Sub-Prime Market Earthquake is Felt Worldwide

The shock waves emanating from the sub-prime mortgage earthquake are now spreading around the financial world. The collateral damage is being unveiled so quickly that it is difficult keeping up with all the collapsed hedge funds, injured banks, and defaulting mortgage brokers. It is difficult to make sense of all of this, partly because financial reporting in today’s business publications is almost non-existent. Reporters usually repeat what is in some company’s press release, and only a few with experience and investigative instincts can really go below the surface and make sense of things. To be fair to the reporters, this crisis is a bit different, because the hedge fund industry is deliberately and obstinately opaque. Hedge funds reveal little about what they own or how much they borrow. That iron curtain of information about hedge fund exposures is making this crisis much worse.

And it is a crisis – probably the defining financial event of this decade, which will impact global economic growth for the next few years at least. Most of the time, financial markets are in offensive mode. Investors are happy to put their money into assets with varying degrees of risk, and banks are happy to lend money to investors for this purpose. Every so often, the financial markets become defensive, and investors start worrying about whether they could lose money on their investments not just from market risk (changes in interest rates or FX rates, for example), but from credit risk, where a default could devastate the value of an investment portfolio.

Global financial markets are now in full defensive mode. The global financial plane has set down on the runway with its reverse thrusters roaring, and the pilots are hoping just to keep the plane from skidding off the surface. The outcome is uncertain, and clearly not all passengers are going to survive this forced landing. Just to complicate things, there is an earthquake underway that threatens to rip apart the runway; it all depends on how far the runway is from the epicenter of the earthquake.

Or, to put this analogy in more practical terms, it all depends on the extent to which the global financial markets are at risk from the sub-prime mortgage mess, because that is the epicenter of the earthquake. Don’t be fooled by what Treasury Secretary Henry Paulson said yesterday; the sub-prime mortgage mess is not “contained”. Problems are spreading to all sorts of financial sectors. Let’s look at these shock waves market by market.

The Epicenter

Real people who have real problems meeting their mortgage payments in the U.S. are at the very center of this financial crisis. These are decent people who in past markets would not have been able to get a mortgage, but in the free-wheeling mortgage circus of the past five years they’ve been able to obtain loans with very beneficial terms such as no proof of employment. They were given low teaser rates that are now setting at much higher market rates, but these are higher than current market rates, because they have to compensate the banks for the cost of providing the low teaser rate in the first place. Depending on which mortgage executive is admitting to what, anywhere from 15% to 25% of these borrowers are behind on their payments to the bank, or in foreclosure. These are very high default rates historically, and given the hundreds of billions of dollars of sub-prime mortgages that have been booked, there is a serious amount of money that is going to be lost.

At the epicenter, it is best to remember we are talking about direct credit losses from customer defaults on the loans they were given. As we move further out to the concentric shock waves, this pure default risk is not a problem, at least not yet. In the outer fringes, the problems relate to portfolios that need to reduce leverage, and to investors and bankers retreating from reckless lending policies in place for most of the past five years.

Wave 1 – Sub-Prime Investors

In olden days (about 10 years ago), the bank that made the mortgage would hold on to it and bear the burden of these credit losses. But in the past decade a whole new market has arisen that securitizes these mortgages, by bundling together thousands of them, and then selling the cash flows as bonds. Large, institutional and presumably sophisticated investors can buy these bonds, almost all of which were rated by S&P or Moody’s as AAA because the great bulk of the mortgages in the bond were rated highest quality prime, and only a small portion were sub-prime mortgages.

Bear Stearns, the New York investment bank, announced a few weeks ago that two of its hedge funds had invested in these types of bonds, and the hedge funds were now broke. If the investments had only a small percentage of these sub-prime mortgages, how could the entire hedge fund go under? The answer here is the miracle of leverage. Bear Stearns for one of its funds had raised about $600 million in cash from investors, but then borrowed over $5 billion more from banks to leverage up the profits in the fund. This leveraging is routine in the hedge fund business, and is the main reason why so much debt has been taken on in recent years in the financial markets. All it took therefore was a not unusual 10% devaluation in the value of $6 billion in bonds to wipe out the $600 million in cash equity in the entire fund. The real problem here is that a not terribly large change in value can act as a force of destruction through leverage.

The second problem is that the banks that lent the $5 billion to Bear Stearns changed the rules. In order to lend this much money, the banks had all the assets of the fund assigned to them as collateral in case the value of the fund’s assets ever fell significantly. When the crisis began, and they saw that 10% of the value of this collateral could disappear, they did some worst-case scenarios and realized that potentially much more damage might occur. They demanded more collateral from Bear Stearns, which really meant that Bear Stearns had to sell some of the fund assets at a time when prices were heading downward. That only makes the price depreciation accelerate, and before you know it – poof! – $600 million of equity is wiped out.

Yesterday two more investors in hedge funds alerted the markets to a similar problem. Radian Group Inc. and MGIC Investments claimed that about $1 billion in investments in sub-prime mortgages were now worthless. It’s not yet clear whether leverage played a role in this problem as well. What is really noteworthy is that both of these companies are mortgage insurers – their business is to protect investors who hold mortgages. What does that say about the mortgage market when the insurers themselves are starting to take sizeable losses?

Wave 2 – Alt-A Investors

A step above sub-prime mortgage borrowers is the Alt-A category. These borrowers do not have the high credit scores and solid payment history of prime borrowers, so they fall into an A- category. It was only two weeks ago that market experts were insisting that there was no contagion in this category from sub-prime problems.

Countrywide Financial, the largest mortgage lender in the U.S., said last week that indeed Alt-A and even prime mortgages were now experiencing a surge in late payments. Yesterday, American Home Mortgage Investment Corp, which specializes in Alt-A mortgages, announced that it no longer had liquidity to continue making new mortgages. This has stranded thousands of potential borrowers with nearly $500 million in mortgages waiting in the pipeline. AHM’s problem is an investors’ strike combined with a lenders’ strike. The investors that bought the securities holding AHM mortgages are demanding that AHM buy back these securities because of the unexpected default rates. On top of this, the banks that lent money to AHM are shutting down access to this credit, and companies like AHM can’t stay in business without the banking industry’s support.

The banks are back-tracking not just because they understand how damaging these high default rates can be, but because they are running stress tests on the mortgage markets and coming up with much higher damages from worst-case scenarios than they had previously thought. Also, some of these big financial institutions, like UBS in Switzerland, and CNA Corp., have announced substantial losses of their own from sub-prime mortgage investments. Top bankers in these institutions are losing their jobs, and there is nothing like a banking executive being put out on the street to elevate the fear level of all bankers.

So much for Henry Paulson’s view about containment. The U.S. now has thousands of borrowers with good credit who cannot get a mortgage.

Wave 3 – High-Yield Bonds

High-Yield corporate bonds are long term debt obligations that receive an S&P or Moody’s credit rating below investment grade. In other words, they have a significantly higher risk of default than investment grade bonds. They therefore offer a higher yield, but in recently years the difference in the interest rates on poor quality versus high quality debt has shrunk dramatically, so that recently this “spread” was at historically low levels.

That is now changing. The market is “repricing risk”, according to Henry Paulson, and part of that process involves investors selling some of the low quality paper and moving into safer investments.

Macquarie Fortress Investments is a hedge fund managed by Macquarie Bank of Australia. This fund invests in high-yield corporate bonds, not in sub-prime mortgages. Yesterday this fund announced that it has lost about 25% of its value, because it was “forced to sell assets to reduce borrowings.” It’s our old friend leverage at work again, this time in a pernicious way. The fund simply had borrowed too much money in comparison to its cash equity – the amount actually put in the fund by investors. Depending on the leverage ratio, it would not take that big a decline in the value of the high-yield bonds to wipe out 25% of the equity of the fund.

Yet another casualty in this market is Sowood Capital Management LP, managed by a former hedge fund guru from the Harvard University endowment, which has been the premier hedge fund investor among university endowments. Harvard even put in $500 million of its own endowment into this fund when it was started a few years ago. The fund has now lost $1.5 billion, or 50% of its equity, seemingly from leveraged investments in high-yield instruments. Sowood Capital has now been purchased at a deep discount by Citadel Investments, a so-called vulture hedge fund that specializes in scooping up distressed hedge funds, and which can continue in this business as long as its banks continue to provide financing.

Wave 4 – Asset-Backed Securities

Asset-backed securities are even further removed from sub-prime mortgages. These securities act like bonds, composed of thousands of small loans made to finance automobile purchases, or retail purchases using credit cards.

Bear Stearns runs the Bear Stearns Asset-Backed Securities Fund, which has $900 million in assets, less than ½ of 1% of which are sub-prime mortgages. This fund also has $50 million invested in cash, a 5.6% cash ratio which is about average for such funds. The fund has no debt whatsoever, so leverage does not come into the picture. Yesterday Bear Stearns announced it was halting all investor withdrawals for this fund. Apparently investors in the fund were so worried about the name Bear Stearns that the redemptions were forcing asset sales, which Bear Stearns as manager felt was inappropriate. None of the assets is in default, and Bear Stearns’ logic is that it should wait out the current turmoil in the market rather than enter into forced liquidations. The rules of such funds can force the investors to sit and wait for indeterminate periods before they can get their money out. It’s another example of the market freezing-up, and it’s a case also of contagion, this time through the sour reputation of the Bear Stearns brand.

The Seismologists

Registering the strength of the earthquake are any number of marketable securities and indexes trading on public exchanges, measuring such things as the credit-worthiness of bonds issued by banks. As an example, the iTraxx Crossover Series 7 Index consists of the bonds of 50 European companies, each bond worth Euros 10 million in value with a five year maturity. If you buy a contract, you are purchasing insurance protection against the risk of default in these bonds, so the higher the purchase price, the greater the perceived risk of default. Yesterday the contract value jumped Euros 59,000 to a total cost of Euros 459,000. Compare this to the contract size of Euros 10 million, and you get the idea that the market thinks the default risk for these European companies has jumped to 4.59% over the 5 year maturity of the bonds. That’s an extraordinarily high default rate, on the level of junk debt.

