the world of money has changed for Indians. Interest rates have come down dramatically. Borrowers have become more powerful than ever before, with plenty of lenders slugging it out for their attention. For investors, however, the choices have become fewer. Investment options such as the 8% Reserve Bank of India (RBI) bond have died. Bank fixed deposits, the most preferred investment for decades, have lost their sheen. Stock market has boomed all right, but the risks have increased too.

In this scenario, one investment choice stands out—the mutual fund. Mutual funds offer everything an investor looks for: easy availability, risk containment, liquidity, transparency, professional management and decent returns. What’s more, you don’t need millions to invest in a mutual fund. Standard Chartered Mutual Fund, for example, allows investors to start with just Rs 500! Investors seem to have accepted the importance of mutual funds; for many, they now constitute the most important part of their portfolios.

Which is the right fund for you?
Mutual funds suit all classes of investors. You may choose a fund depending how much risk you are willing to take and when you want the money back. Go for an equity fund if you don’t mind a little higher risk. If you are slightly risk-averse, prefer a balanced fund, which invests in stocks only up to 60-70%. If you are largely risk-averse, stick to debt funds. Have very little appetite for risks? Choose liquid funds like Cash Funds or short term floating rate funds. You may also choose funds based on when you want your funds back. Look at a cash fund if you need the money in a few weeks. A short-term bond fund would just be fine for you if you expect a return in three to six months. An income fund or an equity fund would fit in if you can afford to leave it with the fund manager for over a year.

Even within each category, you can pick and choose. In equity funds, for example, you have a variety of options: blue chip funds, mid-cap funds, contrarian funds, opportunity funds, dividend yield funds, sectoral funds that invest specifically in select business segments etc. Equity-linked savings schemes allow you to reap tax gains up to Rs 1 lakh a year.
You may want to invest but may not have a large corpus right now. Not to worry. Stash away a little every month. Many equity funds offer the option of systematic investment plan (SIP) that allows you to invest a certain sum every month or every quarter. This way, you not only discipline your investments but to a great extent can protect yourself against the vagaries of the market. Debt funds don’t lack lustre either. Choose among medium term debt funds, short-term bond funds, floating rate funds, dynamic bond funds and cash funds. If you want an aggressive debt fund, then go for gilt funds. If you prefer a mix of both equity and debt, MIPs or balanced funds would do just fine.

Transparency
A mutual fund is nothing more than a collective savings pool. Several investors have come together to invest in stocks, bonds or in both. That is all. However, mutual funds are strictly regulated. They have to declare their portfolios from time to time. Almost all the funds declare their portfolios every month. The net asset value (NAVs) of a fund, which points to how much a unit of the fund is worth on a particular day, is declared every working day. You know where your money is going and how it is doing.

Availability
A few years ago, even if you wanted to buy a mutual fund, it was not easy. Few distributors, most of them small, sold mutual funds. The quality of their advice often left a lot to be desired. But today, you could buy mutual funds in over 60 cities or towns, either through their own offices or through banks. All private sector banks now sell mutual funds across the counters in most branches. Some public sector banks too have begun marketing mutual funds through select branches. As for advice, only a person who has qualified in a rigorous test conducted by the Association of Mutual Funds of India (AMFI) can now sell mutual funds.
Professional Management and Customer Service
When you buy a mutual fund, you hand over the task of investing to a qualified and probably more knowledgeable fund manager who is paid for finding the right opportunities for you. As for customer service standards, mutual funds in India have been constantly raising the bar they have set for themselves. The service standards are comparable to what you will get anywhere else in the world. For example, most fund distributors will come to your residence or office and explain the product features and also collect your cheque.

If you want to sell your fund, you can do so pretty quickly too, mostly within one or two working days. There is no paperwork to fear. For example, in the case of Standard Chartered Mutual Fund’s (SCMF) income funds, the money will be credited directly into your bank account if the account is held with select banks.
In case of systematic investment plans too, you can do so with auto debits. Every month, on a day you choose, your bank account will be debited with a particular sum and specified mutual fund units available for that sum will be bought. No more hassles of issuing post-dated cheques.
Despite all these facilities, you may have myriad doubts and queries. Not to worry. Mutual funds offer toll-free lines at over 200 locations. For example, on the SCMF call-free telephone line, you can get to know valuations, order for account statements and even redeem your investments without any personal identification number.

Conclusion
Mutual funds tower over other investment choices. If past collection figures are a testimony, investors seem to have realized this. Most public offerings of mutual funds have collected in excess of Rs 500 crore from thousands of investors.

To sum up, mutual funds offer you a large menu of choices. Pick a fund based on how much risk you can digest and how long you can wait for returns. Do your homework and shun false expectations - you will not get fabulous returns overnight from equity funds or even income funds. Both require time to fetch decent returns, and you need to be patient. And remember, your job does not end after buying a fund. Keep a watch on what the fund manager is doing with your monies. Check if your investments are in line with your goals.

