Lesson learnt by me in this Market Crash

The five year Big Bull run made everyone that there will always be sunshine. We tended to ignore warning signs and just brushed them aside as an aberration. I was no exception. Have I lost money?. Yes and no. Yes, because I am stuck with an asset which at a given point of time would fetch a lower valuation. NO, because, the loss is only notional.
I have seen two Bear Runs. First, post the Harshad Mehta Scam in 1992-93, next the Technology Meltdown in 2001. I learnt two Different Lessons in these Bear Runs.
In the first Meltdown, I learnt that "Never Invest All your Money at one go, it may the peak you are investing". In that Meltdown, where I burnt my finger as speculator, I qualified to become myself as an Investor. Lesson Learnt : Invest regularly at periodic intervals.
In the second Meltdown, I learnt that "Never Overexposure yourself to One Particular Sector". Lesson Learnt : Do not put all your eggs in 1 Basket. And the Biggest lesson which I learnt from this Bear phase is that I sold Good Stocks to protect my Huge losses in my Bad Stocks. So, ultimately, I was left with Dud Stocks and devoid of Blue Chips. And it took nearly 3 years to get my portfolio on the right track.
And in this present Meltdown, I have learnt not one but Two Big lesson, First, Book Profits Periodically.
Second, Spread Your Investment across Asset Classes including Debt.
I have taken these losses as tuition fees that I have paid to learn from the Markets.
The Biggest Reason why investors lost heavily in this market was due to the prolonged Bull run of 5 years, which made people invest without doing any research due to stocks going up almost every other day.
For me, the market is like an ocean. Anything you throw into the ocean always come back. Whatever you throw into the market will ultimately come back, provided you follow the market discipline.

I may sound naive, but I don't think I've lost anything. That is I have lost money on paper, which I had bought long long time age, and I am sure they will be back up sooner rather than later. The stock market going down doesn't mean the end of the world. The compaines I hold still continue to rake in profits.

But, yes, my faith to be completely invested in equities has been ripped to shreds, as the even the bluest of blue chips have got hammered. So, while I have not changed my current holdings, I will be looking to change my future asset allocation with a provision for debts and a bit of cash reserves to go with.
But, thankfully, I am not even 40 yet, so retirement is still a long way. I am sleeping peacefully, for I know I do not need this money for another 15 years at least.

My advice would also be on the same lines. It is always wise to have a properly diversified investment strategy based on your risk tolerance and as you age, you should become more conservative and shed your aggressiveness and shift towards debt and Large Cap Mutual funds.
I also plan to diversify further by investing in some International Funds.
I also plan to invest through SIPs to take advantage of NAV volatility (and indirectly time the market!) and restrain myself from making Lumpsum Investment.
I also plan to diversify further by investing in Other Asset Classes too like Gold, Silver and commodity funds by committing a small percentage.
I have decided not to borrow funds for investing. (this lesson I learnt in 1992-93 bear run).
I have decided to avoid ULIPs.
I intend to invest only for Long Term.
Best of luck,
Srikanth Shankar matrubai


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Is Portfolio Balancing Necessary?

