Archive for March, 2007

Counterpoint: Term plans + MF are better than ULIPs

25 comments Written on March 26th, 2007 by
Categories: Insurance, MutualFunds, ULIP
A. Sanjeev writes at rediff that Term plans are not as good as ULIPs and goes on to demonstrate using calculations and formulas. Unfortunately, Sanjeev hasn't perhaps taken all facts into consideration, and there are a number of flaws in his article, which I shall highlight. My point is: Sanjeev is incorrect; term plans are FAR better than ULIPs.

Term of paying Premiums
Sanjeev says that ULIPs require only 3 years of premiums, while a term plan needs premiums paid throughout the term. This is incorrect. If you don't pay premium for a ULIP, the mortality charges get reduced from your fund value. Don't believe me? Read the new ULIP guidelines:

Premium Holiday: If the policyholder stops paying premium instalments after paying premiums for three years, the risk premiums and the applicable charges can be adjusted from the balance in the account value, till such time as the balance in the account reduces to one year's premium. This would help policyholders who are unable to pay premiums owing to a temporary disruption in income because of change in employment, or any other sudden drop in income. The premium holiday option ensures continued insurance protection by transferring the risk premium and charges due from the account value, which is built up over a period. But the policy would lapse and this benefit would not be available if premium payments are stopped within three years.
That means, regardless of your attempting to not pay premiums, your charges will get reduced from your fund value, meaning you are paying them. Just not handing over a cheque, that's all.

Even the Prudential ICICI LifeTime policy which Sanjeev has reffered to has a clause stipulating that if the fund value reaches less than 1.1 times the annual premium (meaning if it reached 33,000 or less). It's 75,000 now, and he has to pay annual charges of 11,000, which increases every year as mortality charges increase (plus service tax). Technically he will lose it all in four years.

Another thing you can do is to make the policy "paid up" but that means your cover will be completely lost (only your fund value remains). That is of no use because Sanjeev's friend Amit will lose the cover he so very much needed to insure against his housing loan.

Ease of paying premiums
Sanjeev says he likes ULIPs because you can stop paying premiums after three years, which is good for his client, because "being a software engineer, his work required him to travel most of the times. Plus he also felt that keeping track of premium payment for 25 years would be too tedious".

This is fundamentally flawed. Most insurers, including LIC, allow premium payment online. And this software engineer has to pay other bills also, does he not? If he can pay his monthly phone bills online and his credit card bills online, why can't he pay a premium online once a year? I don't think this is a deterrent to anyone.

Secondly, as I mentioned earlier, you can't just stop paying premiums. Your insurance cover will lapse if your fund value can't cover your premium.

No service tax?
Since 2006, Mr. Amit would need to pay 12.24% effective service tax on the "risk" portion of his premium, taking total amount of premium to Rs. 31,096. This is extra money for no extra value i.e. his sum invested and cover remains exactly the same. In a term plan too he will have an extra amount too.

Service tax is one thing that effectively kills your returns. It is not going to you, or to the insurance company - it is going to the government. Which has already taxed you before you invested!

Note: I had earlier presumed that service tax would apply on the entire premium - but I was mistaken, as pointed out in some of the comments below (thanks Ganesan and Jackson!). So I've redone the calculations.

"Sum assured not sustainable"
I went to ICICI Prudential's premium quote calculators and chose "Life Time Super". Then I put in parameters - 32 years old, 45 lakh sum assured, 30,000 annual premium. Also chose the 3 year "cover continuance" option - meaning you don't have to pay the premiums after three years (charges still get reduced though). Then I click the "Generate EBI" button. It tells me "Sum assured not sustainable".

Now I try with lower sum assured - I find out that the highest sum assured they will show me is Rs. 24 lakhs. That is about half the value Sanjeev has written! For 45 lakhs, you need to put in 58,000 per year. And if you use that, the return ratio will be skewed completely towards Term Plans + MF (because more money will then be put into the MF). To give you an indication, at the same growth rate the ULIP will return 1.82 lakhs, but the term plan+MF will return 2.34 lakhs.

