TIME TO STICK WITH YOUR MUTUAL FIND SIP's

I read a very interesting article in the morning newspaper today SOS -SAVE OUR STOCKS".
There's an eerieness about October.'24, something that the children of the bull market can never sense. The crash of 1929 began on the same day that year & eventually led the the Great Depression. Almost 79 years later, the world is haunted by a similar spectre. Blows from stock losses are slowly giving way to a strange fear of job loses. The drop in markets across continents simply mirrors these concerns.
The Indian market has tanked & SENSEX was down 1070 points. The SENSEX & NIFTY fell somewhere between 11-12% on Friday, as signs of pain in the real economy become evident. The talks doing the rounds is no longer just about slowing corporate earnings in fact, the bigger fear now is corporate defaults, which will then hit the banks which have lent big to these corporates.
Investors who were invested in Mutual Fund schemes fearing the worst have pulled out their money & those who has not were thinking to do so now so save at whatever remains. The investors who know they can not lose anything from here are staying back & are infact increasing their Mutual Fund exposure but staying put in SIP's or increasing the SIP's that they had. In fact at the current market situation they will be buying at lower NAV's & getting more units for lesser NAV's. The markets are going to bounce back for sure, maybe not in in the immediate terms but in the near future. Those with high risk appetite will certainly stay invested & make money in turnaround. Digest the current & wait for the turnaround.
Happy investing
RAJESH NAIR
The author is CEO, RajRak Advisors. He can be reached at rajeshnair72@gmail.com

Why Lehman Bros. & Merrill Lynch fell

Why Lehman Bros. & Merrill Lynch fell

IT all began with the sub-prime issues
If you lost your money in the market crash of January 2008, here's the route to your loss, in chronological order.

2001-2005: House prices in the US begin to rise rapidly. Banks lend aggressively and create a sub prime industry.

Sub-prime lending refers to lending (at slightly higher interest rates) to people who may not be eligible for a loan under normal circumstances. Maybe they don’t have a regular job or income, or have defaulted in the past.

Banks traditionally did not lend to such people due to high risk of default. But since these loans were mortgaged against property and property prices were rising continuously, banks started doing so. If customers defaulted, they could sell the mortgaged property.

2005: The booming housing market halted abruptly in many parts of the US.

2006: Prices are flat, home sales fall.

February 2007: Sub-prime industry collapses in the US; more than 25 sub-prime lenders declare bankruptcy, announce significant losses, or put themselves up for sale.

While they were lending, banks did not factor in the possibility of a fall in property prices. When the Federal Bank (the US equivalent of RBI) started increasing interest rates, the sub-prime borrowers started defaulting and banks started selling off the mortgaged properties. As more and more properties came into the market for selling, the property prices fell.

August 2007: Many leading mortgage lenders in the US filed for bankruptcy

March 2008: Bear Sterns falls.

September 2008: Lehman Brothers file for bankruptcy. Merrill Lynch sells off to Bank of America.

Between 2001 and 2006, the US financial markets had developed a new product – a bond securitised against the mortgages.

In simple terms it means that the mortgage banks borrowed money against the mortgages on the condition that they would repay to lenders as soon as they recovered their mortgages. The lenders in this case were financial institutions (like Bear Sterns, Lehman and Merril Lynch) who in turn sold retail bonds to individuals.

Sadly, the repayment never happened. And institutions like Bear Sterns, Lehman, Merrill Lynch and AIG were the casualties. Since the mortgages were not honoured, the banks could not repay these financial institutions who in turn could not repay retail investors.

4 Golden Rules of Equity Investing

If you want to invest in equities, there are only four things you need to remember.

1. Choose the right company
Look for superior and profitable growth. The company should earn at least 20% return on its shareholders’ capital.

Ideally a long-term investment perspective (more than five years) allows you to participate in the company’s growth. At the short end (3-6 months), share performance is driven more by market sentiment and less by company fundamentals. In the long run, the relevance of the right price diminishes.

2. Be disciplined
Stock investing is a long, learning experience. You will make mistakes, but also learn from them. Here is what you can do to ensure a smooth ride.

• Diversify your investments. Do not put more than 10% of your corpus in one stock, even if it’s a gem. On the other hand, don’t have too many – they become difficult to monitor. For a passive long long-term investor, 15-20 is a healthy number. Use this asset allocation tools to find out if you need to invest beyond equities
• Research and analyse your company's performance through quarterly results, annual reports and news articles.
• Get a good broker and understand settlement systems
• Ignore hot tips. If hot tips really worked, we'd all be millionaires.
• Resist the temptation to buy more. Each purchase is a new investment decision. Buy only as many shares of one company, as fits your overall allocation plan.

3. Monitor and review
Regularly monitor and review your investments. Keep in touch with quarterly results announcements and update the prices on your portfolio worksheet at least once a week. This is more important during volatile times when there can be great opportunities for value picking! Find out how you can buy Re.1 coins at 50 paise

Also, review the reasons you earlier identified for buying a stock and check whether they are still valid or there have been significant changes in your earlier assumptions and expectations. And use an annual review process to review your exposure to equity shares within your overall asset allocation and rebalance, if necessary. Ideally, revisit the Risk Analyser at every such review because your risk capacity and risk profile could have undergone a change over a 12-month period.

4. Learn from your mistakes
When reviewing, do identify and learn from your mistakes. Nothing beats first-hand experience. Let these experiences register as `pearls of wisdom' and help you emerge a smarter equity investor.

Rajesh Nair

CEO -RajRak Investment Advisors