Tuesday, October 14, 2008

Six ways to chill in a bear market

Greed (bull) and fear (bear). These are two words investors often hear and think of, but are unable to control their emotions when it comes to investing. In fact, when stock markets are north-bound, their confidence in buying increases considerably.They buy stocks irrespective of their high price-to-earning ratio and are sure to make good money. If, however, the markets enter a bearish phase, their confidence goes down, leaving them wondering where did they go wrong?The chaotic bear market environment then sets the stage for fear to creep into their minds, thus impacting investment decisions. To make sure that you successfully weather the raging market storms, here are six ways to drive out your fears of losing money in a bear market.
STAY CALM AND ACT SMART
Easy to say than follow. It is true that bear markets spread panic among investors, often causing them to sell all the stocks they hold. But a smart investor, according to capital market experts, is one who gets on with the job of picking up value stocks, notwithstanding where the tide of the market is moving.“Such an investor is rightly rewarded with great profits once the market turns. Since we fail to control our emotions, we forget that investment in equity is not for short term. So for long-term benefit , it is important to stay calm and act prudently in such times,” advises Ashok Kumar Jain, chairman and managing director, Arihant Capital Markets.
SET REALISTIC GOALS
You may have earlier doubled your money in a short span, say six months, by investing in a particular stock during a bull run, but you must remember — what goes up, comes down. Stock investing is not about speculating or making easy money. It is an art and science of buying good businesses at cheaper valuations.“It is important to set realistic goals for your portfolio’s long-term return , and buy only good companies with strong fundamentals and good management,” says Jain. To nip your fears in a bearish market, you should avoid selling just because stock prices have dropped.“You must review your stock portfolio rationally. Then only you should arrive at a decision to sell losers whose future prospects look weak, and hold on to winners with prospects that remain solid,” advises Jain.
DON’T TRACK THE MARKET
Another way you can soothe your nerves in a bear market is by not following the stock markets on a daily basis. Every investor knows that you should buy low and sell high.Bull markets provide you a chance to sell high. Bear markets, however, offer you a chance to buy low. Unfortunately, too many investors are lulled into complacency during bull markets and scared out of their wits in bear markets.So they do just the opposite, buying high and selling low. “Thus, you should avoid tracking the stock markets daily during a bearish phase. This way you will save yourself from unnecessary anxiety and fear,” says Amar Ambani, V-P , research, India Infoline.

SET ASIDE EMERGENCY FUNDS
Investors have the tendency to overinvest during a bull run, which becomes a reason for fear when the markets turn choppy. Ambani holds the view that to counter such a situation, you should have sufficient liquidity in hand for emergencies.“This will make sure that you aren’t forced to sell equity holdings or other assets before the time and price are right,” he says. To emerge as a winner, all you need to do is recognise the fact that your portfolio will decline from time to time, but take solace in knowing that short-term pain is required for long-term gain.
SEE THE POSITIVE SIDE
To make money in equities, it is important to be rational, not emotional. “You should always try to look at the positive side in a bad market,” says Ambani. Citing an example, he says that a bear market provides an excellent opportunity to buy strong businesses at rock bottom prices. Jain adds that no one can tell you when the next bull market will begin, how long will it last, or how high the market will ultimately go.“That should be the key point to drive out your fears in a bear market. So even if the markets are down, you should be convinced that your business is making money. The stock price may not generate great returns due to the bearish phase, but in the long term, your portfolio’s returns will be unmatchable,” he says.Warren Buffett was recently quoted as saying: “I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month.” You don’t get maximum pessimism during bull markets. You get them when the world looks like it’s falling apart. Times like now, for instance.

STUDY BEHAVIOURAL FINANCE
Last but not the least, you can study behavioural finance to calm your fears in a bear market. For the uninitiated, behavioural finance pairs emotions with investments and shows how emotions and cognitive errors can cause disasters in investment decisions. “Individual behaviour, temperament and psychology play an important role in determining investment success. Equity price movements are nothing but a summation of individual behaviours, reflecting their greed and fear,” says Ambani.As always happens, even experienced investors are susceptible to making judgment errors identified by behavioural finance research. “It can help you to be watchful of your behaviour and, in turn, avoid mistakes that will decrease your personal wealth. It provides a platform to learn from people’s mistakes, to modify and improve your overall investment strategies and actually profit from identifying these mistakes,” feels Jain.As for the bottomline, just as it is important to know when to exercise caution, the same way it is important to comprehend when to abstain from fear. Happy investing!

Run on FMP's causing panic

This could be India's subprime and credit crisis which will affect the realty industry the most.