Comparing wrong terms
Sanjeev compares a 3 year premium paying ULIP, to a 25 year premium paying Term plan. In the latter, the coverage is available for 25 years, and for the former, probably only for five, under the new ULIP rules. Perhaps 10 at the very maximum. If you take a 5 year policy for 45 lakhs from LIC (the costliest insurer) you get a premium of Rs. 10,620. Which will alter the complete ratios! (I will demonstrate the true ratios later)

Comparing mortality charges over three years
Term plan mortality charges remain the same over the entire term - meaning even 20 years later, Amit pays the same mortality charges. In a ULIP, mortality charges increase every year. Now if I assume that Amit wants to REALLY cover his home loan for 25 years, then he will want to continue to pay at least mortality charges for the rest of the term. In 18 years, when he is 50, the mortality charges paid will be Rs. 23,000 for 45 lakhs, according to the lifetime brochure. The term plan stays fixed at Rs. 16,000 or so.

Comparing wrong types of returns
If Amit dies in 10 years, what does his family get? In a ULIP, it will only be 45 lakhs (higher of fund value or sum assured). In a term plan + mutual fund he will get 45 lakhs plus the fund value. Different fundas.

Commission under ULIPs
Now Sanjeev says that ULIP advisors make lesser money (Rs. 5,700)than term plan advisors (Rs. 26,243). But he takes the 25 year period of the term plan, but only three years for the ULIP! Secondly, he uses pretty high figures for term plan premiums but low values for ULIPs - this will probably need to get clarified. If you consider his values, for 25 years, the ULIP agent still gets around 18,000 (still less than the term plan advisor).

One-of-a-kind scheme
Note that this is because this is a special policy that does not have upper limits on the sum assured. Most other policies limit the sum assured to a maximum of 5 times annual premium, at which rate the temr plan premiums are significantly lower, and advisor commissions also become appropriately lower. The equation goes COMPLETELY in favour of term plans (even with advisor commissions) if you take any ulip that limits your sum assured.

Let us consider all factors
Let us consider service tax (assume applicable for insurance premiums from April 2006 onwards) and also entry loads in MFs (most of which started charging 2.25% in 2005, prior to that SIPs had no load). Also I will use HDFC Taxsaver as it is an 80C tax saving instrument on the lines of insurance. So the Term + MF strategy yields about Rs. 2,500 more than the ULIP. But if we are comparing short terms - just 5 years, why don't we take LIC's 10,620 as the premium instead? Now the term plan is better off by (nearly) Rs. 30,000!

The premiums are higher by the amount of service tax (for insurance risk premium) and I assume that we will compare the same amount invested in either strategy. Even with the one-of-a-kind ULIP that provides a HUGE sum assured for a low premium, you can see how a Term plan + Mutual Fund has performed much better.

Also if you consider ONLY the investment part, the mutual fund part has grown at an annualised rate of 105%. The investment part of the ULIP has only grown at 48%. That means the investment on the mutual fund has been double of the return on a ULIP. Even though the term plan premiums are higher in the first few years compared to the mortality charges of a ULIP, the extra returns are worth it.

The author says that even earlier private mutual funds were shunned. But that was because they performed badly, or charged people too much! Now the rules are more strict and funds have limits on all charges. Even insurance is getting there but there is still a lack of transparency - portfolio disclosures are not mandatory, units are deducted on a regular basis for various charges etc.

Plus, these are the nascent years and premiums don't really reflect true insurance coverage - simply because most people who have bought these are young (<50 years). In about 10 years, we will start to see a larger number of claims - let us then see how all these insurers perform. ULIPs for them are better because by that time your fund value will cover most of the sum assured - so their risk is lower. But true insurance is term insurance. Low premiums, high insurance.

