Investment myths: Lets break some!

There are many myths in investment management …let us break some of them:

Buy low and sell high: Such a simple statement to make, and impossible to do in real life. Buy cheap and sell dear. People would like to think this is easy to do, but remember whether a share is high or low is something you know only in retrospect. For e.g. if you buy Hdfc ltd. today at say Rs. 2400. Six months later if the price is, say Rs. 3000 and you sell it, you would be right. However if you buy it today at Rs. 2400 and 6 months later it is at 2100, you would be wrong. So it is a nice maxim which is easy to espouse, but difficult to do.

Have greed when others have fear, and have fear when others have greed: A very good, brilliant saying again difficult to implement. When the index was 6000, there was a program on one of the Television channels. The 3 speakers were Comrade Raja, Shankar Sharma, and Rakesh Jhunjhunwala. Rakesh said people should not keep their money in savings bank account but put it in the share market. Raja was of course on a spiel about how Americans are here to corrupt (Oh completely as an aside did we hear any Comrade complain about Russia in Georgia?) us etc. Shankar Sharma told Rakesh “Aha, now that the market has reached 6000, you want the common man to lose money?” and put RJ on the defensive. However what happened to the market after that is well known! So to be fearful when others are greedy and greedy when others are fearful is nice to say, difficult to implement.

as life goes on…we will break some more myths.

What is debt market?

There is no single or fixed location or exchange where debt market participants transact. Also very sadly small investors have no role to play. Which means as a lay investor you can invest in equities (far more difficult to understand) but cannot invest in debt markets (easier to understand).

Dealings are done over phone, and confirmed by fax, email, etc. It is a virtual market (on the net). All the Indian stock exchanges (Bse, nse, otcei) have a separate debt market segment. Debt markets deal with Government securities market and Bond markets.

Sadly in this market the only issuer is the government of India. The government has a vested interest in keeping the interest rates low, and we cannot do anything about it!

What are financial markets?

Financial markets do what all markets do - price discovery. Fish markets find the price of fish, gold markets the price of gold, job markets determine your salary. The price of money means the financial markets mobilize savings into investments - and channel them for various uses. It determines the prices of bonds, equities, warrants, etc. Broadly there are four broad classifications -

a. Debt market b. Money Market c. Capital Market and d. Forex market

Each of them are of course interlinked - and the whole world markets are linked in some form or the other.

What is the Money Market?

Money market is described as the market where short term debt is dealt with. Thus financial instruments which can be quickly turned to cash is dealt with in the Money Market. Short term normally means holding period of < 1 year. The asset should be very liquid - ease of convertibility to cash, and the transactions should not be expensive to execute.

It is a specialised market geared to cater to a specialised set of buyers (lenders) and sellers (buyers).

What are SLR securities? (Statutory liquidity ratio)

RBI fixes SLR (statutory liquidity ratio) from time to time - currently it is at 25%. RBI requires banks to maintain 25% of Net Demand and Time Liabilities (NDTL) which is to be maintained on daily basis by investment in cash (other than CRR) and unencumbered prescribed Central and State Government securities, Treasury bills, and Government Guaranteed Bonds. These securities are approved securities for SLR purposes under section 24 of the Banking Regulation Act, 1949, and Indian Trust Act, 1882 and are issued under Public Debt Act, 1944.

The entire investment has to be made only in G Secs and other approved securities.

Currently the RBI is trying to reduce the SLR below 25% - but that has to happen only with the Parliament’s concurrence.

What is CRR?

Cash Reserve Ratio (CRR) is a regulatory reserve requirement under section 42(1) of the Reserve Bank of India Act, 1934 which is to be maintained as CASH or CURRENT ACCOUNT balances with Reserve Bank of India, along with gold by all Scheduled Commercial Banks as a percentage of its Net Demand and Time Liabilities (NDTL).

The CRR has to be maintained on reporting Friday.

Offer document: What is it?

