5 actions retail investor should take in falling market

Last few weeks Indian economy has seen mayhem in terms of equity market movement southwards. There has been substantial movement (up or down) in all major indicators i.e. equity indexes such as Sensex, Nifty, Currency Indexes such as USD-Rupee, Precious metals such as Gold and Silver, Bond yield etc. They are interlinked and will make each other move.

What the retail investor should do in such a situations? We have come up with 5 actions that one can take about his investments in such volatility.

1.        ULIP(Unit Linked Insurance Policies)- If your money is held in equity or equityoriented fund and you are near (up to 1 year) the maturity or withdrawal then you are due for action. Your priority is to protect the interest earned on investment so far. Most ULIP have different fund options such as Equity, debt and money market or combination of them You should switch them from Equity to Money Market (Liquid) fund. While switching from equity to liquid, one should do so near high of broader markets.

2.       Shares: Unless you are ultra-long (more than 5 years) term investor, you are due for action. Most shares fall in price during fall in broader market. So sell your holdings near high and wait patiently for markets to bottom out. You may buy same shares (provided they are fundamentally sound) near bottom again. (Most retail investors do exactly opposite-Buy near high and Sell near low) 

3.       EquityMutual Funds (MF)- Investors tend to withdraw from MF when the markets are falling. As a result the fund faces pressure to perform. If you are not willing to hold the investment for long term or you are planning to withdraw from fund in near future, it is better to withdraw from equity fund. Alternatively you can switch the funds to safer options like liquid fund.

4.     Silver & Gold: It is possible when equities not performing, gold & silver are doing well. Focus on these investment alternatives by way of ETFs, Physical purchase or through futures.

5.     Short Term Alternatives: You may switch to short term investment alternatives if you have expertise. You can earn in falling markets by way short selling in equity orcommodity in F&O. You can temporarily park amount available in liquid funds, and s switch to equity when you fill markets are reversing.

Put your Money to work

We often listen and use the term “Money Grows” or “Money Multiplies”.

Is it actually the money that grows?

No. In fact money’s only characteristic is that it reduces (depreciates) in price over a period of time.

Let’s take an example. One could buy 1 litre of Milk in Rs 8 in 1980. Today, if I go to the grocer, give him Rs. 8 and ask for 1 Litre of milk. He will either laugh at me or throw me out.   Rs 8 have depreciated in its value. Today milk costs around Rs 48 a litre. The value of Rs 8 is depreciated to one sixth in last 30 years or so.

In literal sense money depreciates if it is kept idle. Years back people did not have many alternatives to invest their money. They used to store the cash or coins in their lockers. What has happened to that cash when it was found years later by their next generation? The money was much less worth (or worthless) than what it was when it was stored.

So why we say that money grows?

Let’s take same example. Suppose, people who had stored coins or notes in their locker would have, instead, bought the gold worth that amount and kept in their lockers. Their next generation would have appreciated the ancestors pretty much than in earlier case. Consider the period of keeping the gold to be around 1950s. The value would have been appreciated 280 times today.

It is not the money that grows. It is the asset or service bought in exchange of money that grows in value.

Put your money to work. Don’t let it lie idle.

Either buy assets with the money you have. You will gain the appreciated returns. Assets will grow in price. You will sell it at higher cost to earn profit. Lend (put on rent) your money to someone (let’s say a Bank) and they will pay you periodical rent for using your money. The rent paid is known as interest.

The next task is to choose the asset class (which assets to be bought) or investment class (whom to rent the money). Here the risk reward ratio comes into picture. The more the risk you are willing to take with your money, the more the chance of your money growing faster.

Suppose you have Rs 2 Lac on an average (average balance) lying in your savings account for last 2 years. You would have earned interest of around 28000 with 4.5% compounded ROI in 2 years.

Instead, if you would have bought a piece of land or would have invested in shares or would have bought even a Fixed Deposit, your chances of earning more returns on Rs 2 Lac were far greater. If you would have sold the asset for Rs 3 Lac after 2 years, you would have earned returns with ROI of 14.5%. So as compared to investing in assets or putting it in better asset class, money was lying as good as unused in savings account for last 2 years.

Of course, there is little extra risk involved in all these options. But, as per rule, even the bank does not guarantee your capital beyond amount of Rs 1 Lac. So the risk is everywhere. We are exposed to life threat every time we move on road. It’s the difference in the amount of risk depending on which mode of travel we move by or which road we travel on.

Even in a family or office everyone has some or other task. We do not want a member of family or of office to sit idle. Why let our money sit idle.

So, the next job is to check and identify, which portion of your money is not working for you. Which investment or asset is not earning you the expected returns.It may call for redefining your portfolio.

Market(Nifty) View for period 11^th to 16^th Aug

Last week Nifty continued to fall for 3 days and touched a low of 5486 but managed to close at 5519. Nifty managed to hold this psychological level of 5500.  From here it started its pullback rally on Thursday, which was last session of the week. The closing on Thursday was 5565.

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Recommendations of the Week

BhartiAirtel: Has taken support at 325 and shown signs of strong rally upward. In the week to come expect Bharti to touch 350-355. Buy Bharti at current level of 337 for target of 350. Maintain Stoploss at 322.

Biocon: Biocon broke out with convincing volumes on Thursday. It will touch the next level of resistance which is at 380. Buy Biocon at 337-340 and expect target of 380 in next few days. Maintain Stoploss at 325.

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Disclaimer: Nifty view and recommendations are given to the best of our analysis and data available with us. No one should understand these recommendations as advice. There is substantial amount of risk involved. Bonvista Financial Planners is in no way responsible for any loss occurring out of any transactions.

