Sensex, Nifty charts (Jun 14, 2019): profit booking emerges near lifetime highs

FIIs were net buyers of equity on Mon., Tue. and Thu. (Jun 10, 11 and 13), but net sellers on Wed. and Fri. (Jun 12 and 14). Their total net selling exceeded Rs 8.0 Billion. DIIs were net buyers of equity on Mon., Wed. and Fri., but net sellers on the other two days. Their total net buying was worth Rs 2.2 Billion, as per provisional figures.

India's CPI based retail inflation rose to a 7 months high of 3.05% in May '19 from a revised 2.99% in Apr '19. However, WPI based wholesale inflation fell to a 22 months low of 2.45% in May '19 from 3.07% in Apr '19. 

The Index of Industrial Production (IIP) grew to a six months high of 3.4% in Apr '19 against 0.4% in Mar '19, but was lower than 4.5% in Apr '18. Some experts have questioned the veracity and sustainability of the improved Apr '19 data.

India's trade deficit widened to US $15.4 Billion in May '19 against $14.6 Billion in May '18. While exports grew 4% to $30 Billion, imports grew 4.3% to 45.4 Billion.

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex touched a lower top of 40066 on Tue. Jun 11 and corrected down to seek support from its 20 day EMA. The index is trading well above its rising 200 day EMA in a bull market.

Some consolidation or correction near a lifetime index high is only to be expected. It is always a good idea to take some profit off the table and lock it in fixed income instruments (but don't touch debt funds with a barge-pole).

Daily technical indicators are turning bearish after correcting overbought conditions. MACD has crossed below its signal line in bullish zone. ROC is falling below its 10 day MA and dropped into bearish zone. RSI and Slow stochastic have fallen to their respective neutral zones. 

All four technical indicators had showed negative divergences by failing to touch new highs with the index on Jun 4. Some more correction, and a part or complete filling of 'Gap 2' (formed on May 20) will improve the technical 'health' of the chart - enabling Sensex to move higher.

Expect the index to meander without a clear direction till the budget on July 5. There may even be a 'managed' pre-budget rally. Use it to book profits.  

The state of the financial system - banks, NBFCs, HFCs (barring a few exceptions) - doesn't look encouraging at all. Frauds and defaults are being discovered on a daily basis. No one is sure how deep the rot is. The government seems to be in denial - trying to put positive spins on negative data.

Small investors should be extra careful about where they invest their money. Choose quality stocks, or the best equity funds - even if they appear expensive. Companies like Asian Paints, HUL, HDFC Bank, TCS have management quality and cash to survive downturns. 

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty touched a lower top and closed 47 points (0.4%) lower for the week. However, the index is trading well above its rising weekly EMAs in a long-term bull market.

The index has spent four weeks above the upward 'gap' formed on the week beginning May 20, but has failed to move higher. It may test support from the 'gap' and fill it partly or completely. The 20 week EMA has entered the 'gap' zone, and should provide additional support to the index. 

Weekly technical indicators are showing bearish signs. MACD is moving sideways inside its overbought zone. ROC is falling below its 10 week MA towards neutral zone. RSI and Slow stochastic are poised to fall from their respective overbought zones. 

All four indicators had showed negative divergences by failing to touch new highs with the index in the previous week. Some more consolidation or correction is possible. But don't expect a deep correction - unless the budget on July 5 badly disappoints the market.

After touching a high of 29.90 on Mon. Jun 3, Nifty's TTM P/E has moved down to 29.24, which is still well above its long-term average in overbought zone. The breadth indicator NSE TRIN (not shown) has re-entered its oversold zone after briefly falling from it. Some near-term index upside is likely.

Bottomline? Sensex and Nifty charts continue to consolidate after touching lifetime highs. A stalling economy, debt crisis of NBFCs/HFCs and weak earnings growth of India Inc. have been 'discounted' by the market. A disappointing budget may derail bullish hopes. Stay invested with trailing stop-losses. Ignore optimistic 'buy' calls from brokerages.

Whatever Happened to Emerging-Markets Stock Funds?

Emerging-markets countries are making more things, delivering more services, consuming more wares. Monies are being spent. But much of that cash does not make it to shareholders. 

It is squandered on profitless corporate expansions (empire building); or placed into government officials' pockets; or siphoned off to a CEO's friends and family.

The lesson of emerging-markets stock funds: Corporate governance matters, greatly.

