Dec 17, 2012

Market Update 17/12/2012

The markets were in consolidation mode over the previous week with the Nifty not able to break out of 5965. The good news is that there seems to be support around 5840. 5800 is an important technical support currently and, if breached, we could see a reversal of the uptrend.

The momentum indicators are in the middle zone implying that the market is undecided on its direction for the short term. The moving averages and other long term indicators suggest a continuation of the uptrend.

Moving on to fundamentals, the Govt's win on FDI in retail is seen as a positive.Bharti Infratel's IPO and NMDC's FPO were moderately successful. There is increased risk appetite in the markets and that augurs well for the near to medium term.  

Globally there still is some concern regarding the US fiscal 'cliff'. This could keep global markets range bound for the near term.

For currencies it will be difficult to predict how the market will react in the near term. The Rupee has found support at 54 to the dollar. But, with the looming 'cliff', we could see the dollar appreciate as investors flee to safer treasury's and bills. However, if FII inflow continues to pour in then the rupee could appreciate. It should play in the 54-55 range. 

Industrial production has inched higher and inflation has moderated leading to speculation that the RBI has room to lower rates. However, debt yields have not moved much in anticipation of the same.

Gold has remained steady. Not much movement on either side. In the international markets it's found support at $ 1700/oz. Should move in local markets in line with the dollar.

Dec 12, 2012

FD's vs Equities- A Rejoinder

Dear Mr. Gomas,

Thank you very much for sharing Mr. ARK’s mail with me. It was a very informative piece and I appreciate Mr. ARK’s efforts.

One is wealthy when one has more than one requires.  If you require Rs 1,00,000 and you have 5,00,000 you are wealthy- plain and simple.  

Mr. ARK has strong and valid points. However, he has ignored something very important which I would like to highlight by means of a story.

Mr. Natwar sold a piece of land and made Rs 1,00,000/- in 1996. I’m sure you will agree that 1,00,000 was quite a sum in those days. He had no requirement for the money immediately. He decided to ‘invest’ the money for his daughter’s higher education in 16 years by investing in a bank FD.  

Fast-forward to 2012 and Mr. Natwar’s corpus is around Rs 3,42,600/- (@8% compounded p.a. and non-inclusive of taxes).  The corpus has more than tripled- smart investment it would seem. So what is the value of this investment in present terms? Mr. Natwar can still afford his daughter’s education but maybe not the best as he would have liked.

In 1996 Mr. Natwar was wealthy- but in 2012 he just about meets his requirements. In other words Mr. Natwar’s wealth has remained the same or decreased. Inflation has eroded the more than three time jump in his corpus.

FD’s are investments that protect your wealth, not grow it. This is fundamental to understand. If you want to remain in the same place then yes- invest in FD’s. Makes sense as there is no risk. But if you want to grow your wealth- then we have to look at other alternatives.

Equity, real-estate and gold are assets where there are no fixed returns. No one can say what the value of these assets will be tomorrow, in 5 years or in 10 years and that is exactly what the risks are with these investments.

I will cite real estate and gold as examples as I go further. You may be more familiar with these assets.  Gold has moved up considerably over the past few years. But, had you bought gold 3 months back @Rs 32,000 per 10 grams (on 14/9/2012) then today(@ Rs 31,455/-) you are sitting on a loss. With real estate too we have a similar story. Prices have remained more or less stagnant for the past 2-3 years. Had you invested 2 years back and were selling today you won’t be making much of a profit if at all. Everyone is buying on the assumptions that these assets will move up. But, when and by how much we cannot say.

This is exactly why we call these ‘long-term’ investments. Had Mr. Natwar invested his Rs 1,00,000 in gold, real estate or even in equity- he would have made much more than what he made through FD’s. But, there is the risk of not knowing what returns he will get and when he can/should sell. It might be that when he has his requirement the asset might not be properly priced. He will have to be smart and sell when he gets a good price. He might need advice for this. And that is what exactly I’m here to provide him.