Posted in Insurance, MutualFunds, ULIP

How Entry and Exit loads affect you

12 comments Written on March 26th, 2007 by
Categories: MutualFunds
Mutual funds sometimes charge you something to buy units from them, or sell them units. Charges on purchase are known as entry loads and charges on exit are called exit loads (or "contingent deferred sales charge (CDSC)" which is a glorified term for exit loads).

Entry loads for equity funds range from 0 (no load) to 2.5% of the value you purchase. Exit loads can very over time and typically range from 0% to 4%. Most closed ended funds launched recently have hefty exit loads to discourage early exits but these loads go down to zero after a while (2 years or such). Most open ended funds have no exit loads - only temporary exit loads.

Entry loads are used to pay distributor commissions. If your distributor is asking you to change funds often, he is trying to earn money from your entry loads. To avoid this, Quantum mutual fund was started by Ajit Dayal with the philosophy that distributors looting commissions from you is simply not right. Of course, his views are echoed in articles by PersonalFn (his own company), DNA India etc.

So Quantum AMC launched Quantum Long Term Equity fund, a fund with no entry load and which is not sold by distributors - instead, you have to contact the fund directly. Kinda like the Vanguard fund in the US which is very very popular.

But for some reason, Quantum charges ridiculous exit loads. From 4% in the first six months, to 0% after 2 years. Such loads are common where the fund manager wants you to stay with the fund, but I personally think anything beyond 1 year is unreasonable; if your fund does not do well after one year, you should be able to exit without penalty. Even capital gains tax only applies if you sell your shares within one year or holding! Let us now see the effect of these loads on your shareholding. I will compare different kinds of funds for one year of holding:

1) Quantum Long Term Equity Fund - No entry load, 2% exit load after on year. Very new fund, but low assets of only 22 cr.
2) HDFC equity fund and Reliance Vision Fund - Large cap diversified funds, with 2.25% entry load. No exit load. Much more than five years old, so have no amortised costs.
3) SBI Bluechip fund and HSBC Advantage India Fund: New funds which have amortised initial expenses (read: more distributor commissions). Had no entry load during NFOs but this was bought POST their NFO, so 2.25% entry load applies. They have no exit load beyond 6 months.
4) NiftyBeES: An Exchange Traded Fund which invests in the Nifty stocks, and has no entry or exit loads. But you will face brokerage charges (usually 0.65% in total) that will act upon both entry and exit so I'll consider that as your load instead.

Only growth option of funds are compared, with the exception of NiftyBeES which only has the dividend option (but I've added up the divident when comparing) Here are the results, purely on an NAV basis.

From the NAV it looks like HDFC fund has done excellently, but NiftyBeES has done phenomenally! Of course, none of these funds have done better than the Nifty (12.87% in one year). SBI Bluechip is actually negative for the year, even though bluechips have done well; I can attribute this to the high amortised costs.

Quantum Long Term Equity fund is not at all spectacular, but has done better than other funds launched around the same time.

Now, let's put in the loads and make the comparison. Let's assume you invested Rs. 10,000 last year, and see how much it has become with the entry and exit loads accounted for:

You can see here how load affects you:
1) If you don't exit your investments, you will note that NiftyBeES is still the best fund to have (13.04%, considering a Rs. 8 per unit dividend in Jan 07). But the next best fund is Quantum long term equity fund (8.42%), purely because it charged no load.
2) If you choose to exit, then NiftyBeES stays superior (12.31%) but the next best fund is HDFC Equity (8.23%) purely because it charged no exit load! Quantum now slips to 6.25% gains only, which is all because of its very high exit load.

Frankly, the better performance of NiftyBeES is also due to the fact that it costs about 1% as annual charges, and the others listed charge 1.5%-2.5%. This is reflected in the NAV, which is lower.