Read more at:

https://www.morningstar.com/articles/925254/what-happened-to-emergingmarkets-stock-funds.html

Sensex, Nifty charts (Mar 08, 2019): testing important resistance levels

FIIs were net buyers of equity on all four trading days. Their total net buying was worth Rs 41.2 Billion. DIIs were net buyers of equity on Tue. (Mar 5), but net sellers on the last three trading days. Their total net selling was worth Rs 16.9 Billion, as per provisional figures.

Government's indirect tax revenues will be under pressure during FY 2018-19 as there could be a further fall in GST revenue. Direct tax numbers are likely to be around the revised target. The fiscal deficit figure of 3.4% will be met as there will be some savings on expenditure.

Inflows into equity mutual funds (including ELSS) declined 17% in Feb '19 to Rs 51.2 Billion from Rs 61.6 Billion in Jan '19. The decline is almost 60% from Oct '18 inflow of Rs 126.2 Billion. However, SIP inflows have remained steady.

BSE Sensex index chart pattern

The following comments appeared in last week's post on the daily bar chart pattern of Sensex: "Sensex closed above its three EMAs in bull territory, but needs to move convincingly above the Fibonacci resistance zone if bulls are to regain control of the chart. Bears are doing their level best to ensure that doesn't happen any time soon."

In a holiday-shortened week, there was strong buying by FIIs. The index rose to test the upper edge of the Fibonacci resistance zone by touching an intra-day high of 36830 on Thu. Mar 7. Bears ensured that the index dropped to close about 140 points below the upper edge of the resistance zone.

The index can make another attempt to climb above the resistance zone, provided FIIs keep buying. Slowdown in the global economy and the ongoing BrExit saga may dampen their bullish fervour.  

Daily technical indicators are looking bullish and overbought. MACD is rising above its signal line in bullish zone. ROC has fallen from its overbought zone towards its rising 10 day MA. RSI is moving up towards its overbought zone, but its upward momentum is weakening. Slow stochastic has started correcting inside its overbought zone.

Bulls have the advantage as all three EMAs are rising, and the index is trading above them in bull territory. However, a corrective move seems likely. Many mid-caps and small-caps rose sharply during the week, and can face profit booking.

The government is on a publicity overdrive - announcing grand schemes worth trillions and giving sops to different sections of citizens - before general election dates are announced. Hope it doesn't become a case of 'too little, too late'.

Thanks to satellite TV, Internet and the proliferation of mobile phones, information dissemination has become instantaneous. Voters have become more savvy. Bullish sentiment can get a beating in the unlikely event of Modi not getting a second term. So, don't go 'all in' just yet.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty closed higher for the third straight week, and is trading well above its 20 week and 50 week EMAs in bull territory. But it failed to move above the Fibonacci resistance zone.

The index touched an intra-week high of 11089 - testing the 61.8% Fibonacci retracement level of 11090 - but closed inside the resistance zone, with a weekly gain of 1.6%.

Weekly technical indicators are in bullish zones. MACD is starting to move up in neutral zone. ROC is facing resistance from its sliding 10 week MA. Slow stochastic is rising above its 50% level. However, RSI is falling towards its 50% level, and showing negative divergence by failing to rise with the index.

Nifty's TTM P/E has moved up to 27.05, which is well above its long-term average in overbought zone. The breadth indicator NSE TRIN (not shown) has emerged from its overbought zone, and can trigger a corrective move.

Bottomline? For more than 4 months, Sensex and Nifty charts have been stuck in sideways ranges after sharp corrections during Sep-Oct '18. Both indices closed above their long-term moving averages in bull territories, but faced strong resistances from the upper edges of their respective Fibonacci resistance zones. Index consolidations may continue till the general elections.

Sensex, Nifty charts (Feb 08, 2019): false breakouts above Fibonacci resistance zones

FIIs were net sellers of equity on Mon. (Feb 4) but net buyers on the other four trading days. Their total net buying was worth Rs 22.6 Billion. DIIs were net buyers of equity on Tue., Wed. and Thu. (Feb 5, 6 and 7) but net sellers on Mon. and Fri. Their total net selling was worth Rs 116 Million, as per provisional figures.

Sluggish returns, market volatility and political uncertainty are affecting inflows into equity mutual funds in India. Inflows in Jan '19 dropped to Rs 61.6 Billion from Rs 66.1 Billion in Dec '18 and Rs 84.1 Billion in Nov '18.

