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28 May 2014

Common Equity Investing Mistakes

With the new NDA government coming to power, many investment experts believe that India is on the threshold of a long term secular bull market. While it is certainly easier to make money in bull markets, it is also easy to make mistakes in bull markets. Mistakes cost investors money and therefore must be avoided. We should clarify that this article is addressed to investors. Here are eight common equity investing mistakes in bull markets.

1. Trying to time investments at the start of a bull market: Retail investors wait too long trying to time the market. Most retail investors are not able to spot a bull market when it is taking off. When the market runs up significantly, retail investors realize that they have missed the bus. Timing the market is incredibly difficult. Even experienced professional investors often do not get their timing correct. Equity investing should be goal based, not timing based. Set investment goals and invest for the long term. Timing does not matter if you have a long time horizon.

2. Ignoring asset allocation: In bull markets hot stocks and mutual funds are always in news. It is important to select great stocks or mutual funds to get higher returns. But investors do not realize that a much bigger portion of portfolio return is attributable to asset allocation and only small portion of returns can be attributed to stock or fund selection. For example, even if you select a great mutual fund that gives you 25% compounded annual returns, if 90% of your portfolio is invested in fixed income assets yielding 6% post tax returns, your overall portfolio returns is less than 7%. You should pay more attention to your asset allocation and consult with your financial adviser to get appropriate guidance on the right asset allocation mix.

3. Adopting trading strategies in bull markets: Investors should understand the difference between trading and investing. Traders are usually professionals and aim to generate profit over a short time horizon, ranging from a day to a few weeks. Investors, on the other hand, aim to create wealth by investing over a long time horizon. Trading and investing require very different strategies. Retail investors in bull markets, seeing market rise sharply, switch to trading strategies. Investors may even be able to make decent intraday or positional trading profits in bull markets. But investors should not think that they are expert traders just because they have made trading profits. Trading is extremely technical in nature and requires considerable expertise and experience which most retail investors do not have. Investors should especially avoid taking leveraged positions using derivatives like futures and options because they can incur big financial losses, if the market or the stock moves in the opposite direction of their trade.

4. Blindly investing in hot midcap tips: Midcap stocks get beaten more than large cap stocks in bear markets. Consequently some of these stocks rally sharply in bull markets, when valuations of large cap stocks seem stretched. Often in bull market rallies, midcap stocks outperform large cap stocks. But in case of a lot of midcap scrips, the up moves are essentially momentum moves and not backed by strong fundamentals. Picking quality midcap stocks requires considerable skills and experience. If you are not an expert stock picker, it is always advisable to invest in midcap funds instead of directly buying midcap stocks.

5. Paying too much attention to monthly economic data: The media goes on overdrive over daily, monthly or quarterly economic data, be it exchange rate, index of industrial production (IIP), inflation statistics, CRR, repo rate etc. It is true that the market reacts to these numbers. But they are not relevant for long term investors. You should stick to your investment strategy and not react to these numbers. The best investment strategy is to get your asset allocation right, and invest in high quality stocks or mutual funds with great track record, and let their investment compound.

6. Panicking in sharp corrections: In a bull market, stock prices rise sharply but they can also fall sharply. In a secular bull market, sometimes these corrections are prolonged and may last several days or weeks. Investors, who cannot handle volatility, cash out during market corrections. But by cashing out during bull market corrections, investors are compromising on their long term financial goals. Investors should remember that such corrections are always of shorter duration than the periods during which the market rise. Over the last 20 years, the market went through many sharp corrections and yet the Sensex is many times higher. Therefore investors should stay invested through the periods of volatility. Their investments will grow in value once the uptrend resumes.

7. Turning off SIPs during a downturn: Successful investors have made money in the market by buying stocks when everyone else was selling. Retail investors often find it difficult to handle volatile markets and stop the Systematic Investment Plan payments during a market downturn. This is a mistake. SIPs enable the investors to buy equities at a low cost in market downturns. SIPs work on the principle of “Rupee cost averaging”. By investing a fixed amount, every month or at any other regular frequency you can buy more units when the prices are low and less units when the prices are high. SIPs ensure good return on your investment and help you meet your long term investment objectives.