All this proves a few things:
1) Zero entry loads does not mean the best return. After one year, even with a non-zero entry load, NiftyBeES has done better.
2) Zero exit loads also don't mean a better return.
3) Investing in established actively managed funds may not be better than investing in a passive fund like NiftyBeES.
4) You can't take loads in isolation - choose funds whose NET load (entry + exit) works out better for you.

This article may be invalid next year, when Quantum finishes two years of existence and therefore has 0% exit load - I will recompare then. But at this time, the best fund to go with is the NiftyBeES. No distributor will sell this fund: talk to your stock broker instead (it's like a stock traded on the exchange).

Posted in MutualFunds

Anoop Bhaskar Quits Sundaram AMC

12 comments Written on March 21st, 2007 by
Categories: MutualFunds
Anoop Bhaskar, the head of equities at Sundaram BNP Paribas AMC, has resigned. Anoop used to manage Sundaram Select Midcap, one of the fantastic performers of the last year. Rumours are that he'll join UTI AMC.

In his absence, N. Prasad, Chief Investment Officer of Sundaram BNP Paribas AMC, will manage the schemes Anoop used to manage.

What does this mean for you? If you call the AMC they'll tell you everything is fine and that they have a transition plan in place. And that their investments are part of a discussed strategy and if the fund managers go the strategy will still continue as usual.

That's a load of bull.

Fund managers are smart people that are hired to run mutual fund schemes. In fact, a fund manager is so important that you have to put his/her name in the offer document.

Managers are responsible for taking calls on buying and selling but usually don't take their decision in isolation. While they will try and create a fall option, managers are usually well informed and will take the final responsibility of a strategy. When they leave, usually it takes a little bit of time for the next person to take the same kind of strategy forward.

SBI's Sandip Subherwal was an excellent fund manager. But after he left, SBI funds have still done well. But there are a number of other cases where fund manager churn has been followed by lowered performance: Samir Arora from Alliance Capital, Nilesh Shah from Franklin Templeton etc.

But in this case, L. Prasad is a smart manager as well and you may not see too much of an impact. Either ways, stay invested but don't buy any more until you can see the performance impact for at least two quarters, perhaps even a year.

Posted in MutualFunds

Do NOT buy LIC’s Money Plus ULIP

24 comments Written on March 21st, 2007 by
Categories: ULIP
It seems that LIC advisors have been distributing pamphlets saying that a plan named LIC Money Plus, a ULIP, demonstrating how you can invest only Rs. 10,000 annually for three years and get back Rs. 16 lakhs after 20 years. This is absolutely fraudulent advise because ULIPs cannot guaranteed results (they are market linked). Plus, this assumes an annual return of 25% which is WAYYY beyond anything that has occured in the last twenty years.

To give you an indication - no LIC endowment policy has made even more than 8% annualised in the last twenty years. 25% is (splutter, gasp) ridiculous!

IRDA has cautioned investors against this practice. Please do not go by such impressions. Please throw your advisor out on the street if he brings you such a pamphlet.

Read:
Original IRDA Press Release, articles from Outlook Money, DNA, Domain-B.

Look ONLY at this illustration:
http://www.licindia.com/money_plus_illustration.htm
(It shows you 6% and 10% returns only, that is all you should expect)

I firmly believe such pamplets are not the creation of a few advisors, but of some LIC officers as well. While it may managed well, there is no possibility of a huge return, and in three years, a lot of gullible investors who have put in their hard earned money will realise they have been conned and take out the money. This kind of redemption will affect the fund as well. In general I am against ULIPs because of their heavily loaded structure. So I would say:

You should NOT invest in LIC Money Plus at all. Beware.

Posted in ULIP

Timing the market is a Good Thing

21 comments Written on March 19th, 2007 by
Categories: Uncategorized
Most investment analysts and advisors tell you, "Don't try to time the market". And in the same breath they suggest a systematic investment plan (SIP) - the idea being that you invest the same amount regularly so that you don't have to time the markets.