Great readings on MF from MC

Risk a little and Gain a whole lot - A calculated risk can go a long way in enhancing your profits

The inside track to profiting in the long term - The best way to assure returns is to pick a fundamental stock well and be in it for the long haul as the Equity markets are tricky

Foolproof strategies to maximize your profits - If you are looking to increase your returns from the buoyant equity market, watch out for some clear tips on the best way to profit from mutual funds

Investing situations that cause Panic - Illogical, split second, decisions can radically reduce your profits, read for a responsible solution to most calamities

The smart guide to picking the best MF - MF investments are subject to market risks, please read the offer document carefully before investing

Is it time to say Goodbye to your fund - Do you understand the concept of a mutual fund

8 investment tips that can turn beginners into PROs - If you are looking to invest directly in the equity market there are some basic areas to take into consideration

7 reasons for SIP in a booming market - Systematic Investing in a Mutual Fund makes good sense especially in the booming markets

6 steps in the right direction - Better safe than sorry with your investments, insurance, taxes, wills and trusts and mortgages

5 corners of a sound Investing Strategy - Don't invest in haste

4 reasons why debt funds are smart buys - Investments in debt funds would normally not lead to a capital loss, though the holding period of the investment could prolong

Stocks are risky, but not buying them is riskier - It is no longer sufficient to 'save', the need of the day is to 'invest'

Why hybrid funds are best hedge against risks - As the Sensex inches higher, how to work towards safer investing at a reasonable price

How to earn more, even as you spend more - The more you spend the more wealth you create! Sounds like an anomaly. But in India this is becoming the norm

Some Do’s and Don’ts of investing - Planning ahead, keeps you ahead. Before you start investing here are some integral issues that you should think through in order to maximize your investments

Failproof strategies for uncertain markets - If you are looking to increase your returns from the buoyant equity market

Hidden bombs in your portfolio? Find out NOW - Your portfolio may be full of risks that can wipe out everything. Read on to check if you are guilty of any of these points

Learn how to invest in Mutual Funds - There are many who are still not sure whether to include mutual funds in their portfolio or not

The Investors biggest Dilemma - Mutual Funds or Stocks

The rich don't work for money,they make money work for them

What is the difference between making money work for you and working for money? In first case where individual makes money work for him/her, s/he becomes master of money. In second case where individual works for money, s/he becomes slave of money and money becomes his/her master. Well known fact is that money is a very good slave but extremely poor master.

How can one make money his/her slave? Simple, by regularly saving and investing. Whenever you earn, first pay yourself. Invest at least 10% of your gross income. Over a period of time your investments will grow and start generating returns. Soon you will reach a stage where return from investments are enough to take care of routine expenses. Moment you reach that stage you are on fast track. Your investment will generate return to take care of your life style and your fresh new earnings will increase your investment corpus. Now you are not working for money. Your investments are working for you. Money is your slave and you are its master. Remember one golden rule in life, earn-save-spend. People who follow this will eventually make money their slave.

There are other set of people. They first earn than spend and lastly save. They will always remain slave of money. When they earn more they spend more. If they do not earn more they probably will borrow. People who cannot control expenses and save become slave of money. They will have to keep working for money whole of their life.

In first instance people are working for themselves. Whatever they earn they save for themselves. From their savings they further generate returns for themselves. Second set of people work for others. When they spend on goods and services, shopkeepers and service providers earn profit, so they are working for them. If they borrow money, they pay interest. Interest paid by these people is income for someone else and hence they are earning for the lenders. These people even end up paying higher tax. This is because all governments give tax benefits to savers, no government gives tax benefit to spenders. Being spenders first they work for paying taxes. After paying everyone, if there is any surplus left they are able to save or should we say spend??

Another important thing rich do is to create assets. Others create liabilities. Definition of asset is different for financial planning perspective. Any cash outflow which has potential to generate returns either immediately or in distant future is an asset. Rich invest in income generating assets. On the other hand majority of people create liability. If any of your outflows are likely going to result in spending either now or in further future it is liability. For example when one invests in fixed deposit s/he will generate income by way of interest and hence it is an asset. On the other hand if one buys car, s/he is likely to further incur expenses by way of fuel, maintenance etc and hence from financial planning perspective car is a liability.

Often people struggle even after earning more or getting pay hikes is because they would have created lots of liabilities. They would continue working for all those liabilities (READ: Others.) Rich create lots of assets and make those assets work for themselves.

An investment is like sowing a seed. Initially you need to water it but soon it starts fending for itself and grow. The rich sow seeds of assets and later make the assets work for them. The others sow the seeds of liabilities and work for them.

TOP FUNDs of 2005-6

Funds that gave good returns