8. Hanging on to underperforming stocks or funds: While investors should have a long time horizon for their investment, they should make sure that they do not hang on to underperforming stocks or funds. Even if the investors have performed adequate diligence in selecting stocks or funds, it is possible that some stocks or funds may not perform well. Retail investors often hang on to underperforming stocks or funds, especially if they are making losses in these stocks or funds. Sometime investors buy additional units of underperforming stocks or funds, to average the purchase cost or NAV. While this strategy may sometimes work in trading, this is a wrong investing strategy. Investors should monitor their investments on a regular basis. If there are stocks or funds in your portfolio which are underperforming relative to the benchmark for 2 – 3 years, then you should exit from these stocks or funds, and switch to stocks or funds that have been performing well. Even if this entails booking losses, investors should not hesitate in exiting underperforming stocks or funds

Conclusion

Investors should avoid these common mistakes when investing in equities. Equities are essentially long term investments. By selecting good stocks or mutual funds, and remaining invested in them over a long period of time, investors can create wealth in the long term by leveraging benefits of compounding. There is always a lot of surround sound in the media with regards to equity markets. Investors should cancel the noise in the surround sound and stick to a disciplined approach to investing.

(Source: Dwaipayan Bose, www.advisorkhoj.com, 28 May 2014)

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15 May 2014

Blog, Investment Advice for Defense, Investments for Defense Sanjeev Govila 0 comment

Verdict 2014: The Way Forward For Investors

Hardly 24 hours remain for the world to know who is going to occupy 7, Race Course Road, the official residence of the Prime Minister of India. All of us are waiting with bated breath to know if Narendra Modi as predicted by the exit polls will win the elections or will the Indian electorate throw up a surprise tomorrow. The exit polls have already given thumbs up to NaMo and team but history shows that we cannot blindly follow these numbers. In this scenario, the question that plagues most investors is what should be their plan of action for May 16, 2014. I have tried to answer this question by putting down three scenarios that can emerge tomorrow and what investors need to do if any of them becomes a reality.

Plan of Action for May 16, 2014

Scenario 1:

Narendra Modi led BJP comes to power, finally ending the decade long rule of the dynasty. This is going to be music to the ears of our investors who have been waiting patiently to see some action on the ground which in turn will positively impact their portfolios. In such a scenario, investors should just relax over the weekend and start slowly entering the market via the different options available to them like SIPs or STPs. They should not consider investing their surplus into the market on either May 16 or in the coming days. If Modi comes to power, we need to remember that he cannot make a vibrant India in a few months’ time. The euphoria that we have been seeing in the market for some time is not based on any fundamentals. It is on the hope that if the BJP is able to put forth a stable government then it will be possible for them to implement a lot of policies which their predecessors were unable to. UPA government was known for its policy paralysis and finally rating agencies had to threaten India to get it into action. This is inspite of the fact that this coalition was headed by an economist turned PM who in 1991 brought about economic reforms which changed the face of India in the global markets. Hence, if NaMo gets a majority mandate, then we believe that the next 5 years should be good for investors. In such a scenario some of the categories of funds which we have been betting on since their downfall like mid & small caps, banking and infrastructure will see a revival. Hence, investors who have been taking an exposure into the same on the basis of our advice will have something to cheer in the coming years.

