Investment Mistakes in MFs to Avoid During Bull Runs

One big mistake you can make when investing in a market that is scaling new highs is to invest in one of the past year’s best-performing funds.

Such funds often don’t manage to repeat their performance in subsequent years.

In every bull market, certain sectors lead the rally.

Funds top the charts by taking a heavy exposure to these sectors.

When the markets correct, these sectors often get hit hard and sometimes stay depressed for years.

The top performers of the bull run then suffer.

The Funds should not be selected based only on a single year’s performance. Look at how it has performed across different market environments and cycles. Besides its performance in a bull market, also check whether it has done a good job in protecting downside losses in falling markets.

1. Lump sum riskier than SIPs

Another mistake investors commit is to invest a lump sum during a bull run.

“With a lump sum investment, you don’t get the benefit of averaging down your cost of purchase of units when the markets correct,” says Nilesh Shah, managing director, Kotak Mutual Fund.

Even if an investor had put money in one of 2007’s top performing funds, s/he would have suffered in a big way only if s/he had made a lump sum investment.

Her/his SIP returns over five years would have been reasonably good in many of these funds.

2. No sector funds, please

Investors entering the markets during a bull run should also avoid sector funds.

In 2007, the infrastructure sector was at the forefront of the rally. The average one-year return of these funds stood at 81.45 per cent at the end of 2007.

Over the next three years, however, they gave an average return of only minus 7.68 per cent, and over five years, only minus 8.07 per cent.

“Avoid sector funds. We have seen investors lose money in technology funds in the late nineties and in real estate, infrastructure and commodity funds after 2007. These funds are far riskier than diversified equity funds,” says Rajeev Thakkar, chief investment officer, PPFAS Mutual Fund.

3. NFOs aren’t cheaper than existing funds

Investors should also avoid new fund offers, NFO.

Typically, when the markets are doing well, fund houses try to raise funds through NFOs by capitalising on investors’ bullish sentiments.

With Sebi turning stricter about permitting NFOs, not too many sector fund NFOs have hit the markets during this rally.

However, fund houses are launching closed-end funds.

Avoid them.

Stick to open-end funds where you can see the fund’s track record.

Investors entering equities now should have a long horizon.

“Invest for at least 7 to 10 years so that you have time to recover even if the markets correct,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

4. Stay diversified across asset classes, and equity segments

If you had decided on a 70:20:10 allocation to equities, fixed income and gold, don’t change it and go overweight on equities just because this asset class is outperforming currently.

Keep rebalancing at regular intervals by selling the asset class that has outperformed and investing in the classes that have underperformed.

Within equities, allocate across categories. You could, for instance, have an allocation of 70:20:10 to large-, mid- and small-cap funds.

“Have a bigger allocation to large-cap funds because these stocks tend to be more resilient. Don’t allow your allocation to mid- and small-cap funds to rise excessively as this is where valuations have turned frothy. Smaller companies also tend to suffer more during a downturn,” says Dhawan.

Balanced funds or dynamic equity funds (which reduce exposure to equities when valuations are high) can be good ideas.

Any money that investors need for, say, their child’s college education within a year, should be pulled out of equity funds and put into fixed-income instruments right away.

Source : Business Standard

 

Valuations in Indian Markets

The post below has been written by well known and highly respected Pune investor Jiten Parmar.

Many believe Indian markets are expensive. Nifty P/E is 24.

My take on this. (Mr. Jiten Parmar).

I believe we must consider the following :

1) Equity competes with the following classes for investment – Real Estate, Gold, Debt (FD, bank deposits, debt MF).

Let’s analyze each of this.

Real Estate:

This asset is in a cyclical downturn. Prices have been coming down and I don’t see that changing in the near term. Real Estate as an investment is not at all a paying asset class right now. And I see lower and lower domestic investment inflows in that.

Gold :
Fascination of gold is decreasing by the day among Indians. I definitely see lot less attraction for gold among the young Indians. Gold imports are coming down. And returns are very low, right now.

Debt :
FD rates, return on debt instruments are coming down by the day. 6-7% return barely matches inflation. So in real term you are really not making anything.

This leaves Equity as the only asset class which can give superior returns.

2) Based on above factors, we are seeing record inflows into equity domestically.

More than 5000 Cr per month coming into equities via MF SIPS apart from lumpsum investments.

