Tuesday, October 7, 2008

If you must SIP, sip good Darjeeling tea

Edward Luce, the Financial Times correspondent who was stationed in Delhi and is now at Washington DC, has written an eminently readable book on the challenges faced by the growth story of modern India. Called "In Spite of the Gods", the book postulates that the reason for the success of a vibrant democracy is India's diversity.

This diversity can be exemplified by how tea is prepared in different parts of India. In the west, tea leaves, water, sugar and milk are brought to a boil in a pan. In the north, spices like cardamom or ginger or both are mixed with the tea to make 'masala chai'. In the south, coffee is the preferred drink, though a large quantity of tea is grown in the Nilgiris. 

In the east, there is Assam tea - a strong rich brew prepared with milk and sugar. And then there is the queen of teas - Darjeeling - whose beautiful bouquet and light taste emerges only if it is brewed in a pre-warmed porcelain tea pot and sipped without adding milk.

That brings us to another SIP, or a Systematic Investment Plan (another of those investment myths!). A disciplined and conscientious investor should have no problems with saving a fixed amount of money every month or every quarter. But is it necessary to invest that sum every month or every quarter on a particular date?

The fund managers of most Mutual Funds will say a resounding "Yes". They even provide examples on offer documents or on business channels to prove their point that investing a fixed amount on a particular day every month or every quarter is the way to untold riches.

Like a dummy, I listened to their collective advice and started a 12 months SIP in a well known diversified equity fund in the middle of 2004. By the time my 12 monthly installments were complete, I found to my horror that my average price per unit had continuously climbed up - along with the stock market. For my last monthly installment, units cost as much as 40% more than the units bought with the first monthly installment! 

One lives and learns. The only people who get rich from your SIP is the fund manager. SIPs provide a steady monthly (or quarterly) revenue to the fund without the fund manager spending any time or effort in selling the fund. 

In a trending market - whether it is moving up or down - a SIP will always make your average cost per unit much higher than the cost you will incur at the beginning of an up trend or the end of a down trend.

Is a SIP completely worthless? No, it works if a market is moving sideways - some times up and some times down within a range - without a clearly discernible up trend or down trend. How often do such sideways movements happen?

Not very often, and even when they do, they last for a short period of 3 weeks to 3 months - not long enough to benefit from the price averaging that a SIP will provide. 

So heed a word of advice. Buy some good Darjeeling tea and learn how to prepare a proper brew. Savour the taste and flavour by taking small sips. And avoid SIPs.

(Note: No, I haven't joined a tea company. But I have alluded to another investment myth: Timing the market vs. Time in the market. That myth will get debunked in a future post.)
Source: http://investmentsfordummieslikeme.blogspot.com/search?updated-max=2008-08-25T23%3A12%3A00-07%3A00&max-results=2

India may ease foreign fund investment curbs-reports

India's capital market regulator is set to ease some restrictions on foreign portfolio investment to help revive capital inflows, two newspapers reported on Monday.

Citing unidentified sources, the Hindu Business Line said the Securities and Exchange Board of India (SEBI) may lift a ban on fresh issue of participatory notes, or P-notes, to ease tight liquidity conditions.

P-notes are issued by foreign funds registered in India to unregistered overseas investors. In October last year, the regulator put curbs on them to help the government keep track of foreign flows into the country. [ID:nBOM282673]

The Economic Times said SEBI's board would meet on Monday and consider giving flexibility to foreign funds, which were barred from owning more than 40 percent of their assets in P-notes and asked to unwind certain holdings within 18 months.

Citing persons familiar with matter, the newspaper said one option could be to extend the deadline, that expires by March 2009, to unwind the positions.

A SEBI spokesman could not be immediately reached for comment.

Foreign funds have pulled out nearly $9.4 billion from Indian shares so far in 2008, largely due to the global credit turmoil, pushing the main share index down more than 38 percent to an 18-month closing low of 12,526.32 points on Friday.

In comparison, the overseas portfolio investors had ploughed in a record $17.4 billion in 2007.
Source: http://in.reuters.com/article/fundsNews/idINBOM33079620081006

RBI cuts CRR by 0.5%

The Reserve Bank of India on Monday cut the Cash Reserve Ratio (CRR) rate by 0.5 per cent to 8.5 per cent.

The central bank's move will infuse Rs 20,000 crore (Rs 200 billion) into the markets.

The RBI said in a statement: 'On a review of the current liquidity situation in the context of global and domestic developments, it has been decided to reduce the Cash Reserve Ratio (CRR) by 50 basis points to 8.5 per cent of net demand and time liabilities (NDTL) from its current level of 9.0 per cent of NDTL.'

'The change will come into effect from the fortnight beginning October 11, 2008. As a result of this reduction in the CRR, an amount of about Rs 20,000 crore would be released into the system. This measure is ad hoc, temporary in nature and will be reviewed on a continuous basis in the light of the evolving liquidity conditions,' the statement added.

'It may be recalled that on September 16, 2008, the Reserve Bank announced several measures to alleviate the pressures on domestic financial markets brought on by external developments in response to the bankruptcy/sell-out/restructuring of some of the world's largest financial institutions,' the statement said.

'Since then, there has been a sharp deterioration in the global financial environment with the number of troubled financial institutions rising, stock markets weakening and money markets strained. Central banks across the world have stepped up their liquidity operations, including coordinated actions, and some have banned/limited short selling of financial stocks,' the RBI said.

'These new developments have impacted domestic money and forex markets with a marked increase in volatility and a sharp squeeze on market liquidity as reflected in the movements in overnight interest rates and the high recourse to the LAF,' the RBI statement said.

The Reserve Bank also said that the 'overall stance of monetary policy in 2008-09 accords high priority to price stability, well-anchored inflation expectations and orderly conditions in financial markets while being conducive to continuation of the growth momentum, as set out in the Annual Policy Statement and reiterated in the First Quarter Review of July 2008. The overriding priority for monetary policy is to eschew any further intensification of inflationary pressures and to firmly anchor inflation expectations.'
Source: http://www.rediff.com/money/2008/oct/06rbi.htm

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  • Principal MIP Fund (15% Equity oriented) 10%
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  • Principal Monthly Income Plan (MIP Fund) 16%
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Best SIP Fund For 10 Years

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