Similar indexes around the world are showing a sudden jump in the cost of protection against default. The prices in the secondary market for bonds issued by Bear Stearns, Merrill Lynch, Goldman Sachs and other Wall Street banks have now fallen so low that they are trading like junk debt.

All these measures and trading instruments show the same thing: credit default risk is considered to be dramatically higher in the market now compared to even a month ago; spreads between poor quality and high quality paper are widening, and the contagion is seeping into newer areas of the market.

The Regulators

Other than the U.S. Secretary of the Treasury, how come other regulators, such as central bankers, haven’t come to the rescue of the market with press statements of reassurance, urgent meetings of banking executives, extended lines of credit to commercial banks, or other similar measures?

One reason may be that the speed of the collapse of the credit markets has caught many observers by surprise. Second, it is critical to remember that the epicenter of the earthquake, and the hedge fund industry that is clustered around the epicenter, are not regulated by the central banks or agencies such as the SEC or Financial Services Authority in London. Like the rest of us, the central banks know very little about what the hedge funds own or even how much they have borrowed.

This is a crisis that is happening in an information vacuum, which means that rescuers will be in short supply and operating with limited tools.

How bad could it get?

This crisis could metastasize into something very serious. Many more hedge funds could disappear, the banks can become panicky over calling for more collateral (thus forcing even more sales of assets in poor market conditions), and the real spillage into the economy of normal people, such as those Alt-A borrowers who now cannot obtain mortgages, could push the U.S. into a recession. Once the U.S. succumbs, China will not be far behind.

This scenario is possible but it is very hard to rate its likelihood, because we simply don’t know much about the exposures of the hedge fund industry, which is the sector which is the source of contagion since it touches so many different markets.

Another possibility that would be far preferable is one in which the announcements of problems taper off in the next week or two, and then disappear altogether. In this best of circumstances, the financial markets will still be left in paralysis for many weeks or months before credit risk-taking can resume. Moreover, it is highly unlikely even then that the markets will return to the “golden age” of unlimited and ill-advised credit that well-known leveraged buyout king Henry Kravis was bragging about just a month ago. There has been too much damage already for the hedge fund and private equity industries to be able any more to swagger and bully their way into obtaining mega-billion dollar loans.

Are there any clues provided by the stock market? Equities have taken a severe battering in the past two weeks once the extent of the sub-prime problem became known. Stocks like Mizuno Bank of Japan have dropped 10% or more merely from announcing some losses in their investment portfolios. In the case of American Home Mortgage Investment Corp., that stock has fallen 90% amid market rumors that the company is facing bankruptcy.

The good news is that almost every indicator of stock market strength shows that the markets worldwide are very oversold, and thus they are ready for a one or two week bounce back. That may be indicative as well of some stability forthcoming in the credit markets, and maybe – just maybe – a market meltdown can be avoided, at least for now. If so, we are left at least with some temporary paralysis in the debt business, giving the markets enough triage time to sort out the irretrievably doomed from the walking wounded, and a little bit more time to ask how this disaster came about.

SIPs do the trick for funds

Systematic investment plans (SIP), through which mutual fund investors put a fixed sum into MF schemes, are proving to be engines of growth for fund houses with the number of SIP investors growing nearly three times since last year, reports The Business Standard. While the fund houses are betting high on SIP inflows, the retail response to their equity schemes has been fluctuating as retail participation to new equity schemes depends on the stock market sentiment at that point of time. Some of the MFs have even brought down the the minimum investment under SIP to Rs 100 and Rs 50 for their special schemes, from the earlier lowest size of Rs 500. "The number of SIP investors is growing. This is also beneficial for mutual fund houses. Presently, the industry has nearly 12.5-13 lakh SIP investors, which has tripled from 4.5 lakh an year ago," said Milind Barve, Managing Director, HDFC Mutual Fund.
The equity scheme-focused fund house has been adding SIP investors to its fold for a long time. Currently, it has 3.75 lakh SIP investors. "The SIP is especially helpful for big fund houses who have to maintain their position in the monthly Assets Under Management (AUM) race. Normally, the inflows into equity schemes dip at the end of the fiscal or sometimes investors defer their equity investments due to weak market conditions. A bigger number of SIP investors means the fund house’s inflows remain constant," said Subhash Bagaria of Angel Broking. After bringing down the SIP levels, the funds are also asking distributors to focus on getting more SIP investors for the New Fund Offers (NFOs). Recently three MFs, Reliance, ICICI Prudential and Lotus brought down the minimum size of investments for SIP. "Given the current levels of volatility in the markets, we believe that entering the equity markets through a SIP will yield adequate returns while minimizing the risks related to investing in equity. We have endeavoured to make this investment option accessible and affordable to a wider range of investors who wish to participate in the equity markets but have restraints on liquidity," Ajay Bagga, Lotus MF said. Industry sources, however, indicated that the MFs were bringing down the SIP levels in an attempt to bring in the middle and lower middle classes, who have traditionally put their money in savings, into their fold. Following UTI and ICICI Prudential’s moves to develop micro SIP options for rural areas, other fund houses could also launch similar schemes in the future. Some of the MFs have even brought down the the minimum investment under SIP to Rs 100 and Rs 50 for their special schemes from the earlier lowest size of Rs 500 The SIP is especially helpful for big fund houses, which have to maintain their positions in the monthly Assets Under Management race.

Mkt valuations stretched, limited upside from here: Tata MF

Ved Prakash Chaturvedi, CEO, Tata Mutual Fund, feels that valuations are currently stretched and the upside from here is very limited. He believes that three factors - monsoons, China and interest rates - will play a major role in deciding which way the market will head. Here goes an interview with Mr Ved Prakash Chaturvedi.

Q: What have you made of the run up of this market and do you expect to see a continuation of that in June or an easing of?

A: For the moment, the news flow and fund flow is very good. There is a fair bit of fund raising happening in the domestic market from mutual funds for domestic equities and we have had fairly good flows. The fund flows are looking good and the news flows has been good. The economic growth for FY07 has been reported at 9.4%, which is second only to China’s about 10%. There is no reason to say that we are going into a period of any concern but clearly valuations are stretched and the upside from here is very limited. I think the market will remain in a consolation phase.

Q: How did you approach that number itself - nearly 9.5% GDP growth? Are you revising any of your earnings forecast for FY08?

A: Broadly, the number of around 9-9.2% was anyway factored in; so what the market is learning from this also and what I have been talking about for some time is that if you look at the last 18 months, the midcaps have significantly underperformed the large caps. The market was virtually driven by a handful of stocks and that is going to change now because clearly if the entire economy is growing, it means that large and small companies are growing too; hence, the focus will shift back on the companies that are growing, but which are at a significant discount to the large cap companies and I guess that is a phenomenon we are seeing in he market right now.

Q: Just getting back to the point you were making about mid and small caps - what is your sense of how all this fresh money will be deployed at this point? Are these levels where you think a lot of that money will get put in or better prices will emerge?

A: If you are talking from a mutual fund perspective, I think typically mutual funds like to put in money or a large part of the money they raise, because NAVs are benchmarks to Indices and hence the fund manager’s typical inclination is to put money as soon as possible. However, I guess in some of the mainline stocks, clearly prices have run up and we are virtually at the peak of the valuation band. My sense is that much of the money that will get deployed now would get deployed in companies where valuations have not run up in the last few months. Hence, by definition, some of the midcaps will attract interest and maybe as far as large caps are concerned people would want to wait for some time and see more moderate prices.

Q: Would you put your money in Gilts at this juncture, as we have seen a significant run-up in at least shorter term paper?

A: From a mutual fund perspective, we have separate Gilt funds and I would say that yes, they made good money. That is the interesting point, because if you look at a one year perspective and if you look at the headroom left in the Index, at least it is not much and actually over the next one year we might have a situation where long bonds may give better returns than some equities.

Q: What have you made of the resurgence of a couple of erstwhile leaders in this market like capital goods and the like?

A: As you know, we have been bullish on the infrastructure and capital goods companies for a long time. We launched the first fund, the Tata Infrastructure Fund, which got money from retail investors for listed infrastructure companies in India. My sense is that it is a no-brainer space and there would be times when prices will decline.
I say one simple thing - you can’t import infrastructure; it has to be built by local companies and we have only a handful of large local companies, which will really be benefiting from all this infrastructure building and I think over the next four years, I clearly see that this sector again will be among the best performers in this market.

Q: What about realty companies? They have had a fairly decent run today and yet there is a big one coming in the primary market. Do you think that the presence of that kind of a primary issue would sap any energy out of the secondary market realty stocks?

A: I guess on realty I have not been a big bull, because of three reasons. One is, I think there is a lack of transparency in accounting, some of which has really come to the front pages of newspapers in the last few months.
Point number two is that for the quality of construction, I guess the prices that are being paid today by individual buyers are too high. Hence, quality has to improve and prices have to come down.
And last but not the least, my sense is that increasingly at prices, which we have now, a lot of realty space has gone out of the reach of the average middle-class consumer. Hence something has to give at some point of time. So, I am afraid at this point of time, I am not a big bull on realty. I guess one can wait and get better prices.

Q: What would be your choice sectors at this point in time? You did speak about capital goods but which other sectors and in particular, what is your outlook on the IT stocks?

A: I would watch four sectors very closely; I would watch capital goods and engineering, IT, telecom and the fourth sector would be the pharma sector, which is a bit of a contrarian sector at this point in time. I would watch this sector for newsflow; in my view, obviously the IT companies' results would be impacted by the currency movement that we have seen but I guess a lot of it is in the price. And if you speak to these companies, the volume growth too look very good and the fundamental story is intact.
So there would be a one time situation where these quarter numbers would not look very good but from the next quarter end, again there would be a zip back in these stocks. They may underperform for a bit while, but I would look at that space very closely. I think the volume growth in the performance of these companies is going to be very good again this year.