LIC and other life insurance also invest a sizable amount in equity.

EPFO and NPS equity inflows have also started. These domestic inflows have really helped in stabilizing and supporting the market even in case of FII outflows.

Our dependence on FIIs has definitely come down. I don’t see domestic inflows slowing down, which will keep fueling the equity markets.

3) Fiscal health of government is also much improved. Tax compliance is bound to increase.

Merging of formal and informal economy has been fueled by Demonetization and will further gather pace with impending GST (a game changer reform).

FIIs are looking at India with renewed vigor (Mar 2017 showed record inflows).

With political stability, reform path is clear.

And a sovereign rating upgrade sooner or later is imminent. This can lead to more FII inflows.

4) Economy is bound to improve from here. Earnings are at a low and sooner or later I see them improving. Massive infra push definitely seems like happening. Many initiatives of government will bear fruit sooner or later.

So, in conclusion, I think that Indian markets may remain expensive or in fact become more expensive.

Corrections may come intermittently (and since many have big cash, will be bought into, thus protecting big downfall).

Runway seems clear at least for the next few years as far as equity is concerned.

And the supposedly expensive 24 P/E may be the new normal for sometime to come.

 

Should the Investors Go for BSE’s IPO?

Barely a month since the National Stock Exchange filed its prospectus with the markets regulator to get listed, the BSE exchange has launched its initial public offering of equity.

While the BSE’s asking valuation is reasonable, compared to peers, there are some factors that long-term investors need to consider before investing.

To begin with, its revenue growth has been rather weak at an 11 per cent compounded annual rate over FY14-16. Operating profit margin has been under pressure in the past two financial years. These have led to a fall in its earnings.

There is a high correlation of volume of transactions (which are volatile) at the exchange with its revenues, as transaction charges form a meaningful part of these.

So, if stock market sentiments take a knock, it will reflect on the exchange’s fortunes.

Importantly, the BSE has failed to compete efficiently with NSE in the equity derivatives segment.

Analysts at Religare Stock Broking note BSE’s market share in equity trading has been stagnant at 13-14 per cent in the past five years, a concern.

These issues give rise to concerns around effective execution by the company.

Additionally, BSE’s depository subsidiary, CDSL, could get listed soon, as the parent has to pare its stake in the latter to 24 per cent, from 50 per cent currently.

According to BSE’s prospectus, this will slice away a fifth of BSE’s FY16 revenue and 16 per cent of its earnings. The impact will be compensated, if only in part, by the one-time money flowing into BSE via the CDSL public issue.

Also, 29 per cent of its FY16 revenue came from non-core and volatile investment income, which lends further volatility to BSE’s financials.

Already, BSE’s net profit has fallen in the previous two years.

While increase in listing fees has fuelled its revenue in recent times, similar hikes might not accrue as it goes forward.

Investors should also note the issue comprises purely an Offer for Sale.

Hence, none of the IPO proceeds will flow into BSE.

Importantly, most of the existing shareholders are likely to book losses (in dollar terms) as they sell their holdings.

Positively, there are long-term triggers.

Given the under-penetration of India’s exchanges, there is scope to grow profitably.

BSE has recently launched an international exchange at GIFTCity near Ahmedabad and is also looking to foray into commodities trading. And, an international clearing corporation at GIFTCity.

The exchange aspires to launch innovative products, as well as enter into tie-ups with global exchanges.

Though these are in the right direction, they will bear fruit only over the coming years.

Its distribution business (mutual funds and insurance) is growing at a healthy clip but is too small in size, as of now, to make a material difference.

On the whole, right execution and profitable growth of its new venture is a pre-requisite to any improvement in prospects.

From the stock perspective, BSE’s market capitalisation, according to the IPO price, is Rs 4,400 crore.

While this is a small fraction of NSE’s reported valuation of Rs 44,500 crore that is due to the latter’s larger size, better financials and market leadership in equity transactions business.

Nevertheless, at the upper price band, BSE is valued at 21 times its FY17 annualised earning, much lower than the 25 times commanded by other listed Asian exchanges.

Back home, MCX trades at about 40 times the FY17 estimated earnings, though it is not strictly comparable to BSE or NSE. Hence, many experts believe BSE can comfortably deliver decent listing gains.