How is trading different than investing?

Difference between Trading and Investing

After I wrote my last post, many readers were interested in understanding the difference between Trading and Investing.

This post is an attempt to understand how trading is different than investing (in stock market).

Cricket being most popular game in our country, let me use the same analogy here. All of us know the difference between T20 Vs One day. One is short term form while another is little longer. T20 offers its own thrills while One day has its own charm.

Similarly both, investing and trading have their ‘good’ and ‘bad’.

Let’s understand them one by one-

Investing:

Investors usually choose Value Stocks (stocks which are available today at a cheaper rate and are expected to grow in value in next few years) after doing research.  The research can include fundamentals about company. Investors buy these stocks and keep them in their kitty for long term. Investors put limited amount of time in researching the stocks. The holding period usually spans from 1 year to several years. Investors are not bothered about short term fluctuations in stock prices. Investors can earn good returns when the markets are rising. Limited buying selling transactions take place. Investors may buy these stocks by aiming specific life goals like retirement.  

Let’s take an example. One share of HDFC Bank was costing at Rs.200 in 2008. Today one share of HDFC Bank is costing approximately Rs.650. So this stock has generated return of 225% in 5 years. Per year return are approximately 45%. So to earn the return of 225% only two transactions took place. Buying in 2008 and selling in 2013.  

Trading:

Trading, on the other hand, is short term buying or short selling activity to earn profit. The span of a trade is usually from 1 day to six months. Traders use tools like Technical Analysis to predict short term moves of the stock. Traders believe in booking the profit in decided time span. If the stock is not moving in the expected direction, traders exit that stock and enter into another trade. Large number of buying-selling transactions are executed. Traders can earn profit in rising as well as falling markets. (Read my article ‘Investing in Futures’ to understand how you can earn in falling markets). Traders spend lot of time every day to analyse the market moves for coming days or hours.

You may not trade with an amount which is kept for specific goals in life, but the one which is a buffer and you would like to earn better than best returns at the cost of some extra risk. It is like generating extra income source through trading of stocks.

Let’s take an example. A Trader was bullish on Tata Motors which was trading at 270 on 27 June 13. Trader decides to buy Tata Motors as his research tells that it would move higher at or around 300. The stock achieves desired price on 25 July 2013. Here trader decides to book profit. The profit is 11% in the period one month. Immediately after this period, trader’s analysis tells him that the stock would move down to 280 in next few days. Here a trader would short sell the stock on 25^th July and buy it back once the stock achieves price of 280 on 31 July, thus earning 6.6% profit in duration of 4 days.

Trading is strongly supported by advancement in Technology like online terminals, various technical analysis tools, trading advisory services, margins offered by brokers, lot of information on internet etc. 

Finally, you need to decide which one suits you. 

Difference between Trading and Investing

After I wrote my last post, many readers were interested in understanding the difference between Trading and Investing.

This post is an attempt to understand how trading is different than investing (in stock market).

Cricket being most popular game in our country, let me use the same analogy here. All of us know the difference between T20 Vs One day. One is short term form while another is little longer. T20 offers its own thrills while One day has its own charm.

Similarly both, investing and trading have their ‘good’ and ‘bad’.

Let’s understand them one by one-

Investing:

Investors usually choose Value Stocks (stocks which are available today at a cheaper rate and are expected to grow in value in next few years) after doing research.  The research can include fundamentals about company. Investors buy these stocks and keep them in their kitty for long term. Investors put limited amount of time in researching the stocks. The holding period usually spans from 1 year to several years. Investors are not bothered about short term fluctuations in stock prices. Investors can earn good returns when the markets are rising. Limited buying selling transactions take place. Investors may buy these stocks by aiming specific life goals like retirement.  

Let’s take an example. One share of HDFC Bank was costing at Rs.200 in 2008. Today one share of HDFC Bank is costing approximately Rs.650. So this stock has generated return of 225% in 5 years. Per year return are approximately 45%. So to earn the return of 225% only two transactions took place. Buying in 2008 and selling in 2013.  

Trading:

Trading, on the other hand, is short term buying or short selling activity to earn profit. The span of a trade is usually from 1 day to six months. Traders use tools like Technical Analysis to predict short term moves of the stock. Traders believe in booking the profit in decided time span. If the stock is not moving in the expected direction, traders exit that stock and enter into another trade. Large number of buying-selling transactions are executed. Traders can earn profit in rising as well as falling markets. (Read my article ‘Investing in Futures’ to understand how you can earn in falling markets). Traders spend lot of time every day to analyse the market moves for coming days or hours.

You may not trade with an amount which is kept for specific goals in life, but the one which is a buffer and you would like to earn better than best returns at the cost of some extra risk. It is like generating extra income source through trading of stocks.

Let’s take an example. A Trader was bullish on Tata Motors which was trading at 270 on 27 June 13. Trader decides to buy Tata Motors as his research tells that it would move higher at or around 300. The stock achieves desired price on 25 July 2013. Here trader decides to book profit. The profit is 11% in the period one month. Immediately after this period, trader’s analysis tells him that the stock would move down to 280 in next few days. Here a trader would short sell the stock on 25^th July and buy it back once the stock achieves price of 280 on 31 July, thus earning 6.6% profit in duration of 4 days.

Trading is strongly supported by advancement in Technology like online terminals, various technical analysis tools, trading advisory services, margins offered by brokers, lot of information on internet etc. 

Finally, you need to decide which one suits you.