The stock market has been staying below its 200-day moving average and forming lower tops and lower bottoms, confirming that it has tanked out
THE debate on whether we are in a bear market or not should be over, as it now feels and seems like a bear market, says brokerage house Morgan Stanley, in its India strategy report titled ‘How Long Will This Bear Market Last?’.
A key indicator has been the market staying below its 200-day moving average (DMA), and forming successive lower tops and lower bottoms.
In the three bear markets of the last 20 peak, Indian benchmarks have already fallen close to 40% from their record highs seen in January this year. But the moot question here, according to Morgan Stanley, is how long this bear phase will last, and not how much further prices are going to fall.
This bear market has averaged 1.3% in the 25 weeks that it has fallen since its January top—slightly higher than the average of 1.1% in the first 25 weeks of the previous three bear markets.
Morgan Stanley India economist is of the view that macro fundamentals could take 18 months to bottom out. Based on this, the bear market may have another 25-50 weeks to go, the Morgan Stanley report says, adding that the pace of fall in stock prices will decline going forward.
“The market will likely bounce back as it does in bear markets the triggers this time around could be a sanguine earnings season, benign action from the RBI and weak sentiment,” the report said. But the brokerage maintains that it will use the opportunity to book profits.
While market is betting on early elections, Morgan Stanley feels is unlikely to be the case. Even if elections take place ahead of schedule, it is unlikely to improve matters.
“Subsequent governments since the mid-90s have been broader coalitions causing the markets to sell off post elections,” the report said.
A fall in crude prices would be positive for a oil importer like India, but the reason for the softening of oil prices will be important.
“If it is led by a significant demand destruction, it may not be good news,” the Morgan Stanley report says.
The brokerage expects a delayed recovery in global risk appetite as Central Banks in developed economies are struggling to deal with slowing growth, rising inflation and fragile financial market confidence.
The report says that for the market to bottom out, retail investors have to panic, and there has to a wave of earnings downgrades.
“This is about the worst performance in more than a decade on a year-on-year basis. However, domestic households seem convinced that equities have to be bought and not sold,” says the report.
Views on oil, inflation, growth and currency (hence risk appetite) should ultimately be embedded in the long bond yield, feels Morgan Stanley.
“Eventually, long bond yields need to stop rising, or put another way, the market has to get confidence that the medium-term inflation rate is under control. On our residual income model, if the 10-year bond yields rise to 9.5% the Sensex fair value drops to 11380 (13% lower from here) signifying the importance of this indicator of macro fundamentals,” the report says.
The market is at fair value but may go below fair value before it bottoms out, the brokerage feels. Also the fair value itself could move down as earnings and bond yields move lower and higher respectively.
“Valuation and return dispersion need to narrow for the market to bottom out. For genuinely long-term investors, cash flows (dividends) are now available in several parts of the market at a reasonable price,” the report adds.
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Sunday, November 30, 2008
The stock market has been staying below its 200-day moving average and forming lower tops and lower bottoms, confirming that it has tanked out
Friday, November 28, 2008
If you have lost money, then have a hard look at your holdings. It is time to be patient
ULTIMATELY, you cannot really lose money in the stock market! If you have, then either you have not been in the stock market long enough or you are in the process of getting the most expensive education. In the last 15 years, I have portfolios earning about Rs 5 lakh from share dividends alone against others who started with Rs 5 lakh and today owe the broker about Rs 3 lakh.
When the markets, Sensex moved from 4,000 to 7,000 points, people thought it was a bubble and many sold out by the time it reached 12,000 points. A huge majority lost the run from 9k to 16k. Seeing their folly, many entered around 17-18k levels and in two months, saw their portfolios doubling. Greed peaked, speculation peaked and the fall shattered millions of dreams.
Is there someone sitting on profits today? The answer is a resounding yes! Here are examples. HDFC was quoting at Rs 300 in 1999 and touched about Rs 3,000 earlier this year. Today, it’s at about Rs 1400 and that too after a 1:1 bonus. Hence, the actual price being Rs 2800. ITC was at Rs 100 in 2003 and today it is at about Rs 200. L&T was at Rs 400 in 2003 and today it’s at Rs 800 and that’s after a 1:1 bonus. L&T touched about Rs 4,100 earlier this year. Sun Pharma was at Rs 200 in 2002 and today it’s at Rs 750, again after a 1:1 bonus. The Reliance group de-merger happened when Reliance was at Rs 500 and today the total value of all shares of both Reliance groups is around Rs 3,000. The list goes on…. Much of this happened in the last five years. Imagine if you were holding these shares for 10 or 15 years.
If you have lost money, then have a hard look at your holdings. It is time to be patient if you hold good companies. They will come back. If you do not have, then no point worrying about what has happened. Shift to better companies. Shift to business models that have been around successfully for decades. Shift to companies whose businesses make sense to you. For example, would you buy a real estate property where the price doubled in one year? You know it’s exorbitant and unrealistic, so why would you buy shares of such a company?
How does one handle the current situation?
Firstly, understand that inflation is an economic parameter which is dependent on many other factors such as demand and supply of goods and services, interest rates, government policies, etc. All these movements are something we have to live with.
Secondly, understand business and economic cycles. Without making things complex, all I want to submit to you is to remember the old adage — good and bad times oscillate. But you must be prepared for it.
What should you be doing now?
1) Use profits to prepay loans.
Inflation and high interest rates make loans expensive. Consider prepayments. Such prepayments should be made only from profits. And profits come from investments. Profits do not come from the savings you made in fixed deposits and similar so-called “safe” instruments.
2) Invest aggressively.
Most people think this is not the best time to invest in the stock market. The same people will return when markets touch 20,000 or more. Increase your investment budget now if you can.
3) Keep your financial goals in perspective — always!
a) If your goals are to achieve something in one-two years, avoid equity.
b) Between two-four years, consider dividing your assets between equity and debt in the ratio of 60:40 or 70:30 or similar.
c) Over four, five years’ goals can move to equity markets.
d) All the same, I am not only advocating equity investments. Find something else that has the capability of giving you returns of about 5% to 6% more than inflation and invest in that category.
The probability of getting 12% to 20% average returns over five-seven year period is highest with equity investments and this is a known fact proved across the world markets. Needless to say, patience, financial discipline and resilience will always be amply rewarded.