Why are they so much against timing the market? Because they don't believe that you, a lay investor, have anything to gain by timing the markets. Some studies like this one from Fidelity suggest that the difference between timing the market accurately, and not timing it at all provides very little difference. It actually says that if you invested in the market at the ABSOLUTE top versus at the ABSOLUTE bottom of every year, continuously for 22 years, and compare the two investments, you will get: 8.6% p.a. for investing only at the tops (meaning you got it at the worst possible time) and 11.5% if you invested at the yearly bottoms (best possible time). This is a "small" difference, says the Fidelity paper.

But is it really a small difference?

If you invested Rs. 50,000 per year for those 22 years, investing at 8.6% would give you Rs. 29.9 lakhs. And investing at 11.5%: Rs. 43.3 lakhs. A difference of 13.4 lakhs is a lot of money (considering that 50,000 over 22 years is only 11 lakhs!)

Also this is a UK based research. Let me show you this research using Indian data over the past 11 years (I think after 1992 is when the real story happened, and the first few years were just finding our feet). If I consider the nifty as a benchmark and think of it as the NAV of a mutual fund, my investment every year will be based on the Nifty value and I will get so many "units". These units then added up and multiplied by the current value of the nifty gives me my current value and thus, I can track my growth. Here's what I have found.

In India, timing the market at the absolute highs versus the absolute lows yields a return of 15% versus 23%. This is a HUGE difference of 8% and as you can see above, the yield of an investment of just Rs. 12,000 per year can be 2.96 lakhs (bad timing) or 4.57 lakhs (good timing). A difference of Rs. 1.6 lakhs, for a total investment of Rs. 12,000 x 11 years = Rs. 1.32 lakhs.

Now you might think this is silly because no one can accurately predict the highs, no? Right now your advisor will probably be smiling if he's next to you and saying, "Okay boss, but how will you know the market is at a top or bottom? What if you miss them?".

I agree that most people will not be able to predict tops or bottoms, but you, the smart investor, will know when the market is severely overvalued or undervalued in a year. So let me assume that you will miss the TOP 10 days of a year and the bottom 10 - that means instead of investing at the yearly high you invest at the 11th highest value instead. Versus, instead of investing at the yearly low, you invest at the 11th lowest value instead. what happens?

As you can see, the difference is still 6% - 22% for good timing, 16% for bad timing. This translates to a difference of Rs. 1.32 lakhs for 11 years of 12K per year - which is exactly the amount you invest in those years put together. Meaning: timing the market can yield you 100% of your investment back!!!

I have mentioned earlier that SIPs have a problem: that you can't time the market by investing more when you think the market is down. It is demonstrated here with data - if you were able to invest at the lows or even somewhere near the lows over the last 10 years, you would perhaps be a much richer investor.

Timing is not a bad thing - in fact, timing can make the difference between a mediocre investor and a smart one. When you understand that, you will want to learn more about how to determine when the market is low or high. But that is another day, another blog post. (In short, look at the P/E movements, and compare it to last 4Q earnings growth - at the highs versus the lows in the past)

And yes, please send me your comments!

Posted in Uncategorized

Bad ICICI Lombard Experience

31 comments Written on March 15th, 2007 by
Categories: ICICI Bank
I want to mention on this blog about a bad ICICI Lombard health insurance experience. Our company has a group policy that covers health of all individuals, and we have always had a maternity cover also.

Before my child was born I had our HR executive called up the executive that sold us this insurance and confirmed that maternity was covered, and he said it was. Still not convinced I read through the policy which had it in the "endorsements" section. Assuming that yes, this endorsement is in our policy, we went ahead with the room selection etc. for the hospital.

When my son was born I submitted the form for a "cashless" claim, and the Third Party Adminstrator (TPA) rejected the claim, saying maternity was not covered. I then called up the ICICI Lombard executive who still maintained that it was. Angry with the TPA, I called and gave them a piece of my mind. To their credit they listened to me patiently and told me that the policy did not have the maternity endorsement.