Sucheta Dalal & Debashis Basu say that withdrawals from Fixed Maturity Plans can turn into a huge problem

A full blown panic in the real estate and financial services sectors has led to the withdrawal of nearly Rs 30,000 crore from Fixed Maturity Plans of Mutual Funds in the past week alone. These funds are meeting all redemption demands by borrowing money at high rates of 20% to 24%. This may end up destroying parts of their corpus and may lead to losses for retail investors. Retail investors have (as usual) foolishly remained invested in FMPs lured by their pitch which touted them ‘safer than fixed deposits and offering higher returns and lower taxes’, on the assurance of ‘indicative’ returns, although MoneyLIFE magazine (FMPs Lose Shine) had repeatedly pointed out that the risks of FDs and FMPs are so vastly different that comparing them are like comparing oranges and apples. FMPs may end up being like the unregulated Overseas Corporate Bodies of the previous market decline. Someone needs to urgently look at what is going on inside them. Unfortunately, SEBI does not even gather data about the FMPs issued by mutual funds or the quality of securities in them.

The other problem today is super-liquid schemes that invest in the call money market. There was no regulatory oversight on these schemes and they have been allowed not to mark their investment to market and could claim to hold them to maturity even when it was a one-year paper. This has created a very dangerous situation today.

Finance and realty companies are the weakest link in the chain. Many FMPs have subscribed to short term AAA rated paper of finance and realty companies. The credit rating of these papers now looks doubtful. One finance company (belonging to the bluest of the blue chip business house whose previous finance arm was deeply involved in the 2001 scam), has also renewed its paper at an exorbitant rate of 32%.

The smarter, corporate investors are taking no chances and pulling out funds and exacerbating the salutation leading to panic. No regulator has bothered to collect data on the investment pattern of FMPs and liquid schemes and keep tabs on it. As result, the systemic risk posed by the redemption runs on these schemes and the shaky underlying debt securities in their portfolio is suddenly upon us and nobody knows whether the RBI should look into it or SEBI or both. Mutual funds that are borrowing to meet redemption are refusing to utilise their bank credit for this emergency, because they feel that it will only put information in the public domain and cause a run on the fund.

Govt, RBI should act fast to restore normalcy in markets: UK Sinha Chairman UTI AMC



UK Sinha, chairman, UTI AMC 

The freeze on liquidity in the local market and the severe downturn in the stock market have hit Indian fund houses which are now seeing a drop in assets under management. It’s been a difficult few weeks for the mutual fund (MF) industry, given the pressure on redemptions in some of the fixed-maturity plans (FMPs) by large corporate investors. Some of the problems faced by the industry are now expected to be addressed by a special group constituted by the finance ministry to assess the current situation and to suggest measures. UK Sinha, chairman, UTI Asset Management Company (AMC) has been co-opted as a member of this group. He spoke to ET on the state of the industry and the changes he foresees. Excerpts: 

How severe is the redemption pressure being faced by mutual funds in their debt schemes, mainly FMPs and liquid money market schemes? 

If you look at the redemption figures in FMPs and liquid schemes last month and compared it with the numbers for the same period last year, you will see that there is not much difference. Earlier, after the September 15 deadline for advance tax, the liquidity in the system used to improve. 

This time, the liquidity situation has worsened. The equity market is seeing one of its worst downtrends, there are rumours about the health of some financial institutions, and there are doubts if some mutual funds will be able to meet redemption demands. Banks have been drawing Rs 80-90,000 crore through RBI’s repo window. Even if they (banks) have surplus fund, risk aversion is very high, and they are very wary of lending. At the moment, the situation, as regards mutual funds, is manageable. The industry has seen a rapid growth in assets under management over the past 2-3 years, primarily on the back of liquid schemes and FMPs. Contrary to what most industry experts may claim, growth in equity assets has not been very high. The 35% CAGR (compounded annual growth) in AUM has largely been on the strength of debt schemes. 

How valid are the concerns relating to quality of assets in liquid schemes and FMPs of MFs? 

In the case of a vast majority of fund houses, 90% of the debt assets are in the highest-rated paper (debt instruments). Some fund houses have been trying to grow their AUM at any cost. These players have compromised on the quality of their assets in a bid to offer higher returns to their investors. Yet, these are minuscule, when seen in the context of the overall industry. The problem can be solved, if these funds are offered liquidity against their top quality assets. This is something that has to be tackled by authorities. Right now, it is not business as usual. The inter-bank money market has not been functional for close to two weeks. 

Confidence among market participants is so low that there are no buyers for quality assets, and no institution is willing to offer credit against these assets. This is a peculiar situation. Faster the government and RBI act to address the situation, better the chances of restoration of normalcy not just in the money market, but in the financial system as a whole. This is not just an issue for MFs, but also for banks, NBFCs, and non-banks. 

