FLAME Newsletter - May 16, 2012


QUOTE OF THE WEEK:

If you want the rainbow, you gotta put up with the rain.

Gains and losses are all part of the game when it comes to investing in the stock markets. Since equities are riskier than other investment options such as fixed income instruments, bonds, gold, etc. the returns on equities can also be better than these other asset classes, provided the economic situation is favourable. Those investing in equities should be prepared to stay invested for a long period of time. In this period, the markets will possibly face several ups and down triggered by economic data announcements or geo-political tensions. The key is to look at the bigger picture. If the fundamentals of a particular stock or sector look favorable to you, it would be best to hold on. However, keep an eye on any development that might have a long-term or permanent implication on your investments such as changes in interest rates, government rulings etc.

The current picture does not look very rosy. The rupee is at all time lows, foreign investors are wary of putting in their money in the Indian markets due to uncertainties over taxation and we are facing a policy paralysis by the government. Globally too, the situation is not any different. Growth in China is slowing and Greece may bid goodbye to the euro zone. At such a time, one wonders is it a good time to invest?

While the good part is that a potential investor will get his desired stocks at lower prices owing to the downturn, one really does not know where the fall will end. For those who can enter the equity market and wait, it might just be a great time to start.

A PICTURE SPEAKS A THOUSAND WORDS...

 

YOUR FINANCE DEMYSTIFIED:

What Should an Investor Do When the Market is Volatile?

The outlook for the rupee, stocks and bonds is uncertain. The economic recovery in the US is fragile. Euro zone debt worries are omnipresent economic growth in China is slowing. At this volatile time, some experts say that this is the best time to buy stocks while the others suggest waiting for some more time.

The general investor is confused with such contradictory advice. Here are a few points that will help you take a right decision.   

Remember all the basic rules   

Remember one thing; the basic rules of investments will never change no matter what is the market situation.

  • The equity market may keep swinging for some time now, but it will perform in long run as it always has.
  • Long term investments in equity are still your best choice.
  • The market is unstable at present but you should stick with your basic knowledge. If your asset allocation is correct and favourable, the market situation will largely not affect your investments.  

When to buy?

The current market situation is making many investors opt for big company stocks as they are available at affordable prices. When the market is rising, these stocks are costly for general investors. But when the market is unstable, prices of these stocks are in a range where investing in them becomes a good option for long term investors. You can buy stocks of a few big companies now and wait for future when the market situation improves and returns turn higher for these stocks.    

The situation in India

As the Indian economy is a growing and emerging economy, the situation is expected to be better than most western countries. We might be battling inflation, but our growth numbers are higher that the West. Also, we are still an attractive option for overseas investors. The situation is more unstable in Europe and America and the recovery is expected to be slow. The current high interest rates of banks in India may encourage customers to save more and spend less. This way, we will soon have a substantial amount to invest. 

Long term speculation

According to experts, the Indian stock market will settle sooner than other European countries. That is why it may be a good time to opt for long term investments. Trust stocks of companies which have good name in the market. Buy big and stable company stocks for the long term. 

How can you gain from Market Volatility?

The market situation is highly uncertain currently and these are very tricky times for investors. Some investors stay put at such time while some withdraw most of their investments. There are even some who buy stocks when they have fallen and then hold them for a long time. When you see an investment option is providing you good returns, more often than not, those options come with high risks. This risk factors rise while the market is unstable. Arbitrage funds are the best option for these times. Arbitrage funds have a history of performing well in uncertain market conditions.

Arbitrage funds    

Sometimes, a particular security or commodity comes with different prices in different markets. Arbitrage funds work with this difference of price. A particular stock comes with different buy and future sell prices from different stock markets. The arbitrage funds can gain good returns, without risk, by buying the stock from lower priced market and save them to sell in the future in a market which gives a higher price.

This practice allows arbitrage fund managers to gain even in the most unstable market, making arbitrage funds the safest bet in uncertain situations. They offer you risk free returns at all times.

Arbitrage fund managers diversify your investments in the right places so that they can work on price differences in the best way possible. Their main goal is to provide you a return based on the price differences in an unstable market.      

Best time for investment

Arbitrage funds need an unstable market to work because in stable market situations, the price differences remain very low. One has to remember that these funds are safe but their returns are limited. So, in stable markets, the returns translate to almost nothing. This also makes them successful only for a short period of time. An investor should only invest in ultra short term arbitrage funds when the market situation is uncertain.

Taxation

If an arbitrage fund consists of 65% or more of equity products, it will be taxed as an equity fund which has tax benefits. If this ratio is not maintained, the arbitrage fund will be considered as a debt fund and will be taxed accordingly. 

IN THE NEWS THIS WEEK:

News over the last few days has been discouraging to say the least. First, industrial production for March showed a contraction in growth, then inflation for April came in higher than expectations and now the rupee has hit an all-time low against the dollar. However, for those who are looking to enter the market and have time on their side, it might just be a good start. Come prepared for the volatility though.

India's industrial output shrinks 3.5% in March

India's inflation climbs back above 7% in April  

Rupee hits new record low on eurozone woes

TERM OF THE WEEK

Hyperinflation

It is an economic situation in which prices are increasing with little or no incline in output. It is also known as runaway inflation and galloping inflation.

ABOUT FLAME

FLAME (Financial Literacy Agenda for Mass Empowerment) is an IIFL initiative to promote financial literacy amongst the masses in order to make them an integral part of India's spectacular growth story.

In an era of accelerating GDP and rising per capita growth, financial literacy has become more critical than ever before such that we all reap the tangible benefits of the nation's economic prosperity. Financial inclusion has been quite high on the governmental agenda, given its emphasis on widening the Banking & Financial services network across the country. IIFL's FLAME initiative stands committed to complement this effort by helping common people gain financial growth and security though better awareness and education on the variety of financial products while avoiding the lure of and loss from unrealistic claims made by unscrupulous agents and ponzi schemes.

Our objective is to light a FLAME, as the name suggests, which will set ablaze a chain of FLAMEs across the country. The new-found light of knowledge will undoubtedly dispel the dark clouds of financial illiteracy and ensure the bright sunshine of financial growth and prosperity.

This portal is but one of the various IIFL initiatives that would be part of FLAME.




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