Market Technicals

S&P CNX Nifty 2849.50 +78.15(2.82%)

I had a good look at the Nifty charts today with a view to predict the next fall. As mentioned earlier, 2524 remains the level to watch and if this breaks, Nifty would head for the next big correction. If you look at the short term(3-months) charts, Nifty made a previous low of 3816 on 16th July 2008 and then entered a bull run within the bear cycle. The critical level of 3816 was breached on 6th Oct 2008. The next low of 2524 was made on 27th Oct 2008. Nifty made an attempt to breach this low on 20th Nov 2008 and closed at 2553.

I see a similarity in patterns between the two cycles, the one between 16th July - 6th Oct and 20th Nov - present. Going by this logic, the next fall(breaking support of 2524) should come within a month.

Viewpoint : Selecting Mutual Funds

I have often wondered if it makes sense selecting mutual funds for investment. Once you have marked your top 10 funds for investment based on ethics, values and actions, there is little difference between them. Have you ever wondered why a fund rated five-star a few months back doesn't even feature in the top 20 list today? Let me explain with an example.

Lets say, you bought Reliance during the month of Jan '00 with a 3-year view. For the period, you would have seen returns of 15-20% on the stock. If you extended your time frame by a few more years, you would have seen a compounded return of over 100% atleast! It is almost impossible to give a time-frame and a ranking of stocks which would give you an assured return within the expected time-frame! In the same way, it is impossible to predict if a fund would outperform within the time span of 3 years.

What one needs to view is the strategic fit of the fund in ones portfolio. Choose the best managed funds based on ethics, best practices(timely portfolio disclosures, transparency etc) and most importantly the funds(or fund managers) actions. If you aren't comfortable holding a fund with high PE multiple, portfolio structure or high equity allocation, you should refrain from investing in such a fund.

While one can rank funds in order of returns on a daily basis, note that the returns are not an indicative of future performance(the tag line at the end of every mutual fund advertisement has a deeper meaning!). While HDFC Tax saver doesnt feature in top 5 based on returns over a 3-year frame, it cant be written off as a non-performer. No rating can explicitly guarantee a funds future performance. The only guarantee is your comfort level based on the factors discussed above. For instance, I wouldn't like to invest in funds which make delayed portfolio disclosures and where I have little clarity on the fund managers actions. At the current stage, I would be comfortable investing in funds with greater cash/debt exposure as I believe this would be the best strategy for long term outperformance. Henceforth, it makes sense to select funds based on base parameters discussed above. However, to say, that one fund is better than the other or rate it in some way has no meaning!

One needs to hold patiently till the fund reaches an optimum sell value. If you have fixed your time frame, then your investment may not yield best benefits. For instance, while "ABC" fund may yield 100% returns over a period of x years, "XYZ" fund may yield the same returns over a different time frame. The compounded annual returns for both funds would be the same or marginally different, it is only the holding time-frame which varies.

In my previous articles, I have recommended funds based on my comfort level(looking at economic indicators and the fund managers actions) and hence does not say anything about the future performance of other funds which were not analysed. "Keep the return constant, not the holding time-frame for the chosen fund".

Market Technicals

S&P CNX Nifty 2846.20 +17.75 (0.63%)

Technically, we're very close to the next fall. I predict the fall to start after 27th January '09. It is to be noted that we're trading on very low volumes. Any positive movement with such little volumes is a critical warning.

Note: The date quoted is not an astrological prediction but a mere approximate after analysing medium term Nifty charts.

Market Technicals

NSE 2736.70 -98.60 (-3.48%)
Dow 8200.14 -248.42 (-2.94%)

Market fell on the back of heavy selling by European banks including UBS. The close below 2744.95(yesterdays close) is a negative sign. For the next few days, S&P CNX Nifty is headed down.

Dow is inching closer to its 10-year support of 7591. I suspect it is only a matter of time before this breaks signalling that this is the worst phase US has seen in a decade. The economy would take a while to recover, but US would probably lead the world in recovery and would be the first one. Investors need to look at key economic indicators like the industrial growth, housing data etc before investing in bulk. Selective investing for long term is certainly a wise thing to do at this stage.

Buy JK Paper

JK Paper NSE 15.55 -0.3(-1.89%)

With a PE of 2.84, BV of 49.3 and dividend yield of over 9%, there is nothing to dispute a buy on the stock.

Top ELSS buys - Short Summary

1. Magnum Taxgain [Relatively safe due to high cash exposure]
2. Reliance Tax Saver [Relatively safe due to high cash exposure]
3. Sundaram BNP Paribas Taxsaver [Like the overall portfolio structure except for the addition of Satyam during Dec '08]
4. Principal Personal Tax Saver [Good buy when market bottoms out. Avoid at this point]

Apart from the above, one can look at Kotak Tax Saver and Franklin Templeton TaxSchield for investment. I advice an SIP for six months duration(Jan '09-June '09) for better risk mitigation.

I'll review the performance of the recommended funds on a periodic basis.

Note: In terms of service, I dont rate Sundaram BNP Paribas MF too high. Their response time is one of the lowest in the industry(4 working days).

Analysis - ELSS Funds(Contd..)