If you still don’t believe this, mark this day and make a fictitious investment of Rs 1 lakh in your mind into some diversified equity fund or in the index. Forget it thereafter and compare the value five years later.
Inflation, economic turbulence, adverse government policies, failures, scams and all other bad things will be there always. You need to be able to steer clear and it is only you who will be ultimately responsible for what do you for yourself, your family, for your children and their children.
Wednesday, November 26, 2008
Prime Lending Rate (PLR)
PLR or prime lending rate is a benchmark against which the lender sets his rate of interest.
Cash Reserve Ratio (CRR)
This is the portion of funds that banks have to retain with the Reserve Bank of India (RBI). When the RBI increases this percentage, the amount actually available with the commercial banks comes down. The RBI increases the CRR to draw out excessive money from the banking system and thus checks increase in prices.
This is the rate at which the RBI lends to other banks. If the RBI increases its lending rate, the ripple effect will be felt across all the other banks that will hike lending rates to continue making profits.
If banks face any shortfalls in funds they borrow from the central bank. Repo rate is the rate at which banks borrow money from the RBI. If the RBI reduces the repo rate, it will be cheaper for banks to borrow money. On the other hand, if the repo rate goes up, borrowing becomes expensive.
Reverse Repo Rate
The RBI can borrow money from the banks and offer them a lucrative rate of interest. This is called the reverse repo rate and banks will be glad to have their money with the RBI for a good interest rate as the money is safer here. When the reverese repo rate is increased, banks find it more attractive to have their money with the RBI, and hence money is drawn out of the system.
Monday, November 24, 2008
You can use the correction phases to build your portfolio with value picks.
Volatility is a basic nature of stock markets. Stock markets are driven by investor sentiments and expectations of corporate earnings. Usually, markets react sharply to negative or positive news developments.
The volatility this year is due to a negative bias. There are many factors that contribute to negative investor sentiments. For example, a persistent high inflation rate (especially the core inflation rate that is driven by basic commodities), rising commodity prices in global markets, slow down in global economy and no visible signs of improvement etc. Global investors who were pumping money into emerging markets are exiting. Large foreign investors are bearish on the global growth potential and expect the global economy to deteriorate.
Since the stock markets are in a sideway movement and not doing very well, equity funds are also not delivering good returns. In fact, most of them delivered negative performance in the last six months and many investors lost money in equities and equity-based funds. According to global stock market analysts, valuations in the domestic markets were over-stretched last year, and that is why the huge correction this year. Some analysts feel the domestic markets will remain in a sideway movement in the short to medium term - in the next six months or so.
Here are some investment options you can explore in volatile market conditions:
Debt mutual funds
Investors can look at higher portfolio allocation to debt-based funds. Debt and liquid mutual funds are offering higher returns due to the tightening of the monetary policy.
Investors willing to take a calculated risk can look at investing in balanced mutual funds. Balanced mutual funds invest a certain percentage of their total corpus in debt instruments and the remaining in equities.
Investors with a moderate to high risk appetite and long-term investment horizon - more than one year - can look at investing in blue chip stocks of select sectors.
Many blue chip stocks are trading at attractive valuations in the market. Investors can invest in these sectors based on a careful analysis.
Here are some tips to help you pick stocks with potential:
- Investment objective: Identify fundamentally-good stocks based on your investment objectives.
- Limit portfolio: Keep your portfolio limited to 6-8 stocks only. Keep your portfolio diversified with stocks from different sectors.
- Analyse before exiting: Do not panic during volatile market moves. Use these market moves to enter into your identified scrips or exit from your positions slowly and gradually. Build your portfolio slowly by accumulating stocks in small quantities at every buying opportunity - dip in the market. Don't hurry and invest your entire corpus at one go.
- Profit target: Always have profit/loss target in mind. Once the profit/loss target is achieved, analyse your investment and decide on booking profits or loss, or revising the target, based on a proper analysis. Often, investors fall into a trap by not booking profits or cutting losses once the target is achieved.
- Risk capital: Always invest your risk capital in the markets. It is not advisable to borrow to invest in the stock markets.
Sunday, November 23, 2008
It’s that time of the year when your salary is supposed to look fatter — after all, the financial year has ended. And the New Year brings cheer with pay hikes and lump sum performance bonus, if any.
- Pay off bad and ugly loan
It’s better that you pay off your ‘bad and ugly loans’ with it. These could be your high interest-paying credit card bills, personal loans or car loan. Any loan that costs above 14% should be paid off.
Never miss the wood for the trees and ensure that any investment is directed towards the ultimate financial goal, experts say. The idea is that you should see your money grow to meet your financial targets.
- Safe instruments
If you want to use the money for medium-term needs, say 3-4 years, consider safe instruments like debt. This could be debt funds or even arbitrage funds. Arbitrage funds generate fixed income by taking advantage of price differentials between the cash and the futures market.
Advise would be not to invest this bonus in aggressive instruments as this windfall is not part of regular investment plan. It’s better to park it in safe instruments, which can later be used for down payment of home loan. This would lower the overall loan amount.
- Retirement corpus
If you are above 35 years old, you could also look at adding this amount to your retirement corpus. Consider index funds or balanced funds. If you have smaller amounts like Rs 50,000 or below, you could look at PPF. That would shore up your long-term savings.
- Equity is good for long term
When you think long term, experts suggest equity. The reason being equity investments can give tremendous returns in the long term. This may be a good time to buy stocks, given that markets are looking choppy. But the bigger question is whether you want to enter the equity route via stocks or look at equity mutual funds? You should look at splitting your money over 5-6 blue chip companies. If you don’t have the expertise, then a diversified equity fund will be a safe bet.
- Park the money in liquid funds, FDs
Consider parking the money in liquid funds, fixed deposits if you require money in the near term. Liquid funds can be a good alternative as the effective tax rate would be less.
Every windfall comes with a price tag. In this case, the bonus amount will be taxed as part of your salary. How much it would exactly cost you would depend upon the tax slab. You could look at insurance, PPF or even equity-linked saving scheme, which would come under Section 80C. Even home loan could help.
The overall tax deduction on the interest component for a single borrower is Rs 1,50,000 and Rs 3 lakh in case of joint loans. Even the principal component of the loan enjoys tax rebate. So, base your decision on the post-tax return, not to mention your liquidity needs.