For many investors “mutual fund form” means one single page that your Relationship Manager / IFA thrusts in front of you while you invest, correct? That is not so. A mutual fund form means a 30 page document - called “Key Information Memorandum” - this itself is an abridged version of the “Offer Document”. Of course the word “offer” comes from the Indian Contract Act, and is an offer from a fund house to the potential investor. The potential investor is supposed to read the “offer document” and sign the form. This is because when he signs the form, he is saying “I have read and understood the terms….”. So let us see what is an offer document and what does it contain….

Offer document (OD) describes a product, and is the most important source of information for prospective investors.

· AMC (Asset Management Company) or the sponsor issues it.

· This (OD) is the primary vehicle for the investment decision.

· It is a legal document that protects and governs the right of an investor.

· Key information memorandum (KIM) is the abridged version of offer document. Application forms are issued along with the KIM.

· SEBI has designed standard format for issue of OD and KIM.

· Offer document and the KIM is valid for two years.

· ODs are to be updated, revised and printed once in every two years.

· Changes made in between these two years are circulated among investors in form of addendum or some other source of communication to investors.

· Changes made in the OD has to be filed with SEBI and should be made available at service centers and in the offices of distributors/brokers. Much easier to find it on the net - all mutual funds have decent websites.

· Offer documents should contain

- Summary information at the cover page containing name, type of the scheme, name of AMC and the mutual fund, opening and closing date of the offer, price of units, highlights of the scheme and most importantly disclaimer clause by SEBI.

- A glossary of defined terms used in the offer document.

- Risk factors – standard and scheme specific

- Due diligence certificate to be signed by Compliance Officer/CEO/Managing Director/Whole Time Director

· The above points should be in the same sequence.

· Offer document contains fundamental attributes of the scheme –

- Type of the scheme

- Investment objective

a) Investment pattern

b) Investment policies

- Load and expenses

· Offer related information – all practical information needed by investor and agents to invest in the proposed scheme.

· Condensed financial information for scheme launched during three fiscal years.

· Constitution of the mutual fund.

· About objective of the fund.

· Activities of the sponsor.

· Name and addresses of the Board of Trustees/Directors

· Management of the fund

· Associate Transactions and borrowing policies

- In case, scheme has invested more than 25% of its net assets in group companies.

a) Business given to associate brokers should be in the limit of 5% of sale and purchase made.

· NAV determination, valuation and accounting policies.

· Procedure for repurchases.

· Tax treatment of investments made in the scheme.

· Investors’ rights and services under the scheme.

- Access to information on NAV computation and unit price.

- Investors friendly services provided by the scheme and documents available for inspection by the investors.

· Brief description of investor complaint history for the last three years of existing schemes and their redressal mechanism.

· Any penalties pending litigation or proceedings should be mentioned in the OD to alert the investors.

Call touches 14-day high as banks rush for funds

Lenders borrow Rs 56,000 cr through RBI’s repo facility to meet reporting needs.

Call money rates were back in the double-digit zone after a gap of two weeks as banks borrowed funds ahead of Bhai Dooj tomorrow, when markets will remain closed.

In addition, banks borrowed over Rs 56,000 crore through the two-day repo auctions as against Rs 42,770 crore on Monday. During the first liquidity adjustment facility (LAF) session this morning, 35 banks submitted bids to borrow Rs 27,125 crore, while in the second auction in the afternoon, there were 33 bids for Rs 28,970 crore. In the afternoon session, two banks also parked Rs 10 crore with the central bank through the reverse repo route.

The high demand for funds was evident in the call money market, with their rates hitting 9.75 per cent in early trade. During the day, call rates touched a high of 13.55 per cent and the weighted average was 11.25 per cent, according to the data on the Clearing Corporation of India website. On Monday, the weighted average call rate was 9.34 per cent and rates had ranged between 6 and 10 per cent.

The volumes in the call money market were estimated at Rs 21,890 crore compared with Rs 17,360 crore on Monday.