Q: How do you plot the next two months or so for this market in terms of big cues? What is it that it will be tracking, is it the monsoons, is it any other move from the interest rate front or is it from the global shows like what the FOMC might have to say?

A: I think there are three big cues. One is what happens to the monsoons. Second, what happens in China? We have seen a frenzied bull run there and we have to see how that unwinds. Thirdly, in the next two months we might see a paradigm shift in the outlook for interest rates in India. All these three factors will play out in the market.

Q: Why aren’t any rates looking for a drying of the liquidity that is feeding on the Indian stock markets for the past so many years?

A: I do not think so. Whenever we go overseas to raise money there is such a fantastic amount of interest on India. Over the next six months, we will be in a trading band. The upside is really limited because valuations are fresh. I guess the impact of high interest rates will, at some point of time, begin to filter into demand and corporate performance. The downside is really limited by the sheer interest in India. We will feet it the first time and you will feel it the first time when we go out to raise money. There are so many people who have not yet put money into India and want to know how to put money in. I guess we will be in a trading band, which would be anywhere between 12,500 to 14.800 levels, and may be we will have to live in that for sometime to come.

Q: You were speaking about capital goods, IT, pharma as the spaces that you would watch out for. Would your yardstick be different for midcap stocks and on the balance would you rather concentrate on midcaps in the next three-four months?

A: I would concentrate on midcaps. I think my yardstick would not be different. I would look at this space. We have a more diversified basket in midcaps. I would watch these spaces very carefully.
What always happens in India is that, in the initial phase of a rally, a lot of the money that comes from the market is from overseas and hence the largecaps typically outperform, which has been a prolonged space this time around. Then domestic funds raise money and start deploying it in the market, which has happened in the last three-four months. Since these domestic funds have a lot more focus on domestic midcaps, these companies get attention and value, and we are seeing some signs of that right now. A significant amount of money, may be about a billion dollars has been raised domestically in the last four months for the domestic market and some of that has really weighted towards midcaps.

Q: What is the call on cement now? It almost seems like a forgotten sector. With the onset of monsoons, how do you think that sector will pan out over the next three months in terms of pricing and the sector as a whole in terms of growth?

A: I would say that I would be very cautious on cement for some time. Obviously, monsoon is not a good period for cement companies and we need to watch the realty space more closely; banks are clearly talking about a slowdown in mortgage lending and stuff like that, as the realty space is one of the highest consumers of cement. I would be very cautious on cement for some time.

Q: What about two other spaces - one of them of course came out with a lot of numbers today - the auto space and the metal space?

A: Actually, I would say that selectively I would look positively at metals. My sense in automobiles is that yet the high interest rates have not filtered towards the consumer demand; we will need to watch that space closely. But I would be very careful. All of us know that in at some point of time a significant part of automobile demand does come from leveraged buys; hence in this reasonably high interest rate scenario, one might want to be cautious on that phase.

Q: Any Disclosures?

A: All statements made in this show should not be construed as recommendations for buying or selling of any individual securities. Comments on individual companies or sectors should be seen in the light of the fact that either I personally, or the funds we manage may be buying or selling into these companies or sectors.

Say ‘No’ to Dividend Payout

There are three options available to us whenever we invest in a mutual fund - Growth, Dividend Payout and Dividend Reinvestment. Many investors are not very sure as to which option is better.
However, the choice of option can make a difference in the final returns because of a couple of other factors.

• When the dividend earned is not reinvested, the returns from a Dividend Payout option will be somewhat lower than Dividend Reinvestment or Growth option. In other words, it is our investment strategy, which will affect the returns, not the choice of option per se.
• The applicable tax rate on the type of fund (debt or equity), the holding period (less than or more than 1 year) and the type of earning (i.e. dividend or capital gains) is different. Hence the post-tax return under different options will differ. The major impact, though, is on debt funds. Again an external factor viz. tax which affects the final returns.

While, we considered the tax aspect in the aforesaid article, in this article let us take the first point forward and see how much impact it can make.

Before we do that, here are a few investing traits commonly found amongst the investors:

• Psychologically it is quite comforting to receive cash from our investments from time to time. Therefore, even if we may not need this money, many times we still opt for dividend payout option
• We diversify our investments across many funds, which of course, is a good thing to do. But it also means that the dividends that we receive are a few hundred or thousand rupees. Since the individual dividend amounts are small, we generally tend to spend it rather than reinvest it.

By doing so, we lose out on the full benefits of compounding. All profits earned are, of course, not distributed as dividend. Since they remain in the fund, we earn compounding benefit on that amount. But we lose the benefit of compounding on the amount distributed as dividend. (Even if we were to later reinvest this dividend, there is some time lost in between and also we may have to pay entry loads.)

Now let us take an example and see what we stand to lose if we choose Dividend Payout option vis-à-vis Dividend Reinvestment (or Growth) option. Of course, kindly remember that here we are basically discussing equity funds and long-term investment horizon.

Exclusive interview with Dhirendra Kumar, CEO, Value Research Online:

Q. Does SIP give you same benefit through market ups and downs?

A. If you invest lump sum in a market, you generally have a harrowing time managing anxiety levels when the market shakes. If you invest methodically and invest over a long time on a regular basis, you can start with a small amount. It also helps investor remain focused.

Q. Should one go for existing or new fund when one invests in mutual fund through SIP? While only existing funds allowed SIP earlier, new funds have now started giving the option of SIP from start.

A. My advice is to go for existing funds, which have been tried and tested. Although track record doesn't mean much to investors, performance of the fund can be taken into account while choosing a fund. To make money from equity, you choose a good fund. As new fund doesn't guarantee good performance, it is better you go for an old fund. At least it is easy to know track record of an old fund.

Q. Subscription limit of SIPs has been brought down from a minimum of Rs 500 to Rs 50 per month by the mutual fund companies. What kind of value should an investor expect when he or she invests a small amount?

A. One should not look at it in terms of value. In fact, SIP has democratised mutual funds. Earlier not everybody could afford to invest in mutual funds. Now everyone can participate in the market. When you invest in micro SIP, your focus will not be on daily returns and you are likely to get good returns in four to five years. Until now the mutual funds have been viewed as an opportunistic investment, but with the launch of micro SIP, investors will see it as a medium of small saving also.

Q. Should one invest in SIP when the Sensex is moving up?

A. SIP is for those who get bothered with the share market ups and downs and therefore are not able to start investment in the market. I suggest don't bother about market ups and downs and invest regularly and select a good fund.

Q. What is the impact on the SIP returns of the falling NAVs of the mutual funds when the market goes down? Is the magnitude of the impact on the SIPs same as that on the lump sum investment in mutual funds?

A. When the market falls, the NAV or value of the mutual fund also comes down. But for SIP investor, it is a good medium of anxiety management. For regular investors, it is good in the sense that they can buy at lower rates when the market is at a low. However, it is not so good if you have to withdraw money in next two months and the market falls just around that time. So it is important to plan your withdrawals.

Q. What is the difference between micro SIPs and SIPs?

A. If one withdraws money from SIPs of small amounts (micro SIPs), one has to pay an exit load of 3 to 4 per cent. I think it is good in a way because it prevents investors from withdrawing money early and therefore from losing on the benefits. However, there is no compromise on liquidity as you can withdraw money at any time. So on paying an exit load, one can always withdraw money from the SIP. I don't think it is a big deterrent.

Q. When does the SIP become free from capital gains tax? Is there no capital gains tax in mutual funds after one year?

A. Same tax laws that apply to equity investments, apply here too. Unless your investment is one-year old, you have to pay 10% capital gains tax on the investment. So you have to give tax on the gains from new investments and not on the old ones.

In order to free your investment in one-year SIP from capital gains tax, one has to give it two years so that the last installment of the investment also becomes tax-free. In nutshell, all units from investment in SIPs will become free from capital gains tax after one year of investment. So your entire money will become tax free if you stay in it for two years.

Q. I want to invest Rs 2,000 in mutual funds through SIP. Where should I invest keeping in mind my target of Rs 25 lakh for a 20-year period?

A. Don't get bogged down by ups and downs of the market and stay focused. Review all your investments after one or two years. HDFC's equity, Franklin's Prima Plus, Reliance Vision fund, Prudential Power Fund are among good equity funds. If you have to invest for ten years at the end of which you require 25 lakh, put in at least Rs 3,000 to Rs 5,000 through SIP. However, there is no guarantee that you will get this amount.

Q. I want to invest Rs 5,000 in a mutual fund but prefer to have more than one fund instead of putting all the money in a single fund. Is it a good decision or should I diversify amongst many funds?

A. Though it is a good decision to diversify, don't go for sectoral and thematic funds. Choose two good diversified equity funds and put in 2,000 each and third could be a good mid cap fund in which you can invest Rs 1,000. Don't invest in one fund family.

As far as achieving adequate diversification is concerned, choose three to five funds and not beyond it. here you can also benefit from the expertise of different fund managers.

Q. I want to invest in Magnum Tax saver for three years through SIP. At the time of redemption, can I withdraw money every month like in case of SIP or I have to withdraw the entire amount after three year? And when should one sell mutual fund?

A. There should be only two reasons for selling a mutual fund -- either when you need money or when you are not happy with its performance. However, don't sell a fund if it has under performed for two to three months. However, you can regularly sell it.

Magnum Tax saver is a good fund, an aggressive one. It has performed very well in the past 3-4 years. If you invest regularly and withdraw the money once it is three year old.

Q. What should be the ideal time for starting an SIP?

A. It depends on the kind of time horizon you have. But you should stay invested for at least three years and further keep it for one to two years in order to take its full benefit. You may not experience full market cycle in a time less than that.

Is Risk eating into your portfolio?

Recently I saw a poster of a movie named “Gafla”…The tag line of this movie read, “ The biggest risk in life is not taking one”. According to me “The biggest risk in life is taking one but believing you have not taken any” or “taking one but not understanding the consequences of your decision”.
Too often we focus on the wrong set of parameters such as oil prices, stock prices, interest rates when it comes to making equity investments. People spend countless hours watching Business channels, reading magazines for hot tips, tracking the unknowns but there is hardly any time spent on the knowns, which is solely in your control.

