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!

10 myths about Systematic Investment Plans

What is a Systematic Investment Plan (SIP)?

SIP is a method of investing a fixed sum, regularly, in a mutual fund. It is very similar to regular saving schemes like a recurring deposit.
An SIP allows you to buy units on a given date each month, so that you can implement an investment / saving plan for yourself. Once you have decided on the amount you want to invest every month and the mutual fund scheme in which you want to invest, you can either give post-dated cheques or ECS instruction, and the investment will be made regularly. SIPs generally start at minimum amounts of Rs 1,000 per month and the upper limit for using an ECS is Rs 25000 per instruction. Therefore, if you wish to invest Rs 100,000 per month, you may need to do it on 4 different dates.
As is customary, I started with describing the concept of an SIP. Let us break some myths on SIP now.


Investment in equity mutual funds or unit linked insurance should always be done in SIP mode: I remember in 1999 when Templeton Mutual fund would talk about SIP – the market looked at it skeptically. And it took a lot of convincing for customers to accept it. Now, life has come a full circle. Everybody wants to (always) invest using an SIP. If you have the maturity and calmness to realize that equities are for the long term and are willing to give your funds about 10 years, and you have a lump sum, you can afford to give the SIP route a pass. However, if your horizon is less than five years, you must do an SIP.
I do rupee cost averaging in a single equity – that is a kind of SIP is it not? This is a question I face every day. No, a rupee cost averaging in a single scrip cannot be equated to an SIP. When the market brings down the price of a single scrip, it is giving you information. You need to react to that.

Let us take 2 examples – Lupin Laboratories – has moved from a high of Rs 700 to Rs 100 and back to Rs 700. The question to ask here is not whether an SIP would have worked. The question to ask is whether you would have had the stomach to continue the SIP through this period. Silverline Technologies moved from Rs 30 to Rs 1300 to Rs 14! In this case, if you had started an SIP at a price of Rs 1300, today you would be licking your wounds. SIP works in a portfolio, not in a single scrip.


You cannot invest a lump sum in the same account in which you are doing an SIP: Many people assume that if they are doing an SIP in a particular fund, and suddenly they have a surplus, they cannot put that lump sum in that account. Fact is, in case you are doing an SIP of Rs 10,000 per month in an equity fund, and suddenly you have a surplus of Rs 100,000 and clearly you have a 10-year view on the same, then you can just push it into your SIP account. SIP is just a payment mode, not a scheme!


If I miss investing for a particular month, will they prosecute me? Now, this is the fear of EMI that people have. In an SIP you are buying an investment every month (or quarter), there is no question of prosecuting you for missing one investment. As a matter of discipline, you should not miss any month; however, missing one month’s investment is not a crime!


When you have a surplus (accumulation stage of your life) you should do an SIP and during retirement you should do a Systematic Withdrawal Plan (SWP):

No. You should ideally keep your withdrawals only from an income fund or a bank fixed deposit. You should sell an equity fund on some other basis, say deciding to sell 20% of your portfolio in a year so that the return is 4 times the 30 year historic return. SWP, by definition cannot work in an equity fund!
SIP works for everybody, but does not work for me: Another myth. SIP works in a well-diversified equity fund in the long run. When people put forth arguments that it does not work for them, they have either not chosen a good fund or are looking at a 12 month horizon.


SIP is only for small investors: Nothing can be farther from the truth. I have a client who has invested Rs 32.66 lakhs using SIP, starting from January 1998 till date. Obviously, he has invested much more in later years as his income went up and the funds together are worth Rs 97 lakhs, substantially higher than his provident fund.


Market is at very high level to start an SIP: I have heard this when the index was 3000 also. I have no clue where the market is headed, but I know SIP works!


All fund houses are now charging a full load on the SIP, so now SIP will not work Why not time the market? Introducing an entry load was expected to happen and it has happened. What actually hurts the retail investor is the asset management charges – 2.5% in most cases is a bigger threat to compounding!

If I do an SIP in a tax plan, can I withdraw all the money on completion of 3 years? Another regular question almost! Every installment has to be with the fund house for 3 years. The lock-in comes from the Income tax rules, which say that a tax saving scheme should have a 3-year lock-in. You cannot escape that by doing an SIP!

How to build your Mutual Fund portfolio?

Great salaries, excellent bonuses, fairly valued markets, high interest rates – the time looks just perfect to design and put together your mutual fund portfolio.

Building a MF portfolio is akin to building and furnishing your own home:

• Rs 50,000 to pay-off the personal loan in 2007
• Rs 2 lakhs for children’s higher education in 2012
• Rs 1 lakh for foreign trip in 2010
• Rs 7.5 lakhs for daughter’s marriage in 2015
• Rs 1 crore retirement corpus in 2020

Second, your goals must be realistic. They must be in line with your financial position and risk appetite. No point in having too ambitious or too pessimistic goals; or having goals, which require you to take undue risks.

Devote proper time and thought to planning your goals.

Done? Good, that’s a major part of your job over. Once you know where you stand and where you want to go, the rest is just a matter of details.

