Sensex, Nifty charts (Feb 15, 2019): bears attack after false breakouts above Fibonacci resistance zones

FIIs turned bears, and were net sellers of equity on all five trading days. Their total net selling was worth Rs 24.8 Billion. DIIs were also net sellers of equity on Mon. and Tue. (Feb 11 and 12) but turned net buyers on Wed., Thu. and Fri. Their total net buying was worth Rs 24.4 Billion, as per provisional figures.

India's WPI-based inflation in Jan '19 touched a 10 months low of 2.76% - down from 3.8% in Dec '18 and 3.02% in Jan '18. Lower inflation in fuel and manufactured products led to the fall.

Trade deficit in Jan '19 widened to US $14.73 Billion from $13.08 Billion in Dec '18, but was lower than $15.7 Billion in Jan '18. Exports rose by 3.74% while imports grew a meagre 0.01%.

BSE Sensex index chart pattern

Following a failed upward breakout above the Fibonacci resistance zone (between 36140 and 36810), the daily bar chart pattern of Sensex closed lower for six trading days in a row as FIIs turned net sellers of equity. 

The index dropped below the Fibonacci resistance zone and tested support from the 200 day EMA. For the fourth time since end-Dec '18, the index breached the 200 day EMA intra-day, but bounced up to close above it in bull territory. 

The index has been consolidating sideways with a slight upward bias for the past 3 months, which is evident from the gradually rising long-term moving average. Bulls are trying to regain control of the chart slowly and steadily.

The battle lines are clearly drawn between the two warring sides. A convincing index close above 37000 will give the advantage to bulls. A convincing index close below the 200 day EMA will tip the scales towards bears. 

Daily technical indicators are looking neutral to bearish. MACD has crossed below its signal line in neutral zone. ROC is falling below its 10 day MA in bearish zone. RSI is moving sideways along its 50% level. Slow stochastic is falling below its 50% level. A near-term technical bounce is possible.

Q3 (Dec '18) results season is almost over. Another quarter of India Inc.'s tepid earnings growth is not going to help the bullish cause. The Pulwama terror attack and clamour for revenge has added a fresh layer of uncertainty to the stock market.

This may be a good time to realign portfolios and invest in fixed income and ELSS instruments.

NSE Nifty index chart pattern

Thanks to FII selling, the weekly bar chart pattern of Nifty lost more than 200 points (2%) on a weekly closing basis, and closed below the Fibonacci resistance zone (between 10880 and 11090) and its 20 week EMA.

The index breached its 50 week EMA intra-week, but bounced up to close above it for the 12th straight week. The gradually rising 50 week EMA is an indication that bulls are trying to gain ground slowly.

Weekly technical indicators are looking neutral to bearish. MACD is moving sideways above its signal line in neutral zone. ROC has crossed below its rising 10 week MA and dropped to neutral zone. RSI is falling towards its 50% level. Slow stochastic formed a bearish 'rounding top' pattern before falling from its overbought zone. 

Nifty's TTM P/E has moved down to 26.53, but remains well above its long-term average in overbought zone. The breadth indicator NSE TRIN (not shown) has fallen from its oversold zone. A near-term pullback is possible.

Bottomline? For more than 3 months, Sensex and Nifty charts have been consolidating sideways after sharp corrections during Sep-Oct '18. Both indices are trading above their long-term moving averages in bull territories, but continue to face resistances from the zone between Fibonacci 50% and 61.8% retracement levels. The consolidations may continue till the general elections.

What India’s Top Three Mutual Funds Bought And Sold In March 2018

Inflows into equity mutual funds hit a 13 month low in March as net investments into these funds declined 59 percent over the previous month to Rs 66.6 Billion, according to Association of Mutual Funds in India data. 

That’s despite a record inflow of Rs 37 Billion into equity-linked savings schemes in the last month of the financial year to help save on income tax.

Here’s what India’s top three fund houses bought and sold in March:

https://www.bloombergquint.com/markets/2018/04/16/what-indias-top-three-mutual-funds-bought-and-sold-in-march

How to Save your way to greater Wealth

Why do people invest their savings? That's a simple question, and should have a simple answer - like "For a rainy day." Turns out, it doesn't.

Just ask around. You will hear answers ranging from "To get rich", "To retire early", "To travel the world", "To buy an apartment", "To buy a BMW", and so on. The answer that makes most sense is: "To build wealth." 

It goes without saying that wealth building requires a meaningful amount of savings every month, which in turn requires adequate earnings. 

If someone is earning only Rs 15000 per month then he will barely be scraping through, and won't be able to save much. What will he do then?

Find ways and means of increasing his earnings. Acquire some new skills. Start a home-based business, or take up a second (part-time) job. It will be tough, but not impossible.