I have shared some of the UNKNOWNS that we so often focus on and the KNOWNS that we ignore most of the time.

UNKNOWNS (This is NOT in anyone’s control)

• Sensex and Nifty Behavior
• Stock Prices
• Oil Prices
• Interest Rates
• Inflation
• Tax Laws & Regulations
• Geo Political Risks

KNOWNS (This surely is in your control)

• My Needs and Goals
• What is my time horizon?
• What is it I want to achieve in Life?
• How do I react to different things including Stock Market Ups and Downs?

In fact when it comes to investing, to be a winner, one must make as fewer costly mistakes as possible. A lot of people like to believe that they are better-blessed souls of our century who do not make mistakes. There is no one in the world of investing who has not made a mistake. The key point is to understand how to a costly mistakes. Getting back to my point, Understanding and Managing Risks are the most important parts of the investing process. Take too much Risk and you might jeopardize your financial future with huge losses. Take too little and you jeopardize your financial future with low returns barely enough to cover your lifestyle expenses.

So how do you determine how much risks you should take and are you taking enough?

First determine what returns you reasonably need to achieve your financial goals (Assuming that you know what your goals are). So if you need a 10 % return, why should you opt for some exotic thing like a derivative or trade like a maniac! I met a person recently who tracks the market day in and day out, devours every investment magazine and finally when the stock market closes, switches to the commodity market. Guess how well his portfolio is doing. From a value of Rs. 4 Crore it has come down to 2.8 Crore most of which I would attribute to a pinch of foolishness (with due respect) and a dash of arrogance. Second step is to figure out whether you are getting those returns consistently. Knowing your benchmark can help you a taking more risk than necessary.

One of the investors that I know who believed that what has worked in the recent past will surely work for him again made an aggressive investment in F&O in May. But later, this is what he had to say “I had made 50 % returns in just 15 days but now I have lost 200% because of the leverage” said one investor. I will never invest in the stock market again”. This is a common response like the one from jilted lovers who say “I will never fall in love again”. Well I better not comment on the love factor but one thing I know for sure is that this mistake of not understanding the nature of the investment and completely blaming the asset class altogether does far more damage than anything else. At the end of the day “Failure is an opportunity to begin again more intelligently”. I have used an anecdote from the book the Intelligent Investor by Benjamin Graham that sums up my point “I once interviewed a group of retirees in BOCA RATON, one of Florida’s wealthiest retirement communities. I asked these people mostly in their seventies – if they had beaten the market over their investing lifetimes. Some said yes, some said no; most weren’t sure. Then one man said, “Who cares? All I know is, my investments earned enough for me to end up in BOCA”. Could there be a more perfect answer. After all the whole point of investing is not to earn more money than average, but to earn enough money to meet your own needs. As Ben Graham says “The best way to measure your financial success is not by whether you are beating the market but by whether you have put together a Financial Plan and a Behavioral Discipline that are likely to get you where you want to go”.
In the end what matters isn’t crossing the finishing line before anybody else but just making sure you do cross it.

Now how do you figure you are taking too much risks. 3 Simple questions might help.

1. Have I lost sleep during the May crash or in general after making the investments?
2. Do I feel pressurized to watch stock prices, fund NAVs weekly or daily?
3. Do the UNKNOWNs given above worry me about my financial future?

If you have answered yes to either of the above 3 questions, you have taken more risk than you can digest.

If you answered yes to all the above, then like the kiddy line “it’s time to put your toys away” - it is time to put some of your stocks/equity funds away. As F Scott Fitzgerald said, “If you don’t know who you are, the stock market can be an expensive place to find out”.

Dreaming big can make you rich. Know how

There is a proverb which says, "If you want your dreams to come true, don't sleep'. In reality most of us dream big and then go to sleep. We dream of creating wealth, we dream of luxuries in life we want lots of riches but unfortunately we do not stay awake to plan for those dreams and make them reality , we just daydream about them. There is difference between dreaming and daydreaming. Someone who dreams has desires, aspirations, ambitions etc. On the other hand a daydreamer only builds castles in the air.

First step to realize any dream is to crystallize it. It is not good enough to say I want luxury car. It is important to be specific , I need luxury car worth Rs 10 lakh after 6 years. Similarly, do not have it in the ‘back of your mind’ to save money for your son’s marriage. List it down. Clearly state how much funds you wish to spend on your son’s marriage. Also note down approximately after how many years he is likely to get married. In case of marriage it is difficult to gauge exact age when marriage will take place but we can always have a ballpark number of years after which marriage will take place.

Having crystallized dreams next step is to create reserve for those other events that can upset our plans to reach those dreams. Events like job loss, temporary migration due to natural catastrophe etc. Suppose if we have not made provision for these events and if they occur then they will deplete funds, which has been created for our dreams. Job loss, temporary migration etc. are events for which no formal insurance is available. Therefore set aside contingency reserve.

After creating contingency reserve, we should evaluate our existing insurance. First verify whether we have sufficient health insurance because if we have ignored health insurance for family while saving for our long-term goal and suddenly someone from the family falls ill, we will erode our savings, which was initially being set for our dreams. After obtaining sufficient health insurance we should also focus on disability and life insurance. Lastly, protect our property ; our house, car, jewelry etc. by buying relevant insurance.

After we have ensured that there are sufficient provisions to withstand perils that may cross us, while we are moving ahead in our journey to reach our dreams, we should move to savings and investing.

Do you know the biggest hurdle, which stops us from saving sufficient amount for our dreams? "OURSELVES." Our habits of procrastinating and spending are the biggest barricades in making us reach our goals.

Sooner we start walking on our path to reach dream destination, by regularly saving and investing, faster we will reach. We should not procrastinate. Also stay focused on to our dreams. If we lose focus, we will start utilizing our hard earned money into other unnecessary expenses and not realize our dreams.

Don’t just dream about future, plan for it. Remember famous saying "If you fail to plan, you plan to fail."

Market closes with hefty gains: Media, bank stocks up

It was a good close for markets as they ended with some hefty gains. The markets opened flat and was trading in a tight range throughout but gained momentum during the final hour of trade. Asian cues were not very not exciting as most of the Asian markets ended flat.
Outperforming the frontline indices were the broader markets i.e. the midacp and smallcap indices. The market breadth has been in favour of the advancesa and the turnover also picked up in the final hour of day. Banking, whether midcap or smallcap showed leadership. Also media stocks were on fire and even some construction and real estate stocks closed higher. Except for IT, all the BSE sector indices closed in green.
Sensex closed up 197.98 points or 1.42% at 14127.31, and the Nifty up 50.65 points or 1.23% at 4170.95.
About 1586 shares have advanced, 971 shares declined, and 67 shares are unchanged.
The BSE Midcap Index ended at 6,041.33 up 86 points or 1.44%.
The BSE Smallcap Index ended at 7,205.96 up 103 points or 1.45%.
The BSE Bankex was up 3.1% at 7,413.32. Oriental Bank, SBI, ICICI Bank and Andhra Bank moved upwards.
The BSE Capital Goods Index was up 1.5% at 10,082.93. Alfa Laval, Gammon India, BHEL, KEC Infrastructure and SKF India closed higher.
The BSE Health Care Index was up 0.2% at 3,721.93. Wyeth, Matrix Lab, FDC, Glenmark and Nicholas Pirama closed higher.
The BSE Auto Index closed at 5,045.10 up 1%. Amtek Auto, Tube Investment, Tata Motors, Exide Industries and Bajaj Auto surged.
The BSE Metal Index closed at 10,325.26 up 0.7%. Guj NRE Coke, Hindalco, Mah Seamless and Welspun Guj advanced higher.
The BSE FMCG Index gained 1.2% at 1,838.68. United Spirits, HLL, P&G and Shaw Wallace closed higher.
BSE Oil and Gas Index closed higher at 7,401.56 up 1.5%. IOC, Reliance, Petronet LNG and Reliance Naturalended in green.
The BSE IT Index lost 0.5% at 4,847.07. Hexaware Tech, Mphasis, Infosys and TCS closed lower.
The NSE cash turnover was at Rs 10668.92 crore and the NSE F&O turnover was at Rs 32810.52 crore. The BSE cash turnover was Rs 5157.33 crore. Total market wide turnover was at Rs 48636.77 crore.
Markets in green: SBI, Hindalco top gainers
The markets have gained momentum and have moved upwards. At 15.04 pm IST, the Sensex is up 160.63 points or 1.15% at 14089.96, and the Nifty up 52.25 points or 1.27% at 4172.55.
About 1549 shares have advanced, 976 shares declined, and 81 shares are unchanged.
Top gainers on the indices are SBI, Hindalco, HDFC Bank, Reliance Comm and HLL.
Top losers on the Sensex are Hero Honda, HPCL, Infosys, BPCL and TCS.
Index heavyweight Hindustan Lever was trading at Rs 196.60 up 1.81% from its previous close of Rs 193.10.
Index heavyweight Reliance was trading at Rs 1,628.05 up 1.89% from its previous close of Rs 1,597.85.
Tech major Infosys was trading at Rs 1,951.90 down 1.05% from its previous close of Rs 1,972.55.
Cigarette major ITC was trading at Rs 162.85 up 0.56% from its previous close of Rs 161.95.
Refinery major HPCL was trading at Rs 295.00 down 2.33% from its previous close of Rs 302.05.
Markets in green: SBI, Hindalco top gainers
The markets have gained some ground and are trading in green with moderate gains. Midcap and smallcap indices have outperformed the frontline indices.
At 14.17 pm IST, the Sensex is up 62.57 points or 0.45% at 13991.9, and the Nifty up 17.50 points or 0.42% at 4137.8.
About 1498 shares have advanced, 982 shares declined, and 81 shares are unchanged.
Top gainers on the indices are SBI, Hindalco, HDFC Bank, Reliance Comm and HLL.
Top losers on the Sensex are Hero Honda, HPCL, Infosys, BPCL and TCS.
Index heavyweight Hindustan Lever was trading at Rs 196.15 up 1.58% from its previous close of Rs 193.10.
Index heavyweight Reliance was trading at Rs 1,610.05 up 0.76% from its previous close of Rs 1,597.85.
Tech major Infosys was trading at Rs 1,939.80 down 1.66% from its previous close of Rs 1,972.55.
Cigarette major ITC was trading at Rs 161.30 down 0.4% from its previous close of Rs 161.95.
Refinery major HPCL was trading at Rs 294.75 down 2.42% from its previous close of Rs 302.05.
Market trades flat; midcaps outperform frontline indices
The markets have given up their gains and are trading flat. Midcap and smallcap indices have outperformed the frontline indices.
At 13.27 pm IST, the Sensex is up 25.67 points or 0.18% at 13955, and the Nifty down 6.80 points or 0.17% at 4113.5.
About 1474 shares have advanced, 943 shares declined, and 92 shares are unchanged.
Top gainers on the indices are SBI, HDFC Bank, Reliance Comm and HLL.
Top losers on the Sensex are Hero Honda, HPCL, Infosys, BPCL and TCS.
Index heavyweight Hindustan Lever was trading at Rs 195.40 up 1.19% from its previous close of Rs 193.10.
Index heavyweight Reliance was trading at Rs 1,602.50 up 0.29% from its previous close of Rs 1,597.85.
Tech major Infosys was trading at Rs 1,941.55 down 1.57% from its previous close of Rs 1,972.55.
Cigarette major ITC was trading at Rs 161.30 down 0.4% from its previous close of Rs 161.95.
Refinery major HPCL was trading at Rs 296.95 down 1.69% from its previous close of Rs 302.05.
Mkt trades steady; midcaps outperform frontline indices
The markets are steady trading with moderate gains on selective buying seen in index pivotals. Midcap and smallcap indices have outperformed the frontline indices. Except for BSE IT, all other sector indices are trading in green. Buying interest is seen in select bank, FMCG and metal stocks.
At 12.45 pm IST, the Sensex is up 60.91 points or 0.44% at 13990.24, and the Nifty up 8.10 points or 0.20% at 4128.4.

