Investors can multiply their money in this falling market through good strategy

Mutual funds turn into big buyers

In the month of August, the domestic mutual funds in India turned into big buyers of equity in August. Once upon a time, stock market relied mostly on the Foreign Institutional Investors (FIIs) for uplifting stock market indices. If the FIIs even symbolically invested, the stock indices will go up. But if the FIIs even symbolically made a token withdrawal, then the indices will plunge. But with the growth of mutual funds, this trend has been arrested to an extent. Still the importance of FIIs cannot be understated. But their importance has been reduced.

But returns are worst

But even though mutual funds made a net investment of Rs.25240 million in August, the mutual funds reaped their worst monthly returns in 2011 as all the indices plunged. This was the highest investment in a month made by the mutual funds since June 2008. In June 2008, the mutual funds invested a sum of Rs.31790 million. Among the sector funds, banking and technology funds performed worst. They fell by more than 12% during the month. Global economic slowdown and worries about layoff in IT industry battered down technology sector. Rise in interest rates and fears of rising NPAs struck down banking sector. The highest increase during the month was registered by ETFs due to rising gold and silver prices.

SEBI should restore the earlier 2.25% commission

The imposition of Rs.100 fee for mutual fund distributors has raised a debate among the industry circles. This fee will be charged only if the investor invests through distributors. If they invest directly through fund houses, they will not be charged this fee. But this fee is much smaller compared to what the distributors used to get as upfront commission earlier of 2.25%. Now insurance companies are also offering shorter duration schemes and competing with mutual funds. Insurance industry gives the distributors better deals. So, why should a distributor canvass for a mutual fund for lesser returns? Even the cost of providing basic services in a city like Mumbai or New Delhi is not covered by this paltry amount. SEBI should restore the earlier 2.25% incentive to the distributors for level playing field for the mutual funds.

Only well informed investor can invest directly in stock markets

As a further boost, the mutual funds are paying trail commissions to the distributors on a monthly basis. This will boost the cash flow of the distributors. Earlier, the trail fee was paid on a quarterly basis. For a well informed investor, direct investment in equities will be a good proposition. But for this, the investor needs to be constantly informed and update his knowledge. He has to read financial newspapers, business journals and get information from the Internet. He has to interact with the stock brokers and get their reports, which are biased in many cases. The investor also needs to go through the company reports, attend Annual General Body meetings and interact with other well informed investors. All these things are possible for only very few investors.

Research reports on companies can help

The second option is to rely on a particular broker or a website for information and then base one’s investment on the recommendation of this broker or the website. But as I said earlier, brokers are interested in enriching themselves rather than paying attention to the investor’s wealth. Therefore, on many occasions, the advice tendered by the stock brokers turn out to be biased, with the exception of few old guards. It is very difficult for the investor to differentiate a grain from the chaff. There are many stock market websites that churn out information time and again. But here again, many of these websites are owned or operated by stock brokers through their assistants and the reports they produce may not be qualitative. These websites are attractively designed and immediately captivate the attention of the investors who visit them. Personally, I have come across a website called www.stockmarketresearch.webs.com and the recommendations made in this website are very accurate and qualitative. They make recommendations only for a few companies at a time. There is no flurry of activity in this website like other sites. The website is not attractively designed and is black and white. There are no attractive colours. The author brings out well researched reports about companies every now and then, though not periodically. Nevertheless, the recommendations are reliable and one can make money by following its recommendations. Every week, only five to ten companies are recommended and a detailed research of these companies is made. The owner of this website is not a stock broker and therefore there is no bias in the reports. Reports are easy to understand and no technical jargon is used. Earlier, the author was giving report in another website for the past ten years, but has closed down the other site and switched on to this new site only recently for some unknown reasons. But the quality continues.

Mutual funds route is safe but not rewarding

The third alternative is for the investor to rely on mutual funds. One can pick up a basic simple fund as the one offered by HDFC or highly specialised fund based on one’s wish. But here again, there are problems. For the last two years, the returns from the mutual funds have remained stagnant or even come down in some cases. Dividend payout from them has also come down due to SEBI rules or their own poor performance. The only advantage in investing through mutual funds is to gain from the experience and expertise of the fund managers. In a falling market, investors cannot pick up value stocks and tend to buy stocks which are at the lowest price. Thus they miss out returns when markets again start to rise. But fund managers, because of their skill and experience, never miss out value stocks and add them to their portfolio.

Timing of entry and exit is important

Also timing in entry and exit in stocks is as important as investment itself. In cricket, a batsman’s strike alone is not important, but the timing of the ball is very important. Similarly, if an investor does not know about timing of entry and exit in stock markets, he has to better rely on experts including fund managers. A single mistake can cost the batsman his wicket. Similarly, a single mistake can erode the wealth of the investor substantially. It is very difficult to make good the loss. This is because of the mathematical proposition that a 90% loss can be made good only through a 900% gain, which is impossible. My personal advice for the investors is to put only 25% of their surplus money in equities either through direct stock market investment or through mutual funds. The remaining 75% of their money should be invested in bank fixed deposits, post office schemes like MIS, bonds, company deposits and similar schemes. At least 10% of their surplus funds should be liquid for emergency use like for example in savings deposits of banks or post offices.

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