Source : Business Standard

 

Modi’s War Against Black Money: Buy Stocks, Avoid Real Estate

Some are calling it a surgical strike of a different kind. Still others, an example of Modi ‘Trump’ing over one of the biggest roadblocks in India’s path to prosperity. As the hours roll by, we are sure the surprise announcement is going to be called various names. But one thing everyone’s going to agree with is the fact that such a move is rare in Indian economic history. It was last taken by the Morarji Desai government when it had demonetised Rs 1,000, Rs 5,000 and Rs 10,000 notes in a bid to counter black money. Today, in a nationwide address, Prime Minister Modi announced that currency notes of Rs 500 and Rs 1,000 denominations will be illegal starting 12 midnight on November 8. The move is seen as a full frontal attack on the hoarding of black money. He adds… Corruption and black money is (sic) something we have fought for immediately after assuming office…There is a time when you realise that you have bring some changes in society, and this is our time to feel the same. Not surprisingly, the announcement was met with widespread shock and confusion as people try to make sense of how it will impact their transactions of all kinds. And as far as the stock markets are concerned, brace yourself for a volatile ride. Initial feelers seem to suggest that the move is extremely positive for stocks in the long run.. However, out of sheer uncertainty in the short run, investors can also run for the exits. Coming to our view, honestly, we have no idea of what the markets could do tomorrow or the day after. And we don’t care. As far as the long term outlook is concerned, there are two ways the stock markets can benefit. First, from the very improvement in fundamentals this would lead to and second, there’s a strong possibility more money moves into stocks as black money investment channels dry up. But does this mean we should go out and buy every stocks we could lay our hands on? Absolutely not. The principles of stock selection still remain the same; buying fundamentally strong companies, run by a competent management team and available at reasonable valuations. The only change we see as of now is the fortunes of a few sector as well as companies changing structurally and changing for the better. Exactly which ones would be difficult to comment at the moment. But we do expect a gradual improvement in purchasing power across the board thus leading to buoyancy in stocks related to the consumption story. Now, what about real estate, the other important asset class. The last time real estate prices in India saw a sharp correction was nearly two decades back (1997 to 2003). So almost a generation of Indians has grown up believing that realty price typically move in only one direction. Scrapping the Rs 500 and Rs 1,000 notes is not just a war on black money. It is a war on real estate prices as well. The asset class has been due for correction for long. But black money, which has been the panacea for the sector, allowed realty companies to revel in the froth. The resulting bubble had a cascading impact on home loans as well. In fact, banks are hand in glove with realty companies to keep the bubble bloating. Bank loans to commercial real estate moved up from Rs 75 billion to nearly a trillion rupees in the past six years. In our view, the withdrawal of the Rs 500 and Rs 1,000 notes will have the much needed impact real estate prices. This may mean more pain for realty companies and some banks and NBFCs in the near term. However, eventually we expect this move to be a big positive for the economy as a whole. In conclusion, taking a broad brush, big picture approach, the move to ban 500 and 1000 denomination notes is certainly a move in the right direction. Along with the GST roll out, it will certainly give a big fillip to the India growth story.

Source : 5 Minute Wrap (Equitymaster)

 

Staying Invested in Equity Mutual Funds via SIP Really Pays in the Long Run

Most equity schemes have more than doubled their NAVs in 8 years, even if they entered at the pre-Lehman crisis peak

India’s equity fund managers have done quite a job since the Lehman crisis period. Investors who’d entered at the pre-crisis peak in January of 2008, when the 30-share Sensex touched a high of 21,000, have managed decent returns.

September will mark the eighth year since Lehman Brothers went bankrupt in late 2008. This had led to a global slump in financial markets; the benchmark Sensex lost a little over 60 per cent of its value over 14 months, plunging to levels of 8,000 in March 2009.

As a result, the net asset value (NAV) of India’s equity mutual fund schemes dived, with a loss of 50-75 per cent. However, since then, these schemes have not only recovered the loss but more than doubled their pre-crisis NAVs. This is significant, as the Sensex is up only 33 per cent in absolute terms since the pre-Lehman peak, while equity schemes’ NAV have jumped a little over 100 per cent.