About 1530 shares have advanced, 825 shares declined, and 78 shares are unchanged.

Top gainers on the indices are SBI, HDFC Bank, Reliance Comm and HLL.
Top losers on the Sensex are Hero Honda, HPCL, Infosys, BPCL and TCS.

Index heavyweight Hindustan Lever was trading at Rs 195.70 up 1.35% from its previous close of Rs 193.10.
Index heavyweight Reliance was trading at Rs 1,606.00 up 0.51% from its previous close of Rs 1,597.85.
Tech major Infosys was trading at Rs 1,951.00 down 1.09% from its previous close of Rs 1,972.55.
Cigarette major ITC was trading at Rs 161.40 down 0.34% from its previous close of Rs 161.95.
Refinery major HPCL was trading at Rs 295.20 down 2.27% from its previous close of Rs 302.05.
Market trades with moderate gains: Bank stocks up
The market is trading in green with moderate gains on account of buying seen in select bank, FMCG and metal stocks.
At 11.37 am IST, the Sensex is up 76.40 points or 0.55% at 14005.73, and the Nifty up 15.95 points or 0.39% at 4136.25.
About 1436 shares have advanced, 709 shares declined, and 73 shares are unchanged.
Top gainers on the indices are SBI up 3.12%, Reliance Comm up 2.04% and HLL up 1.86%
Top losers on the Sensex are Hero Honda down 2.84%, Infosys down 0.79% and TCS down 0.7%
Top losers on the Nifty are HPCL down 2.58% and BPCL down 23%.
Index heavyweight Hindustan Lever was trading at Rs 196.50 up 1.76% from its previous close of Rs 193.10.
Index heavyweight Reliance was trading at Rs 1,609.60 up 0.74% from its previous close of Rs 1,597.85.
Tech major Infosys was trading at Rs 1,957.00 down 0.79% from its previous close of Rs 1,972.55.
Cigarette major ITC was trading at Rs 162.15 up 0.12% from its previous close of Rs 161.95.
Refinery major HPCL was trading at Rs 294.55 down 2.48% from its previous close of Rs 302.05.
Markets trading flat: IT stocks continue to lag
The markets are trading flat after losing some of its morning gains. All the key indices are in green except It index. Banking, consumer durables and oil & gas index are in focus today and the market breadth is impressive.
At 10.41 am IST, the Sensex is up 58.80 points or 0.42% at 13988.13, and the Nifty up 13.05 points or 0.32% at 4133.35. About 1259 shares have advanced, 569 shares declined, and 62 shares are unchanged.
Top gainers on the Sensex are Dr Reddys Labs at Rs 669.60 up 1.85%, BHEL at Rs 2,561 up 1.67% and SBI at Rs 1,245.70 up 1.55%.
Top losers on the Sensex are Hero Honda at Rs 689 down 1.26%, Infosys at Rs 1,956.55 down 0.81% and TCS at Rs 1,228.80 down 0.63%.
Index heavyweight Hindustan Lever was trading at Rs 193.80 up 0.36% from its previous close of Rs 193.10.
Index heavyweight Reliance was trading at Rs 1,608.10 up 0.64% from its previous close of Rs 1,597.85.
Tech major Infosys was trading at Rs 1,956.00 down 0.84% from its previous close of Rs 1,972.55.
Cigarette major ITC was trading at Rs 161.85 down 0.06% from its previous close of Rs 161.95.
Refinery major HPCL was trading at Rs 295.70 down 2.1% from its previous close of Rs 302.05.

Markets @ 9:56 am

Mkts open with modest gap up: SBI, RIL, Infy up
The markets opened with modest gap up today on account of some buying seen in the sensex heavyweights like SBI, Reliance, ONGC and Infosys. The Asian markets were trading mixed today. Market breadth was seen positive.

At 9:56 am, Sensex was up 80 points at 14009 and Nifty was up 20 points at 4140. Major gainers in the opening trade were Rel Comm, Reliance, SBI, BHEL, Infosys, ONGC, Bajaj Auto and Satyam Computers. However, Tata Steel, Dr. Reddy's labs and ACC were trading soft.

Asian markets:

Asian markets were trading mixed. Japan's Nikkei slipped 0.23% or 40.40 points at 17,472.58, Hong Kong's Hang Seng declined 0.12% or 24.10 points at 20,844.05. However, Taiwan's Taiwan Weighted was up 0.14% or 10.82 points at 7,985.85, South Korea's Seoul Composite gained 0.22% or 3.5 points at 1,592.87 and Singapore's Straits Times was flat at 3,474.19

Market cues:

FIIs net buy USD 14.4 million in equity on May 14
NSE F&O Open Interest up by Rs 921 crore (Rs 9.21 billion) at Rs 55,541 crore (Rs 555.41 billion)

F&O cues:

Futures Open Interest up by Rs 513 crore (Rs 5.13 billion); Options Open Interest up by Rs 408 crore (Rs 4.08 billion)

Nifty Futures shed 6.3 lakh shares in Open Interest
Nifty Futures at 10-point premium
Nifty Open Int Put-Call ratio up to 1.19 from 1.18
Nifty Calls add 1.8 lakh shares in Open Interest
Nifty Puts add 3.4 lakh shares in Open Interest
Nifty 4150 & 4250 Calls & 4000 Put add significant Open Interest

An Overview Of RELIENCE MONEY

WHY RELIANCE MONEY ?

For all people interested about Reliance money and how you can use it as a vehicle for your stock, commodity and offshore investment Ideas. Why reliance Money? The least brokerage in the country without compromising on the service. Brokerage is paid upfront, and there are 3
Slabs:

Rs 500 for 1 Cr or two monthsRs 1350 for 3 Cr or 6 monthsRs 2500 for 6 Cr or 1 year

Demat Account with RELIANCE Capital Company would cost Rs. 750/- with Annual Maintenance Charges of Rs.50/-.

Once brokerage is paid, all you would have to pay would be Rs 12 per transaction (Trades done).
Comparison for buying and selling 1 lakh of delivery.

ICICI: Around Rs 1600
Sharekhan: Around Rs 1200
Indiabulls: Around Rs 1200
RELIANCE MONEY: Around Rs 120

A Single platform for Stocks, Commodities, Life and General Insurance, Mutual funds, Credit Cards. So any insurance or mutual fund of any business house could be bought and sold. CFD'S is the new buzz word. CFD stands for Contract For Difference, something very similar to futures, but the only difference is that settlement happens everyday. With RELIANCE MONEY we could trade most of the international stock and commodity markets with incredibly LOW MARGINS. A Nasdaq index would require just a 1% margin.

Sundaram Midcap buys bank, IT; sells engineering

Sundaram BNP Paribas Select Midcap enhanced its exposure to banking, IT, media, oil & gas, utilities and metal sectors. However it pared exposure to engineering stocks.


In banking space it introduced Oriental Bank of Commerce and Bank of Maharashtra. It also bought 1 lakh shares of Centurion Bank of Punjab, Indian Bank and Power Finance Corporation. Andhra Bank and Bank Of Baroda were also in buying list. However, it sold Union Bank of India, Bank of India and India Infoline.


In IT pack it made fresh exposure to Sparsh BPO Services and also purchased Prithvi Information Solutions and 1.51 lakh shares of Polaris Software Lab, 1.05 lakh shares of Mphasis. In media sector it introduced Television Eighteen and Wire and Wireless.


In oil & gas pack it introduced Indian Oil Corporation and bought 2 lakh shares of HPCL. Buying was also seen in utility space as it bought Gujarat Industries Power, Torrent Power AEC and Tata Power Company.


In metal pack, the scheme introduced Kirloskar Ferrous Industries and Jindal Steel & Power. It bought Jindal Saw and 1.5 lakh shares of Welspun Gujarat Stahl Roh.


