Index hits high, investors hit low - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
Index hits high, investors hit low A  A  A
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31 OCTOBER 2013


There used to be a time when, for every one thousand point gain in the BSE-30 Index (now officially called the S&P BSE-30 Index), the TV screens on which we watch the business news would light up with the equivalent of the cheer leaders at an IPL-1.

High Index, no investors?

But that was then.

Today, the only people who seem to care about the Index hitting a new high are the people who hope to extract some benefit from an unsuspecting audience (namely, you): brokers, wealth managers, and the media who cover the financial news.

Just as the cheer leaders in IPL-1 faded into oblivion with purdah-style clothing in successive IPLs, the interest by retail investors in stock markets has been clouded by suspicion that the system does not work for them.

The BSE-30 Index may have leapt into the 22nd century with a new name due to the partnership with global rating giant S&P and the NSE may be on the cutting edge of technology with something sexy called algo trading - but the retail investor are not impressed. They continue to head for the exit door and stay away from the noise and racket of Dalal Street - or the eerie silence that envelope the interiors of the financial glass towers at BKC.

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And those that do not head for the exit door are heading to the police stations to file criminal complaints against the broking firms or wealth management producers who have depleted their savings. Not happy with this bandobast, SEBI has reportedly asked the police to go easy on these complaints since there exist internal "redressal" systems to correct any wrongs.

As a "fund manager", I rejoice the market reaching a new high but, as a provider of services and a "manufacturer" in the financial services industry, I am embarrassed at the brazen disrespect that most people in the field of finance have for the well-being of their clients. If any of the three entities I helped create (Quantum Mutual Fund, Equitymaster, and PersonalFN) were to ever practice what many of the financial services have adopted as a "standard operating procedure", I would bow my head in shame. (But I would have the money to advertise my brands and make you feel safe.☺)

But should investors be buying stocks at this stage?

A quick recap of where we are:
  1. Markets have risen by 17% from a "depressed" state of 17,000 levels in August 2013 to this recent peak of 21,000 in two months - this 17% rate of return in two months cannot be maintained; it should be noted onions have given a far better rate of return than the BSE-30 Index in these past two months;

  2. While the best in stock returns may be over for now, these past 2 months prove the old saying "markets can turn on a dime"; ignoring equities as an asset class is dangerous - one never knows when the markets will surge or collapse;

  3. Over the past 32 years the BSE-30 Index has risen, on average, by some 16% per annum (not 17% every two months!); that is a very powerful rate of return over long periods of time and mostly reflects the growth in earnings of companies;

  4. The world is not a safe place financially and there could be a Lehman-like blow up again; no one knows when but the odds are that the central banks of the world have printed too much money (particularly in the past 6 years) and are in a corner. If the central banks print more they risk inflation, if they stop printing they risk a collapse in stock markets; their choice is akin to that of a drunkard who went on a drinking binge to forget the miseries of his life: if he drinks more, he will probably die of excessive alcohol consumption but, if he stops drinking, the reality of his misery will make him commit suicide. The outcome of whatever action the central bankers take is not likely to be good;

  5. In this uncertain global environment, India will soon have the wonderful opportunity to select a leader for the next five years. This is likely to be an election of lesser evils - not an election of hope and optimism;

  6. Specifically, profits of companies are not soul-stirring and inspiring so any surge in stock prices will not have the fundamental support of a "rosy" outlook for the performance of corporate India;

  7. As pointed out above - and as you can see from your decimated savings pool - the financial services industry does not seem to exist for your benefit but is built for finding ways to convert your savings into their revenue streams; so you cannot trust most of these local and global giants.
No, I am not "bearish" on stocks but I continue to believe that - while investing in stock markets is necessary to give us all a chance to afford onions in the future - be careful of:
  1. How much of your wealth and savings is invested in stock markets,

  2. Who you invest with: whether a mutual fund house or a direct purchase of a specific stock;

  3. The time period you wish to invest: if you have anything less than a 3 year view on stock markets, please stay away from the stock market.
If you have been on the side lines and have missed this "rally", please do not be tempted to jump into the market with a chunk of your savings in one shot. That will probably end up in disaster. Step in slowly and gradually, and invest methodically over a long period of time - even if markets decline from the day you first bought.

If you are "heavily" invested, it is time to take some profits and invest your profits in fixed deposits and wait patiently. Will the Index head to 17,000 again? It could - hopefully long enough to allow you to increase your allocation.

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Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)
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% 20% Keep aside money to meet your expenses for 6 months to 2 years

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"


Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.


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