Many of you would be wondering what is happening with the current market and what should be done with your investments. Pl read on…
Equity Market update.
While the Indian equity markets (BSE Sensex) ended the last month of the calendar year 2010 on a positive note (by gaining 987.8 points or 5.1%), the first month of calendar 2011, the BSE Sensex corrected by -10.6%, and so did the S&P CNX Nifty (which corrected by -10.2%).
The IIP number of 2.7% for November 2010 also acted as a spoil sport which also led to the bears dominate the bulls.
This is due to poor manufacturing growth and consumer durables growth in Dec 2010.
The FIIs too remained concerned about inflation remaining above the comfort levels of the RBI, the IIP number taking a nose dive and to some extent the unrest in Egypt. During the month FIIs turned net sellers in the Indian equity markets to the tune of 4,813 crore, which was unlike the buying activity seen in the month of December 2010
What should equity investors do?
Going forward we think as the U.S. is displaying signs of economic recovery as revealed by its promising GDP growth rate and reducing unemployment rate, some amount of me decoupling from the developed nations (especially the U.S.) can been seen till the upbeat economic mood in the U.S. continues. So, to simply put there would be a change in focus of investment destination from emerging nations to developed nations. In fact interestingly post the QEII announcement, India has not witnessed much FII inflows.
Also there seems to be shift in focus on commodities, rather than equities, which again is witnessed by the surging prices of commodities (especially gold and crude oil).
On the domestic front, following are the risks exposed.
• High Inflation.
• High Interest rates, which increases borrowing costs and postpones consumption.
• Political instability due to scams.
• Reduction in credit growth.
• High Fiscal deficit.
• Slow down in economic growth.
Our recommendation is to slow down in equities, and only make purchases every time a fall occurs in the market, which is a buying opportunity and also maintain and increase Systematic Monthly Investments(SIPs) for long term.
Ensure an allocation of 5-10% of your portfolio in silver and gold. This is more so, because of the ongoing debt crisis and fall in the dollar which should happen with the QE initiated by the US.
Debt Market update-
With high interest rates, and increasing pressure on yields, the best option for shot term investors, is liquid funds. If your time horizon is 3-12 months, investing in short term plans and floating rate funds is a good option.
To take advantage of high yields, investing in Fixed Maturity Plans(FMPs) with a duration of 12-15 months would also lock you in at a high interest rate, with tax free returns.
Refrain from investing in long tern income funds and govt securities which would be more sensitive to interest rate changes, until the next monetary policy due in March 2011.
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Dilshad Billimoria BBM, LUTCF CFPCM®,
Certified Financial Planner.
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