In cement sector, it bought Birla Corporation, Shree Cements, Jaiprakash Associates and Prism Cement. In enginnering pack, it exited Elgi Equipments, however it bought KEC Infrastructures.
Jaiprakash Associates, Mphasis and Polaris Software Lab were the top stocks held by the scheme in March. Cement (9.85%), Technology (9.75%) and Engineering (8.26%) were the top invested sectors in the scheme's portfolio. (Check out - Top stocks held by Sundaram BNP Paribas Select Midcap).


The equity exposure of the scheme has decreased from 73.34% to 70.88%. The total assets managed by the scheme over the month were Rs 2033.95 crore as on March 30, 2007.
Over the last one year, Sundaram BNP Paribas Select Midcap has yielded 11.5% returns as against 3.83% yielded by its benchmark BSE Midcap Index as on April 13, 2007.

ICICI Pru Dynamic Plan buys banks, metal, auto

ICICI Pru Dynamic Plan has enhanced its exposure to bank, metal, oil & gas and auto, however it sold IT and food & beverages. (View - What is ICICI Pru Dynamic Plan buying / selling?)
In the banking space, it bought 12.67 lakh shares of Federal Bank, 3.57 lakh shares of ICICI Bank, 3.17 lakh shares of SBI, 1.23 lakh shares of Punjab National Bank and nearly 1 lakh sthares of HDFC Bank, but it exited Canara Bank.

In the metals pack, it introduced SAIL and Tata Steel, however it exited National Aluminium Company.


In the oil & gas sector, it bought 1.71 lakh shares of ONGC and 1.60 lakh shares of Reliance Industries, but it exited IPCL.


Buying was also seen in auto space as the scheme made fresh investment in Tata Motors. It also bought 1.83 lakh shares of Maruti Udyog and 1.28 lakh shares of Mahindra and Mahindra. However, it exited Bajaj Auto.


In media pack it bought 7.42 lakh shares of Zee Entertainment Enterprises. In pharma pack it introduced Cadila Healthcare and bought Alembic, but it exited Cipla.


On the contrary, in IT pack the scheme exited Firstsource Solutions, sold 2.20 lakh shares of TCS and 1.5 lakh shares of Infosys Technologies. But it bought 1.96 lakh shares of Wipro. In food & beverages it exited Triveni Engineering and Nestle India.


In manufacturing the scheme sold 7.34 lakh shares of Amtek Auto, in tobacco it sold 2.80 lakh shares of ITC and in construction it exited Akruti Nirman.


Reliance Industries, TCS and Infosys Technologies were the top stocks held by the scheme in March. Technology (16.07%), Bank (13.95%) and Oil& Gas (9.75%) were the top invested sectors in the scheme's portfolio. (Check out - Top stocks held by ICICI Pru Dynamic Plan).
The equity exposure of the scheme has decreased from 84.46% to 79.48%. The total assets managed by the scheme over the month were Rs 1962.93 crore as on March 30, 2007.
Over the last one year, ICICI Pru Dynamic Plan has yielded 17.17% returns as against 21.2% yielded by its benchmark S&P CNX Nifty as on April 16, 2007.

AIG Global launches AIG India Equity Fund

AIG Global Investment Group (AIGGIG) has announced the launch of its maiden scheme " AIG India Equity Fund. The New Fund Offer priced at Rs.10 per unit (plus applicable entry load) will be open for purchase from May 3, 2007 to May 31, 2007. The fund will re-open for ongoing purchases / redemptions no later than June 29, 2007.

AIG India Equity Fund is an open-ended diversified equity fund with no biases. The fund has the flexibility to invest across companies without having any bias towards a particular sector, investing style or market capitalization range. The fund will be managed by Mr. Tushar Pradhan, Chief Investment Officer - Equities.

AIGGIG believes that no single sector, market capitalization orientation or style has outperformed consistently over the long term. The key to consistent long term performance is to have the flexibility to pick stocks without having any restraints on style, sector, theme or market capitalization.

Speaking on the occasion Sunil Mehta, Country Head and Chief Executive, India, American International Group, Inc. said, "Our vision is to create a world class asset manager in India that combines AIG Global Investment Group’s global expertise with our local experience gained over the years and the track record of our experienced and professional management team. The launch of this fund further reaffirms AIG’s commitment and participation in the fast growing Indian economy.”

Ravi Mehrotra, Managing Director and Head of Asia Asset Management Companies for AIGGIG said "AIG India Equity Fund is the first amongst a range of investment solutions that we plan to offer. Our corporate philosophy is to align with the interests of our investors by taking a meaningful stake in the asset class. We, thereby, share common goals, parallel motivations and comparable attitudes towards portfolio and risk management. Given the pedigree of AIG Global Investment Group, the investing philosophy and the depth of experience, we are confident that our funds will form an integral part of any investor’s product portfolio."

The Indian Equity fund management team of AIG Global Investment Group is linked to the global fund management team through an intranet-based knowledge system called EPIC (Equity Platform for Investment Communication). EPIC serves as the backbone for equity research, stock categorization, stock ranking, idea-generation and communication. This system allows Equity teams around the globe to function as a cohesive unit and “speak the same language”.

India underweight in benchmark indices: JP Morgan

JP Morgan AMC is bullish on India. Harshad Patwardhan, Investment Manager-Equities of JP Morgan AMC says the domestic fund will not be a mirror image of their offshore fund.
According to him, India's interest rates are close to peaking out. He expresses concern that India is grossly underweight in benchmark indices. Proportion of India is just 6% in benchmark indices.

Q: How is the Indian market positioned right now, as you are entering the market?

A: We remain very bullish on the Indian market; we are already one of the largest investors into the Indian market.
We have close to USD 6 billion of India dedicated money invested into the Indian market through our FII vehicles. We have also been in India for a long time; our oldest funds have been around for 3-14 years.
Yes, this is our new fund as far as the domestic business is concern.
But we have been in India for a long time managing large pools of money. We remain confident on the prospects of the Indian market, in the medium to long term.

Q: What have the JP Morgan global funds been doing in the last 3-6 months while most funds have a fairly cautious approach in India because of the interest rates situation, earnings slowdown etc?

A: During the last calendar year, which is the reported performance, we underperformed benchmark only by 1%, but we were ahead of most of our competitors.
Our philosophy has been always to look at the long term.
In fact, that is one of the differentiating factors that we have vis-à-vis many other competitors.
We tend to look at long term and short term volatility, which will always be there in the Indian market;we have seen it over the last 10-15 years.
So we tend to use it more as an opportunity rather than get victimized by it.

Q: What will you do? Will you manage the portfolio actively here or will it reflect or mirror the 5 funds that you manage offshore?

A: One of the key features of our investment process is the team approach, what we call - ‘two geographies one team’.
We have a team based out of Hong Kong of 3 fund managers looking at the offshore funds; we have team here in India of 4 investment professionals.
So we look at, discuss, debate on the ideas collectively; it’s a fairly collaborative research approach. So to that extent, some of the thinking that we have in the offshore funds is likely to get reflected for the domestic fund.
But there are various things which are different.
For example, the money that we have in offshore funds is about USD 6 billion; the domestic funds to start with, will be at least be smaller than that.
Also we will not face here, some of the constraints faced by my offshore team. So it will not be a mirror image; but to an extent it will reflect similar investment philosophy and process.

Q: What is your take on the whole interest rates and inflation situation out here and how would you approach it as you start putting the money to work?

A: As far as inflation is concern already the headline inflation has started coming down and we believe it will come down further. On interest rates our view is that it is closer to peak now. So essentially this whole fixation about headline inflation number, once it starts trending down then that should be a time which should be positive for the equity. I would say that we are launching a fund at an appropriate time.

Q: How do you look at India relative to some of the other global markets since you have that emerging market perspective? We are still about 10% below our highs, most other Asian markets have cruised to well above their previous highs, do you see this kind of divergence continuing?

A: One of the key advantages that we have at JP Morgan Asset Management is the team approach for the India team.
What we tend to do is extend this team approach beyond.
We have lot of investment professionals who are looking at China, Korea, Taiwan and various other markets based out of Hong Kong. So we tend to get a lot of perspective on other markets as well.
In addition to that, we also have a team out of our London office that manages global emerging markets money; they have prospects to offer in Latin America and Eastern Europe.
Considering all that, we continue to be very positive on the Indian market. If you look at emerging market as a whole, the proportion for India is only 6% in some of the benchmark indices.
We believe that’s grossly underrepresented. The kind of corporates that we have in India vis-à-vis some of the other emerging markets, we have absolutely no doubt in our mind that the potential for Indian market is very positive indeed

ICICI Pru launches Micro Systematic Investment Plan

Aimed at providing access to formal finance to over 600 million rural poor, ICICI Prudential on Wednesday launched Micro Systematic Investment Plan (MSIP).

"The scheme will provide an opportunity for the rural poor to invest periodically in small amounts, as low as Rs 50 and its multiples," ICICI Prudential Managing Director Pankaj Razdan told reporters here.

He said the MSIP would help the rural poor to build a corpus of savings over the long-term through a disciplined and systematic approach.

Having no lock-in period, investors are entitled to withdraw the invested amount anytime, subject to applicable exit loads.

Razdan said that the ICICI Prudential has over 200 tie-ups with micro finance institutions (MFIs) and NGOs across the country, which would act as aggregators and subsequently deposit the consolidated amount to the fund house.

"However, we will try to incorporate as many MFIs and NGOs as possible," ICICI bank's Deputy Managing Director Nachiket Mor said. ICICI Bank has 3.2 million customers in rural areas.

ICICI Prudential is one of the largest players in the domestic mutual fund industry. As on March 31, 2007, ICICI Prudential has Rs 37,906 crore worth of assets under management.

Fidelity International Opportunities Fund – Should you buy?

Fidelity Fund Management has launched Fidelity International Opportunities Fund (FIOF), an open-ended equity scheme that aims to generate long-term capital appreciation from a diversified portfolio of predominantly equity and equity-related securities including equity derivatives in the Indian and international markets. The scheme intends to invest up to 30% of the portfolio in foreign stocks in the Asian region (except Japan).


