Welcome, correction

A dip in the market is an opportunity if you have missed out on the action earlier or even to rejig the portfolio.

A falling stock market has few takers. On April 26, when the Indian stock markets felt the first tremors of the Greek crisis, many experts started predicting a correction.

Since then, the Bombay Stock Exchange Sensitive Index, or Sensex, and the CNX Nifty have already fallen over 4 per cent in the last nine trading sessions. Investors, obviously, are unsure of the magnitude of correction or if there will be one at all.

This is quite similar to last March, when the Sensex was languishing at the 8,000 level, most people were uninterested in putting in any fresh money.

There were reports that the number of folios with mutual funds fell sharply because even systematic investment plans (Sips) were not being renewed. As a result, in the turnaround that followed, many investors missed out.

Hemant Rustagi, chief executive officer, Wiseinvest, sums up an investor’s psyche and says, “Investors are always in a dilemma. They want the market to go up for existing investments, but want it to fall to make fresh investments.”

For a value buyer, one share of Reliance Industries (RIL) was available at Rs 859.15 (52-week low) on July 13, 2009. The scrip closed at Rs 1,010.90 on Thursday – almost 15 per cent more expensive.

For different kinds of investors, a falling market presents different opportunities.

The first timer: For those who have not entered the market, a falling market is a wonderful opportunity to start investing in a portfolio of stocks as well as in mutual funds, and at a much cheaper price.

Says VK Sharma, head (private broking & wealth management), HDFC Securities, “For those, who have missed the boat, a correction is a great opportunity to get stocks at a lower value.”

However, financial planners are more cautious. They feel that first-time investors should look at equity diversified funds initially. This allows them to have a slice of the entire market.

If you are starting out, try out a mix. Say if you have Rs 1 lakh to invest, you can put Rs 50,000 in equity diversified fund.

Also, depending upon you regular income flow, start two-four systematic investment plans (SIP) of Rs 5,000 each, one could be an equity-linked saving scheme that will give you tax benefits under Section 80C. Use the rest to buy some blue chip stocks.

Another strategy could be moving money through systematic transfer plans (STPs). Said Anil Rego, chief executive officer, Right Horizons, a financial planning firm, “When markets are falling, buy in tranches at different index levels by way of STP. In case of a sharper fall, move higher amount of money and quickly.”

Already in, but entered at a high level: Corrections are great opportunities for them. Most people enter the market during a bull run. For example, between July and December 2007, the Sensex rose from 14,800 to 20,200 levels – a rise of 38 per cent. During the same period, equity mutual funds collected Rs 59,601 crore. Clearly, investors feel more comfortable in a rising market.

Once the market corrects, they are a nervous lot. And, that is primarily because of the value of their shares fall sharply. But, they could look at cost-averaging. That is, buying the same shares at a lower price to reduce their holding cost. Importantly, SIPs should be continued for the same reason because you get more units for the same installment.

A word of caution though – if you own cyclical stocks, it is important to do proper research. “If there is a stock in the portfolio that is dependent on commodity cycles, be careful with the cost-averaging strategy,” added Sharma. For instance, there are expectations that reduced demand from China will adversely impact commodity prices in the coming days. As a result, related companies could suffer. Here, a cost-averaging strategy could go for a complete toss.

Well-diversified portfolio: A correction is an opportunity to move money. If there are dud stock as or some non-performing funds in the portfolio, which have not performed in the rising market, you can move money from them to better stocks and funds. Similarly, if you have overexposure to some sectors, prune it.

Investing in stock markets is not a cakewalk. There will be dips and rises. But overtime, a patient investor will surely be able to make money.

Source: http://www.business-standard.com/india/news/welcome-correction/394084/

Volatility Index mirror global trends, surges 38%

India’s volatility index, VIX, which gauges investors’ risk perception about sharp swings in the market based on options prices, has risen quite a bit in the past two weeks. This trend is in line with the rise of volatility indices worldwide.

India VIX rose from 19.23 on April 21 to 23.69 on May 5. The rise is even more significant on a month-on-month basis with the index going up from 17.20 on April 6, 2010 to 23.69 on May 5, 2010. That’s a rise of nearly 38%. Still, India VIX is a long way off from its peak of 85.13 it had touched in November 2008, in the aftermath of the global financial crisis that caused equity markets around the world to free fall.

The India VIX seems to be mirroring global volatility trends. For instance, the Chicago Board Option Exchange’s CBOE Volatility Index, based on S&P 500 Options prices, has risen from 18.7 on 21 April to 24.15 on May 5. That’s a gain of about 29.14%. The Dow Jones Industrial Average dipped 2.31% during this period. According to Bloomberg data, the 10-day volatility for the Dow was at 20.58 compared with 13.05 for the last 30 days. This indicates that volatility over the last 10 days has risen.

Of late, Indian equity markets has become increasingly vulnerable to negative newsflow from the Eurozone area. “Investors are panicking because of the fears that Greece and other European countries may not be able to solve their debt crisis,” said Girish Patil, manager-derivatives, Antique Stockbroking. “So, there is a huge demand for put options from foreign institutional investors and domestic mutual funds. This is like buying an insurance against possible meltdown in equity.”

According to Siddarth Bhamre, head of equity derivatives at Angel Broking, FIIs have options strike prices of 4700, 4800, 4900 adding open interest. “This means they expect the market to be volatile and see some correction in the near future. Implied volatility (VIX) is a function of premium. The premium goes up as volatility increases and vice versa,” he said.

In this scenario of rising VIX, Bhamre advises clients to use short strangle in Nifty. “If the market comes to 5000-odd levels then you sell 4,900 put and 5,100 call. This way you get a premium of Rs 170-180 and you are safe till 4,720 on the lower side and 5,280 on the higher side.”...

India VIX has been trading at around 17-18 in April 2010, its lowest levels since the index started in April 2008. Experts feel that the VIX will not fall below its current levels of about 23.

“Whether it will rise is a matter of debate. But it will certainly not fall below these levels,” said Patil of Antique Stockbroking, adding that the Eurozone debt crisis is a significant negative that will loom over the market for some more time.

However, the market could get some respite if the dollar appreciates against the yuan as it will make US goods and services cheaper and more competitive internationally, said Patil....

Source: http://www.financialexpress.com/news/volatility-index-mirror-global-trends-surges-38/616080/2