Stay Calm, Stay Invested

India is attractively placed compared to many other markets

Indian Equity markets falls more than 3%
Today morning whoever has been following the stock markets would have got a shocker with the Indian markets falling more than 3%.  In absolute terms, the Sensex is down 1000 points and Nifty is down 300 points as I write this.
What is causing this fall?
Chinese Currency Devaluation over the last and Chinese growth worries are the main culprit.  Chinese Yuan has seen an devaluation of more than 3% in the last 1 week.  Chinese economy has been in deeper trouble than what the world was thinking about it.  The growth momentum has tapered off and Chinese government has been doing all kinds of things like devaluing the currency, artificially propping up the Chinese stock markets, placing exit restrictions for investors, massive infrastructure spending etc.,  Naturally, Chinese stock markets have been going through roller-coaster rides for the last couple of months.
So, as a reaction to the “cold” China has contracted, the world markets are “sneezing” today.  
As investors, what we need to understand is, these kind of reactions in stock markets are a common phenomenon.  There has been more than 55 instances where the Indian markets have corrected more than 4% in a single day since 2000.  So, this is not the first time the Indian markets have fallen and neither its going to be the last time.
As we invest in Indian markets and stocks, we need to understand how India is placed compared to different countries.  I would bet my money on India than anything other country at this stage, due to the following reasons:
1.  Falling commodity prices are good for India.  We are net importer of commodities (particularly crude oil, coal etc.,) and falling prices will help us to reduce the import bill and there by improve the fiscal condition.  Crude oil is quoting below USD50 a barrel now.
2.  Thanks to competitive devaluation of Indian rupee against Chinese Yuan, we are around 66.48 against a dollar as I write now.  This devaluation would help the Indian exporters.  This would help India IT, Pharma and other export oriented sectors like Textiles, Leather, Tea etc., to gain bigger global market share.  This market share gain can help in improving employment opportunities internally and also for the growth in GDP
3.  We are one of the very few countries in the world where we are seeing inflationary situation.  Most of the countries across the world are in a deflationary environment.  We continue to grow and remain an oasis among the world markets.  The current interest rates in India provides opportunities for rate cuts which can also help the economy.

4. Among the Emerging Markets, India is one of the strongest economies and thereby India would garner more flows and allocations to the Emerging Markets. Our foreign exchange reserves are at an all time high thereby providing much needed comfort.

5.  There is a wave of domestic money waiting to enter Indian stock markets.  Employees Provident Fund Organisation has recently started investing in Indian equities, which goes on to validate that equities are the asset class to be in for the long term wealth creation.  Other than EPFO, there is a huge amount of domestic investor money coming in through Insurance and Mutual Funds.  These fresh buying would provide the support for the Indian equities in the weeks to come.

The current market fall has more to do with the global developments like China slowdown and the expectation of slowdown of commodity exporting countries (like Saudi Arabia, Indonesia, Brazil, Russia etc.,) owing to fall in commodity prices.  India stands to benefit in this scenario and we should use this as an opportunity to increase our equity exposure.  

Always remember, we are not investing to make quick returns from equities but to build wealth over the long term and to meet our various financial goals.  Therefore, there is nothing to panic and and this sell off in the markets is a good opportunity to buy towards building long term wealth.

If you are doing monthly SIPs, there is absolutely nothing to panic and these lower prices would help you to get better entry prices for this month’s instalment!

If you are waiting on the wings for a better entry opportunity, I think this is one for you!

Stay calm, Stay Invested!

Equity as an asset class – Part III

Welcome to Part III of this series.  You can read the Part I here and Part II here.

Immediately it struck Ajay – Does this mean, this is the perfect asset class? Should I go in for that PMS investment straight away? Hari cautioned him against the same. For a beginner is best to invest in equity on a periodic basis rather than going for lump sum investments. Plus a PMS scheme may not be the optimal investment mechanism.

This brought smile to Ram’s face. He said, he was now convinced about equity and would start investing based on the trading tips he gets. Again Hari, counseled him about the dangers in direct investing based on rumors.

With a smug look, Bharat turned around to Ajay and Ram – see, I was on the right track all along, right Hari? Hari complimented Bharat on investing his money periodically in equity over the past ten years. He has reaped tremendous returns. Investing via mutual funds is the most efficient way for busy professionals. But if Bharat had continued to invest throughout instead of stopping in 2009 when the market was at a low, his returns would have been even better. Plus it is not a good idea to put all his money in equities.  Proper asset allocation based on your needs and goals is vital. You should then plan the amount you invest in equities.

Hari had some quick closing suggestions for his friends:

  • Equities will give excellent returns in the long run. But they will have high volatility in the short run
  • Investing in diversified equity mutual funds via the Systematic Investment Plan (SIP) route is the best way to proceed and take advantage of the price volatility
  • Over long periods of time, the so-called volatility associated with equity investing gets evened out and you stand to make returns which not only inflation beating but really adds up to your capital

As there are more than a 500 equity funds, his final advice was to find a good financial planner and plan your investments. Once they understand your needs and goals, the planner will help to determine the optimal asset allocation.  They can then determine the right mutual funds to invest in.  But this list should be reviewed on a periodic basis.

On that note the friends parted company and they resolved to be in touch and see how they make progress. Happy Investing!!