Investment expert Sandeep Shanbhag says, "Accessing foreign markets, especially through a mutual fund of high pedigree like Fidelity is great diversification for Indian investors hitherto being fed a diet rich only in Indian stocks."


On the flipside, advisor Hemant Rustagi feels, "Since the fund would largely be focusing on Asian markets, it would not truly provide diversification that one could achieve through an international fund."


However, Ashu Suyash, Managing Director and Country Head, Fidelity Fund Management clarifies, "The fund manager is expected to have a focus on the Asia-Pacific region but the fund is not limited to investing in Asia-Pacific equities only. The fund manager has the flexibility to invest in other markets depending on the opportunities available." "However, as the Fund Manager of Fidelity International Opportunities Fund, Rajesh Singh, has said, Asia is going through a growth phase and offers a wide set of opportunities for stock picking in markets, some developed (like Hong Kong, Singapore and Australia) and others emerging (Korea, Malaysia, etc.). So the focus currently will be on investing in Asia-Pacific equities", she added.

Tax Restrictions:

• (a) "The Income Tax Act bestows tax benefits only to a fund that invests at least 65% in domestic Indian equity. Till that changes, FIOF and similar schemes will have to limit their exposure to foreign equity to 35%", says Sandeep Shanbhag. Ashu Suyash adds, 'The structure of the product is constructed to make the most of current regulations pertaining to overseas investing. Plus, with 65% in Indian equities, investors will enjoy the prevailing tax benefit of long-term capital gains applicable to all Indian equity funds. However, if these tax laws were to be amended in future, the fund's offer document has enabling provisions to make changes in the investment pattern."

• (b) "The other aspect that needs a little clarity is taxation of foreign investments for the scheme. It is the Indian Income Tax Act that exempts the income of a mutual fund from domestic taxation. However, FIOF's investments in markets abroad will be subject to tax incidence as per the rules of the foreign markets and this will somewhat eat into the returns of the scheme", says Shanbhag. However, he adds, 'On balance, the multi-country portfolio diversification that FIOF offers far outweighs the additional taxation, if any."

Limit of $150 mn for Global Equity Investment:

"SEBI regulations mandate that a mutual fund can invest only up to a maximum of $150 million in global equities. Though there have been some changes ushered in by the credit policy announced on the 24th of April, these are just announcements yet and the laws are yet to be passed. $150 million roughly works out to around Rs 650 crore which in turn could be around 30% of the funds intended to be mobilized in the NFO", says Shanbhag.
However, he adds, "That being said, as time passes, regulations will only be relaxed and it is hoped that the scheme will adapt to the relaxed regulations."

Performance of Fidelity’s existing schemes:

Fidelity's maiden equity offering in India - Fidelity Equity Fund launched in April 2005 and the more recently launched Fidelity Special Situations Fund (launched in April 2006) and Fidelity Tax Advantage Fund (launched in January 2006) have a four star rating .

Shanbhag says, "The experience and capacity of Fidelity as a fund house is evidenced from its performance even in the Indian market to which it is a late entrant. The flagship Fidelity Equity Fund has been amongst the top performers consistently and the Special Situations Fund is also shaping up well."

Conclusion:

All things considered, experts believe that investors who already have a portfolio of funds investing in Indian markets can achieve further diversification by investing in international markets through this fund. And for first timers too, FIOF will be a good NFO to subscribe to. The NFO closes on April 30, 2007.

Fidelity Equity Fund declares 25% dividend

Fidelity Mutual Fund has announced a dividend of 25% (i.e. Rs 2.5 per unit on Face Value of Rs 10) in its open-ended equity fund, the Fidelity Equity Fund. The objective of the Scheme is to generate long-term capital growth from a diversifed portfolio of predominantly equity and equity-related securities.(Check out - Recent MF Dividends )

The record date for the dividend is April 30, 2007, 2006. All investors registered in the Dividend Plan of the scheme as on April 30, 2007 will receive this dividend. Please note that dividend as decided shall be paid, subject to availability of distributable surplus. Pursuant to payment of dividend, the NAV of the schemes would fall to the extent of payout and statutory levy (if applicable).

The last dividend declared by the scheme was 20% in March 2006. Over the last one year, Fidelity Equity Fund has yielded 22.7% as compared to 15.9% given by its benchmark BSE 200 as on April 24, 2007.

Bullish on telecom: DBS Chola

Q: How would this month shape up for the market?

A: This month began on a very lackluster note; I don’t think it came with a lot of open interest positions built up. Looking at the derivative, I feel that although we need to consider a wider range considering the volatility in the market, support should be somewhere at 3,850 looking at the put-call position and probably it may attempt to once again move towards its earlier peak of 4,200.

Q: What is the call on both - tech and autos - sectors post the earnings season?

A: Going forward, taking a view on technology with the concerns on rupee appreciation would be a contra call. Next quarter too if we see Ebitda margins sustainable for these companies then I would have to retract my view of a contra theme for the IT sector. I believe we need to closely watch auto numbers that come month on month to look at topline growth. Auto as a sector has not done too well in the last 12 months and have already been underperformers. Any bit of positive news would drive prices up, added to that you have Maruti disinvestment coming up in the sector, and you could also see some other big outsourcing story etc coming up in the auto ancillary space. It’s a sector we have to at least have a neutral view as far as our fund house is concern. But on IT, I would rather have a contra view at the current moment.

Q: Do you think quality midcaps have more headroom to run and would you say there is a very good chance that the markets can test their old highs of 14,700 any time soon?

A: Midcaps are very scrip driven; it’s very news driven, very specific about results pertaining to each company that comes out. One has to be very careful, we cannot broadly comment that midcaps as a general theme would run away. I would rather say that it would be more news as well as results driven in the sector.

Q: As a fund manager at levels of about 13,900 would you sit on higher cash or have you been buying?

A: In open-ended schemes the fund managers should not keep any cash. If at all its needed it would be in single digits to tide over liquidity. I believe that at all points of time there are opportunities that exist and one needs to buy into those stocks, which look undervalued. My asset call between cash and equity would be to remain invested fully.

Q: How do you play the telecom sector, very good results coming from that space but would you say most of it is already in the price only?


A: Today’s results of Reliance Communications reiterated the fact that it is a growth sector which one needs to continue looking at. The kind of EBITDA margins these companies are showing today makes me believe that there is lot of steam left in the sector, and I would say that one needs to be overweight going forward as well. I don’t think the price levels today are not sustainable going forward because I see the topline growing at a robust 30% and bottomline too are in that range of 25-30% for most telecom companies. If you give them PE of between 20-25 times with FY08 earnings consensus then I think they still look a lot to go up from here.

Indian shares rise, Tata Steel falls; Karachi up

Indian shares climbed 0.5 percent on Wednesday, led by gains in Reliance Industries Ltd., but Tata Steel Ltd. fell sharply on its plans to fund its takeover of Britain's Corus Group Plc.
Reliance, India's most valuable firm, hit lifetime highs for a third day on speculation the energy to petrochemical firm that is making a foray into retail hypermarkets may make a major announcement.

Avinash Gorakshakar, head of research at Emkay Share & Stock Brokers Ltd., said there was a sharp jump in derivatives positions in Reliance.

"This built-up means that the market is expecting some trigger which could come in the form of either good quarterly results, or some announcement on the retail side," he said.

Open interest in Reliance May futures rose 41.5 percent to 558,450 shares, from Tuesday's 394,650, data from the National exchange showed.

Shares in Reliance, which have the highest weight in the benchmark BSE index, ended 0.7 percent up at 1,486.45, after hitting a record 1,495.

This helped lift the BSE index 0.48 percent, or 65.15 points, to 13,672.19, with 20 of the 30 constituents gaining. The index had dropped 0.65 percent on Tuesday.

In the broader market, 1,315 gainers narrowly beat 1,234 losers on volume of more than 209 million shares.

Tata Steel was the biggest loser on the index, falling 3.3 percent to 511.35 rupees on its plans to raise $4.1 billion, mainly through equity, to help fund the Corus deal.

Expectations of good earnings pushed top lender State Bank of India up 2.65 percent at 1,035.45 rupees, while smaller rival ICICI Bank rose 0.82 percent to 896.90 rupees.
State Bank is expected to report a 22 percent rise in quarterly net profit and ICICI should post 26 percent rise, a Reuters poll showed on Monday.

Export-led Infosys Technologies Ltd., the second-biggest stock on the main index, eased 0.2 percent to 2,077.85 rupees as it extended losses into a third session on concerns a strong rupee could crimp earnings.

But smaller rival HCL Technologies Ltd. ended 7.2 percent higher at 323.70 rupees after it reported a 72 percent jump in quarterly earnings on Tuesday.

The 50-issue Nifty rose 0.67 percent to 4,011.60.

Elsewhere in the region, Karachi's 100-share rose 1.55 percent to 12,189.29 points. Colombo is closed for a local holiday.

STOCKS THAT MOVED

* TV Today Network Ltd. rose 5 percent to 147.15 rupees after Reliance Capital announced an open offer worth up to 1.51 billion rupees ($36 million) to increase its stake in the broadcaster by up to 20 percent.

* Debutant Dish TV India Ltd. ended at 102.55 rupees. The company was spun off from top listed media firm Zee Entertainment Enterprises Ltd.

* Software services firm Prithvi Information Solutions Ltd.
gained 2.5 percent to 292.30 rupees after its net profit for March quarter rose 49 percent.

MAIN TOP 3 BY VOLUME

* Dish TV on 18.8 million shares.

* IFCI Ltd. on 7.7 million shares.

* Himachal Futuristic Communications Ltd. on 7.5 million shares.

ANALYSIS - India unleashes rupee to knock out inflation

The Reserve Bank of India (RBI) appears to have stepped out of the way of a rising rupee, after buying almost $20 billion in four months trying to cap it, and is instead using the currency's strength to help fight inflation.


Analysts say the rupee may have run out of steam for now after hitting a nine-year high of 41.62 per dollar this week, and the next step in the anti-inflation offensive could be controls on raising external debt, possibly in a policy review next week.


