India Sensex volatility - mutual funds vs fii

India mutual fund companies and foreign institutional investors (FII) appear to have been betting in opposite directions for most of the recent Sensex growth.

ETIG data highlights this trend:

• When Sensex jumped from 14,000 to 15,000, FII sold shares (net sales) worth 2372.10 crores while Indian mutual fund companies bought shares worth Rs 2891 crores
• Between 15000 and 16000, FII bought shares worth Rs 7307 crores while Indian mutual funds bought only Rs 667 crores
• When Sensex moved from 16000 to 18000, FII bought shares worth Rs 24,372.3 crores while mutual fund companies sold (net sales) Rs 2182.21 crores
• Between 18000 and 19000, FII bought Rs 7378.2 crores worth shares while mutual funds sold (net sales) Rs 966.2 crores worth of shares
• Finally, when Sensex jumped from 19000 to 20000, FII sold (net sales) Rs 1281.1 crores worth of shares while Indian mutual funds bought shares worth Rs 1515 crores.

Question arises as to why two groups of well researched/informed institutional investors have bet on opposite sides in a stock market that has grown to dizzying heights in a matter of months.

It appears, that mutual funds companies in India expected a correction in Sensex when the US sub-prime crisis hit in August - therefore they preferred to lower exposure. While some market commentators expected FII money running away from the US sub-prime mess to come to emerging markets, the relative deluge in to India surprised many a mutual fund pundit ! Domestic mutual funds, who were cashed up, now appear to want to get into the market so as to meet performance hurdles. Interestingly, FII money in the latest run up, seems to be going the other way.

All said and done, while an investor may be able to make some money purely playing momentum, longer term players would be better off considering fundamentals of the company closely while trying to leverage momentum plays. However, if leading institutional investors see fundamentals of blue chips in India so differently, what chance does a retail investor have ?

India gold purchase: could end use be insurance ?

Gold prices continue to rise. On Friday, gold surged past US$ 800 per ounce in New York. Factors supporting rise in gold prices include:

• Rising oil prices
• Financial worries in the US
• Inflation concerns
• Weakness in US dollar
• Geopolitical concerns
• Potential shortage of physical supplies to back paper traded gold
• Continuing physical demand from countries like India.

Despite this rise, prices have not reached the peak reached in 1980 (US$ 850 per ounce on 21 January 1980). However, some market analysts now feel that gold could test these levels. Newmont Mining Corp predicted, two years ago, that gold prices could touch US$ 1000 per ounce !

On the other hand, some technical analysts suggest that gold is in an overbought position and could weaken should US dollar strengthen. Supports are at US$ 802, 797 and 785. Resistances are at US$ 823, 850 868.

If your risk appetite is low and are buying gold this Diwali season (whether resident Indians or NRI), you may be better off buying it for end-use where you can handle volatility as opposed to buying it purely for speculation. If prices continue to go up, the end-use nature would lock in notional profits, but if prices were to fall, the longer term holding nature of end-use may act as insurance against value loss.

People who have the stomach may opt to continue trading based on macro economic situation and technicals – however, as always, this will require keeping a close eye on gold markets to ensure that proper loss protection devices are put in place.

Mutual funds missing in Indian investor's account !

India related investments and savings sometimes throw up unusual challenges. A mutual fund investor in India learnt an important lesson the hard way.

Mid Day Mumbai describes the case of a lady in Mumbai who invested money in State Bank of India (SBI)'s mutual funds through her broker in July 2007. In October, she called up the help line number to check her balance and was shocked to learn that the invested amount was not reflecting in her name. Further investigation revealed that the broker had set up the account in his own name and had issued her a fake statement confirming deposit of the money. She confronted her broker and the money was duly refunded. A case of fraud has been filed against the broker.

This case highlights the ease with which your money can go walk about unless carefully monitored. An Indian investor is better off watching his/her investments closely to ensure all the hard earned money is put to work at the earliest.

Risk appetite for individual investors in India

Exuberance in stock markets (Sensex), of the type seen recently in India, often leads to individual investors behaving in one of two ways:

• Investing with the herd
• Never finding the right level to enter the market !

Both these outcomes have the potential to be painful for individual investors. When you invest with the herd, you are never really sure if you are picking ‘yesterday’s’ good news and therefore buying at close to peak. On the other hand, if you stay out of a rising market for too long, you are likely to miss out on significant gains. What should an investor do in such a case ?

It comes back to thinking of investment as a long term game and building a diversified asset portfolio that meets your risk appetite as you go through different life stages.

A popular yardstick to understand one’s risk appetite for equities is to measure it as ‘100 – your age’. For example, if you are 40, this yardstick suggests that you can have approximately 60% of your asset allocation in equities. In our opinion this yardstick need not be correct for many investors. Risk appetite is a personal matter and it can vary based on an individual’s situation and age.

Some believe that it is better to have an investment strategy built around how much you are willing to lose as opposed to how much you would ideally like to make. Risk appetite could then be defined as how much of value you would be ready to lose over short /medium term (up to 3 years). If the answer is 40 to 50%, then you obviously have a high risk appetite and are investing for the longer term (e.g. 10 years). In such a case, a relatively higher proportion of riskier assets that can outrun inflation by a significant amount could make sense. Investments in stocks, particularly in emerging technologies, mid caps, etc could give you the upside in such situations.

However, if you are willing to lose no more than say 10 to 15% of your investments’ value over the short/medium term, then you can be classified as a risk averse investor who could be better off with more ‘secure’ investments like bank deposits, etc.

If you have the heart to lose between 15 to 40% of your investment value over the short/medium term, you could be classified as a moderate risk investor. In such cases, your portfolio could contain balanced mutual funds that diversify your risks and have about 65% of their assets in equity, the rest being in ‘safer’ instruments.

Please recognise that the investment percentages talked about above are primarily for liquid assets – i.e. do not include property which typically forms a large portion of many investors’ portfolios. Also, the risk appetite percentages of 10-15%, 15-40% and 40-50% are indicative.

We will talk about what a typical portfolio might look like for these three investor classes in a subsequent article.