Prashant Jain, chief investment officer (CIO) at HDFC Mutual Fund, says: “Historically, in India, equities have displayed cycles of six to eight years. This analysis captures the performance of MFs across a cycle and, thus, can be a sound alternative to more popular trailing returns. Simply following trailing returns over the near term might not be very rewarding when the markets are in transition as they appear to be today, just like in 2008.”

The strong comeback by MF schemes shows if an investor had invested at the peak of 2008, s/he would have still emerged with a sizable chunk of money if one stayed all through the crisis times and thereafter. This further strengthens the view that time spent in the market is more important than timing the market.

Sunil Singhania, CIO-equity at Reliance MF, says: “There is merit in the active fund management space in India. Fund managers can beat the benchmarks – we have the ability and flexibility to pick stocks before markets take recognition of it. Having said that, investors can make money even if they had entered at high levels. If one believes in the India growth story, investors should not look at market levels.”

Further, even if one had started through the Systematic Investment Plan (SIP) route in January 2008, the current value of investments would have more than doubled. The majority of the largest equity schemes have done it for investors over the past eight years. For instance, since the 2008 peak, a Rs 1,000 SIP would have accumulated into a principal sum of Rs 1.04 lakh.

The value in current time would be between Rs 1.9 lakh and Rs 2.85 lakh.

Mahesh Patil, co-CIO at Birla Sun Life MF, says: “If an investor has a sufficiently long holding period, one would still make a decent return even while investing at the market crest, as India is a high growth economy. One needs to be disciplined and continue to have patience. Active fund management has generated benchmark-beating returns of four-five per cent over the long term, implying about 50 per cent additional return over the past 10 years.”

It is worth noting that as the global crisis struck India, there was a massive exodus of investors from equity MF schemes. The umber of investors’ equity folios went from 41.1 million till 29.1 mn. Those who entered late and panicked as their appetite to hold units was fragile were the biggest losers.

While, those who stayed invested emerged much wealthier. The Indian MF segment is no more a naive one. There are several schemes with a track record of over 20 years and an SIP investment of Rs 2,000 per month for two decades (about Rs 480,000 cumulatively) would have turned into a fat sum of nearly Rs 1 crore.

 

How to Maximize Benefits from your PPF Account

A typical diversified portfolio should consist of all types of asset classes and varied Investment Products. While we have often written on the importance of equity in a portfolio to beat inflation and create wealth, we have never stated that it must be the only asset class in your portfolio.

The Public Provident Fund, or PPF, is the perfect example of an investment every individual must consider.

Under the safety umbrella, no other instrument can match this one.

For one, the investment is perfectly and absolutely safe since it is backed by the central government. In other words, it offers the highest level of security one can get on any investment.

Not only is the capital protected, but even the return is guaranteed, though flexible. The annual returns were initially fixed at 12 per cent and in 2000 got lowered to 11 per cent. Since then it dropped gradually to 8 per cent and over the past few years has fluctuated between 8.6-8.8 per cent because they are reset every financial year. Going ahead, it will be done quarterly.

So while the return fluctuates, it is still assured.

Not only does such an investment offer stability to a portfolio, but it even offers a tax break.

Investments in PPF are entitled to a tax exemption up to Rs 1,50,000 p.a. What’s more, even the interest earned is tax free. The interest is added to the principal investment and compounded, and the accumulated amount is also exempt from tax on maturity.

You cannot get any other fixed return investment with such a benefit — tax-free interest combined with a tax break.

Here’s how to get the best out of it

The range of investment is fairly wide. The minimum investment is Rs 500 per annum and it can go up to a maximum Rs 1.50 lakh, which is the limit under Section 80C. The amount does not have to be invested at one go but can be done over maximum 12 installments in a year. If you struggle with cash flows, this aspect takes care of it.

However, if you do have the money to spare, it would make sense to invest it at one go at the start of the financial year. That’s because while the interest is only added to the account at the end of the financial year, it is calculated on a monthly basis. So if you deposit the entire amount that you wish to invest before April 5, you get the maximum gain.

The interest is calculated on the lowest balance between the fifth and the last day of the month. So to maximise your earnings, if you make multiple deposits, ensure that you do them between the 1st and 5th of the month.

What generally tends to put investors off is the long tenure of the PPF account. The PPF account has to be held for 15 years, and then can be extended in blocks of 5 years. However, the 15 years are calculated from the end of the year in which the initial subscription was made. In reality that translates to 16 years.

