Keep the insurance - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
Keep the insurance A  A  A
PRINTER FRIENDLY | ARCHIVES
30 APRIL 2008

At the end of February 2008 (Please read Buy Gold...an insurance) I spoke about the need to think of gold as an insurance for your investments in the Indian stock markets.

Investing in India - insure your stock portfolio.
Since then the price of gold has been beaten down below the USD 900 levels. It has lost some 6% in value.
The Quantum Long Term Equity Fund has also lost about 6%.
So, where is the insurance?
Both have declined - both the products have moved in the same direction.

Table 1: Gold could be a good insurance policy.
Value of current investment Hypothetical change in value if global economy messed up New Value of this portfolio: GLOOMY scenario Hypothetical change in value if everything is fine and the global economy recovers New Value of this portfolio: BRIGHT scenario
Quantum Long Term Equity Fund Rs 150 -20% loss Rs 120 +20% gain Rs 180
Quantum Gold Fund Rs 30 +50% gain Rs 45 -50% loss Rs 15
Quantum Liquid Fund Rs 5 No change,
some interest
Rs 5 No change,
some interest
Rs 5
Cash in bank Rs 15 No change,
some interest
Rs 15 No change,
some interest
Rs 15
Total value Rs 200,
base value
  Rs 185,
loss of - 7%
  Rs 215,
gain of +7%
The above table is given purely as an Illustration and is not to be treated as a forecast

If the world is under control and the central bankers have their eye on the ball, so to speak, then gold deserves to be a lot lower.
And stock markets a lot higher.

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But both are down about 6% over the past two months.
They cannot head in the same direction for much longer.

Either the problems in the world has been solved - in which case the FII money flows into India will be higher and the Indian stock market can make another charge at 20,000.
Or the problems in the world remain. And stock markets are nervous and will decline and gold will surge.

Investing in India - the central bank is sensible.
Over the past few days the Reserve Bank of India is preparing the country for a battle with inflation.
While the Finance Minister is busy reducing the end price of products like cement and steel by imposing tariff barriers on exports and reducing his own taxes on the products, the RBI is busy ensuring that the cost of capital begins to increase.

Higher interest costs will reduce consumption and demand.
Moreover, there is likely to be some sell off by foreign investors. The FIIs have already sold some USD 3 billion in assets so far this calendar year. If the global markets move against them and risk aversion for India prevails, look out for more selling. The FIIs could sell USD 10 billion in one year. Or, they could buy more.
Who knows?

But the data points are not good.
In India or globally.
We have elections due in India.
And inflation is at above 7% when the target is to keep inflation below 5%.

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In the USA, people are losing their homes by the thousands.
And those that don’t have a mortgage on their heads are losing their jobs.

The US central bank is due to announce its next interest rate cut on April 30. Most analysts expect the US Fed to cut its target rate for overnight lending between banks to 2% (from 2.25% currently). Many believe that the rate-cutting cycle in the USA is over. A currency with a higher interest tends to be stronger. Everyone is waving the all-clear flag.

We are not so sure about that.

Study Table 1 above and stick with the insurance: Quantum Long Term Equity Fund and the Quantum Gold Fund.

Suggested allocation in Quantum Mutual Funds
Quantum Long Term Equity Fund Quantum Gold Fund Quantum Liquid Fund
Why you should own it: An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 15% 5%

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"

Note: Ajit Dayal, the author is a Director in Quantum Information Services Private Limited and Quantum Asset Management Company Private Limited. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited or Quantum Information Services Private Limited.

Mutual Fund Investments are subject to market risks. Please read the offer documents of the respective schemes before making any investments.


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