I then paid up at the hospital and a few days later when I reached the office, checked the copy of the policy document. Guess what. The front page is a printed cover that mentions our office name, address and number of employees covered. There's a section for "endorsements" which was empty. Then there was a pre-printed set of terms and conditions which specifically rules out maternity unless endorsement E2 is applicable. Endorsement E2 - the maternity endorsement - is also printed later.

Well, it turns out that "Endorsement E2 is applicable" must be printed on the front page, otherwise the endorsement is not valid. This is weird. If I have a policy document in which the endorsement is present, it is not enough. The fact that the endorsement is VALID should be printed somewhere else? How is anyone supposed to know this? Even in my LIC policy only those endorsements are listed which apply to me! Why can't ICICI Lombard give us a group policy document that contains only those endorsements that apply to us, especially when we pay a ton more of premium?

Of course, their stand is all legal. And it is my stupidity that I did not get a court approval before I went to the hospital. But I think this was a way to trick us, because the document is worded in a way that makes me believe that the endorsement is applicable, but when you try to claim it is not. Further the maternity benefit was there in earlier years, and during renewal they removed it and we were dumb for trusting them. Still, that is a standard trick and now I am smarter, and I hope you are too.

What is inexcusable was ICICI Lombard's procedure to handle the claim. I didn't hear one apology from anyone; everyone we called insisted that the maternity claim was valid and that they would call us back but they never did. And the TPA was actually more helpful than ICICI's executives. Even to the end, there was just a blame game going on at ICICI and then I gave up.

ICICI Lombard executives came to my office yesterday to renew our building insurance. I have cancelled every single insurance we hold with them and am getting quotes from others. It is unlikely that I will ever use their services again.

And today, doing a search for other such experiences, I have found a number of other people that have had problems. Not with ICICI lombard per se but with ICICI banks divisions in general - ICICI bank is a promoter of ICICI Lombard.

This page starts off with ICICI bank's bad services, and other people come in and pour their views.

Arjun Prabhu then posts a blog entry and gets 594 comments, spewing vitriol over practically every aspect of ICICI Bank's services, including credit cards, loans, insurance, and NRI offerings. Some berate the lack of service, others complain about executive apathy. When an ICICI bank executive presumably came in to stem the damage, and responded to one customer, that customer immediately replied and provided evidence to which there was no further response.

More posts follow: Whoisdeep, Arjarapu, Ankur Raheja, Neha Vishwanathan and Deepak K

Mouthshut's ICICI bank review page seems to have a huge number of bad experiences, out of 474 reviews.

Most woes are not about bad experiences per se, but about ICICI Bank's lack of empathy with their customers. Some of their PR executives have tried to enter the fray and solve issues by providing email ids in the comments.

But why am I posting this in my Investor blog? Because this kind of massive customer reaction is usually an indicator for the ICICI Bank stock as well. Any publicity is good publicity but the kind of venom spewed by customers is definitely not a good sign. I personally think they have some fantastic people at the top: I have immense respect for KV Kamath and his team. But perhaps, in the furious pace of growth, they have had issues with training their middle management, and eventually, their customer facing executives. In the long run, this kind of attitude is very difficult to reverse - and in my experience, it will only be addressed after the shit hits the fan.

From an investor perspective, this is a touch-me-not. Very few customers have staunchly supported the bank in any of these posts. Almost all reviews are negative. A retail business can't survive for too long like this, can it? If you own ICICI bank shares, you might want to seriously evaluate its future.

And in the same vein, I encourage you to look at all your stocks, and talk to the customers of these companies. It might help you understand whether you own a gold mine or a minefield.

Note: You may see some ads regarding ICICI in this page. I haven't blocked them from advertising here, and I hope they will respond to some of these issues too.

Posted in ICICI Bank

FIIs are not the source of all problems

2 comments Written on March 15th, 2007 by
Categories: Commentary
A recent economic times article berates "the games FIIs play" as a reason for the massive volatility in today's markets.