Amid some liquidity tightness, dealers said, banks borrowed in the market to meet their reserve requirement ahead of the Reporting Friday. Banks have to report their cash balances to the Reserve Bank of India (RBI) every fortnight and usually they try and complete most of their borrowing in the first week itself. Two holidays during the week, including for Diwali yesterday, are adding to the pressure.

“Last fortnight was not the correct indicator of liquidity since banks may have had a surplus because of RBI’s decision to cut the Cash Reserve Ratio (CRR) with retrospective effect. Banks are playing it safe as they always like to have additional money instead of falling short of the requirement,” said a bank chairman.

RBI’s dollar sales in the foreign exchange market are also putting pressure on the rupee as the central bank is trying to check depreciation of the Indian currency against the greenback.

Wednesday’s closing call rate of 13.50 per cent was the highest since October 10, when it had touched 13.75 per cent. The repo borrowings were also the highest since October 15, when banks had raised Rs 55,340 crore from RBI amid tight liquidity conditions in the market.

The weighted average collateralised borrowing and lending obligation (CBLO) rates were also marginally higher at 8.36 per cent compared with Monday’s 8.08 per cent. The volumes, however, stayed around the Rs 24,000-crore level.

Through CBLO, entities such as non-banking finance companies (NBFCs), mutual funds and primary dealers raise short-term money against securities.

Source: http://www.business-standard.com/india/storypage.php?autono=338665

4 reasons why you should buy while FIIs sell

LET’S assume that you have invested in both, the US and the Indian stock markets. Now, it turns out, while your Indian investments are doing exceedingly well, the US portfolio suffers acute losses.

What is the most obvious thing you would do?

You would book profits in India, in order to make up for the US loss. Right?

This, in a nutshell, is the current scene today. The only difference is that the investors are foreign institutional investors (FIIs). These are institutions that operate mutual funds, hedge fund and portfolio management services abroad and invest the fund money in other countries. FIIs by definition, have world wide investments. So, not only India but other Asian markets are also facing a sell off.

What happens when FIIs sell?
FIIs have a huge exposure to the Indian market. Due to this, their buy and sell actions have a considerable impact on the market. 


Recently, FIIs have been on a selling spree. This is one of the reasons for the markets to register steep falls. 

If FIIs are selling, should you buy?

The US is in turmoil but there is nothing wrong with us. The following factors just reaffirm this:


1. Toxic securities (such as MBS and CDOs) are conspicuously absent in our market, thereby preventing us from catching the infection.

Mortgage Backed Security (MBS) and Collateralized Debt Obligations (CDOs) are securities which are backed by a pool of mortgages that are paid by home loan takers in the US. So, if a home owner defaults on his repayment, the MBS holder suffers. Read all about these instruments and how they caused the big collapse . 


2. As far as domestic operations of banks are concerned, RBI has been extremely strict by continually increasing the risk weights to real estate and housing loans, thereby discouraging banks to get ahead of themselves, in a bid to increase business.

See: Why Indian banks are safe 

3. Unlike the West which has a negative savings rate, our domestic savings rate is more than 35 per cent, that means, on an average, Indians save 35 per cent of their income. So, even if there is a protracted slowdown, we would still have considerable demand for products and services, which in turn will help the economy to achieve good growth.

4. Amongst all emerging economies, our export to GDP ratio is the lowest. This means that even if our exports went down, our growth won't be significantly impacted. Therefore, even a full blown US recession will shave only around 40 to 60 basis points off our GDP growth rate. So, we will still have the capacity to chug along at an 8 per cent plus rate.


India - a safe haven
The fundamentals of our economy make our market nothing short of a safe haven during such turmoil. So, I don’t care if the market falls to 9,000 or even lower. Once this storm blows over, things will be back to normal.

In the meanwhile, your fortune as an investor would depend on how you react or, rather, don’t react to the situation.


The great fall of the market isn’t going to suddenly reverse the quality of the companies listed. If anything, I am looking forward to picking up some cheap but quality stuff.

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