Friday, November 21, 2008
Most investors want to play safe in turbulent times, yet expect reasonable returns on investments. Below is the list of five themes to help you come out unscathed
DARE to bare your wisdom in the current market situation? You better shelve the idea if you have the faintest clue of the factors behind the negative sentiment. In fact, over the last six months, weak global market cues, skyrocketing commodity prices, particularly crude oil, high inflation, suspense over signing of the nuclear deal and political uncertainty have all cast a pall of gloom over the markets and made even the best laid-out investment plans go awry. And if you are a first time investor, this can’t be a more inappropriate time.
All, however, is not lost yet. Out five investment themes which may help you to beat the market blues over the next six months.
No investor likes a range-bound, highly volatile market, marked by spikes and falls at regular intervals. And if you believe industry analysts, there is no let-off in the second half as well. They hold the view that bears and bulls will continue to punch each other to gain supremacy in the capital markets over the next six months, and losing the bout, probably, will be you — the investor. Thus, it is better to go for a defensive positioning. If you wish to dabble in the stock markets, then better buy defensive sector stocks — FMCG, pharma, healthcare and information technology.
You should opt for large-cap blue-chip liquid stocks, as in a tough macro economic environment, these stocks can withstand pressures. The focus should be to identify stocks in this space which are quoting at attractive valuations, without trying to time the market.
STAY WITH CASH
If you think you don’t belong to the first category, are cautious about your investments but still you want to get the best out of the equity markets, then you should better spend the next six months piling up cash. Over the near term, markets will remain volatile due to multiple factors such as policy responses to rising inflation ahead of national elections, absence of FII flows until the global scenario improves and earnings growth moderation. Further, growing strains amongst the ruling coalition pose additional uncertainty for the markets. In this scenario, analysts think it won’t be a bad idea to stay with cash, which you can accumulate to your advantage in the long-term, particularly till the market stabilises after the general elections.
If the first two themes don’t excite you, and you are an investor who wants to enjoy the best of both equity and debt markets, then you should opt for structured products with capital protection. The advantage of investing in a capital protection product is that it allows participation in the stock markets without the accompanying worries of capital erosion. Typically, capital protection funds invest up to 20% in equity. Thus, not only your portfolio benefits from a reduced credit and interest rate risks, but also gains from the current high yields. In a nutshell, it acts as a hedge against a difficult market situation.
If you are an aggressive investor, then probably your investment outlook should be to do value picking in the stock markets. In the current market scenario, analysts believe that quality stocks across sectors will clock relatively good performance as investor focus returns to fundamentals. You should slip into the contrarian investing style, buying stocks that are currently trading below their net asset values. The recent volatility in the markets has thrown up attractive opportunities. Stock prices of various front liners at the current level seem to have already factored in lower growth prospects and look attractive.
Financial and engineering stocks are a good bet in the short-term, considering they have undergone sharp falls during the last few months. The banking sell off is overdone, and this sector remains a strong growth sector.
Last but not the least, your investment theme should be one which includes a disciplined approach to investing. Markets are expected to be cyclical and in such a scenario, analysts recommend that either you can reduce the risk of equities by increasing your holding period or invest regularly through systematic investment plans (SIPs). It is advisable to avoid momentum and concentrated bets in a range bound market. The advantage with systematic plans is that it helps to average out your investments to the ups and downs of the equity market.
Wednesday, November 19, 2008
Market Regulator SEBI Allows Repricing Of ESOP, this is due to market conditions as Exercise Price Becomes Less Than Market Price making ESOP less attractive.
THE bloodbath in the stock market has forced some firms to restructure their employee stock option programmes (ESOP) to assuage employees who are seeing a large portion of their ‘wealth’ disappear. Thanks to the market correction early this year, a number of Esop schemes have become redundant or gone “underwater”. This means the current market price of the stock has fallen below the Esop exercise price.
This is true of most firms that issued Esops over the past one-and-half years when the markets were high and bullish. There are many firms which started Esops last year, particularly those which got listed in 2007. All firms who have a vesting period of one year would either have to reprice the options or see it as a worthless option at the hand of the employee which won’t be exercised.
Employees who got Esops before the market crash at the then prevailing market prices have seen a significant erosion in the value of their options. This places them on an inequitable ground compared to employees who are getting Esops priced at currently depressed share prices, as they would get to exercise their Esops at a lower price. Companies in such a situation are considering repricing of Esops issued earlier.
So far only a handful of firms have resorted to repricing though. DTH firm Dishtv, for example, last week approved a proposal to reprice the stock options at Rs 36.10, which have already been granted but not yet exercised. In August 2007, the firm had approved its Esop Scheme 2007, where it planned to grant 30.7 lakh options to 43 employees at a price of Rs 75.2 per share. In April this year it approved the grant of 1.84 lakh options at a price of Rs 63.95. However, the current price of Rs 39.05 makes all these options redundant.
Sometimes repricing may be required if the management feels that the options were granted at a time when the valuation was unrealistically high, in which case its more of a correction exercise.
He, however, warns that repricing is a double-edged sword. If done during usual market dips, it may signal insecurity and lack of confidence in the future growth trajectory on the part of the management, which can send out wrong signals to their people. It can create wrong expectations in the minds of the employee that the firm will continue to do so whenever the prices are not favourable. This defeats the very purpose of a stock option, which is intended to reward only if the market valuations are rewarding, and is not generally meant to be guaranteed profit.
Market regulator Sebi allows repricing of options if the exercise price becomes less than the market price. Of course, options are underwater not just in India. According to New York-based compensation consultancy Steven Hall & Partners, as of June end as much as 40.3% of Fortune 500 firms’ stock options were out of money by an average of 34.5%.
Monday, November 17, 2008
MAJOR emerging market fund groups recorded outflows during the fourth week of August with EMEA (Europe, Middle-East, Africa) equity funds hit the hardest in percentage terms, according to Emerging Markets Portfolio Funds Research.
Investors pulled money out of the diversified Global Emerging Markets (GEM) Equity Funds for a fifth-straight week and extended Latin America Equity Funds’ losing run to 12 weeks and $4.1 billion. Since the second week of June, EPFR Global-tracked Emerging Market Funds have surrendered a net $23.1 billion, the note said.
Appetite for exposure to emerging markets has been eroded by a sharp correction in commodity prices during the current quarter, a string of downward revisions to economic growth forecasts and painfully high inflation rates in several key markets including Russia, India, South Africa and Argentina. Investors still have appetite for direct exposure to China, although the $175 million they committed to China equity funds was more than offset by redemptions from Asia (excluding Japan) equity funds, Greater China equity funds, India equity funds and Taiwan equity funds.