However, this can work to the investor’s benefit as a smart savings tool. The money is locked in — which makes it an excellent long-term savings tool, you get a tax break, the interest-free return is compounded annually and not taxed. This is a great way to accumulate money for a goal.

For instance, if you are 30 years old when you open an account, on maturity the money could come in handy for your child’s higher education. If you are viewing it as a retirement kitty, then on maturity, extend it by a 5-year block. Or, if you and your spouse are each managing your own PPF accounts, one account can be used for retirement savings, the other for another goal — such as child’s education or marriage.

Don’t let mobility hinder you

Individuals can open a PPF account at any branch of State Bank of India, its associated banks, certain nationalised banks, and the post office. If shifting residence, intra city or to another city, the account can be transferred to a bank or ‘account office’ that the account holder chooses.

If an individual attains the non-resident Indian, or NRI, status after the account has been opened and is functional, he can continue with the account till maturity (though the money cannot be repatriated).

Edited Article – Courtesy : rediff.com

 

9 Mistakes First-Time Investors Make

Investing in the stock market is no easy game. Many enter with high hopes, only to find themselves crushed and broke after a few months of trading. That is the harsh reality for would-be investors who do  not exercise caution, and who do not strive to find knowledge and understanding before they pump their money into the first “hot” share.
There is money to be made in the stock market, but competition is strong and fierce, and experienced traders have been learning the tricks of the trade for a long time. First-time stock market investors often enter this strange world of numbers with false expectations and ideals that ultimately lead them towards common mistakes.
Those who are new to the world of the stock market would do well to learn from these errors before they find themselves astray. Here are nine mistakes that first-time stock market investors frequently make:

1. Not Having A Plan
 
Successful stock market investors have a solid plan, and they stick to it. Newbie investors on the other hand tend to go in blind, like a boat without a compass, and therefore get lost and stranded at sea.
A personal investment plan helps you to map your goals and objectives, your entry and exit points, the amount of capital you will invest in a certain trade, any potential risks, the maximum amount you are willing to lose, and your plans to diversify your portfolio. With these details you will be able to invest with purpose, according to and against your own principles. New investors who make a plan may also struggle to stick to it, and change their course whenever the market dips, or whenever an investment doesn’t go exactly as they expected. Sticking to your plan will help you to navigate the stock market even when times are tough. Not having one can cause you to flail out and make emotional decisions that are detrimental to your aims

2. Playing The Guessing Game
 
Playing the guessing game with your stock market investments is exactly the same as gambling. It is your ability to work with stock market data and other relevant channels of information that distinguishes the two.
A real investment is not made on speculation, or on the basis of a rumor that you heard, but on a valuable opportunity that you have researched, and which looks like it will pay enough long term profits to justify the risk.New stock market investors tend not to do their homework very well, or at all. You should never take a stab in the dark with the stock market; you may as well play roulette. Instead, try to gather and monitor enough data that you can start to make informed decisions about where you will invest your money.
Do your homework, stick to the plan, and your investments just might pay off.

3. Not Understanding Risk.
 
Every investment comes with a certain amount of risk. That is the nature of the stock market, and of all investments. Newcomers often don’t properly evaluate the risk of their investments, or their own tolerance to that risk. This can cause them to make flamboyant moves with serious life savings that quickly land them in the dump.
On the other side of the coin, risk aversion can create a psychology of scared money, in which the first time investor is frightened to take an opportunity that looks lucrative because they don’t want to risk the losses.

There is a balance to be found, and it lies in knowing that every investment is a risk, and also in knowing the margins that you are willing to push.
There are safe bets out there; investment options that come with very little risk. One example is to purchase blue-chip stocks from a very well established company. There is always some risk involved, but you can be fairly confident that these stocks will rise, or that the company will pay dividends.
Investments in which you stand to gain more, generally (but not always) come with a higher amount of risk. New investors fail to think about what they stand to lose as well as what they stand to gain. Your risk tolerance will likely determine, at least to some extent, your style of investment.
4. Not Knowing How Much Is Too Much.
 
If you are new to stock market investments, and you play with only money that you are willing to invest, then you at least only stand to lose what you can afford. The single most devastating error that a first time investor can make, is to play with money that they cannot afford to lose. This is a direct ticket to complete emotional turmoil, irrational decision making, and perhaps even financial destruction.Whatever you do, only play with money that is yours. Do not take out loans to invest in stocks, especially if you are a beginner. Don’t invest your own reserves. Even experienced investors keep a liquid asset stream.