Scenario 2:

India gets a hung parliament and in this scenario, what will happen to markets is only a foregone conclusion. The immediate reaction of investors will be to get out of the market as soon as possible and switch their existing surplus into liquid funds. However, do investors really need to punish themselves and start thinking from their heart while taking investment decisions? Hence, my advice is that if there is a correction, then consider it as an appropriate time to enter the market aggressively. The reason behind this recommendation is the macro-fundamentals of the Indian economy. At this juncture a majority of our macro indicators are not in a great shape: India is growing at less than 5% which can be gauged from the GDP estimates; IIP is as always volatile and currently is in the negative territory; both the inflation indicators that is WPI and CPI are moving upwards; RBI is not showing any inclination for reducing the policy rates; the list goes on. This is a clear indication that the economy needs a quick cure, or else things will spiral out of control. Hence, even if an unstable government is formed, they will do everything in the book to get India to recover from the current slowdown in growth momentum. This definitely will take time, but we can confidently say that if the macro-economic indicators improve, investors will only stand to gain in the long run.

Scenario 3:

India decides to give a third chance to UPA and here although the market would react negatively, investors need not worry too much. This is because the incumbents have already learnt the lesson of waking up late and trying to do the impossible in a short span of time. Hence, a third chance means that they will consider this term seriously and rectify the errors of the last 5 years.

In short, my advice to investors is not to get carried away by the chaos in the market but to stay invested till their goals are achieved. During this time, there will be several months when their portfolios will be in red but over a period of time market is known to reward patient investors.

(Source: iFast Financials article dated 15 May 2014)

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02 May 2014

Blog, Investment Advice for Defence Personnel, Investments for Defense Sanjeev Govila 0 comment

Three Smart ways to Invest in Gold this Akshaya Tritiya Week

Indians have always considered Gold as a safer option to invest vis-a-vis other investment opportunities like equities, fixed income, real estate etc. Gold’s ability to act as a hedge in times of financial emergencies is one of the main reasons for the yellow metal to find a favour with Indians. Gold is also believed to be auspicious and in addition to this has proved to be a prudent investment option for a long time now.

In the last few years, we have been seeing a trend wherein young and savvy investors are looking at gold as more of an investment instrument rather than a commodity to be passed onto posterity. Hence, they prefer to invest their surplus into gold via instruments which are hassle-free and are more viable than investing in physical Gold. The mutual fund industry offers multiple alternatives to physical gold if investors wish to take an exposure into the yellow metal.

Gold Exchange Traded Funds (ETF): Currently, Gold ETFs is one of the most popular investment options among investors and this is evident from the AUM of Gold ETFs which stands at Rs. 6414 crore as of March 2014. Gold ETFs directly invest into physical gold and track the spot price of gold. Gold ETFs can be traded on the exchanges and this flexibility makes it a popular instrument. Demat account is compulsory for taking an exposure into Gold ETFs. The only drawback of Gold ETFs is that they have to be bought in lumpsum as a Systematic Investment Plan (SIP) is not available.

Gold Fund of Funds: Fund Houses have launched Gold Fund of Funds for those investors who wish to invest into gold but do not have a demat account. This option invests into Gold ETFs and enables an investor to buy and sell units like any other fund in the industry. One of the biggest advantages of investing in gold Fund of Funds is that it allows an investment via the SIP route which means that the investor can invest in these funds on a regular basis without timing the markets. The SIP investment amount can be as small as Rs. 100 per month.

Gold Equity Funds: Many investors mistake this for a fund which invests into physical gold. However, the truth is that Gold Equity Funds invest into shares of companies which are engaged in extraction, processing and marketing of gold. Currently, there are only 2 funds in the industry which fall into this category and they are DSP BlackRock World Gold Fund and PineBridge World Gold Fund. Since these funds invest into stocks of gold mining companies it is not necessary that whenever there is a rise in gold prices these funds will also move upwards. Although the profits of these companies will be dependent on gold prices, those can be offset by factors like operational issues, labour problems and even regulations. Hence, only investors who have a risk appetite should think of investing into these funds.

To conclude, investors who wish to take an exposure into the yellow metal as a part of their asset allocation should consider Gold ETFs and Gold Fund of Funds. On the other hand, investors who are interested to invest into global funds may consider Gold Equity Funds.

(Source: iFast Financials’ monthly report for May 2014)

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