As many as 363 infrastructure projects, each worth Rs 1.5 Billion or more, have incurred cost over-runs of over Rs 3.42 Trillion due to delays in land acquisitions, forest clearance and supply of equipment. 

BSE Sensex index chart pattern

The following comments were made in last week's post on the daily bar chart pattern of Sensex: "All four technical indicators are showing negative divergences by touching lower tops. Bears can be expected to fight to defend the 36810 level." 

Strong buying by FIIs and DIIs caused the index to breakout and close above the Fibonacci resistance zone between 36140 and 36810 on Wed. Feb 6. Though it closed above 36810 for a second day, the index formed a small 'reversal day' bar (higher high, lower close).

Bears decided enough was enough. Profit booking pulled the index back inside the Fibonacci resistance zone on Fri. Feb 8. Bulls failed to regain control of the chart, as the upward breakout above 36810 turned out to be a false breakout.

Despite the sharp correction of more than 400 points on Fri., the index eked out a 0.2% gain on a weekly closing basis, and closed above its three daily EMAs in bull territory. 

Daily technical indicators are turning bearish. MACD is falling towards its signal line in bullish zone. ROC is falling towards its 10 day MA in bullish zone. RSI is seeking support from its 50% level. Slow stochastic is about to drop from its overbought zone. Some more correction seems likely.

The index had rallied on rumours of an interest rate cut by the RBI at its monetary policy meeting on Thu. Feb 7. The actual rate cut triggered a sell-off, as there was little follow-up buying due to weak corporate Q3 earnings.

FIIs have been net buyers this month. If they continue buying, bullish sentiment may revive.

NSE Nifty index chart pattern

Combined buying by FIIs and DIIs caused the weekly bar chart pattern of Nifty to breakout above the Fibonacci resistance zone intra-week. Absence of follow-up buying and profit booking pulled Nifty back inside the resistance zone by Fri. Feb 8.

The index breached the 11000 level after 4 months but failed to sustain above that psychological level. It closed above its two weekly EMAs in bull territory, with a 0.4% weekly gain.

Weekly technical indicators are turning bearish. MACD is moving above its signal line in neutral zone. ROC has crossed below its rising 10 week MA and dropped to neutral zone. RSI has turned down after facing resistance from the edge of its overbought zone. Slow stochastic is poised to fall from its overbought zone. 

Nifty's TTM P/E has moved up to 27.10, which is well above its long-term average in overbought zone. The breadth indicator NSE TRIN (not shown) is falling inside oversold zone. Some consolidation or correction is likely.

Bottomline? For more than 3 months, Sensex and Nifty charts have been retracing the sharp corrections during Sep-Oct '18. Both indices are trading above their long-term moving averages in bull territories, but are continuing to face resistances from the zone between Fibonacci 50% and 61.8% retracement levels. Repeated failures of upward breakouts may be tipping the balance towards bears.

The six new classifications of hybrid mutual funds

"SEBI has recently proposed a change in the name of balanced funds into six categories - 

• Equity savings fund 
• Aggressive Hybrid Fund 
• Balanced Hybrid Fund 
• Conservative Hybrid Fund 
• Multi-asset allocation funds and 
• Dynamic asset allocation fund"

Read more about them here.

(Note: Those who invested in HDFC Prudence Fund may want to switch to HDFC Balanced Fund.)

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

5 Tips for Reading a Balance Sheet

The Indian stock market indices have come off their Jan '18 tops and have been consolidating sideways for the past 4 weeks. There is every possibility that there will be some more consolidation or correction at least till Mar 31 '18.

From Apr 1 '18, the re-introduced LTCG tax comes into effect. That can put a near-term floor on the indices. From mid-Apr, Q4 (Mar '18) results season will start. 

If Q4 results of India Inc. show any improvement over Q3 results - as they are expected to do - buyers may overwhelm sellers, and stock indices can resume their upward trajectory.

This may be as good a time as any to start preparing a 'buy list' from companies that have performed well in the previous three quarters. 

How to choose which companies to put on the 'buy list' from the several hundreds that declared good results? The best place to start is to read their annual reports, and choose the ones with the strongest balance sheets.

Given below are links to three introductory articles published in investopedia.com to get you started on balance sheet analysis:

1) 5 Tips for Reading a Balance Sheet 

2) Reading the Balance Sheet

3) Breaking Down the Balance Sheet

There are several links in the above articles which can help you to dig deeper into balance sheet analysis.