5. Short-Term Thinking.
 
Many new investors rush to make their first stock market investments. The stock market isn’t some sort of get-rich-quick playground.New investors often enter with high hopes for a steep and rapid profit, and they want to make it big with short-term investments. This makes for bad investment decisions at the best, and for many leads to nothing but a quick exit from the marketplace.More established investors have a totally different idea about what makes a short-term and a long-term investment. In their view, a long-term investment might be 20 or more years, and even when they consider an investment to be short-term they will probably be looking to stick with it for three-to-four years.
If you thought you were going to turn a quick profit in a few months then it is time to re frame your approach to time. Be in it for the long run, or don’t be in it at all. Investment is best seen as a process of long-term wealth accumulation.

6. Selling Out In A Panic.
 
If you do have a long term plan in place, and you understand that stock market movement is best understood over the course of years and not weeks and months, then you probably won’t be in much of a panic if stocks start to decline. Stocks rise and fall all of the time.
First-time investors, if they have a short-term attitude towards investments, or obsessively monitor their stocks for daily movement, can often get more than a mild case of hysteria if they spot a downward trend. This can cause them to sell out their position blindly, without properly considering whether or not they are likely to rise back up.Very short-term trends are not great indicators overall, and experienced investors may see opportunity for recovery. Whatever happens you shouldn’t panic. Now is the time to make wise, sober-minded decisions

7. Failing to Cap Losses.
 
The opposite to selling out in a blind panic, but just as damaging when the tides are against you, is to hold on to a losing stock even when market indicators suggest that the share is unlikely to pick up again. Did you see the keyword there? “Market indicators.” This is what an experienced investor uses to decide whether a downward trend is just a temporary blip, or whether it is a long-term loser.
Experienced investors cap their losses, and move onto the next investment idea. When a share is depreciating, knowing when to cut your losses is essential.

8. Failing to Diversify Investments.
 
This really is a huge mistake that a lot of first time investors tend to make. It is never clever to put all of your money in one investment, or even one type of investment. Markets can crash, and stocks for a single company can go down the drain. If your whole investment strategy revolves around one company, or even one industry, then a single movement could cause you huge trouble.
More savvy investors tend to diversify their investments across several industries and sectors, and have a portfolio that involves stocks in a variety of different companies.Investors who feel intimidated with the market can reduce their risk and increase their diversity by investing some of their money in mutual funds and index funds, as well as making their own choices in a diverse way. It is also useful to keep assets outside of the stock market; keep some money separate, and invest in hard assets such as gold to diversify even further.

9. Investing In Alluring Stocks.
 
First-time investors, if they are not making their decisions based on the proper information and stock market data, often do so based on what looks like a good deal. The problem with this is, those which look good at first glance, are not often the most lucrative investment opportunities.
Many new investors think that a low stock price makes for a great opportunity, but this is not necessarily true. Value is key, not price. Sometimes high priced stocks offer a high potential for return, and low priced stocks can be worthless investments.
Following the herd is another mistake, and can lead new investors into paying too much for a “hot” stock that will not hold its value in the long term.

Courtesy : http://www.thestreet.com

 

5 Most Prudent things to do when the Stock Markets are Down!

It is prudent to do a few things that can really benefit you in this market.

1. Don’t exit at a loss: Experts say long-term investors don’t really need to panic.

When the Sensex crashed to 8,160 in March 2009 due to global economic crisis, it was back to 14,300-level two months later in May – a recovery of 75 per cent. Within seven months, it touched 17,300-level, or 112 per cent.

It has been observed that in stock markets, the longer the correction, bigger is the upside,

Sitting out after losing money is the biggest mistake an investor can do, even for a short period.

Between October 27, 2009 and November 4, 2009, the market went up 24.93 per cent.

More recently, in September 2013, the market rose 9.67 per cent within eight trading sessions.

2. Buy more: A correcting market is a great opportunity to buy or even start a systematic investment plan.

Individuals can use the spare cash to invest in the market in a staggered manner. Those already in the market for three years would be sitting on a profit.

