Money Market Instruments – Portfolio Management for Armed Forces Officers

Fundamental Guidelines of ‘The Market’

While it is true that, in the stock market, there is no rule without an exception, there are some principles that are tough to dispute:-

Sell the losers and let the winners ride! Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined, in hopes of a rebound. Always bear in mind not to allow your apprehensions to curtail potential returns or amplify your losses. The following information might help:-

• Riding a Winner –No one in the history of investing with the I’ll-sell-after-I-have-tripled-my-money” mentality has ever had a ten-bagger.
• Selling a Loser –Don’t be afraid to swallow your pride and move on before your losses become even greater!
• Don’t chase the “hot tip”.When you make an investment, it’s important you know the reasons for doing so: do your own research and analysis of any company before you even consider investing your hard earned money.
• Don’t sweat the small stuff.Being a long-term investor, it’s imperative not to succumb to panic when your investments encounter short-term fluctuations.
• Do not overemphasize the P/E ratio.Investors often place too much importance on the Price-to-Earnings ratio. To gain meaningful insights, the P/E ratio demands interpretation within a broader context, and its effectiveness is best realized when combined with other analytical methodologies.
• Resist the lure of penny stocks.A common misconception is that there is less to lose in buying a low-priced stock. In fact, a penny stock is probably riskier than a company with a higher share price, which would have more regulations placed on it.
• Focus on the future.It’s important to keep in mind that, even though we use past data as an indication of things to come, it’s what happens in the future that matters most.
• Borrow Expertise and Knowledge to Win.As smaller retail investors, we are constrained by a large number of limitations on our knowledge. It is better to invest in the stock market using the expertise of good brokerage houses (or of Mutual Fund managers) so that our long and short-term goals are fulfilled through this powerful investment vehicle.

Common Pitfalls to be Avoided

• Not being disciplined and failing to cut losses at 8% below the purchase price. But do not sell a winning stock just because it pulls back a little bit.
• Do not purchase low-priced, low-quality stocks.
• Do not let emotions or ego get in the way of a sound investing strategy.
• Opt for long-term investments in equities rather than focusing on short-term gains.
• Not keeping an eye on what the big players / mutual funds buy & sell is a pitfall and an opportunity lost to pick the right stocks
• Patience is a virtue in investing. Do not panic about your existing stocks.
• Remain proactive and well-informed about market happenings, delving beyond the surface of mainstream media’s top stories to seek comprehensive information.
• Avoid concentrating all your funds on a single venture; instead, opt to diversify your portfolio across five distinct industries and allocate investments into a well-balanced selection of ten individual stocks.
• Greed is dangerous. Once a reasonable profit is made, the investor should get out of the market quickly.

SECTION IV : GOLD

Gold has worked down from Alexander’s time. When something holds good for two thousand years, I do not believe it can be so because of prejudice or mistaken theory.

– Bernard Baruch (1870-1965), American millionaire

Over the ages, Gold has worked as an investment, especially during times of economic crisis, political strife, and wars. It has also been used to back currencies. In the year 2011, almost 980 tonnes of gold were bought in India, the world’s largest market for gold, a 40% jump over the corresponding period last year. Such is the demand for gold in India that prices have increased in the long term, even in the last decade, when many central banks sold their gold holdings. The compounded annual growth rate (CAGR) of gold prices over the last 10 years stands at 9-10 % CAGR,  The price of gold is expected to rise also because Central banks of several countries have been adding to their gold reserves and the cost of production is rising. Moreover, activities in many African mines have been reduced due to strife, adding to the low supply situation.

What kind of gold should you buy? If you see this purely as an investment, then SGBs issued by RBI are the best way to invest in Gold and you can also buy it in the form of physical gold bars, biscuits, or coins or even in a dematerialized form. The disadvantage of buying gold in the form of Jewellery is that its re-sale is not always a profitable proposition, one cannot be sure of the purity, and handling and storing remains an issue. Bars and biscuits are better as they can easily be exchanged for cash even though while purchasing these may be priced up to 8-20% above the market value of Gold.

The modern way to invest is buying dematerialized gold from a commodity exchange – it eliminates risks related to physical storage and theft, reducing paperwork and facilitating the easy transfer of holdings through the electronic mode. However, a very good option that has emerged now is buying Gold Exchange Traded Funds (Gold ETFs) on stock exchanges. These are typically in the denomination of single units, generally representing one gram of gold each. Many companies, like Reliance, Kotak, Quantum, Benchmark, and UTI, are offering the same on NSE (National Stock Exchange) and they are bought and sold exactly like stocks. In case you wish to buy in small quantities regularly so as to build up a good gold portfolio over a period of time, Gold Mutual Funds are the best option. Here you buy Gold units exactly like you buy any other units – in small nibbling through Systematic Investment Plans (SIP) and/or in bulk.

Where should you buy Physical gold from? Bullion experts recommend that it is best to buy gold from a reputed jeweler. Banks that sell gold bars charge a premium as high as 8-20% for providing you with a ‘certificate of purity’, but they are not allowed to buy it back and the jeweller that you sell it to has no use for that certificate. You end up paying a premium for no real value addition. If you buy from reputed jewelers, not only do they buy it back from you, but they also give you the prevailing market rate for it.

The paths taken to financial independence vary depending on the risk profile of the investors, the amount of capital they begin with, and the targeted capital that they wish to end up with. There is also a factor of luck and timing that many investment advisors do not like to acknowledge but is a fact of investing and planning. The most carefully laid out plans can be challenged by special, unforeseen circumstances. And conversely, sometimes those who did not have a plan end up reaching financial nirvana by sheer good luck and fortune. But though we respect the power of luck and timing, we still believe that most people who plan their financial future will have a better understanding of what they need to do to achieve their targets than those who rely only on luck. The suggested broad financial strategy below is only a guideline since the actual personal plan will be entirely individual-specific as per his requirements, risk profile, commitments, priorities, market conditions, state of the economy, and finally, what’s available in the market!!.