If you don't feel excited about analysing balance sheets and identifying good companies for investment, fret not. You can start SIPs in highly-rated equity and balanced mutual funds, and leave all the analysis to fund managers.

(Wishing all visitors, regular readers, g+/fb/twitter followers and newsletter subscribers a safe, colourful and happy Holi.)

Nifty chart: a midweek technical update (Sep 06 ‘17)

FIIs have continued to sell equity in the spot market. Their net selling during the first four days of trading in Sep '17 totalled Rs 34.4 Billion. DIIs were net buyers of equity worth Rs 12.1 Billion.

Nifty has been trading sideways with an upward bias in a range between 9700 and 10000 since correcting down from the Aug 2 top of 10138. However, it has formed a 'rising wedge' pattern from which the likely breakout is downwards.

The Nikkei India Services PMI for Aug '17 was 47.5 - higher than 45.9 in Jul '17 but below the 50 level which indicates contraction. Call it the 'GST effect'. The Services PMI was also below 50 in the Nov '16 to Jan '17 period - thanks to demonetisation.

The daily bar chart pattern of Nifty had broken out below a 'diamond' pattern after touching a lifetime high of 10138 on Apr 2. Read all about the 'diamond' pattern and its implications in an earlier post.

After receiving support from the 9700 level on Aug 11, the index bounced up to touch 9948 on Aug 17 but entered a sideways consolidation within a bearish 'rising wedge' pattern.

Daily technical indicators are in bullish zones but not showing any upward momentum. MACD is moving sideways above its signal line. RSI is seeking support from its 50% level. Slow stochastic has dropped from its overbought zone.

Nifty's TTM P/E is at 25.88 - much higher than its long-term average. The breadth indicator NSE TRIN (not shown) has dropped sharply and entered its overbought zone - hinting at a correction.

A fall below the 'rising wedge' should receive some support from the 9700 level. If the support fails to hold, a deeper correction to test support from the rising 200 day EMA may follow.

Keep a close watch on the zone between 9700 and 10000. Bears will dominate below 9700. Bulls will rule above 10000. Where is the index headed first?

Don't place any bets, but the odds of a fall below 9700 first appears better. Why? Because a bull market requires earnings support to sustain and prosper in the long-term. And earnings of India Inc. has been disappointing to say the least.

DIIs don't have much choice but to keep buying as investors continue to pour money into mutual funds, because investments in realty and gold is no longer in fashion. But as long as FIIs keep selling, the index is not going to move much higher.

So, sit out the correction. Bravehearts can short the index if it falls below the 'rising wedge' (not a recommended strategy for novice investors).

Why a stop-loss is the difference between gambling and investing

Many small investors - particularly old timers - prefer to invest in 'safe' options. Like bank fixed deposits, tax free bonds, national savings certificates. They get a fixed rate of return - regardless of the state of the economy or volatility in the stock market. Plus, they rest assured that their principal amount will be returned intact on maturity.

For 'safe' investors, investing in stocks is nothing short of gambling. A company one invests in can go out of business. Even if they remain in business, they may make losses and not pay any dividends. In other words, there are no guarantees of any returns, plus there is a risk that the invested principal may get  depleted. (The same logic applies for equity mutual funds.)

In some ways, investing is gambling if you have no idea of what you are doing. If you buy a company's stock without doing adequate research about its background, competition, business outlook, management capabilities then the possibility of making any money through capital gains or dividends will be like betting on a cricket or football match. You will either win, or lose.

Since you have no control over the outcome of a sporting contest, you will lose your entire wagered capital if your team loses. You won't have much control over the performance of a company either - specially if you hold only 200 or 500 shares.

However, you may use a stop-loss - set 3% (or 8%) below your invested amount in a company's share. If a share's price falls more than 3% (or 8%), you can sell the share at a small loss and recover more than 90% of your invested capital.

This loss mitigation technique is the major difference between gambling and investing. One would think that most investors would be disciplined about setting stop-losses for each of their purchases, and sell when the stop-losses get hit.

Experience says otherwise. Setting a stop-loss (or a trailing stop-loss) is an art that few investors learn and even fewer investors practice. 

There is another important difference between gambling and investing: regular dividends. Only long-term investors benefit from it. If you do proper research before buying a stock and then hold on to it for 5 years or more, reinvesting the dividends that a company pays can add up to substantial returns.