The market is up by about 25 per cent since January 2013. The investors should continue their investments as usual, especially if they are investing via systematic investment plans.

You can also increase the SIP amount slightly depending on your cash flows.

If you are investing in equities directly, go for companies that you are comfortable with and whose business you understand.

According to investment experts, amidst global bad news, there are still many positives for the Indian economy.

3. Make changes to portfolio: The current situation presents an opportunity to investors to realign their portfolio and move to sectors which promise better growth opportunities.

Some analysts have advised investors to avoid small and mid cap stocks unless they find one that has high competitive advantage in its sector and also a healthy balance sheet and good Management.

4. Follow asset allocation strategy : Financial planners say the best thing to do in a falling market is follow the asset allocation strategy.

Say, your portfolio comprises 70 per cent equity and 30 per cent debt. Keep a margin of five to 10 per cent for each asset.

So, if equity allocation goes below 60 per cent, replenish your asset allocation to maintain the balance.

This will automatically tell you when to book profits and when to pour more money into an asset.

5. Keep ready cash: It is prudent to keep around 30 per cent of portfolio in cash or liquid funds.

Cash gives you the flexibility to invest on dips or can be used for investment opportunity that is open for a very short period. It also lowers the risk in your portfolio.

Even mutual funds sit on some cash when markets undergo correction for an extended period and deploy them slowly over time.

Whatever changes you make, do keep tax liabilities and your future goals in mind.

 

 

 

Capitulation in Small & Mid Cap Stocks – What to Do?

If you have invested in small & mid caps in 2015 or early this year, you might be worried by looking at your portfolio in red with significant losses by now. Worst hit so far is the small cap index which has lost almost 15% in last 15 days and carnage may continue going forward as per most of the analysts.

Why not? We have seen many of the micro, small and mid cap companies giving returns in the range of 100% to 500% or more in last 1 to 2 years. If stock prices goes down by 20% or 30%, we must accept it as a normal correction. Yes, intensity of falling prices can hurt our sentiments, stock prices during such severe correction fall like a knife and make us fearful giving rise to emotional selling.

At this crucial juncture, you must have patience and start accumulating small and mid cap companies with strong fundamentals in your portfolio during ongoing market correction. Following the crowd in the stock market can lead to disaster if you’re not careful. Panic buying or selling can push stock prices beyond reason.

The crowd-following problem seems worse when the markets are down and the mood is pessimistic, people tend to sell even if there is no specific reason to let go of an individual stock. Avoid doing so and hold on your nerves, buying high and selling low will convert your notional losses into actual losses.

This common trading mistake costs investors dearly. When the talking heads on television and the wags in print and online begin talk of doom, many investors dump their stocks in favor of cash or other “safe” investments.

Rushing In

As soon as the same crowd gets excited about the market again, the cash investors rush back to the market and buy stocks.

The problem with this approach is that the investor is frightened out of the market when prices are depressed and lured back in when prices have rebounded. In other words, sell low, buy high.

Your best defense against a market that slumps dramatically is to have a well-diversified portfolio that contains an appropriate amount of risk for your financial condition. This alone won’t protect you when the whole market dives, however it will position you to ride out the slump and be in good position for when the market rebounds.

The thoughtful investor always asks why the price of a stock is moving before making a decision.

• Has something changed in the company?

 

• Has something changed in the company’s primary market?

 

• Has there been a negative or positive regulatory or legal change?

 

• Is there an underlying change in the economy?

These are not all the questions you should ask, some will be specific to the industry or sector, but you get the idea. When you can find nothing in the answers to questions specific to the company, you look to the market.

Is this stock dropping (or rising) because the overall market is moving dramatically in that direction? It can work both ways, although a down market seems to depress overall prices more than an up market raises overall prices.

Shopping at Discounted Price

If you are looking to add to your portfolio, consider a down market a great shopping opportunity. A thoughtful investor is going to buy on the potential of a company and if he or she can pick the stock up at a discount so much the better.

This investing approach takes some courage and confidence in your ability to distinguish between a stock price depressed by a down market and a stock that is fundamentally flawed. You also must be prepared for further declines if the market continues to slide and consider it to add more of our favourite stock picks backed by strong fundamentals and reasonable valuations.