Here's my take on individual points.

Short Selling
The author says that FIIs short sell even though SEBI has not allowed them to. They do this by borrowing shares from PN accounts, directly from their custody accounts without the lenders permission. I must say that "without the lenders permission" seems to be an assumption - I believe most people who own p-notes have signed up to earn some interest on lending their shares for the short term (callable in a few days).

Short selling through borrowing is happening in the Indian market all the time, not just by FIIs. Have you got a letter from your online broker recently saying that your stocks are going to be placed by default into the "margin" account? Meaning the stocks you buy will be directly placed into the brokers proprietary account which they can use to short sell (or lend to FIs to short sell).

This is a huge problem - I had to call up my broker and say I want the stocks to be moved to my DP account and I don't want to have margin account at all. They have said ok, and I get a DP statement for all stocks I buy. Many brokerages simply tell you what you have bought but don't credit the shares to your DP. (they keep it in their account for trading, and will give it to you whenever you want of course) If you want the shares - say to sell them - then they will ensure the shares are provided back to you.

Short selling like this is happening with Indian brokerages too, small and large. The FIIs are no different.

For the period that you have the shares in the "margin" account, you can use a certain part of their value as your margin for trading. Now I don't trade (i.e. buy/sell daily) so I don't need a margin account. But I'm sure my broker will love to borrow my shares! So I remove shares from the margin account.

In more developed markets, I could put the shares up for borrowing and people would pay me money to borrow the shares for a short while. They must give me back my shares whenever I want of course.

In any case, this point is moot: The Finance Minister has allowed short selling by institutions legally.

Long term derivative contracts
The author complains that FIIs are internally providing long term contracts like six months and one year contracts to each other without SEBI's knowledge. To that I say: Big deal. The buyer and seller are aware of the risk, and SEBI is not guaranteeing the contract, so why should SEBI be involved?

And this is a darn good thing. We need long term contracts (six months to one year) because it provides a very good stable base for the market. SEBi doesn't allow it because the exchanges don't have the infrastructure to manage them (plus even the +2 month contracts are ultra illiquid) That is no reason to disallow a long term contract!

What are FCCBs? They are long term call options for the investors. What is the Mukesh Ambani increasing his stake in Reliance? It is an 18 month future on Reliance. If that is legal, why is long term derivatives not legal? I think it is completely legal to offer a long term derivative if you are willign to take the risk. In fact I can write a six month call option to you, anytime, and SEBI cannot interfere. Why? Because this is not guaranteed by SEBI or an exchange.

Long term derivatives are great stabilizers, if you look at the markets abroad.

FIIs are bad boys
the article says traders have not made money and hedge funds are the main mischief makers. Hello? Hedge funds is hot money. Trading is a risky game. For time immemorial, most traders have lost money. In every market. Only a few people make money in the stock markets.

For a couple of years, it was too easy to make money. You could either do an overnight position in a high volume stock and sell on open. Or you could short after 15 minutes of opening and make 2%. It was a simple pattern.

Today it is a lot more difficult to make money on trading. Not because of hedge funds. Because the market is more mature, and the patterns have been broken comprehensively. Now to blame FIIs for this and say that because of them traders have lost the ability to make easy money is being a cry-baby. Adapt, evolve or leave.

Btw, hedge funds lost the most money in december with the simple patterns and trying to manipulate the market by overselling and then hopeing market will drop. It did not drop and they suffered.

At this point nobody has the power to manipulate the market, not even FIIs. You can see how much of the market the FIIs trade; the market is equally shared between FIIs, Indian FIs, and retail investors.

FIIs are not united firstly, so each one is a small entity that barely has the power to move hte market much. Secondly, the only way to manipulate the market is by doing synchro trading, which SEBI is really harsh on.

Thirdly we should be for open markets only - what's the point of a controlled market, it is like going back in time. One day the argument will be that no one should make losses, like we do for farmers' agriculture loans.