In gambling, there are no dividend payments for betting over long periods. Since each bet usually has a short time limit, you either win or lose quickly. Then you place your next bet, with similar results.

You can read more here.

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.

Is stock investing risky?

To be able to answer that question, one has to understand the meaning of risk. The problem is: there is no clear cut definition of risk, or the best way to measure risk.

Volatility is often considered a measure of risk - particularly by inexperienced investors. But seasoned traders thrive on volatility and make most of their money from it.

One often thinks of a bank fixed deposit as 'safe'. Why? Because there is very little chance of losing your principal amount. 

Compared to a bank fixed deposit, stocks seem more 'risky'. Why? Because during a bear phase the price of a stock can fall below the price at which it was bought.

Many small investors fall into the trap of such a simplified view of risk and choose the 'safe' option. What they fail to realise is that safety also comes at a price.

Returns from fixed deposits are taxable and subject to fluctuations in interest rates. A 3 years deposit earning 8% interest may seem like a good safe return, but the real rate of return is only 2% if inflation is 6%.

There are a couple of ways that risk can be reduced when investing in stocks. The first is by diversification: (i) across market capitalisation, i.e. investing in a mix of large-cap, mid-cap and small-cap stocks; and (ii) across sectors, i.e. buying stocks from auto, pharma, FMCG, financials, etc.

The second is by portfolio diversification through investment in different asset classes, like stocks, funds, fixed income, gold.

Another way to reduce the riskiness of stock investing is by learning the basics of technical analysis. 

While fundamental analysis is a must in understanding the financial robustness and competitive advantage of a company, technical analysis provides signals of when to buy, when to sell and when to sit tight.

Plus, the concept of a 'stop-loss' allows an investor to exit with a smaller loss when a stock's price is tumbling down.

If you are not adept at picking stocks, you can still invest in stocks and diversify your portfolio by buying units of different mutual funds.

By choosing the 'dividend option' in a fund, risk is reduced because the periodic dividend payments act as partial profit booking and freeing up some cash that can be utilised elsewhere.

So, the answer to the question is: No - provided you know what you are doing.

To learn more about risk, here is an interesting article from investopedia.com.

How to avoid buying near a market top and selling near a market bottom

Common sense suggests that investors should buy near a stock market bottom and sell near a stock market top. But time and again, investors do just the opposite. They buy near a market top and sell near a bottom - losing their savings in the process.

Why so? The short answer is: Greed and fear. The greed of making quick money when the market has already gained a lot. The fear of saving whatever little they can of their invested amounts when all gains disappear and the market still keeps falling.

Even for experienced investors, it is very difficult to identify stock market tops and bottoms precisely. The brave-hearts keep trying by utilising various technical indicators that are supposed to identify when a market is in the throes of euphoria and when a market is totally in the grip of doom and gloom.

Smart investors follow an investment strategy that has been honed over the years. Since each individual is different from another - physically and mentally - investment strategies should take these differences into account.

How? By making a plan. In fact, two plans. First, a financial plan that includes current earnings and savings, present and likely future requirements - be it higher studies, marriage, child's education, parents' medical needs, retirement - and last, but not the least, tolerance to risk.

A financial plan acts like a map for the future in money terms - what amounts will be needed at various future life milestones, and what savings and investment instruments (depending on an individual's risk tolerance levels) will help provide the required amounts at those particular milestones.

Sounds complicated? It only requires a little bit of effort and the desire to make that effort. It definitely isn't rocket science. In fact, there are websites that will guide you how to develop a financial plan for free (if you don't want to pay for the services of a professional).

After you prepare a financial plan, it will be time to prepare an asset allocation plan according to your risk tolerance. The assets can be stocks, mutual funds, fixed income instruments, gold, cash. The proportion of your savings allocated to each asset will form your plan.

Real estate is usually kept out of a small investor's asset allocation plan because real estate investment usually means a flat for self occupation, which is unlikely to be sold in a hurry. 

So, what does all this planning have to do with avoiding buying at a market top and selling near a market bottom? 

Everything. Once you start following your plan, it will 'tell' you when to buy and sell which asset. Think about it. If the market shoots up, the 'stock' portion or 'equity fund' portion of your assets will increase in value. Proportionately, your investments in fixed income, gold, debt funds will reduce in percentage terms.

Beyond a threshold, which you can preset, it will trigger a 'sell' in stocks and 'buy' in other assets - to keep the percentage allocations to each asset class intact. So, you will actually sell near a market top.