One reader of my blog Mr.Nester Dias wrote a brilliant letter and here it goes :
Hi ShareSher
I am 32 years old, newly married and would like to invest upto 40K per month on mutual funds ( SIP based ) . That is around 45% of my income post tax - I consider myself a safe investor and would like to make steady returns and not lose money . Basically I am a new entrant to Mutual Funds ( entering in phases since Feb 08 ) but am thinking that this present moment would be the rite time to a) learn more about mutual funds/stocks b) very importantly make money :) . I am looking at making money in the long run ( say 5 years + from now ) .
Been doing a lot of reading and have noticed that most of the fund do have the same stocks - this applies to contra funds also..So I am not very sure about how the financial experts evaluate funds . Anyway having said this can you lend me your expert opinion on my portfolio
Would appreciate your input and your reasoning why . Thanks
Reliance Diversified Power Sector - Dividend Plan 25000 One time
Principal PNB Long Term Equity Fund - Series 2 10000 One time
JM Contra Fund - Dividend Plan 10000 One time
DSP Merilly Lynch TIGER Fund - Dividend Regular 25000 One time
Kotak Global Emerging Market Fund 10000 One time
Birla Sun Life International Equity Fund- Plan B - Dividend 30000 One time
Tata Indo Global Infrastructure Fund - Dividend 30000 One time
Tata Pure Equity Fund - Dividend 2500 SIP for 1.5 years
Tata Equity Oppurtinity Fund - Dividend 2500 SIP for 1.5 years
DSP Merill Lynch Top 100 Equity Fund - Dividend 2500 SIP for 1.5 years
DSP Merill Lynch Tax Saver Fund - Dividend 2500 SIP for 1.5 years
Kotak Tax Saver - Dividend 2500 SIP for 1.5 years
DSP Merill Lynch Top 100 Equity Fund - Dividend 25000 One time
DSP Merill Lynch Top 100 Equity Fund - Dividend 2000 SIP for 1.5 years
HDFC Top 200 Fund - Dividend 2500 SIP for 1.5 years
DSP Merill Lynch TIGER Fund - Dividend 25000 One time
DSP Merill Lynch TIGER Fund 2500 SIP for 1.5 years
Sundaram BNP Opportunities CAPEX Opp Fund - Dividend 2500 SIP for 1.5 years
Kotak 30 - Dividend 25000 One time
Kotak 30 2500 SIP for 1.5 years
ICICI Prudential Infrastructure Fund (Dividend ) 30000 One time
ICICI Prudential Infrastructure Fund 2500 SIP for 1.5 years
Century SIP - BIRLA SUNLLIFE Frontline Equity Fund ( Growth ) 2500 SIP for 1.5 years
Reliance - Regular Saving Fund (Growth ) 2500 SIP for 1.5 years
Regards
Dear Nester Dias,
You have a good exposure of your savings to Equities. But considering, that you call yourself a 'Safe" investor, it surprises me that you have more than 40% of your lumpsum investment into Infrastructure Funds and 25% of your sip investments going into again Infrastructure Funds. You need to reduce your exposure to Infrastructure Funds and add more of Diversified Equity Funds to add Stability to your portfolio. While Infrastructure as a Sector looks highly promising, its short and medium term outlook does not look all that rosy because of the slowdown in the economy and the high interest rate scenario. If you are willing to hold for more than 5 years or so, you can continue to stay invested in these funds.

I agree with you that most of the funds do have same set of stocks. But the key differenciator as to why some funds become outperformers and some laggards, is because of the percentage of the stocks they own. Suppose Fund A owns more Reliance and Fund B owns more L&T. And, if say, Reliance spikes up due to some news, then Fund A gains more thant Fund B and thus becomes a better performing fund.
Also, it also depends on Cash component held by fund at each stage of market. Fund A holding more cash in a Bearish Market will definitely gain and will be able to outperform others due to its ability to keep picking stocks at every fall.
Also, some funds perform better because of their Enter/Exit Strategy. Example, ICICI Fusion Fund II has bought Subhiksha (unlisted) at a very low low price, and since the scrip is not listed, the Fund could not exit and would lose heavily.
These and some more factors are considered while evaluating funds and their future performance.
As far as your portfolio is considered, while you can continue to stay invested in most of your lumpsum investments for now, do take a call around April 2009 when the Full year's Annual Results are announced.
However, since you already have sufficient exposure in Infrastructure Fund, I recommend you stop/switch your sip in all the three Infrastructure funds, and consider investing in Diversified Equity Funds. So, stop sips in DSP Tiger, ICICI Infra and Sundaram Capex Funds.
Alternatively, you can consider investing in HDFC Prudence Fund, Sundaram Select Focus Fund and DWS Alpha Equity Fund.
Best of luck,
Srikanth Shankar Matrubai.

Visit http://goodfundsadvisor.blogspot.com for More Detailed Mutual Fund Advise.

Why SIP is Good

Systematic Investment Plans (SIPs) are much misunderstood. For one, investors often mistake SIPs as an investment avenue rather than a mode of investing in mutual funds. Then there are investors who invest in SIPs expecting quick results without fully appreciating the need to invest via SIPs for the long-term.

In an earlier article, we discussed how SIPs are perceived incorrectly by many investors as standalone investments. This explains why one of the most common queries we receive on the website is – which is the best SIP? Unfortunately, these investors have not been educated by their investment advisors about SIPs i.e. SIPs are only a mode of investing and not an independent investment avenue.
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Minimum tenure of an SIP
Another misconception investors have about SIPs is with regards to the minimum tenure. Most fund houses have a minimum SIP tenure of 6 months. This leads investors to believe that 6 months is the ideal time frame for investing via SIPs (just like a lot of investors invest Rs 5,000 in mutual funds simply because that is the minimum investment amount for several mutual fund schemes).