The abrupt loss of enthusiasm for Russia, fueled by state pressure on firms in “strategic sectors” and the recent incursion into Georgia, has played a role with outflows from Russia equity funds since late June exceeding $800 million, the EPFR note says. And since late June investors have pulled nearly $4 billion out of the Emerging Europe equity funds, which currently maintain a 42% weighting to Russian equities.
Among developed markets, US Equity Funds experienced outflows — for the first time in five weeks — of $2.52 billion as modest flows into Mid cap funds were more than offset by redemptions from Large cap Blend ETFs.
The two diversified fund group geared primarily to developed markets — Global and Pacific Equity Funds — recorded their third-straight week of outflows respectively. The $835 million removed from Global Equity Funds pushed year-to-date outflows from last year’s most successful fund group in terms of attracting new money to nearly $8 billion. Investors pulled out $1.23 billion from Europe equity funds during the week, and year-to-date outflows from this fund group are now within striking distance of $45 billion versus $50 billion for the much larger group of US Equity Funds, the EPFR note said.
Growth in the 15-member Euro zone is also slowing sharply as tighter credit squeezes domestic demand. Inflationary pressures, meanwhile, have prompted hawkish rhetoric from the European Central Bank.
Japan equity funds extended their losing streak to the fifth-consecutive week, with $128 million of money flowing out at the net level.
Sunday, November 16, 2008
DURING the past six months, the financial and economic scenario has undergone a sea change due to high inflation of nearly 12%, softening property prices after reaching astronomically high levels, reduction in gross domestic product (GDP) forecasts and consequent slower growth rate of the economy, political uncertainty, sub-prime financial crisis and slowdown in the US. In view of the above, let us review what investment strategies one can adopt.
The stock market is a reflection of psychology as well as earnings, dividends and asset value. The BSE Sensex is currently at 15,000 level, implying a price to-earnings (P/E) ratio of about 18 (with EPS of say Rs 850) and an earnings yield of nearly 6%. So, is this the time to buy, hold or sell stocks?
This is definitely a difficult question to answer as no one can accurately predict the future direction of stock markets. Historically, a P/E ratio of 15 for the stock market is considered fair, implying a BSE Sensex of 12,750. Although, the economy is currently expected to grow at 8% and the corporate sector is showing strong developments and profits, although it is showing some weakening trends now. Hence, an investor should start gradually investing at/ from BSE Sensex 12,750 to 15,000 level from a long-term perspective.
As for the promising sectors to invest in, retail, diversified financials, real estate, healthcare services, capital goods and telecom can offer good returns over the long-term. In India, over the last 10 years, growth stocks have outperformed value stocks, which have generated returns of 15% and 13%, respectively. Thus, a long-term investor should focus on growth stocks in the above sector.
The bond yield on 1-year, 5-year and 10-year government securities (G-secs) is currently approximately 9.46%, 9.42% and 9.41%, respectively, and on 5-year corporate bond (AAA rating), it is 10.80%.
The Reserve Bank of India (RBI) first quarter review of Annual Policy for 2008-2009 on July 29, 2008 made the following changes:
• Repo rate (the rate at which banks borrow funds from RBI) is increased by 50 basis points (bps) i.e. 0.50% with immediate effect — thus, borrowing cost of banks will rise and effectively, interest rates charged by banks have/will also increase.
• Cash reserve ratio (CRR) — the amount of funds that the banks have to keep with RBI — will be hiked by 25 bps with effect from August 30, 2008 — in effect the amount available with banks will come down as it will drain out the excessive money from the banks.
• Bank rate (rate at which banks lend money) and reverse repo rate (the rate at which banks park surplus funds with RBI) are unchanged at 6%.
Due to the inverse relationship between bond prices and interest rates, the current trend of rising interest rates have brought down the prices of bonds and consequently, the gain thereon. On account of this, the returns on medium-long-term debt funds, including MIP, have been very low over the last year.
Thus, it is advisable for investors to maintain/ invest in lower portfolio durations to minimise the impact of rate increases. In effect, investors should invest in short-term products — directly in G-secs or through mutual funds in debt mutual funds, especially fixed maturity plans.
Although banks are offering high rate of interest on fixed deposits, debt funds are most tax-efficient for investment since interest on fixed deposits are taxable at the regular rate of tax ranging from 10.30% to 33.99% while dividend on debt funds is tax-free (however the debt fund would be liable to pay tax on distributed income ranging from 14.1625% to 28.325%, depending upon the type of holder and type of debt funds) and long-term capital gain (holding period of more than 12 months) is taxable at the rate of 10% (without indexation) or 20% (with indexation).
Therefore, for an investor falling in the highest tax bracket of 33.99% planning to park funds in debt funds, for short-term investment (holding period not exceeding 1 year) dividend option and for long-term investment (holding period exceeding 1 year) growth option would be more tax-efficient.
Gold has appreciated by a whopping 35% over the last 1 year. In the long term, gold prices are expected to increase but not at double digit figures year over year. In the past month and in short term, gold prices have and can still marginally come down respectively.
Thus, investors should stay away from precious metals like gold and silver.
Property prices in India have softened in the recent 3-6 months and could get cheaper in the near term. Thus, it may be a good idea to buy prime property (commercial or residential) from a long-term perspective after carefully analysis as immovable property is not very liquid.
Friday, November 14, 2008
Inflation, is an economic concept. If you really thing about it, inflation makes the worth of money reduce.
the prices of everything goes up over time and this phenomenon is called inflation. The question is: By how much do the prices go up? At what rate do the prices do up?
The rate at which the prices of everything go up is called the "rate of inflation".
My family's monthly expense is Rs 50,000. At an inflation rate of 5 per cent, how much will I need 20 years hence with the same expenses?
The required amount can be calculated using the standard future value formula. Inflation means that over a period of time, you need more money to fund the same expense.
Formula: Required amt.=Present amt. *(1+inflation) ^no. of years
Type in: =50000*(1+5% or .05)^20 and hit enter. You will get Rs 1,32,664 as the answer, which is the required amount.
Also used for: Calculating maturity value on an investment.