If you have at least two to three years before you will need to begin cashing in your holdings (at or near retirement), you may be able to ride out an extended economic downturn. However, if you do your homework, you’ll find bargains in down markets that may reward you handsomely in the future.

Don’t be frightened off a stock just because the overall market is sour. If the fundamentals of a company are solid, a down market may be a great time to do some discount shopping. A fundamentally sound company will likely be on the leading edge out of an economic downturn.

And yes – mutual fund investors are advised to continue their SIPs and reap the benefit of Rupee Cost Averaging, thereby adding some more valuable units in their medium to long term portfolios during this downturn.

 

Key Mistakes In Personal Financial Planning

Financial planning today has become one of the most important aspects of life as we know it. Every single person from high ranking officials like CEOs, COOs to housewives all know that it is critical to plan their finances for a better life not just for them but for their loved ones.

Till about a decade ago, life was simple, needs and wants were few, all one needed was to get a job to raise a family and most of the needs (both short as well as long term) were met through the salary one earned and maybe a paltry / low amount of savings in fewer and simple financial products.

However, today the world has changed tremendously. Needs and wants have increased and the costs associated with them are continuing to increase year after year resulting in people beginning to understand the importance of planning for the future. This has brought to the forefront the need to start making sacrifices during the early phases of one’s professional career to work towards building that corpus for a secure and comfortable retirement many years down the line.

Economic cycles are becoming shorter and with inflation here to stay, financial instruments are getting more complex. The need for proper financial planning for one’s future to safeguard from financial worries is becoming more and more important as time goes by.

Here they go…

1. Having no set goals

Setting goals prior to financial planning is very crucial. If goals are clearly defined it becomes easy to work towards the goals since each goal has different amounts, timelines, risks associated with them and thus, diversification of a portfolio becomes important. Therefore, with the absence of clearly defined goals it becomes difficult to plan.

2. Saving post spending

One needs to save first and then start spending rather than spending and then saving as this doesn’t work. Your expenses should be accounted for after you have saved.

3. Absence of a professional advisor

It is critically important to enlist the services of a certified financial planner to create one’s portfolio as this task has become so complex with risks being so varied. Instead of trying to do this by ourselves, it is advisable to seek professional help to build towards a brighter financial tomorrow.

4. Not planning for contingencies

We may plan towards achieving various life stage goals and in doing so, it is very important to set aside a contingency fund to help us through any emergency situations that we encounter which may put our income at risk. This fund is to be used only during and for emergencies and not for expensive holidays or shopping trips or even luxury purchases.

5. Don’t forget the risks

Your goals can be impacted if you have not accounted in the risks associated. While financial planning one must not forget that things like death, disease, disability may happen to anyone at any point of time disrupting your financial strategy.

Sound financial planning takes these factors into consideration and protects you against an economic impact of the same.

6. Not accounting for inflation

While planning, while accounting for a rise on year-on-year income, we need to remember that expenses will also increase proportionately. Due to inflationary costs, savings will start to deplete at a higher rate than expected. Thus, not accounting for inflation will paint an incorrect picture with regard to progress towards financial goals.

We also need to remember that the inflation rate for healthcare services and education is significantly higher than the consumer price index based rate of inflation.

7. Not having adequate life insurance cover

Choosing a cover that sounds attractive and is lighter on the pocket but which may not cover risks to all your financial goals is the biggest mistake one can make. In the case of any eventuality, it is this cover which will help your loved ones sink or swim and save them from financial stress. Generally having an insurance cover of 10-12 times a person’s annual income is considered appropriate.

8. Not reviewing progress

If a person does all of the above then he has taken a giant step towards securing his financial future. However all of the above will come to a naught if the progress of his / her portfolio is not reviewed periodically.

At least set a couple of days every year to review how you are doing against the plan. This will give you a fair insight into the path that you are on is correct or if a few tweaks need to be made to ensure that the goals are not just met but that one gets maximum bang for their buck when it comes to return on investments.

Carefully planned finances are a giant step forward towards a healthier financial future. Committing any of the above listed mistakes will be gambling with one’s financial security. Financial planning is a systematic step by step process that can help you evaluate your financial position, goals and aspirations through a clear and well-thought out plan. The old dictum ‘failing to plan is planning to fail’, still holds true and so by planning your finances properly not only will a person have safety and security of their finances but most importantly have peace of mind.

Source : Rediff.com