When inflation is high - it hit a two-year peak of 6.7 percent in early 2007 -- intervention makes it even harder for the central bank to contain price pressures, and analysts think this may have prompted a shift in the stance on the rupee.


"Keeping the currency weak exacerbated inflationary pressures so you got a vicious cycle," said Shahab Jalinoos, currency strategist at ABN AMRO in Singapore.


The partially convertible rupee has risen around 6 percent this year, with most of the gains coming in the past five weeks as, traders say, the central bank has become less active in the market.


The RBI bought $19.7 billion in the four months starting November, including a record $11.9 billion in February, trying to block the rupee's rise, latest data shows.


Both ABN and UBS see the rupee now retracing to 42.20-42.50 - although UBS expects intervention to be a factor while ABN sees it weakening on profit-taking after the recent surge.


CIRCULAR PROBLEM

Worried about a widening trade deficit and fearing a sudden destabilising reversal of capital inflows, the central bank had kept the rupee in a broad range of 43-47 per dollar for the past three years by intervening whenever it neared those limits.


When the RBI sold rupees for dollars, it added funds to the local banking system - fuel for the rampant credit and money supply growth it was trying to rein in with interest rate rises.
To counteract that, the RBI has impounded some of the banks' lendable funds through three reserve increases since December and also by selling bonds.


But the measures created short-term cash shortages, which banks overcame by selling dollars to raise rupees - adding to the pressure for the currency to rise.


An added problem is that foreign investors are also buying rupees to invest in the fast-growing economy either via stocks, property, new factories or promising small companies.


Domestic firms have been exploiting lower interest rates overseas to fund expansion, raising $9.1 billion of debt between April and December, all of which led to huge inflows, higher demand for rupees and more intervention.


A.V. Rajwade, a member of an official panel on capital account convertibility, said not only was the RBI nearing the limit of intervention that it could absorb by issuing bonds, it also could not keep jacking up the cash reserve ratio (CRR).


"The CRR is a very blunt tool and hurts smaller banks more," Rajwade said.


ALTERNATIVE MEASURES


Nine out of 14 economists polled by Reuters do not expect the central bank to raise its key short-term lending rate at its April 24 review. The lending rate has been increased by 125 basis points in five moves since early June last year.


But many think the central bank is not done tightening policy and its next step could be short-term, targeted capital controls.


Chetan Ahya, economist at Morgan Stanley, said the RBI could moderate certain types of inflows if they surged further.


"For instance, it could reduce the limit on the amount of external commercial borrowings that can be raised by the corporate sector during a year," Ahya said.


The central bank caps external commercial borrowings, known locally as ECBs, at $22 billion per financial year, and companies and banks can bring in $500 million without asking permission.
It was unlikely the RBI would go as far as Thailand, which in December required a percentage of foreign speculative inflows to be held interest-free for a year at the central bank.


"The central bank would be wary of putting capital controls in terms of foreign investments as it would have a big repercussion on the stock markets," Rajwade said.


But short-term limits on ECBs could reduce capital inflows without hurting portfolio or foreign direct investment flows.


"I don't think it's a great idea. If you're genuinely worried about the currency it makes more sense to try to find ways of encouraging local money to leave as an off-setting factor," ABN's Jalinoos said.


The government says it needs infrastructure investment of $350 billion over the next few years to build better roads and ports and to overcome growth-stunting supply bottlenecks.
"India needs foreign money, so turning off the taps may not be a good idea in terms of a long-term growth opportunity - but as a short-term measure it's a possibility," Jalinoos said.

Electronics goods distribution firm Redington India rose 3.3% to Rs 148.20

Redington India gets going: Electronics goods distribution firm Redington India rose 3.3% to Rs 148.20, after a distribution agreement with Apple Computer International, for distributing iPods, desktops and notebooks in India.
As many as 8.1 lakh shares changed hands in the counter on BSE.
Redington India debuted at Rs 140 compared with the IPO price of Rs 113 and closed at Rs 163.25 on 15 February 2007. It had weakened shortly after debut, to reach a low of Rs 126.15 on 7 March 2007. Redington India had recovered from a lower level, up to Rs 143.45 by 16 March 2007.
Redington India distributes IT products in India, the Middle East and Africa. Besides distribution, Redington (India) also provides support services for IT hardware and mobile phones.
On a consolidated basis, Redington reported a net profit of Rs 39.72 crore for April-September 2006 on revenues of Rs 4127.94 crore.

Dow, Nasdaq post gains in early trading on Monday

Stocks opened higher Monday after Citigroup Inc.'s financial results came in stronger than expected and the government reported an increase in March retail sales. Earnings reports begin arriving at a steady clip this week, giving investors fresh indications about the state of the economy. This week nearly half the 30 Dow Jones industrial average's component companies report results. While investors expect profit growth will slow, they are hoping consumer spending will remain robust. The Commerce Department's data Monday showed that consumers spent strongly last month, sending retail sales up by about 0.7 percent. The figure was close to what analysts predicted, and up from a revised 0.5 percent rise in February. Beyond earnings news, investors appeared pleased by the acquisition of SLM Corp., known as Sallie Mae. The student lender agreed Monday to be sold to two private investment funds and J.P . Morgan Chase & Co. and Bank of America Corp. for $25 billion, or $60 per share. In the first hour of trading, the Dow Jones industrial average rose 55.18, or 0.44 percent, to 12,667.31. Broader stock indicators also rose. The Standard & Poor's 500 index rose 8.44, or 0.58 percent, to 1,461.29, and the Nasdaq composite index 15.81, or 0.63 percent, to 2,507.75. Bonds rose, with the yield on the benchmark 10-year Treasury note falling to 4.74 percent from 4.77 percent late Friday. The dollar traded near all-time lows versus the euro, but strengthened against the yen after the Group of Seven decided Friday not to urge Japan to raise interest rates to boost its currency. Oil prices slipped Monday, with a barrel of light sweet crude falling 7 cents to $63.56 in premarket electronic trading on the New York Mercantile Exchange. Gold also rose. Profit news drew investors' attention Monday as they were eager to see how well profits would hold up. Wall Street anticipates the reports will indicate that corporate growth slowed in the first three months of 2007 compared with previous quarters. Standard & Poor's recent estimate of first-quarter earnings growth for S&P 500 companies is 3.8 percent. Citigroup, the largest U.S. financial institution, said its first-quarter profit fell by 11 percent, but the results included a charge to cover a massive restructuring. Excluding that charge, the profit was higher than analysts expected, thanks to an increase in revenue. Eli Lilly & Co.'s first-quarter profit fell 39 percent. After adjusting for certain items, the company's profit came in above expectations. The drug maker also reported a rise in revenue, and raised its full-year sales and earnings guidance. The Russell 2000 index of smaller companies rose 6.65, or 0.81 percent, to 826.02.

Time to Sew, and Time to Rend

The recent correction in stock market gives investors a good opportunity to re-assess their expectations from their investment portfolios and also their tolerance to risk. When markets are in a bull run, investors are rarely aware of the risk they are exposing themselves to. But it becomes all too apparent in a crash! Being an optimist and believer of market cycles, helps maintain that it is never too late to correct ones mistakes.

Excessive volatility in portfolio values may be attributed to many factors:


1. Problem: Concentration Antidote : Diversification



If your stock portfolio has a small number of securities, then undue change in value of any of them, will excessively impact the total market value of your portfolio. If you don’t want this to happen to your portfolio, diversify your holdings across more stocks. Too many will again make it impossible to track and study, and there is also a good likelihood of below market performance of the portfolio due to excessive diversification. Ten to Fifteen should be alright.



2. Problem: Equity oriented portfolio Antidote : Diversification


Check the asset allocation profile of your portfolio. Does it have too much equity, if not only equity? Equity as we are all aware, is among the most volatile asset classes available. At any point in time, one must be prepared to accept a 20% fall in the market values. By having a balance between equity and bonds in your portfolio, the overall risk of the portfolio can be brought down. If your portfolio size allows it, have a mix of bonds, real estate and equity.


3. Problem: Mid cap exposure Antidote: Diversification!


Shares of mid cap companies tend to be more volatile than large cap companies. This is because of the shallow market for such stocks. Small quantities of selling or buying can swing the prices a lot. Further, small companies, because of their size, are more vulnerable to economic downtrends than large companies. Hence their prices could fall at the sound of someone sneezing! Investors in mid cap stocks should be prepared to keep them for the long haul for them to become multi baggers.


4. Problem: High single sector exposure Antidote : Diversification!!


Having too many companies in the same industry sector (for example cement, IT etc) renders your portfolio sensitive to their fortunes. If you do not like your portfolio to be held to ransom by policy makers here or for that matter, in some foreign land avoid concentration in any one sector.


5. Problem: High Beta Antidote : Diversification!!!


Beta is a statistic, which indicates the sensitivity of a share price relative to the broad market movements. A high beta for the stock indicates that the share price moves in proportions greater than the index movement. If this aggression is not your intention, include low beta stocks or low standard deviation stocks/ funds. (These data are commonly available in many business newspapers).

6. Problem: No money to buy at lower prices Antidote : Diversification!!!

Investors often wish that they had more money in their pocket to buy their favorite stocks when they are bottoming out, and as a result they are saddled with stocks, which they have bought at a high price. The waiting period for them to profit from their holding elongates after a fall. The best way to solve such a problem is to diversify investments across time. Whether it is stocks or equity funds you are buying, a discipline of buying them in small quantities (in relation to the portfolio) but at regular intervals will ensure that you are able to buy your favorites during a fall, too. As a result you are able to average your purchase price and remove the risk of investing all your money at a peak.

It is by no means a coincidence that all antidotes are Diversification! Diversification in all manners serves to mitigate risk. The diversification may be by asset class, capitalization, time or sector. (Beware: According to the Capital Asset Pricing Model, excessive diversification will bring down returns!) Conversely, super returns can be had only by taking undue risk or by taking a higher risk than what exists in the market as a whole. Ultimately, matching portfolio design to your expectations of upside and downside holds the key to a good sleep!