Wednesday, November 12, 2008
It is advisable to start investing early in life towards a retirement plan. Here are some tips:
Retirement planning should be an essential element of everyone's financial planning. Individuals should start planning for their retirement funds as early as possible in their life. If we look at the way our society is shaping (increase in average lifespan, nuclear families etc), it becomes even more important to plan carefully so that you are totally independent in your golden years. Planning for retirement is a comprehensive process for determining how much money you will need at the time of retirement.
Some people feel that retirement planning is important when you cross 40 years of age. It then becomes difficult to build a good corpus within the next few years and eventually these people end up investing in risky investment instruments. They invest their hard-earned money in risky stocks, where the returns are generally not certain.
There are many insurance instruments available in the market that provides different flavors to people in their post-retirement life.
Many people use various insurance policies as their retirement planning tool to make life after retirement easy and pleasant. Most people invest in endowment life insurance policies. These plans invest most of their corpus in corporate bonds, G-secs and the money market instruments. They provide a safe/guaranteed return in the range of 4-7 percent. These policies provide life insurance during the active tenure and a lump sum amount at the time of maturity.
Unit-linked plans (ULIP) have been in the limelight from the last few years as the stock market was soaring. ULIP is like a mutual fund with a life cover added to it. They invest the corpus in equities as well as debt instruments and therefore promise to deliver better returns than regular endowment policies. Investments in ULIPs should be related to the individual's risk appetite. Individuals who can take higher risk (younger investors) should allocate a higher percentage of their investments to equities.
Under pension plans, an individual decides his retirement age at the time of subscribing to the policy. The investor pays a regular premium to the insurance company and the insurance company invests this money in various instruments to earn returns and build a corpus over the term of the policy. At the time of retirement, the corpus amount is converted into a monthly income (annuity) payable to the investor. The premium paid for pension policies qualifies for deduction under Section 80C of the Income Tax Act.
In addition to regular cash flows, another major postretirement concern is the expenditure on healthcare. Medical expenditure can be constant or variable in nature. There are many health insurance schemes available in the market. Many people subscribes to mediclaim policies that covers all major hospitalization expenses. Other healthcare policies available in the market include accident policies that cover death and disability of a family's breadwinner and even provide monthly pensions to the beneficiaries. Some healthcare policies cover all major diseases. In case the policyholder gets these diseases, he gets a lump sum payment in addition to periodic cash flows.
The idea here is to start planning early in life and diversity your investments (avoid relying on one source for all post-retirement needs). Investing early gives time to your investments to grow by way of compounding, and also, investors can invest in instruments with a higher risk-and-return ratio. A good retirement portfolio should have investments in mutual funds, insurance (life insurance as well as medical insurance), fixed deposits and properties.
Monday, November 10, 2008
How you can invest in stock markets outside India and some risks involved
Indian citizens had the ability to invest abroad as early as 2003. Investments in mutual funds up to $25,000 in a calendar year were allowed. Since then, the Reserve Bank of India (RBI) has raised the limit to $2,00,000. This has opened up many investment categories for Indian investors. You can invest in stocks, mutual funds, foreign currencies, real estate and insurance policies anywhere in the globe. You could also invest this amount in hedge funds, currencies and currency derivatives. So, the global markets, with its glittering array of financial products, are now just a click away.
Why invest abroad?
For some of you would are interested in equities, there are thousands of shares listed in global equity markets to choose from. But first and foremost, you must be clear on why you want invest abroad. There are many good reasons for investing in equities abroad. For example, as a risk-averse investor, you may simply wish to build a balanced, global portfolio. On the other hand, if you prefer to specialize in technology investments, you would want to buy shares listed in NASDAQ, as most of the world's leading technology companies are based in the US and quoted on the NASDAQ stock markets. Your reasons for investing abroad could be simply to get a good portfolio diversification or could be to get some alpha returns by finding undervalued or fast-growing stock markets.
How to invest
The procedure for investing in stock markets differs from country to country. To invest in the US markets, you can either go through any of the leading domestic brokers who have tie-ups with US brokerage firms or sign up with an online US broker directly. Your decision will be a function of the quantum of your investable surplus, cost, convenience and frequency of deals. For small and infrequent deals it may make sense to go through a domestic broker. Brokerage, administration charges and other fees tend to be higher abroad.
In most European countries, you usually have to open an account with a broker in the relevant country before you can trade. Japanese markets however have another added complication. You have buy equities in lot sizes of 1,000 shares or occasionally 100 shares. So, the quantum of investment required would be rather large. This makes Japanese markets rather inaccessible to the average retail investor. Some Japanese brokers do offer to deal in 'mini-stocks', i.e., multiples of one-tenth of a unit. But you have to enter into such deals only after sufficient research and caution to safeguard your investments.
Procedurally, it is very easy for you to start trading in equities abroad. You need a bank account with a branch that allows foreign remittances, and an account with a provider/domestic brokerage.
Domestic service providers have tie-ups with international equity brokers, who allow you to use their platform for trading. You have to transfer your investment corpus to your brokerage account by filling up Form A2. The money is transferred in a day or two. You can buy shares in a matter of a few clicks on your trading screen. Similarly, you can sell your investments online. You can transfer your money electronically back to your bank account.
There are some risks involved when you trade in a foreign country. You need to consider these before getting in. They are:
a) Currency risk
Investing abroad is for people who are thoroughly informed or who are very brave. Currency risk is one of the biggest minefields you encounter in international investing. You may be lucky enough to invest in a foreign share that runs up 50 percent. But if the local currency halves in value against the rupee, you will be no better off than earlier. Let's look at this with an example.
On January 1, Re 1 is equal to 1.50 Philippino pesos. You spend Rs 15,000 buying 100 shares in a Philippine brewer at 150 pesos per share. On December 1, the shares in the brewing company have doubled in value to 300 pesos. Your investment is now worth 30,000 pesos. Unfortunately, the exchange rate is now Re 1 = 0.75 pesos. Converted back to rupees, your investment is still only worth Rs.15,000.
b) Custody risk
In many countries, including India, investors get some degree of protection from frauds, bankruptcies and misdeeds of the broker with whom you have entrusted your investments. For example, under UK laws, a UK investor enjoys a high degree of protection when he places his money with an authorized UK investment firm. Any losses he suffers if the firm collapses will be made good to a maximum of £48,000. The scheme is funded by insurance contributions paid for by member firms, and ultimately backed by the government's own guarantee.