If someone is already earning a decent amount of money, life becomes a lot easier. Or, does it? Often spending tends to increase in proportion to earnings.

Priority is given to better furniture, a bigger TV, a foreign holiday. Whatever savings are left get invested in ELSS funds at the end of the year.

Wealth building requires availing the full power of compounding. That means starting early, having a financial plan, and staying true to the plan for the long-term.

Haphazard buying of mutual funds, stocks, fixed income instruments, insurance policies will provide inadequate returns, even if earnings and savings are substantial.

Check out the advertising in print, online or TV media. They are all screaming 'buy', 'buy', 'buy more'. Consuming may be good for the economy. But buying clothes and jewellery and gadgets won't help you to build wealth.

Having discipline and self-control to buy only what you absolutely need - except for the occasional indulgence in a movie or dining out - can help you to meet your financial goals and enable you to retire in comfort.

How many Mutual Funds should you hold to adequately diversify your portfolio?

If you ask that question to your friendly fund agent, he may say: "The more the merrier. The more funds you have the more diversified will be your portfolio." From his point of view, the answer may seem logical. 

If you listen to his suggestion, you may end up with 15 or 20 funds. There are so many funds to choose from - large-cap funds, mid-cap funds, small-cap funds, multi-cap funds, FMCG funds, banking funds, infrastructure funds, arbitrage funds, funds of funds, balanced funds, ELSS funds, gilt funds, short-term debt funds, long-term debt funds, income funds, liquid funds, gold funds, and so on.

After a year, you will find that your portfolio has under-performed the fixed deposit rates of banks because the good performance of some of the funds have been neutralised by the poor performance of the others.

So, what should a small investor do? The answer is: It depends. On what? On where you are in your investing/wealth-building stage.

If you are a young person who has just joined employment, investing your meagre monthly salary savings in one good balanced fund may serve your purpose and provide adequate diversification. 

The equity component of a balanced fund can comprise a mix of large-cap and mid-cap stocks. The debt component can comprise a mix of government securities, company fixed deposits, NCDs. 

The equity component takes care of growth. The debt component minimises downside risk. A balanced fund with 60-65% equity component is treated as an equity fund. That means they are not subject to long-term capital gains tax and dividends paid are tax free. 

Someone who has been working for a while, or is running a successful small business, more substantial monthly savings may be available for investment. In which case, a large-cap equity fund, a mid-cap/small-cap fund, an ELSS tax saving fund, a gold fund and a debt fund should provide adequate diversification.

What about all the other types of funds mentioned earlier? Aren't there money-making opportunities in them? 

Yes, if you have nothing better to do than monitor the performance of your funds regularly. Then you will be in a position to move in and out of your funds to increase returns - most of which may be eaten away by fees and taxes.

No, if you want your funds portfolio to run on auto-pilot while you spend your time and energy in furthering your career or growing your business.

Many investment advisors - particularly the ones who work in wealth management divisions of private banks - are clueless about what constitutes an adequately diversified funds portfolio.

Typically, they give you a suggested list of funds that are 5-star or 4-star rated by valueresearchonline.com or moneycontrol.com and expect you to choose from them. 

You may end up with 8 or 10 funds all of which hold Infosys, Reliance, L&T, HDFC Bank, Tata Motors among their top holdings. In which case, the performance of all your funds may depend on the performance of just these 5 stocks - giving you hardly any diversification.

You will be better off just buying these 5 stocks and not buying any of the suggested funds.

Remember that the more funds you have, the more time you will need to spend in monitoring their performances. Also, proper fund selection to avoid duplication of holdings will give you better portfolio diversification.

Last, but not the least, avoid the newer funds. Choose established funds that have a long-term returns track records.

Do you invest with your head, or do you invest with your heart?

One of the building blocks - may be the most important one - of becoming a successful investor is to know yourself. To help you understand if you invest with your head or your heart, here are some practical situations that you are likely to face:-

1. March is usually the time for last-minute tax-saving investments. So you start looking at some ELSS funds. You hold the SBI Magnum Tax Gain fund since Mar '07. It was one of the best ELSS funds then and gave good dividends.

Your head tells you to sell it because of its recent under-performance and switch to Canara Robeco Tax Saver or DSPBR Tax Saver. Your heart urges you to stick with it as it will surely return to its earlier glory.

2. The Nifty is trading just short of its Jan '10 high for the past 6 trading sessions. Your head is saying 'be careful' because a previous top made some time ago can be a tough hurdle to cross. Your heart is saying 'a new high is imminent' and this is the time to jump in.

3. You had made a killing in the Bharti Airtel stock when you sold part of your holdings when it hit 1200 (pre-split) back in 2007. The rest of your holding effectively became 'free of cost'. Ever since, the stock has been sliding, but you held on because your holding cost was zero.

