Investment options in a bear market – a guest post

Both Sensex and Nifty indices have been sliding down in bear markets for the past 13 months. There doesn’t seem to be any signs of a recovery. In fact, the economic situation – both in India and abroad – seem to be heading from bad to worse. This is not the best time for investing in the stock market, because the market can fall much further.

What should investors do? Where can they park their savings and hope to get reasonable returns without undue risk? In this month’s guest post, Nishit discusses a few investment options that can provide decent returns without taking on too much risk.

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With the markets falling continuously, the question uppermost in people’s minds is where to invest their hard earned money? Let us explore a few options.

PPF investment limits have been increased from Rs 70,000 to Rs 1 lakh, and the interest rate has been increased to 8.6%. This is one of the safest options for investors and should be used first before looking at anything else. Next it is tax saving time and IDFC has come with Infrastructure bonds which provide tax saving on an additional Rs 20,000 over and above the 1 lakh cap under Section 80C. These bonds have an interest yield of 9%. If you are in the highest tax bracket you will save additional tax of Rs 6,000. Thus, in the month of December itself, additional avenues to invest Rs 50,000 are possible.

Gilt funds are a good place to be in. In the past 1 month, bond yields have fallen from 8.97% to 8.4%. Bond funds have given a return of 4.5%. Now, this performance will not be repeated every month but one may get an annualized return of about 15% in the next 2 years in gilt funds.

A slightly more sophisticated way of generating money in a falling market is writing call options of the Nifty against your portfolio. For example, Jan 5200 Nifty call is trading at Rs 32. The margin for writing 1 lot is around Rs 20,000. So, for 5 lots one would get an inflow of Rs 7,500 and the margin of 1 lakh would be blocked till Jan 25^th 2012. This is another safe way of generating steady returns in a bear market.

HDFC Top 200 is a very good equity fund where one can continue to do a SIP every month. This fund has yielded a return of 22% over the last 15 years. During this time, several bear and bull markets have come and gone.

The above mentioned are just a few avenues for putting in one’s money as per his or her risk appetite. Also, there is the safe bank fixed deposit giving very good returns for risk-averse investors. My advice for those not needing that cash in a hurry is to lock in the money for next 5 years for returns between 9-10%, depending on the bank.

Also, there is the L&T NCD trading on the NSE which has an expiry of about 7.5 years still and yield is about 10%. The benefit is one gets the interest credited twice to the bank account.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Investing strategies in inflationary times – a guest post

The business channels and pink papers have been obsessive about high inflation in the Indian economy and the consequent rise in interest rates – and well they should be. The government doesn’t seem too perturbed about the deleterious effect that high inflation causes – not just to GDP growth, but also to the wallets of common citizens.

During such times, savings and investments may be farthest from people’s minds as they struggle to make both ends meet. However, there are some comparatively less risky investment opportunities that smart investors can avail of – and Nishit discusses them in this month’s guest post.

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Inflation is rising, cost of loan repayments (EMIs) is going up and jobs are getting lost. How does a common man deal with such a situation?

Government bond yields have almost reached 9%. This means interest rates may rise further in the times to come. EMIs may go up if the RBI hikes the Repo rate, which is currently at 8.5%. In the case of loans, it is best to pre-pay some amount rather than letting the tenure increase. Many people will not get a tenure extension if their tenure has reached the maximum limit of about 25 years.

This is a good time to lock in your savings in high yield fixed investments. Non Convertible Debentures of L&T Finance gives an yield of about 10%. Other fixed income investments like Bank FDs should be utilized to avail of high interest rates. A SIP can be started in a Gilt fund. The interest rate cycle is about to peak soon and Gilt funds are likely to give good returns.

The recently increased limit in PPF investments from Rs 70,000 to Rs 1 lakh, and the higher rate of PPF return of 8.6% is a wonderful opportunity and should be made use of by small investors.

The markets are headed downwards. This scenario is likely to remain till interest rates start moving down. At every decline to key support levels, one can add blue chip shares to the portfolio keeping a 5 years horizon in mind. Supports for the Nifty are at 4700, 4300 and 3700.

Gold as an investment can be looked at only when the previous high of US $1900 per oz is taken out, or near the support level of US $1600 per oz.

For astute investors, cash is king. In a slow GDP growth environment, if one is willing to put down cash then real estate as well as automobiles may be available at good discounts. Plummeting car sales indicate that good cars may soon get sold at discounts just to clear off the inventory and keep the assembly lines working.

This is a great time for an investor to build an entire new portfolio. The portfolio should comprise of fixed income instruments, stocks, commodities and real estate. A proper balance of allocation to these assets will generate wealth going forward.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

A good time to feel ‘Gilt’y – a guest post

The stock market is in a strong bear grip. Even blue-chip stocks are feeling the heat and sliding down at the first hint of trouble. Mid-cap and small-cap stocks have been hit hard.

What can small investors do to protect their capital and get decent returns? In this month’s guest post, Nishit suggests that investors take a look at Gilt funds.

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Last month, the RBI hiked interest rates for the 11^th time since March 2010. The Repo Rate is now 8%. When will the RBI signal a pause?

The Repo rate is the rate at which the RBI provides short-term loans to banks. At 8%, it is about 1% below the peak which it achieved three years back. The hike in interest rates by about 3.25% has put pressure on interest rate sensitive sectors like Banks, Automobiles and Real Estate.

It’s a classical economist’s dilemma. If you hike interest rates you lower inflation but sacrifice growth. So, do you want high GDP figures or lower inflation? There is no correct answer. It has to be a mix of both.

The IIP numbers are high and so are the inflation figures. The latest Inflation number was a bit lower than the previous month, but continues to be high. Expect one more round of rate hike in September. The 1 year T-Bill is already quoting at 8.47%.

How do we play this rate hike in our favour? It is time to buy some Government Security (Gilt) funds. This is a time to very easily lock in about 20-25% returns over the next 12-18 months. This is based on the following factors: a) The government will eventually end the rate hike cycle starting with a period of pause and then a gradual reduction in interest rates; b) The 10 year bond yield will drop by about 200-300 basis points (2-3%) over a period of time.

Government Securities are freely traded in the Debt Market. A 10 year G-Sec having a face value of Rs 100 gives a yield of about 9%. After, say 12 months, the yield goes to 6%. The traded price of each bond goes up from Rs 100 to Rs 150, an increase of 50%. This is the optimistic best price scenario. Looking at entry and exit it is safe to expect about a 25% gain.

If we visit www.valueresearcholine.com, and do a search for Birla Sunlife Government Securities Fund, its best annual performance was from May 2008 to May 2009 when its yield was almost 26%. If we co-relate with the chart above, in June 2006, the Repo rate was 8% which went up to 9% before being brought down to 4.75% in April 2009. So, a net reduction of 3.25 % in the Repo rate was good enough to give the above returns.

Strategy:

Should we wait for further rate hikes before investing? It is not possible to always time the markets, so allocating about 50% of the investible funds now and rest after the September RBI policy announcement may be a prudent course of action.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)