The rewards for being able to accept risk and plan around it are well worth it. An investor has to understand this fundamental insight without which no investment is possible. If you want to grow your wealth you will have to take some risk. If you are content with your wealth and are comfortable with the knowledge that there is the possibility of it being eroded due to inflation then FD’s are the ideal investment for you.

Mr. ARK has quoted the case of Japan. Along with equities the prices of real estate have also came crashing down.

Gold also was on its way downward in yen terms till about 2000, when globally the prices of gold started to increase.

This is precisely why we had the depression in Japan. The economy shrunk because of the fall in value of assets. A bank FD in Japan currently yields 0% (Please check graph below).

I’m sure you won’t consider that as an investment for wealth creation whatever the circumstances. 
I hope this has cleared your understanding of what an FD is and where it stands in respect to other asset classes. I’ll be happy to clarify your doubts.


Recommended reading for further understanding:

Dec 5, 2012

Fixed Deposits vs Equities

Dear Mr. Gomas,

Thank you for consulting with me on your investments. As we’d discussed last evening I will proceed to explain why investing in Fixed Deposits would be better than investing in Equities. 

The primary purpose of investing is to have money when you need it. These needs may vary from person to person and time to time. But the basic principle as to why we all invest is to have money when you need it.

When we look at important events in our lives- buying a house, children’s education, children’s marriage retirement etc it is important to have the money required at the right time. By investing in a Fixed Deposit you can be sure of the amount you will have, whereas in equity it’s a bit like a lottery.

Say you invested Rs 1,00,000/- in January 2008 in a Fixed Deposit for your daughter’s wedding in 5 years. Assuming 8% per annum as the yield your return today would be- 1,46,933/-. Even with 30% tax the amount you would have in hand would be 1,32,853. 

If you had invested the same Rs 1,00,000/- in the Sensex, in January 2008 the Sensex was around 21,000. Today, nearly 5 years on it is at 19,000! Your 1 lac would have become Rs 90,476/-. In other words you would have suffered a loss.

Most equity advisors say equity is a long-term investment. They never explain what a “long term” is. Is 5 years not enough to plan for an event? Should important events in your life- like a wedding or retirement depend on the vagaries of the market? I wouldn’t depend on these investments for financing my goals. A statistic that is often quoted is that the index was at 100 in 1979 and today it is at 19000. That gives you an annualized return of 17%. And the period is 33 years.

However, if we look at the period from 1992- 2004 of the Sensex, on March 31st 1992 Sensex was valued at- 4253. It took until September 30 2003- Sensex at 4453- for the market to decisively break out from this high. That’s a period of 11 years and 6 months. To me that would be a long term investment. There is an interesting article on the subject here:

Since 2003, the market picked up momentum and made money for everybody, up until 2008. But, there was a long period before that where there were no returns at all. What this tells us is that it is very important to ‘time’ the market. And, even the market ‘experts’ will tell you that it is not possible to ‘time’ the market. 

Even the oft repeated SIP mantra doesn’t apply to all time frames- Take for eg a Rs 1000/- SIP in the index from March 1992 to March 2002- a period of 10 years. The reason why I chose March 1992 is that the market was at its peak (Harshad Mehta’s time). A 1000 Rupee SIP would have returned only a meager 2% p.a. yield- again highlighting the importance of ‘timing’ the market.

Then there is the case of Japan where the markets haven’t recovered for nearly 30 years! If 30 years is not a long term then I’m not sure what is!

Please look at the all-time historical graph above.

To read more on the Japanese market crash.

One can make money on the markets only if one has the skill to time the market. There is no such thing as it’s always a good time to buy the market or an SIP is designed to give you returns in all market conditions. It’s a game best left to those willing to take the risk to play it. 

It is always be better to be safe than to be sorry. I would thus advise you to look to invest in Fixed Deposits over equity.

 I'll be happy to answer any other queries that you may have.


Note: Sensex data from