The reverse will happen when a stock market starts sliding fast. Beyond your preset threshold, 'stocks' will become a 'buy' and your other assets will become a 'sell'. So, you will buy near a market bottom. 

This periodic adjustment in your asset allocation plan according to market conditions will keep your original percentage allocations intact - and free you from the clutches of greed and fear at market tops and bottoms.

Read more about it in this article from investopedia.com.

Related Posts
How to reallocate your assets
About Asset Allocation – a guest post

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.

Day Trading Strategies for Beginners

The post title is a bit of an oxymoron - because beginners should stay as far away from day trading as possible. Why? Because to make money on a consistent basis from day trading, one requires two important skills:

• more than a working knowledge of technical analysis
• a trading strategy that has been honed over several years

But isn't technical analysis what this blog is all about? Yes. However, learning about technical analysis may be necessary, but it is not sufficient. 

A trading strategy for picking entry points, exit points, setting stop-losses, identifying chart patterns while they are still forming and having the discipline to stick to the strategy takes many years of experience.

Lack of appreciation of the skills and discipline required for trading success is why majority of day traders lose money. 

That is like warning someone that smoking and drinking are injurious to health. People do it anyway because their peers are doing it, and they don't want to miss out on all the fun.

It is the fun and excitement of making money with very little capital outlay and even less effort that draws beginners to day trading like moths to a flame.

There are two choices in front of beginners:

• tread the path of slow and steady - gradually build up your capital by investing your monthly savings in one or two mutual funds; once you have around Rs 5 Lakhs in your funds, think about building a portfolio of individual stocks; then keep adding to your portfolio from your monthly savings, and retire rich
• jump into the stock market after opening a demat account and a trading account; pay some margin money and start day trading

The first choice is the one I endorse. It is the saner and safer choice that almost guarantees investing success. But it is also boring - like watching a fruit tree growing from a sapling till it starts bearing fruit several years down the line.

If the adrenaline rush of making quick money with very little effort or cash excites you - then you will try your hand at day trading anyway. Regardless of all the warnings that it may be injurious to your wealth.

In that case, you might as well go through Justin Kuepper's article 'Day Trading Strategies for Beginners' in investopedia.com.

The 4 Key Elements of a Well-Managed Portfolio

It is easy to have an investment portfolio. Open a demat account and an online broking account and you can start buying stocks. Buying funds require filling up a form and submitting it with a cheque to the fund management house.

Then you just sit back, and get rich. Right? That is what most first-timers think - but they end up losing money instead. What is the catch?

First, you need to know what to buy. Next, you need to know when to buy. Even after correctly deciding what and when to buy, you won't get rich if you don't know how to manage your own portfolio.

The 'what' requires knowledge of fundamental analysis. It helps to have accounting knowledge in dissecting Annual Reports. But basic math skills and common sense are often good enough (unless you have ambitions of being a research analyst in a fund management house).

The 'when' requires knowledge of technical analysis. Again, it helps to be a science graduate or engineer to understand the benefit of graphs drawn on semi-logarithmic sheets. But it isn't rocket science - and the basic concepts are quite simple to understand and apply.

The 'portfolio management' part is often not clearly understood or appreciated by most small investors - even many experienced ones.

In an article in investopedia.com, Brian Bloch explains the 4 key elements of a well-managed portfolio. Here are a couple of excerpts from the article:

"Any investment process must involve planning, organization, leadership and control to some extent in order to be considered managed."

"Portfolio management is defined as the art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance. This is a very specific definition of management in the investment context."

You can read the full article at this link.

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How To Pick A Stock

Stock picking is a skill. As with most skills, it is practice that makes you perfect.

You can learn to ride a bicycle in a day or two. The bicycle may cost Rs 3000. You just hop on to it, and try riding it – with the help of training wheels, or a friend. The chance of seriously hurting yourself in a fall is low (unless you decide to ride in Delhi or Mumbai traffic without adequate practice).

Learning to operate and ride a motorcycle is more complicated. The machine costs Rs 50000. You will need to learn a lot more about how to operate it, memorise road signs and obtain a licence after passing a test. If you don’t use a helmet, any accident can be fatal.

What does this have to do with stock picking? I’m coming to it.

In the investment context, buying a bicycle is a lot like investing in a mutual fund. Fill out a KYC form, a form from a fund house, write a cheque for Rs 1000 and you become an investor. You don’t need to know much about the stock market. The fund manager will take care of buying and selling of stocks.

