Black holes and big bahu - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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9 SEPTEMBER 2008

"Years ago", read the sms in the inbox of my mobile phone, "people who sacrificed their sleep, family, food, and joy were called saints…….today they are called shareholders."

And so we chuckle in pain as we see the value of our portfolios decimated since the start of the year.

If I did not have a sense of humour, said the Mahatma, I would long ago have committed suicide.

But much of this decimation in wealth is due to greed. The saints never went out seeking riches, they sought understanding. The day traders of the saas, bahu, and the beti kind were all seeking quick bucks. Every time they hit that upward circuit breaker, the business channels waved the 1,000 point placard in their faces. Like cheerleaders they encouraged the poor saas, bahu, and beti to focus on the Sensex.

The food budget for the family eventually found its way into some option instrument. F&O was more important that Food and Orange juice. These punters did sacrifice their sleep, family, and food to pay the margins for their F&O contracts. They were not saints. They were Fatally Intoxicated Investors - our own made in India FII.

At the peak of the market, the outstanding volumes in the F&O markets had reached USD 20 billion.
The markets were heading north: every bahu knew that buying some obscure contract would mean that today's dal money would turn into tomorrow's paneer money.

Volumes tank as profits vanish

But then there is no guarantee that the saints who sacrificed their sleep, family, and food would find the Enlightened Truth.
Just as there is no guarantee that every contract bought by the humble bahu would turn into a paneer kathi roll.

Black holes
The portfolios are roasting now and have turned into stale papadams that no one can eat. The bahu, saas, and beti have stepped back. Maybe they will go back to sensible things like investing in gold. And to the more worthy efforts of ensuring that their children grow up to be a positive contribution to society.

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But while we can understand the behaviour of the hysterical masses and the foolishness of the amateur investors, can someone explain to us the behaviour of these asli FIIs - the Foreign Institutional Investors.

Let's take that word by word.
Foreign - someone who is not from India.
Institutional - someone who has a framework, stability, thought-process around them.
Investor - someone who invests, generally for the long term. Otherwise they would be termed as speculators.

So, in a correct move the government allowed FIIs to invest in the Indian stock markets.

And the FII entered the Indian stock markets. Hesitantly at first, and then - like our dear bahu and saas and beti - with full gusto.

Table 1: FII/local flows from CY 2003
Period Foreign Activity
(US$ m)
Local Fund Activity
(US$ m)
Total
(US$ m)
Change in BSE-30 TRI in
that period (%)
CY 2003 6,940 93 7,033 + 86.3%
CY 2004 8,958 -261 8,697 + 23.1%
CY 2005 10,896 3,089 13,985 + 42.2%
CY 2006 7,994 3,442 11,435 +53.3%
CY 2007 17,236 3,121 20,357 +68.5%
Cum Total till CY 2007 52,023 9,484 61,507 +742.1%
YTD Aug 2008 -7,068 1,732 -5,336 -34.5%

And every time they poured their billions into India, the Sensex roared.
And the TV channels waved their 1,000 point scorecard.
And the bahu created paneer from dal.

But the story has changed this year.
The FII is selling Indian shares! The markets are collapsing. Like a star that implodes
into its own force of gravity and leaves behind a black hole.

India plunging (BSE Sensex)

Tinkoo and Papu are now being told to eat dal - without any salt. Paneer is not affordable anymore. Some benefit: at least we will create a generation of healthy children. That is why in the opening trades today, 29 of the 30 stocks in the BSE-30 Index are up, but Ranbaxy is down. Healthy India will need to buy fewer medicines!

Some husband should ask the bahu, saas, and beti: why did they gamble the family food money into stocks? Of course the husband knew - but he kept quiet as long as the going was good.

Just as the regulators should ask: what kind of institutional investor would be buying and selling Rs 4,000 crore of shares every day - and then being a net seller or net buyer of Rs 100 crore every day. Imagine, making daily bets and then being a net buyer or seller of only 2.5% of the overall volumes every day.

These licenses were given on the basis that FIIs were long term investors.
They were of some institutional quality.

What a joke!
These so-called FIIs are the biggest punters. Worse than our bahu and saas and beti.
They will gamble on the Indian stock markets till they find a better gamble in any part of the world.

They are not providers of capital to help India build a long-term economy; they are here for the "2/20" fee structure and once those fees look difficult (like they do now in a declining market); they will run for the exit door.

They sneaked into the Indian stock markets from a back door via the issuance of P-Notes. And they continue to cause havoc on the Indian stock markets.

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As an Indian if you invest more than Rs 50,000 in the markets, you need to get a PAN card and Know Your Client clearance.

You invest more than Rs 2 lakh in any mutual fund and the income tax department sends you a standard list of 30 questions.

These P-Note champions buy and sell Rs 4,000 crore of shares every day - and we don't even know who they are!

What a strange situation: The P-Note holder is under an I-don't-care-who-you-are-rule and the made-in-India bahu is scrutinised by the bank, the broker, the mutual fund company, and the tax man.

Maybe its time for the bahu to move to Singapore and London and start buying India through P-Notes: atleast the family will stop reminding her of her losses.

Suggested allocation in Quantum Mutual Funds
Quantum Long Term Equity Fund Quantum Gold Fund
(NSE symbol: QGOLDHALF)
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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