Match each goal with the appropriate MF category

Equity markets are too volatile in the short-term, but can give good returns in the long run. Debt funds, on the other hand, give steady but low returns. Therefore, select the goals, which you will finance through equity funds and through debt funds.

Assuming your retirement is still 15 years away, a predominantly equity portfolio may be a better option.

But for your personal loan, which is payable just one year hence, debt funds will be more suitable.

And for the medium term, like your foreign trip, balanced funds may be the right answer.
Liquid funds are a nice way to park your very short-term funds.

Don’t be too concentrated or over-diversify..

Depending on the corpus, one could invest in an average of 4-7 funds for an equity portfolio and maybe 3-4 funds for the debt and balanced category. Too less a number of funds make your portfolio concentrated and risky. Too many, makes it unmanageable and doesn’t really serve the purpose. You need to strike the right balance.

Also, while selecting the fund, study their portfolio mix and ensure that they are different. If most of them are same, then even with 6-7 funds you won’t get the desired diversification.
In order to achieve diversification across asset classes, one could now look at some of the forthcoming options such as real estate fund, gold fund, international fund etc.

Build a suitable mix of equity funds

Apart from allocating your corpus in different asset classes, you need to do some allocation within the equity class. Index/Large Cap funds, Mid-cap/Small cap funds and Sector Funds are the 3 broad sub-categories in which you have to divide your corpus.
Index and Large Cap funds will deliver steady returns, which will be in line with the market performance. In the equity space, they carry lesser risk as compared to mid caps, small caps etc. About 70-80% of your corpus could be allocated to this category. They provide stability to your portfolio. Go for funds with moderate risk and consistent performance.
Your portfolio may need some kicker too. Mid-cap/Small cap funds and Sectors Funds have the potential to provide higher growth (of course with a higher risk). Be prepared for a bumpy ride; and sometimes crash landing too. A 10-20% allocation to this category may be okay. In case of a bad performance, major portion of your corpus is still relatively safe. Large caps will minimise your losses and will also bounce back quickly

Don’t forget the tax aspect

Neglecting to pay tax is bad, but tax planning is not. It can help you to minimize your tax outgo, legally.
Therefore, take care to choose the right option – dividend payout, dividend reinvestment or growth. They may help you to save unnecessary taxes.

Having built a suitable portfolio, you need to nurture it. You have to regularly feed it with additional investments. You will have to remove the weeds (poor performing funds) periodically. And be patient. It takes time for the tree to grow. But once is has grown, it becomes strong – so you don’t have to take too much care; and fruitful – it will give you returns year after year.

Simple rules to earn better returns

Biggest thrill of any markets - more so in case of equity markets, is its rapid price movements. This thrill is further enhanced by the fact that, it is easy for even a lay investor to participate in the equity market price movements.

Since price movement is rapid, individuals can recollect recently passed price points more easily. That causes anchoring effect. An anchoring effect from an investment perspective is one where an individual basis his/her decision ‘only’ on recent price point and makes an investment call. E.g. suppose price of SAIL Ltd. is Rs 38.00. Company has had bad year last year. Investors remember last year and opts not to invest in SAIL Ltd. If price of SAIL Ltd starts moving up from Rs 38.00 to Rs 105.00, investor remembers Rs 38.00 and finds SAIL Ltd stock expensive. Same investor when price of SAIL Ltd drops to Rs 85.00 from Rs 105.00, finds SAIL Ltd stock reasonable to "BUY" here investor has in mind price of Rs 105.00. Mind you this is the same investor who did not purchase SAIL Ltd at Rs 38.00.

We can also say that anchoring effect is like driving the car only by looking into rear view mirror - driving based on what has passed-by. Rear view mirror will only show us what is behind us. If we keep driving our car based purely on what we see in rear view mirror, we will end up with an accident.

Anchoring effect shifts investor.

Anchoring effect shifts investor focus from long-term growth to short term price movement. Investor then starts believing that s/he will be able to make money by tracking price movement i.e. timing the market. Fact is no one can ever create wealth by timing the market. Wealth can be created by time-in the market. More the time you stay in the market, higher are the chances of creating long-term wealth.


One of the legendary fund managers of Wall Street, Peter Lynch had once said that while my fund has performed well, that is not rue for its investors. Peter Lynch was the fund manager of Fidelity Magellan Mutual Fund for about 13 years. This fund gave an average annualised return of 29%. Unfortunately, not all investors of Fidelity Magellan Mutual Fund got 29% annualised return during those 13 years. Many got much less because they tried to time the market and moved in and out of the fund.

Back home BSE Sensex, which was at about 2900 level in April 2003 is today (March 2007) around 13000 points. This is a growth of about 464% in absolute basis. Kindly check whether your entire equity portfolio has gone up by 464% or more in same time period. If your portfolio has not grown at 464% or more and with lesser risk, then all the efforts you made in stock/mutual fund schemes picking and timing the market has gone waste. You could have simply purchased BSE Sensex index fund and left it as it is.

Remember this important principal of investing - "Real life long term returns is what investor does and not what portfolio does....."