Stock picking is more complicated. If you think opening a demat account and a trading account is all there is to buying stocks, it will be like riding a motorcycle in traffic without a helmet and being clueless about road signs.

In a recent article in investopedia.com, the various steps necessary to pick stocks have been explained.

You may also want to read a three-part series of posts I had written on stock picking for long-term investment. The links are given below.

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How to pick Stocks for Investment - Part I

How to pick Stocks for Investment - Part II

How to pick Stocks for Investment - Part III

The Risks & Rewards of Penny Stocks

Message boards in many investment groups and web sites are full of 'buy' recommendations for unknown small-cap stocks. Why do small investors get attracted - like moths to a flame - by such recommendations?

Two reasons: desire for instant gratification and greed. No one is willing to put in the time and effort in studying the fundamentals of a company. Much easier to follow some one's tips - and more fun if it is a penny stock, because more is the possibility of a multi-bagger.

End result? Getting stuck with unsaleable stocks, losing money, and losing faith in the stock market. Moral of the story? Small investors should read and learn about the stock market before spending a single Rupee. When they are ready, they should get their feet wet by investing through mutual funds.

Should small stocks be avoided entirely? Yes, if you are a novice. No, if you have paid your dues and appreciate and understand the risks involved.

In a recent article at investopedia.com, the risks and rewards of buying penny stocks have been explained. You can read the article here.

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'Fatal Attraction', or why small investors prefer small-cap stocks

How to make money in the stock market the easy way – a guest post

There are two kinds of investors in the stock market. Those who know, and those who don’t. Those who know what is going on (a minority), use their knowledge to ‘take’ money from those who don’t have a clue about how and when to buy or sell stocks (a majority).

There is no harm in not knowing something – as long as you acknowledge the fact, and don’t put your money in it. The majority of small investors lose money in the stock market because they fail on both counts. They are in denial about their market knowledge (rather, the lack of it), but invest their money any way.

In this month’s guest post, targetted at the majority of investors, Nishit suggests a simple and easy way to make money in the stock market. In fact, it is a ‘no-brainer’. The only drawbacks(?) of this simple strategy are that it is boring, requires discipline and works only over the long-term.

If you are looking for excitement or adrenaline rush while ‘investing’ – visit a casino or a race course. You may enjoy yourself while you lose money!

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The stock market is a complex place and it keeps rising and falling without any apparent logic. Those who are acquainted with the market can make a killing by picking the right stock at the right price and at the right time. A vast majority of the population does not have this skill set. So, what can they do to participate in the gains?

There are various asset classes like fixed deposits, real estate, gold and equities. Equities far outclass the other asset classes as they give significantly high returns over a long period of time. Real estate is illiquid and one needs to have vast sums of money to invest in real estate. Gold also has long periods of time where it moves nowhere and inflation eats away the returns.

For those who have no clue about equities, the first step is to identify 3-4 good Mutual Funds. There are several funds, like HDFC Top 200, which have given compounded returns of 20% for the past 20 years.

Next, they have to invest a fixed amount every month (SIP) - which could be as low as Rs 1000. Over a period of time, the bull phases and bear phases will be taken care of to give smooth annualised returns.

Of course, somewhat alert and savvy investors can tweak this model further by investing more amounts when markets have tanked and booking profits after significant run ups. Nowadays there are many free blogs (like mine and Subhankar’s), which can guide investors about the trend in the market. Also, there are general phenomena - like the market peaking in Feb-March and then correcting 20-30%. The current year is a classic example of this.

Someone may ask the question: How does one identify the right mutual fund? For this one can ask a savvy investor friend, a financial planner or check out the website www.valueresearchonline.com.

This website gives a list of 5 star rated funds in various categories. Based on this, one can shortlist the funds and do a periodic investment in these selected funds. A handful of funds should be more than adequate.

With the advent of the internet, it has become very easy even for those with limited financial knowledge to invest and earn money from the markets.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan. You can reach him at nish.stockid@gmail.com)

New to investing? Try a balanced fund

The stock market is hitting new highs on a regular basis. Many stocks are touching their 52 week or lifetime highs. New and astonishingly higher targets for Sensex and Nifty are being floated by market experts in a mad scramble to outdo each other. A frenzy of bullishness is being built up – but for whose benefit?