In our view, investors should ideally invest via SIPs over at least 2-3 years. This way they can exploit the most critical benefit of an SIP – rupee cost averaging. Let’s understand how this is possible.

For an SIP to deliver the goods, it must witness a falling market. This way the investor can average out his cost of purchase. If the investor does not witness a downturn, i.e. he is only exposed to a market rally, the average purchase cost of his SIP will rise over a period of time.
SIPs in a rising market
Month of investment NAV (Rs) No. of Units
January 11.00 45.45
February 12.00 41.67
March 12.50 40.00
April 12.90 38.76
May 13.25 37.74
June 13.40 37.31
Avg. purchase cost of 6 SIPs Rs 12.45
(The example is for illustrative purpose only.
We have assumed that the SIP is done on the first trading day of the month; SIP amount is Rs 500.)

In the above table the average purchase cost of the SIP is Rs 12.45. Clearly, the SIP has not worked in the investor’s favour. Why is that? Because if he had instead invested lumpsum in January, his purchase cost would have been Rs 11.00 as opposed to the average purchase cost of Rs 12.45 over a 6-month period.
SIPs in a falling market
Month of investment NAV (Rs) No. of units
January 11.00 45.45
February 12.00 41.67
March 12.50 40.00
April 12.90 38.76
May 13.25 37.74
June 13.40 37.31
July 12.10 41.32
August 11.20 44.64
September 10.30 48.54
October 10.10 49.50
November 10.50 47.62
December 10.20 49.02
Avg. purchase cost of 12 SIPs Rs 11.50
(The example is for illustrative purpose only.
We have assumed that the SIP is done on the first trading day of the month; SIP amount is Rs 500.)

However, if the investor had opted for a longer investment tenure of say 12 months, he could have benefited from greater fluctuations in the mutual fund’s NAV. These fluctuations which arise over a market cycle lower the average purchase cost of the SIP over the long-term.

This is apparent from the above illustration. As is evident from the table, if the investor had taken an SIP for 12 months (instead of 6 months) his average purchase cost would have declined to Rs 11.50. Compare this with the average purchase cost of Rs 12.45 for a 6-month SIP.

It can be argued that there is no way for the investor to know when there is likely to be a turnaround in the markets (in this case a downturn). That is exactly our point. Since the investor does not know when markets will fall (and lower his average purchase cost), he must opt for a longer SIP tenure. Or at least he must manage his investments in a manner so that when his existing SIP terminates without witnessing a dip in stock markets, he can extend it further. This way should the markets fall, his SIP can benefit from a dip in the mutual fund NAV which in turn will lower his average purchase cost.

Points to remember before opting for an SIP

1) Ironically, while SIPs are meant to eliminate market-timing, investors must opt for a long-enough SIP tenure so as to ‘time’ the market downturn.

2) SIPs are equally beneficial in a falling market. Most investors believe that lumpsum investments (as opposed to SIPs) prove more beneficial in a falling market. This is only partly true. Having an SIP in operation during a falling market can ensure that investors stand to benefit should markets fall even further.

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Investment Advise

When the price of gold comes down - people buy more gold. When it goes up they do not sell. They expect it to go up in the long term. When it comes to equity/mutual funds - when sensex comes down - they stop investing. When it goes up they start investing.This is because they always think for the short term when it comes to equity.

If they follow the same strategy as the one that they follow for gold - they will make more money.

Yes, people buy more gold when it falls, but when it comes to Equities, they not only stop buying, in fact contemplate selling at a loss!!

WHAT AN IRONY!!!

When people buy Gold or for that matter, Real Estate, they buy with an intention of holding at least 5 years (that's the thumb rule), and in the interim, if the value of the Gold or Land, they are not at all bothered, and why should they, they have bought with the intention of investing for long term, isn't is?

Now, when it comes to equities, it stumps me as to why they suddenly lose their focus and conviction on the stock/fund, and try to get out of the same at the first opportunity.

They need to educated. Warren Buffet said, 'Buy a Stock, as if the Stock Markets are going to be closed for 5 years'. If we all follow the same approach, then I do not think investors will face grief and reap the benefits of High Yields from the Stock Market.

Think over it........

Best of luck,
Regards,
Srikanth