If you have such a safety net you do not have to worry constantly about whether you can trust those handling your money. Such protection may not be available in other countries or these laws do not extend to foreign investors. It is therefore possible that you may lose everything in the event of fraud, negligence or mismanagement. Reading up about investor protection norms in the country you want to invest in may go a long way in safeguarding your money.
Investing in global stock markets will be rewarding for investors who acquire in depth knowledge on the functioning of international stock markets.
Sunday, November 9, 2008
It’s more than just the money. For many emerging companies, Private Equity investors provide invaluable advice and the right perspective, when it matters most
ARBURG PINCUS’ dalliance with Bharti Tele-Ventures from 1999 to 2005 is still remembered as one of corporate India’s most famous relationships. When it ended, the international private equity giant walked away with a cool 450% return on its investment. Bharti, too, has grown since then in leaps and bounds to become India’s largest mobile network service provider. However, the saga continues to live on and many consider the deal to be India’s first truly fruitful partnership between a corporation and a private investor. Not because of the sheer volume of money the former injected into the latter back then, but also because Warburg set a new precedent in taking a company with great potential and hand-holding it all the way to success.
This deal and others like it (such as Pantaloons’ transformation assisted by ICICI Venture) helped many PE firms and financial institutions understand one simple fact; that the Indian market was not starved of funds or entrepreneurial spirit. India has and continues to produce lakhs of great entrepreneurs with amazing ideas. But they face two challenges—getting organised and attaining operational efficiency. That’s when private institutions stepped in to fill in. Capital was never a constraint here; The real need was to take a traditionally-run, unorganised business and provide professional and institutional support.
While emerging companies make a good investment proposition, financial institutions find that they sometimes lack global perspective. That is why global firms like Lehman Brothers, Apax Partners, Soros Fund Management and Baird Private Equity, apart from several others, are now taking interest in India. Many financial institutions that associate themselves with emerging companies say that more often than not, small and medium firms have good business models but lack professionalism. It’s just the lack of exposure in family-run businesses that is a barrier. Most of them are actually ready to change for the sake of growth
Take the case of DRS Logistics. Kotak Private Equity, an arm of Kotak Mahindra Bank, invested Rs 100 crore into the firm in March 2007. The Agarwal family that owns DRS Logistics was already running it but large-scale changes were necessary if the company was to become competitive differentiate itself in the highly fragmented road transport services segment. It took us seven months to get their systems and processes organised. The accounting practices followed were old and inaccurate and several statutory compliance issues had to be taken care of. There was no formal reporting hierarchy either. We had to be careful with every move. Investing in a family-owned business is tricky as personal equations come into play and you cannot afford to antagonise anybody.
Kotak helped DRS hire a new chief financial officer and other senior level functionaries. Since the books of accounts had to be practically rewritten, Deshmukh knew that plonking them in front of a ‘Big Four’ accounting firm would be of no use. Kotak brought in a smaller agency to help DRS prepare for the audit. The PE firm also went ahead and got a family business consultant to speak with the Agarwals to ensure that everyone understood their roles perfectly and there were no internal conflicts. Even the mission statement was redone. Today, the company looks completely different from what it used to be and there is an IPO happening some time in the near future.
Banks too provide financial assistance to smaller companies. Sometimes, founders of emerging companies require a professional perspective on foreign exchange or other financial problems. We do not interfere in their operations, but try to be helpful wherever necessary by bringing in expert opinions and conducting seminars for them. The company has evolved from a family-run business to a professionally run one and the credit goes to the financial institutions associated with us. The challenge is to make SME entrepreneurs understand why certain hard choices have to be made. In such cases, using financial clout where needed may be the only way out.
Thomas of IVF Advisors believes that there are three issues that financial institutions need to learn when dealing with traditionally-run firms.
The first, he says, is that many Indian entrepreneurs typically consider capital expenditure a necessary evil.
The second is that the accounting methods followed are inefficient because the value of transparency of accounts isn’t immediately evident to the businessman.
Thirdly, he says that such companies hesitate to pay managerial compensation on par with the rest of the industry. Shared control is a scary thought for a small entrepreneur. But if you don’t pay talent the rate that it would get elsewhere, you’ll always struggle to grow.
Today, the Meru radio taxis are well known among commuters in the metros. But the company started very small, and in a different segment. In 2000, Neeraj Gupta, currently managing director of the Rs 40-crore V-Link Travel Solutions (then called Travel Link) was running a fleet service for call centres. But after IVF Advisors came into the picture, the company was radically transformed. V-Link was solely into fleet management back then. But we felt that the cab business was getting lucrative as well—and that’s how VLink diversified into the Meru radio cab service. Neeraj was really enthusiastic about the idea too. The good part about working with him is that we get on really well. Neeraj is someone who really has his ear to the ground and is full of enthusiasm. So our interventions didn’t meet with much dissonance.
From a founder’s point of view, watching your business being taken care of by a surrogate parent (read PE firm) is never easy. Resistance to change isn’t uncommon and PE firms have to indulge in a fair amount of fire fighting and going beyond the call of duty. Luis Miranda, CEO of IDFC Private Equity, a firm which has, among its investees, companies like GMR Infrastructure, Gujarat Pipavav Port, Sical Logistics and Manipal Health Systems, explains, You have to spend time getting comfortable with the founders and the management team. During the initial honeymoon period, everyone’s sweet to each other, but what really counts is getting it right after that period is over. This usually occurs when the promoters believe in divulging only whatever is really necessary because they don’t truly feel that the PE firm is adding value to the company. Miranda says, You have to strike a balance. If the founder knows something better than you, let him take the decisions. If not, you have to convince him you’re acting in the company’s best interests.
When IDFC PE invested in Manipal Universal Learning, they were aware that the company had 50 years’ worth of experience in the education business, and therefore, concentrated on getting a good leadership team in place. IDFC helped them identify a CEO, an ex-IT professional from our own network of contacts. Similarly, there have been times when Miranda has had to get rid of people or stop the right people from quitting his investee organisations.
PE firms in the resurgent India of today have got a new role to play. They provide order in a chaotic world. But it is a role they aren’t averse to playing. They know that in a vast land teeming with great ideas and a huge consumer market, great entrepreneurs are waiting around every corner. All they need is a helping hand to add some polish to their dreams.