If you are a new or first-time investor in the market, it won’t be surprising if you are getting caught up in the frenzy. With stories of fantastic multi-bagger returns from unknown stocks doing the rounds, getting the ‘left behind’ feeling is quite natural. Who doesn’t want to get on the bull bandwagon and make a ton of money in quick time?!

Jumping in feet first into the market is precisely what stock brokers and market experts want you to do. Brokers make money on the number of transactions they do. The more the merrier. Market experts have bought at much lower levels. They want to dump their holdings on to unsuspecting novices at higher prices.

What should a small investor do? In a sensible article published in Business Standard, new investors have been advised to take a look at balanced funds. The advice is sound. The growth option is often preferred by young investors. The dividend option is safer – as it acts like partial profit booking when NAVs become too high.

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7 investing mistakes to avoid in this rampaging bull market

There has been a sea-change in market sentiments ever since the Modi-led BJP received a majority in the general elections. The chaos, confusion and scams of coalition governments of the past many years have come to an end.

Modi is expected to usher in a new dawn of corruption-free, growth-oriented and economically inclusive administration that will restore India to the top echelons of world leadership. In anticipation, a new bull market has started – and as per consensus estimate of experts, it will be a multi-year bull market.

Even after 100 days – during which not much has changed on the ground (it may be too short a time to expect major changes) – the feeling of hope and expectation of ‘acche din’ persists. The setback for the BJP in the recent by-elections may be a temporary aberration. Today’s strong rally in the market has confirmed bullish sentiments.

For small investors who have not been able to participate in the bull rally so far, or the few smart ones who managed to get in early but are experiencing their first ‘real’ bull market, this is as good a time as any to be aware of some easily avoidable investing mistakes in a bull market. Here are 7 of them, not in any particular order:

Mistake 1: Taking expert opinion at face value

It is the job of market experts to voice their opinions – even if they contradict each other. Many have vested interest in the stock market, in spite of their disclaimers. Do not consider any such opinion as gospel truth. Use your intellect and common sense. Particularly regarding buy/sell recommendations, one should do their own due diligence and act only if convinced.

Mistake 2: Believing that a ‘new’ bull market has started

In a post three months ago, it was explained why this bull market may be 5.5 years old from a long-term perspective, and at least 1 year old from a short-term perspective. In other words, it can’t be considered ‘new’. That means, most of the low-hanging fruit have been plucked. One needs to be extra careful in selecting individual stocks for investment now.

Mistake 3: Thinking that a rising tide lifts all boats

In a bull market, small companies with low equity and questionable management start flying through the roof. The rise in stock price is often the result of circular trading among a few entities working in cahoots. These are leaky boats. They may rise when the tide comes in, but will sink soon – leaving small investors with a useless entry on their demat statements.

Mistake 4: Buying individual stocks on a limited budget

If you are a small investor getting your feet wet in the market, you probably don’t have much savings to spare. You may want to buy 10 shares of Tata Motors or 100 shares of Ashok Leyland. Don’t do it. If the stock price rises 10%, you will be tempted to book profits – missing out on a bigger payday. If the stock falls 10%, you may get into a panic and sell, instead of buying more. Better to start a SIP in a good equity fund. Build up your capital for 4-5 years, then think of buying individual stocks.

Mistake 5: Taking a personal loan to invest in stocks 

Don’t have enough savings? Still itching to enter the market? Forget about taking a personal loan. The interest cost will be prohibitive, and will need to be paid regardless of your portfolio’s performance. Buying an iPad or a fancy cellphone on EMI is bad enough – but you will at least have a useful asset. But once a stock starts falling like a stone, you may not have the will power or discipline to sell at a loss.

Mistake 6: Waiting for a correction to enter

Timing the market is difficult, if not impossible. It requires several years of investing experience to understand which correction to invest in and which correction to sit out. Investing at or near a market top may not give good returns in the near term, but investing your savings regularly and having a long-term (3-5 years) outlook is likely to provide inflation-beating returns.

Mistake 7: Investing without a plan

When you think about going on a vacation, you tend to plan well in advance to avail of cheaper air-tickets and better hotel deals. But when it comes to investing, you probably don’t even think about how deep the water is or whether there are sharks lurking before diving in. It is imperative that you make a financial plan and an asset allocation plan before buying a single stock or fund. The plans should reflect your financial commitments, aspirations and risk tolerance. Buying stocks or funds according to your plans will provide better returns and enable you to reach your financial goals.

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