Investment as a parallel Profession

This is a known paradigm. Most of them give an old adage approach to this. Yes the concept is old, probably very old. But how many take investment as a serious parallel profession. May be a few! An overlook into the investment habits of Indians indicates a routine exercise to put the substantial amount into either FDs or in post office schemes. Quite a few years ago Indians were unaware of the investment opportunity available across sectors like equities, bonds, and infrastructure and so on. The absence of liberal financial policies could be accused for this missed opportunity as banks were reluctant to introduce saving schemes which involve risk and profit. Moreover investing in equities was considered as gambling by many middle class families.

There was a shift in this paradigm in the last five years. People started to invest heavily in equity linked policies. But how aware are they with respect to the risk poised or the opportunity available. Ninety five percent of the people who invest in these saving schemes are not aware of this. The results, they end up getting minor returns for the investment or in case of short term investment they end up losing a major part of the principal amount they invested. At the end they quit these saving schemes and moves back to the father of all savings scheme, THE FD. So what went wrong? Who is the culprit? Bank or investor? I would say both are!

There are many points that need to be kept in mind while starting a SIP or ULIP. A) Sign all the documents only after getting a better understanding of the kind of returns the scheme gave for the last two years. B) Understand the exposure to equity in terms of percentage of the amount invested. This will let you know how much percentage of your money is exposed to high risk. Banks, instead of giving an understanding of this to the customer and getting his input, would rather put the entire amount in equity related funds. This result in heavy loses when the stock market crashes. So here the customer has to be cautious. The customer could make an analysis of the market or could get suggestions from other people to check whether its right time to invest in equity linked policies. If the market is undergoing a bubble then have less exposure to equity and invest in bonds or liquids funds.

Once invested don’t let the bank to take care of it. This is the point where part time investment professional makes the most out of the opportunity provided by these funds. One such scenario that he takes care is choosing between the frequencies of premium payment. If you are going for SIP or ULIP make sure that you pay your premiums on a monthly basis rather than on a half yearly or yearly basis. Since these schemes are based on the unit values of NAV, a monthly premium payment will give an added advantage that when the market is down, the number of units bought out of your premium amount will be more and when the market swings back returns will multiply.

The second thing that most of the investors are unaware of is ‘Fund Switching’. They might have seen this along with various saving scheme advertisements. But rarely people take effort to find out what’s the benefit that Fund Switching can offer. Even banks take an approach of not screaming about this as each fund switching add to their transaction costs. We will talk about an example here for explaining the benefit. Suppose A has chosen a 100% equity related fund when he started investment and invested around 25000. He bought 5000 units at 5rs per unit. The next two months witnessed a bull market rally where the market rallied from 10000 to 14000. Since the unit values are related with the performance of equity market, the unit which he bought at 5rs has now become 7rs. But did he book profit? No. This is just unrealized profit. If there are indications that the market will be bearish for the next two months, you can go for a fund switch. Here the investor can switch from equity fund to bond or liquid fund where he can preserve his unrealized profit. When he switches he has 35000 in his hand. He then waits for the bear market. Once the market goes bearish, he again switches his fund back to equity as the unit is available for 5rs again. He ends up in buying 7000 units gaining 2000 units with out additional investment. The next bull market will ensure that he doubles the returns to 25000.

But for those who just leave behind his investments once done, will end up finding the returns to be nominal. It is often found that people often have the ‘Not My Apple” kind of approach when it comes to investment. But what it takes it to keep some tips which can keep you ahead.

So who is better poised to make most out this. It’s you, but be better positioned with some information, just be aware of some market trends and the tremendous opportunity market can provide. Be what ever profession you are into; make investment management as a parallel profession. But wait. “Mutual Fund investments are subjected to market risk. Please read the offer document before investing”.

The Mesmerizing Bubble

It’s raining cats and dogs on a scorching summer day. Beautiful bubbles every where, bursting in seconds creating a mind-blowing atmosphere. Scarce are those who don’t love that beauty. A temporary halt for many in the pursuit for unknown!! Is that what was happening for the last one week in our country? Let’s have a look! The people of India took a bold decision to bring in a stable government at the center, if otherwise could have created chaos in our economy. Now everyone from the farmer to the top guns of the financial institutions hope for the revival of economy. The bubble that occurred in our stock market last week could well be the indication of it.

We will look at what has lead to this bubble. There were cries for more reforms particularly in sectors like retail, insurance and aviation. These reforms were put on hold due to the pressure from the socialist people during the last tenure of the government. But with the formation of a stable government there are indications that liberalization of these sectors will be revisited. This has lead to the rally of aviation, retail and insurance stocks pushing the Sensex 2000 points on a single trading session. The Sensex reached it upper notch three times and the authorities have decided to halt the trading for the day. This is the first time in the history of any stock market that the trading has crossed the upper notch with in seconds. The second reason was the hope for disinvestment in the public sector. The last reason was the increased confidence of foreign investors in the Indian market. Last two month alone have seen an inflow of 3 billion dollars into the market. One of the top financial institution Moody have increased the growth forecast from 5.5% to 7% for the current financial year.