What more should RBI and the government do besides the recent steps taken to ease liquidity? 

The government itself can inject liquidity into the system; it can provide credit to the non-banking industry as well. RBI could think of further reduction in CRR and SLR. At the moment, oil and fertiliser bonds do not qualify as securities for meeting SLR requirements. This norm could be changed. Coming back to mutual funds, at least 90% of the assets in debt schemes are in highest-rated paper. RBI should ensure that these papers remain liquid, by offering credit against them.

India mutual funds turn to central bank for short-term cash

RBI mulls proposal to let them deposit debt with central bank for cash

India's mutual funds have asked the central bank to lend them short-term cash via a repurchase facility after the global financial crisis virtually paralysed the country's money markets, fund executives said. 

The Reserve Bank of India (RBI) is considering the proposal to let mutual funds deposit some of the short-term bank debt they hold with the central bank in exchange for cash, said four senior executives, who were involved in talks with the central bank and declined to be named. 

Central bank repurchase facilities are normally only open to banks and primary dealers. The central bank's spokeswoman said that she could not immediately comment. 

Mutual funds would normally sell bank debt on the money market to raise cash to meet redemptions, which should have risen in September as customers pulled out money for quarterly tax payments. 

But Indian money markets have been hit by the global financial crisis, which has wrecked banks across the United States and Europe and made lenders around the world wary of dealing with each other. 

The cost of overnight borrowing on the interbank market jumped to a 19-month high of 23 per cent last Friday, more than double the central bank's short-term lending rate of 9 per cent. 

The central bank has tried to ease the liquidity squeeze and the executives said that it would only agree to the mutual funds' request if the money markets failed to thaw. 

The central bank lowered the proportion of deposits banks must keep in their vaults by 150 basis points from Saturday, adding 600 billion rupees (S$18.5 billion) to the amount of cash available for lending. 

The stock market regulator, the Securities and Exchange Board of India, has asked mutual funds to give details of their holdings of certificates of deposits (CDs), short-term debt sold by banks. This data would be used by the RBI to assess the request for access to the repo facility, the executives said. 

'That seems to be the final objective in mind,' one of them, a chief executive of an Indian mutual fund house, said. 

CD issuance has ballooned this year as banks scrambled to raise funds to feed demand for credit. Mutual funds have bought them, attracted by returns. 

Central bank data shows that outstanding CDs at the end of August totalled 1.71 trillion rupees, up nearly 40 per cent from the start of the year. 

But appetite for CDs is waning and cost of borrowing for three months by selling certificates of deposit has jumped to as high as 14 per cent compared with 10-11 per cent a month earlier, two money market dealers said on Saturday. 

That spells trouble for mutual funds at a time of rising redemptions. Customers pulled a net 43 billion rupees out of liquid mutual funds in August after investing a net 630 million the previous month, according to the Association of Mutual Funds in India. The association has yet to release figures for September, when withdrawals typically rise due to quarterly tax payments. 

Foreign funds are bailing out of the tumbling stock market, driving the rupee to a record low against the US dollar. The central bank is buying rupees to support the currency, exacerbating the cash shortage. 

The government has also yet to disburse cash for planned spending, something which would normally boost cash supply in the banking system. 

To try to the thaw out the market and prod banks into lending to each other, the central bank injected a record of 920 billion rupees in its repo operation last Friday. 

Liquid funds managed 891.2 billion rupees at the end of August and accounted for 16.37 per cent of the total industry's holdings, Association of Mutual Funds in India data shows.

Meanwhile, India's central bank governor Duvvuri Subbarao said that the South Asian nation may 'escape the worst consequences' of the global financial crisis even as its currency and stock markets experience some impact.

Indian banks have 'very limited' direct or indirect exposure to the collapsed US mortgage market or failed financial institutions, Mr Subbarao said on Saturday at the meeting of the International Monetary Fund in Washington.