Your head is urging you to get rid of it, as the entire telecom services space has lost its pricing power with the entry of big global players. Your heart is forcing you to hold on because Bharti has proven management and the stock will definitely move above 500 soon.

4. Your decision to pick up OnMobile Global shares at 250 in Mar '09 turned out to be a really judicious move, as the stock zoomed to hit 700. Out of the blue, the bears attacked and the stock halved in value to 350.

Your head is accepting the fact that you got a lucky break initially, but you goofed by not booking profits at 700. Your heart is considering it as plain bad luck that your smart pick suddenly changed direction through no fault of yours.

5. You read my blog post about Indraprastha Gas back in July '09 when the stock was trading at 137. I had mentioned a possible target of 180. You decided to spend some time to research the stock thoroughly. But within a month, before you could gather sufficient details, the stock hit 180.

Your head told you to wait for better valuations. Your heart decided that you should buy before the stock runs away even higher.

6. Cranes Software was a hot stock in the previous bull market. It sold engineering software products to overseas clients and made huge profits. Because of the down turn, the stock hit the skids but at 45 it seemed like a screaming buy.

Your head warned you not to try and catch a falling knife. Your heart ignored the warning as the downside seemed very limited, and you bought a large chunk and then averaged down at 30.

If you are like most investors, you some times invest with your head and at other times invest with your heart. There are no guarantees which will be a better investor - your head or your heart. Logically, for long-term investors, the head should rule the heart. But stock markets can be illogical in the short-term.

Does it make any sense to invest in tax saving (ELSS) mutual funds?

If you are like most investors, then you probably haven't yet planned your tax saving investments for the Accounting Year 2009-10. Barely 10 weeks remain for you to decide and make your investments.

The more conservative investors will probably choose the 5 years fixed deposit at a bank, or the NSC VIII savings certificates at the Post Office to avail of tax benefits of up to Rs 1 Lakh under Section 80C of the Income Tax act. (I'm not including LIC insurance policies - because insurance should not be confused with investments.)

Both pay a risk-free interest of around 8%, with the NSC VIII certificates requiring a holding period of 6 years. (For those who are in the early stages of your career, it makes a lot of sense to make monthly or quarterly investments by buying these certificates. After 6 years, you get back about 1.6 times your original investment every month or every quarter. So, after systematically investing for 6 years, you won't need to make fresh investments, as you can keep reinvesting the amounts that mature.)

But I'm digressing. Let me get back to the original topic about ELSS funds. Since these have a lock-in period of only 3 years, many investors - particularly the younger ones - prefer them over the more 'old-fashioned' bank fixed deposit or NSC VIII certificates. But does it make any sense to do so?

I made a quick visit to the valueresearchonline.com site and used their Point-to-point return calculator for ELSS funds, giving a start date of Jan 15, 2007 and an end date of Jan 14, 2010. That gives the return for all ELSS funds for a 3 year minimum holding period.

The results are interesting, to say the very least. Out of the 27 ELSS funds listed at the site, only 50% managed a return of 8% or more. Now, remember that ELSS funds invest mostly in equity shares - with its associated risks.

The 3 years holding period gives the fund managers some flexibility in buying shares with a longer-term perspective as there won't be an immediate threat of pull-out by investors should the markets turn for the worse in the near term.

That doesn't mean that the risks are reduced too much. On top of it, there is no guarantee that you will even get back your principal amount. If you had bought the units of either ING Tax Savings or Fortis Tax Advantage Plan on Jan 15 '07, your returns till date would be negative.

If we add a minimum 'Margin of Safety' of 5% above the risk-free interest of 8% in bank fixed deposits or NSC VIII certificates (to adequately cover the risk of equity investing), then only the top 6 funds out of the 27 make the grade of giving returns of 13% or more.

These are Taurus Tax Shield (21.35%), Canara Robeco Equity Tax Saver (18.09%), Sahara Tax Gain (16.08%), Religare Tax Plan (15.02%), Sundaram BNP Paribas Tax Saver (14.56%) and Fidelity Tax Advantage (13.27%).

So, should you just invest Rs 1 Lakh in any one of these 6 ELSS funds and be done with it for this year? Not quite, and I'll show you why. By pushing back the start date to Jan 15 '06 and end date to Jan 14 '09, the returns decline quite dramatically.

That isn't surprising considering the bear market during Jan '08 to Mar '09. Still, only the top 2 funds managed positive returns - Sundaram BNP Paribas Tax Saver (2.94%), Canara Robeco Equity Tax Saver (2.78%). The rest were all in the red.

Obviously, a lot depends on the state of the market - both at the time of investing, and nearer the time of maturity. Considering that the BSE Sensex is close to an intermediate top, the risk-return equation seems to be favouring the risk side more.

That was the long answer. The short answer is: avoid ELSS funds for your tax saving investments.