But who all benefited from this bubble? The out-performers were ULIPs and SIPs which saw the unit values going north bound in a week. In last two days investment banks saw the requests for fund switching piling up. We are now not in a position to predict when the bubble will burst even though we have seen profit booking happening in large chunk. But the market is all about these mesmerizing bubble which pulls the investors towards it.

The Business Cycle

The Great Recession of late 2000!! Array of pictures cascaded by the situation just flips through the mind. Everyone from the Hyde Park, London’s most expensive street to the slums of Mumbai is affected. Over 100 million are added to the world's starving population. Questions arising over the persistence of Capitalism. Slogans arising for the implementation of regulated capitalism or socialist capitalism. Government bodies competing against each other reducing the interest rates and pumping in more liquidity in to the market. For Indians this might be the first recession that has a direct impact on their daily life. Its all were dreams they were living when the corporate earning climbed its peak, when investments pumped in giving the lower class a stable source of income which brought millions out of the poverty line, when the skyline of India started to change and many talented youngsters started representing the new face of India. Many thought of being doomed in uncertainty accepting the speculative predictions of the economists.

Question here is 'Is this recession a part of the economic activity?' May be the new face of India is not yet ready to think on this question because we just started to taste the goodness of capitalism or more precisely regulated capitalism. As an answer to the question we will look into the economic activity cycle or Business cycle. In a macroeconomic scenario where we calculate the real growth in terms of the GDP and per capita income, recession can be defined as a slowdown in the GDP growth or a contraction in Business cycle. In fact Business cycle refers to the fluctuation in the economic activity.

In Keynesian economics the factors that led to recession are increased savings and less liquidity. The high interest rates tend the consumer to save more which reduces the consumer demand. This in turn has an effect on the corporate earnings leading to unemployment which further reduces the consumer demand. As the consumer demand falls, the commodity prices starts falling leading to deflation. This deflation will switch consumer from a spending mode to a wait and watch mode. The reduced demand affects the corporate earning results in the crashing of stock market and multiple bankruptcies of firms occur. This kind of scenario is tackled by either decreasing the interest rates or by pumping in liquidity into the market, or by investing in the infrastructure. With the reduced interest rate, consumer tends to spend more which requires corporate to increase the production. Corporate will switch to a debt mode taking huge loans from the bank at low interest to expand the business. This leads to high productivity and high consumer demand. The high consumer demand leads to huge defaults for banks and increased inflation. In order to contain inflation government will step in and start increasing the interest rates again. This cycle continues… This indicates that recession is part of the economic activity. So now we have reached a point where we should think how we can minimize the impact.

But was this the reason for the economic slow down that India is facing. No. You might have noticed the nosedive of our stock market from 21000 in Dec 2007 to 8200 in Oct 2008. As the recession started tightening its grip on the western economies, the foreign institutional investors who have pumped in a major chunk of money into our market started pulling out. 2008 alone has seen FIIs pulling out 58000 crore from our market. In layman's terms it’s pulling out of the 58000 crore from his home. Second reason was the effect on export sector due to the reduced consumption in the western market. Some of the sectors that are badly affected are IT, Textile, Diamond, Iron ore and the list goes on. But most of the non export sectors are still healthy either due to the government policies or due to the inefficiency to have a global organization. One such sector is our banking sector where in RBI has highly efficient regulations for lending.

The obvious answers we got because of this recession are, we are now playing a much important role in the global economic scenario, our economy is inclusive (Less dependent on export compared to other economies like China and other East Asian Economies), our banking sector is strong, and we will be among the first to recover.

COMMON SENSE

Apply common sense man!!! Annoyed of hearing that from your boss. Hold on!! There is something that you can smile and accept. If you look at the life of great leaders you could notice that they were not the best in any respective area. Then what made them great leaders. Is it common sense, is it the thirst for efficiency or is it their positive approach towards constant improvement. It depends on the industry you are into. Let us segregate things. We will move on to service industry. In service industry it’s the efficiency with which you handle frontline employees lead to the organizational success. Leaders here facilitate the decision making at the frontline level by flattening the organization which considerably reduces the bureaucratic delay. In manufacturing industry, the synchronization with the suppliers, optimization of the inventory, innovation of a product or quality of the product can play as the driving force. A leader here creates a team for product innovation or takes the decision of keeping the supply chain lean and efficient to avoid inventory build up. Hey now wake up and think. Are these decisions making a monopoly of a business analyst, or by a Harvard product? The answer is 'NO'. As we think through we will realize that we all play the role of a silent leader in our every day life. Keeping the monthly expense after a salary cut (financial restructuring), deciding on how to tackle an employee who has put on papers(people management), deciding on a new career offer (takeover scenario), deciding on a new marriage proposal (merger and acquisition), deciding on the new loan plans (future investments) and that goes on. These leaders have just applied it on a bigger picture and they agree that its all COMMON SENSE.