Friday, November 7, 2008
MANY of us like to believe that we have a robust financial portfolio that would take care of our future. Interestingly, the plan would work only if funding the plan is regular. What happens if the funding suddenly stops?
When it comes to investing in insurance, many of us mistreat it as a pure tax-saving tool. With the advent of ULIP and many innovative products in the market, thanks to privatisation of the industry, insurance is also being looked at as an ‘investment’ option that is expected to pay dividends/ returns, along with securing one’s future. Irrespective of our motivation to buy insurance, we often grope in the dark to determine the right approach for buying insurance products and assessing if we have an adequate insurance cover.
Life insurance has moved from protecting life to protecting lifestyle. Today, there is a choice of innovative products that meet financial needs at each of one’s life stages — be it marriage when one assumes responsibility to protect one’s family, or at the birth of a child when one assumes added responsibility towards family or when one is preparing for a comfortable retirement. Simply put, financial needs can be classified into four broad categories:
* First is protection, which ensures that if anything was to happen to you, your family continues to be financially protected and maintain the same lifestyle.
* Second need is that of saving, which means that one should be able to generate required corpus to meet responsibilities, such as higher studies of your child, buying a house, etc.
* Third need is that of retirement. With the average age of post-retirement life increasing, planning for comfortable retirement is becoming increasingly important.
* The last need is that of investment, which helps build wealth.
The first step in buying insurance is to adequately assess ones ‘needs’ — what is my life stage (age, family, etc.) and what are my responsibilities (protecting my income, children’s education and wedding, buying a house, retirement, etc.)? How much corpus will I require to meet such financial responsibilities, and how do I plan them so that even if I am not around, my family can still sail through these milestones? Often we find these to be tough questions to answer, but we must remember that they are fatal if ignored!
WHAT’S ADEQUATE COVER?
If assessing your financial need while buying insurance is important, the adequacy of insurance protection is equally critical. We are often led to think, ‘Am I adequately insured?’
Consider the example of a 35-year person, who needs to protect his family against any mishap that may happen to him. Let’s assume that his expenses are Rs 50,000 per month (Rs 6,00,000 per annum), which he/she needs to protect. In other words, his/her needs to buy a protection plan (commonly known as term life) that would, in case of his death, give a corpus which when invested, is sufficient to give his family a return of Rs 6,00,000 per annum. Assuming that the investing instrument (bank fixed deposit, mutual fund or any other such instruments) gives an annual return of 10%, then he needs to have a protection (sum assured) of a minimum of Rs 60,00,000 (6,00,000 x 100/10 = 60,00,000). In case the returns are that of 7.5%, he needs a sum-assured of 6,00,000 x 100/7.5 = Rs 80,00,000.
Clearly, if he does not have a sum assured of Rs 60,00,000 (assuming investments give a return of 10%) he is under-insured. Interestingly, there is no other instrument other than life insurance which can help he generate this corpus if he is unable to keep contributing for this desired corpus.
Additionally, if he needs to save for his/her five-year-old son’s higher education, he needs to have a saving plan in place. Various products in the market offer such saving solution, which not only saves for the need, but in case of an unfortunate death of the policy holder, offers to protect this saving and give the promised return at maturity.
Assuming that he/she needs Rs 10,00,000 for his son’s higher education when he turns 21 (16 years later), he/she needs to have a child education plan (type of insurance product) in place, which will yield a return of Rs 10,00,000 (sum assured) after 16 years. Hence, if he does not have an insurance product that has a sum assured of Rs 10,00,000, he is under-insured.
WHAT IF I AM UNDER-INSURED?
More often than not, we do not think (or do not want to think) what will happen when we are gone — especially when one has not met all life stage responsibilities. Though the family goes through the emotional trauma, financial burden leads to additional pain. One has no remedy for the emotional pain, but smart financial planning can certainly ease the financial pain.
If one is under-insured, it could lead to a slip in family’s lifestyle in case of an eventuality. The family may need to compromise on various fronts to make the ends meet. These could include slipping to lower grade house (to save on rent), lower grade schooling for your children, cutting of expenses, including food, medical, entertainment and many more such expenses.
Clearly, while life insurance is critical to meet financial responsibilities, adequate insurance cover is the key for meeting your responsibilities. So, having a cover is not enough — having adequate cover is critical.
Wednesday, November 5, 2008
Inflation, is an economic concept. What the cause of inflation is, is not important to us from the point of view of this article. What is important to us is the effect of inflation! The effect of inflation is the prices of everything going up over the years.
A movie ticket was for a few paise in my dad’s time. Now it is worth Rs.50. My dads first salary for the month was Rs.400 and over he years it has now become Rs.75,000. This is what inflation is, the price of everything goes up. Because the price goes up, the salaries go up.
If you really thing about it, inflation makes the worth of money reduce. What you could buy in my dad’s time for Rs.10, now a days you will not be able to buy for Rs.400 also. The worth of money has reduced! If this is still not clear consider this, when my father was a kid, he used to get 50paise pocket money. He used to use this money to go and watch a movie (At that time you could watch a movie for 50paise!)
Now, just for the sake of understanding assume that my dad decided in his childhood to save 50 paise thinking, that one day when he becomes big, he will go for a movie. Many years pass. The year now is 2006. My dad goes to the theatre and asks for a ticket. He offers the ticket-booth-guy at the theatre 50paise and asks for a ticket. The ticket booth guy says, “I am sorry sir, the ticket is worth Rs.50. You will not be able to even buy a “paan” with the 50paise!!”
The moral of the story is that, the worth of the 50paise reduced dramatically. 50paise could buy a whole lot when my dad was a kid. Now, 50paise can buy nothing. This is inflation. This tells us two important things.
Firstly: Do not keep your money stagnant. If you just save money by putting it your safe it will loose value over time. If you have Rs.1000 in your safe today and you keep it there for 10years or so, it will be worth a lot less after 10 years. If you can buy something for Rs.1000 today, you will probably require Rs.1500 to buy it 10 years from now. So do not keep money locked up in your safe.
Always invest money.
If you can’t think where to invest your money, then put it in a bank. Let it grow by gaining interest. But whatever you do, do not just lock your money up in your safe and keep it stagnant. If you do this, you will be loosing money without even knowing it. The more money you keep stagnant the more money you will be loosing.
Secondly: When investing, you have to make sure that the rate of return on your investment is higher than the rate of inflation.
What is the rate of inflation?
