Market update and what you should do Feb 2011
We understand that many of you are concerned about the current market situation and are looking for guidance on your investments. Please continue reading for insights into the market's recent developments.
Equity Market Update:
The BSE Sensex saw a positive end to the final month of 2010, gaining 987.8 points or 5.1%. However, the first month of 2011 witnessed a correction, with the BSE Sensex and S&P CNX Nifty both falling by approximately 10.6% and 10.2%, respectively. The reason behind this correction can be attributed to a disappointing IIP growth rate of 2.7% in November 2010, particularly in the manufacturing and consumer durables sectors.
Foreign Institutional Investors (FIIs) have expressed concerns about persistently high inflation levels, the decline in the IIP, and the unrest in Egypt. Consequently, they turned into net sellers in the Indian equity market, amounting to 4,813 crore during the month, in contrast to their buying activity in December 2010.
What Should Equity Investors Consider?
Looking ahead, as the U.S. displays signs of economic recovery with promising GDP growth and declining unemployment rates, there may be a shift in investment focus from emerging nations to developed ones. However, it's worth noting that India hasn't seen substantial FII inflows since the announcement of QEII. Additionally, there appears to be a growing interest in commodities, particularly gold and crude oil, as evidenced by their surging prices.
On the domestic front, several risks are worth considering:
- High inflation
- Elevated interest rates, increasing borrowing costs
- Political instability due to corruption scandals
- Reduced credit growth
- High fiscal deficit
- Economic growth slowdown
Our recommendation is to approach equities cautiously, taking advantage of market declines as buying opportunities, and continuing or increasing Systematic Monthly Investments (SIPs) for the long term. We also suggest allocating 5-10% of your portfolio to silver and gold, given the ongoing debt crisis and the expected weakening of the U.S. dollar due to QE measures.
Debt Market Update:
In the current scenario of high interest rates and pressure on yields, liquid funds are a suitable choice for short-term investors. If your investment horizon is between 3-12 months, short-term plans and floating rate funds are viable options. To capitalize on high yields, consider Fixed Maturity Plans (FMPs) with a duration of 12-15 months, which lock in attractive interest rates and provide tax-free returns. Avoid long-term income funds and government securities, which are more sensitive to interest rate fluctuations, at least until the next monetary policy review in March 2011.
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Thank you and best regards, Dilshad.
Dilshad Billimoria BBM, LUTCF CFPCM®, Certified Financial Planner.
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Wealth creation is a deliberate process that requires time. Plan your financial strategy and stick to your plan. Wishing you successful investing!