Money market funds face intense redemption heat

Liquidity crunch sees banks, companies withdraw Rs30,000 cr from such funds over the past fortnight
The liquidity crunch in the Indian financial system has taken a toll on the mutual fund industry. Liquid and liquid-plus funds, popular debt schemes among corporate investors and bank treasuries for parking surplus money, are seeing heavy redemption. An estimated Rs30,000 crore, or about 30% of the corpus of such funds, has been withdrawn in the past fortnight, according to two fund managers and the head of treasury operations of a diversified group.
According to the Association of Mutual Funds in India, an industry lobby, liquid and liquid-plus funds, also known as money market funds, constituted a quarter of the Rs3.6 trillion of assets under management in debt, or fixed income, funds at the end of August, the last month for which such data is available.
India’s total assets under management in the mutual fund industry were Rs5.4 trillion in August. This came down to Rs5.2 trillion in September.
“There a liquidity problem but we don’t see any credit crunch,” said Ritesh Jain, head of fixed income at Principal PNB Asset Management Co. Pvt. Ltd, which manages about Rs10,000 crore worth of assets.
Liquid-plus funds had a particularly tough time in the previous week with 33 of 291 of such funds declining in value between Wednesday and Friday. Fund managers had to sell some assets below cost price due to heavy redemption by banks and firms, said industry analysts, dubbing this a rare occurrence for such schemes.
Market watchPeople outside the BSE building. Investors fear liquid and liquid-plus funds could be sitting on huge losses. PTI
One such fund house—Mirae Asset Global Investment Management (India) Pvt. Ltd— has eight variants of its liquid-plus schemes quoting at a discount to par value, or the price at which an investor bought units of the scheme.
“The very essence of money market funds is that they don’t dip below par,” said Dhirendra Kumar, chief executive of Value Research India Pvt. Ltd, a mutual funds research firm.
While liquid funds can mark to market up to 10% of their assets, liquid-plus funds can have more assets marked to market, an accounting practice of assigning a value to a position held in a financial instrument based on the current market price for that instrument.
In liquid funds, the drop in net asset value (NAV) is not as stark as in the liquid-plus funds because of the 10% cap on the accounting practice of marking to market its assets under management.
“Though there is no regulatory diktat on it, most liquid-plus funds also keep only a small portion of their portfolio in instruments that are marked to market,” said a fund manager who didn’t wish to be named.
The fear, thus, is that many of these liquid and liquid-plus funds could be sitting on huge losses in the rest of their portfolio, which is held to maturity.
If the liquidity crunch continues for long, the funds may have to recognize the losses and pass them on to the investor. Else, the funds themselves will have to make good the losses by injecting cash in the scheme.
Most fund houses have a small capital base, sometimes as low as Rs10 crore, which would prove insufficient as losses could be more. In the current scenario, when short-term rates have risen by 400 basis points in three months, a six-month maturity portfolio would be out of money by 2%. One basis point is one-hundredth of a percentage point.
“Getting a bank line (of credit) is not easy,” said Ganti Murthy, debt fund manager at SBI Funds Management Pvt. Ltd. “Banks are facing liquidity tightness themselves.”
Markets regulator Securities and Exchange Board of India, or Sebi, does not call for capital protection in the liquid-plus schemes currently available. But, according to analysts, it has been taken for granted that fund managers handling such schemes would invest in a combination of papers to ensure NAVs are maintained above par value in normal times.
But these are unusual times, and redemption by firms and banks have risen sharply, said many fund managers.
“Nobody has money to buy these assets,” said Ashish Nigam, head of fixed income at Religare Aegon Asset Management Co. Pvt. Ltd, which is yet to launch any scheme.
As overnight lending rates rose, banks redeemed their liquid-plus schemes to be able to lend to other banks at higher rates in the inter-bank money market.
Interest rates on the overnight inter-bank call money market crossed 20% on Friday, the highest since April 2007, as banks rushed to borrow from each other to tide over their temporary asset-liability mismatches. Since then it has come down after the cash reserve ratio (CRR, or the balance banks need to maintain with the central bank) cut.
Companies, on the other hand, have been getting higher returns from fixed deposits with interest rates on such deposits for one month rising to 12%, from 8-9% a month ago, said N.S. Paramasivam, head of treasury at Essar Group, a steel-to-oil conglomerate. “This has made many corporates switch over from mutual funds to FDs (fixed deposits).”
In a tight credit situation, yields, or interest rates, on debt instruments rise and their prices fall, hurting NAVs of money market funds.
While liquid funds typically invest a majority of their assets in debt instruments that are of one- seven-day maturity, liquid-plus funds hold a large chunk of their assets in papers with one- three-month maturity. Liquid-plus funds are becoming increasingly popular as they are more tax efficient for investors.
To be sure, funds are now rebalancing their portfolios and switching to papers with a shorter tenure. “This will ensure the funds’ liabilities (the money they manage) which can be redeemed every day will be in line with the tenure of the paper they invest in, said Paramasivam.
According to Jain of Principal PNB Asset Management, the liquidity problem could be solved “as early as in a fortnight or so”.
The Reserve Bank of India’s move in cutting banks’ CRR infused Rs60,000 crore in the financial system last Saturday. “This and more such measures are expected to help the industry tide over the crisis of confidence,” said Paramasivam.
Source: http://www.livemint.com/2008/10/14001655/Money-market-funds-face-intens.html?pg=1