As we said earlier, the prices of everything goes up over time and this phenomenon is called inflation. The question is: By how much do the prices go up? At what rate do the prices do up?
The rate at which the prices of everything go up is called the "rate of inflation". For example, if the price of something is Rs.100 this year and next year the price becomes approximately Rs.104 then the rate of inflation is 4%. If the price of something is Rs.80 then after a year with a rate of inflation of 4% the price go up to (80 x 1.04) = 83.2
So, when you make an investment, make sure that your rate of return on the investment is higher than the rate of inflation in your country. In our county India, for the year 2005-2006 the rate of inflation was 4% (Which is really low and amazing!). This rate keeps changing every year. The finance minister generally gives the official statement on the inflation rate of the country for a particular year.
What is the rate of return?
The rate of return is how much you make on an investment. Suppose you invest Rs.100 in the market and over a year, you make Rs.120, then you rate of return is 20%.
If you invest Rs.100 in the market today and you make money at a 3% "rate of return" in one year you will have Rs.103. But now, since the rate of inflation is at 4%, an item costing Rs.100 today will cost Rs.104 a year from now. So what you can buy with today’s Rs.100, you will only be able to buy with Rs.104 a year from now.
But the Rs.100 that you invested has grown only at a 3% rate of return and so it is worth Rs.103. In effect, you are loosing money!
So in conclusion, the rate of return on your investments, have to be higher than the rate of inflation.
From the above paragraphs you can note how silently, inflation eats into your money. You would not even know about it an your money would sit loosing value for no fault of yours. But inflation is not the only thing you should be considering, there are other things too that eat into you money. The first thing is “brokerage” and the second thing is “taxation”.
Monday, November 3, 2008
Goldman Sachs Asset Management L.P. (GSAM), has received regulatory approval from the Securities and Exchange Board of India (SEBI) to start a wholly-owned asset management and mutual fund business in India.
The senior management team appointed to spearhead the asset management operations of Goldman Sachs Asset Management in India is led by Mr. Adam Broder as Chief Executive Officer and Mr. Prashant Khemka as Chief Investment Officer.
Mr. Khemka said, “It is our goal to emerge as a world class asset manager in India, by drawing synergies from our global expertise and combining them with our proven risk management techniques to deliver strong and consistent results for our investing clients. India is amongst the fastest growing economies in the world, with a robust and growing savings and investment pool.”
Added Mr. Broder, “We are delighted to have received the Mutual Fund approval from SEBI so promptly. India is one of the most important countries to our Asian business and we have a long-term strategic commitment to this market. We are confident that our experienced team, innovative product set, long standing industry experience and client focused culture gives us a unique vantage point from which to establish a leading position in the Indian asset management industry.”
Sunday, November 2, 2008
It is all about balancing growth and inflation. Like the Finance Minister said recently, "Inflation-control measures like drawing excess money out of the economy and the robust GDP growth cannot go hand-in-hand". The matter, as it stands today, is how much growth should we forego to control inflation? The Finance minister is of the opinion that the government would not mind sacrificing GDP growth to some extent for controlling inflation. Hence, the focus of domestic and global policy makers has shifted from GDP growth or recession to fighting inflation.
Actually, this situation was forecast many months ago. It was a problem waiting to happen when the US Fed kept cutting benchmark rates repeatedly in the last nine months. Inflation has now become one of the biggest global issues. Soaring inflation, particularly in food prices, has moved to the top of the agenda for policymakers.
The European inflation rate accelerated to 3.6 percent last month, the highest in almost 16 years, China's economy inflation stayed above eight percent despite efforts to ease food shortages. The expansion in liquidity due to rate cuts has led to a huge amount of money chasing commodities, pushing up their prices to irrational levels.
The diversion of food for the production of bio fuels, such as ethanol, is also being stated as one of the reasons for increase in food prices worldwide. Recently, there were protests in the Philippines, Haiti and Egypt over shortages in food and their soaring prices. Many rice-growing countries like India, Cambodia, and Vietnam have imposed restrictions on exporting food staples like rice to protect their populations from price hikes.
Policymakers are worried that such restrictions will further reduce supplies to non-producing countries and push the prices up further. This could worsen social unrest. The World Bank estimates that 33 nations are at risk of unrest. Analysts expect inflation to remain high at least in the first half of the year.
On the domestic front, India's inflation has soared to its highest level since November 2004. The wholesale price index-based inflation rate, which soared to 7.41 percent year-on-year in the week ending March 29, has marginally declined to 7.14 percent this week against an expectation of 7.21 percent. Inflation is currently well above the central bank's comfort zone of around five percent. In its annual report released on August 30, the central bank forewarned of an increase in price pressures, due to shortfalls in farm production and infrastructure, which would spur inflation and curb growth.
In the Indian context, food prices play a big role in inflation because food items have a larger weight in the indices here. As many live on sustenance wages, even a marginal increase in price of food items becomes unbearable. These have large political ramifications. Inflationary pressures could increase, as oil prices are now at $105 a barrel. But on the flip side, the government has announced that the southwest monsoon, crucial for the nation's agricultural economy, would be normal this season. How factors influencing inflation will play out will have a crucial i m p a c t, going forward.
Moderation in growth
The domestic stock markets had factored in the worst in the prices of all stocks. The markets rallied most part of last week due to there being no bad news. From the results declared, it appears as though the economic growth will begin to moderate in the coming quarters. That moderation, given last year's robust growth rate of 9.4 percent, may be at 8.2 percent. But given the global context, this is indeed a very good figure.
Investors here have been resilient to the Reserve Bank of India's (RBI) rate hikes due to a dramatic growth in incomes. If the growth for the fiscal year does reach the central bank's forecast of 8.5 percent, it will be only marginally below the 8.6 percent average achieved over the past four years.
The RBI is due to announce the annual credit policy on April 29 and economists are expecting a hike in the cash reserve ratio (CRR). Some are of the opinion there could be a bank rate hike too. Overall, the growth momentum is still expected to remain notable, despite the anticipated slowdown.
Policymakers hold key
Inflation remains the biggest threat to this outlook, and supply-side factors, if not dealt with appropriately, could render these growth rates unsustainable. The key to the problem lies in how deftly the policymakers, both RBI on the monetary front and the Government on the fiscal front, control inflation without damaging growth too much. Hence, the future of the stock markets is in the delicate balance between growth and inflation.
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