FIIs very large orders get filled in only gradually, and the weighted average price of large orders is at the higher end of buys and lower end of sells. Meaning there is not much scope for manipulation.

If we are excited about FIIs buying a stock, we are the ones that are stupid. If they are buying a stock like crazy, why should we follow suit? If there's a good reason, yes, but if we buy just because they buy, we are nothign but sheep.

What we have to do is learn and adapt. Don't blindly buy a stock that is FII pushed - remember that many FIIs are funded by Indian black money, so there is scope for insider manipulation - and if you own a stock that is being favoured like hell by FIIs, consider booking out your profits.

Posted in Commentary

Big dips: How to choose stocks in a downturn

11 comments Written on March 14th, 2007 by
Categories: Uncategorized
The Nifty's fallen 15% since its highs, and even then I had said that it was not undervalued. I seem to put my foot in my mouth when I comment but I still maintain that we are not overvalued.

Currently, the Nifty has a P/E of 18. This may not sound significant but from what I see, nothing much has changed in the earnings growth area! Meaning, I still expect to see growth of over 25% in the top few companies (which comprise the Nifty) and this means that there is still value in these companies.

Tata has acquired Corus at a 12 billion dollar value, and Suzlon and Hindalco are also paying big money for their acquisitions. This will hit their books in the short term, but provides excellent long term value for all these companies, mainly because the integration will give them lower costs and higher margins.

Reliance and IPCL will merge and the benefit will entirely go to Reliance. Think about it - IPCL has a P/E of less than 6, and Reliance is at about 18. IPCL has past 4Q earnings of Rs. 50 (approx) per share, which adds to Rs. 1300 cr. of profit over the last four quarters. The combined entity, if you add up the last four quarter profits, will have 11,857 cr. of profits, giving an EPS of Rs. 82 per share. At the current price of Rs. 1285, RIL shareholders will have a company of P/E 15 or so - which, at the rate it's been growing, is remarkably cheap. I am personally buying RIL shares on a regular basis nowadays.

Now, what am I saying? Should you just go and buy any company because the Nifty seems undervalued? Well, no. Like in the RIL-IPCL case above, make your decisions based on future potential.

A lot of companies will seem like bargains to you now. Bajaj Auto at 2500! It was up to 3000 a couple months back! But that is no reason to buy, because 3000 could have been simply too high an expectation. In the face of rising interest rates, people will have lower leverage to buy vehicles, so the growth may be tempered. Plus, with the world cup around the corner, Hero Honda, a prime advertiser, is likely to put a lot of heat on Bajaj. So perhaps Bajaj is not the best bet today.

Another example: SBI is at 955, and just three months ago it was above 1200. That's a 20% drop and may look like a darn good deal! Unfortunately, interest rate hikes and slowing growth in retail lending will take its toll, and perhaps SBI will not grow at 20% or more in the next few months.

But there are others which sound just too good to be true. BHEL for instance, has an existing order book of 30,000 cr. Plus, the government wants more ultra mega power projects, which BHEL has a lot of expertise in. And the growth seems less dependent on interest rates or competition pressure, so the earnings visibility is fantastic. Add to this the fact that they've announced a 1:1 bonus (likely to be decided by May) and that their price is now at Rs. 2,000 (a P/E of 24). At the current price this seems like a great buy!

Disclosure: I own all the stocks above. And none of these will give you benefits overnight or within three months. Think of this as investments that will pay your medical bills when you are old.

If you find a vendor selling apples cheap, will you buy the half rotten ones that were ripe a few days back? Or will you choose only the good ones? It doesn't matter if they are cheap, you still want good apples.

This market has a lot of value, but you must search for value that is absolutely plain and obvious to you. Don't buy based on other people's tips, or what you remember of the stock price during the boom.

And if you find a good stock, please let me know too. Perhaps we can share and earn a lot more together!

Posted in Uncategorized

« Older Entries