My impending analysis on ELSS funds would help choose some of the best managed funds for investment. As the financial year ends, many would cram to invest in tax saving instruments like ELSS, insurance, PPF and Bank FDs. Many may feel it wrong to invest in equity at a point when the world is going through an uncertain phase. Well, I would say, this is probably a good time (if not the best) to invest. If you invested without fear during 2007 and early 2008, there is no reason why you shouldn’t in 2009 when the markets have shelved more than 60% of their gains. However, I would recommend a 20-40% investment in equity (or equity linked tax saving instruments like ELSS) for the current financial year depending on your risk appetite. The remaining should be invested in a mix of instruments like bank FDs(5yr), insurance or PPF.

I analyzed 3 funds in my previous analysis and would add some more here.

1. Fidelity Tax Advantage

I don’t like the fund for its undisciplined approach to important disclosures. They don’t seem to disclose their latest portfolio information as quickly as some of the prominent funds do. Their latest portfolio is dated a month back (30th Nov ’08) as on today. So, I am analyzing based on their disclosed portfolio available as on date.

Asset Allocation
As on 30/11/3008

Equity 87.58%
Debt 0%
Others 12.52%

The funds equity position is more or less unchanged from the previous month. The fund has reduced exposure in RIL (5.96%), HDFC (4.23%) and Infosys (2.39%) while added exposure in ITC (4.89%), Bharti Airtel (4.60%), SBI (4.18%) and HUL (3.77%). The fund has marginal exposure to Satyam. While I like the fund manager’s actions, I think the fund still has huge exposure to RIL. At this point, I am negatively biased on the stock. In my view, funds need to have very little exposure to oil refining companies when oil prices internationally are under tremendous pressure. RIL would face margin crunch and would probably report flat numbers. Given this, I would have liked if the fund manager exited the holding completely or maybe reduced the exposure to less than 2% of the portfolio. The fund manager has also not increased his cash exposure and hence wouldn’t benefit as much.

Investment Valuation Stock Portfolio

Portfolio P/B Ratio 4.01
Portfolio P/E Ratio 14.75

Even though the fund has reduced its P/B and P/E as compared to the previous month, both the ratios are on the higher side as compared to other funds analyzed here. Hence, I recommend investors to invest in small quantities (<10%)> Again, it’s important to note that I am comparing this fund based on November ’08 data whereas other funds mentioned here are based on December ’08 data. I’ll review again once the fund releases its latest portfolio structure.

2. Kotak Tax Saver

Asset Allocation
As on 30/12/2008

Equity 82.18%
Debt 8.85%
Others 8.97%
I like the significant cash/debt exposure of the fund. Debt would yield superior returns than equity in the short term.

The fund reduced exposure to Bharti Airtel (4.25%), ONGC (3.03%) and HUL (2.62%) while increasing exposure to RIL (3.45%), ICICI bank(3.013%) and HDFC Bank(2.97%). The fund introduced NTPC during the month.

Investment Valuation Stock Portfolio

Portfolio P/B Ratio 4.19
Portfolio P/E Ratio 15.13

The fund would do well when the market picks up. However, for the short term, I see more downside. The funds P/E and P/B are high as compared to other funds analyzed here. I recommend investors to invest in small quantities.

3. Magnum Tax Gain

Asset Allocation
As on 30/11/08

Equity 77.30%
Debt 1.34%
Others 21.36%

I am analyzing the fund based on November ’08 data as the fund has not declared its latest portfolio as on date. The fund has increased its cash exposure significantly. This is positive considering that call rates have moved up in the short term. In the medium term, the fund would gain by entering stocks at lower levels.

The fund reduced exposure to RIL(4.21%), HDFC(3.29%) and L&T(2.95%) while increasing exposure in ONGC(2.78%), Bharti Airtel(2.66%) and SBI(2.19%).

Investment Valuation Stock Portfolio

Portfolio P/B Ratio 2.45
Portfolio P/E Ratio 13.97

I am comfortable with the funds P/B and P/E ratio and believe the fund is well positioned to capitalize on every downside. The fund has been making the right moves and hence I recommend buying the scheme.

4. Principal Personal Tax Saver

Asset Allocation
As on 30/12/08

Equity 83.41%
Debt 0%
Others 16.59%

The fund is sitting on good amount of cash which is a positive. The fund has increased exposure to RIL (4.82%), ICICI Bank (4.03%), Jindal Steel & Power (3.54%) and Bharti Airtel (3.24%) while reducing exposure to Crisil (3.07%), Indian Bank (2.51%) and Pantaloon Retail (2.3%). The fund has introduced Infosys Technologies and Cipla during the month.

Investment Valuation Stock Portfolio

Portfolio P/B Ratio 2.33
Portfolio P/E Ratio 11.73

I am comfortable with the funds P/B and P/E ratio and believe the fund is well positioned to capitalize on every downside. The fund has been making the right moves and hence I recommend buying the scheme.

5. Reliance Tax Saver

Asset Allocation
As on 31/12/08

Equity 79.05%
Debt 0%
Others 20.95%

The fund is sitting on good amount of cash and is well capitalized to benefit through phased equity investments in a falling market. The fund increased exposure in SBI (5.86%), Areva T&D (5.71%), HUL (4.06%) and Triveni Engineering (3.8%) while reduced exposure in Cipla(5.54%), ICICI Bank(3.72%), Infosys Technologies(3.36%) and TCS(3.29%). The fund is making the right moves by reducing exposure to technology and depending on old economy stocks like SBI and HUL.

Investment Valuation Stock Portfolio

Portfolio P/B Ratio 4.24
Portfolio P/E Ratio 14.99


The funds P/B and P/E ratios are on the higher side. However, considering the cash levels of the fund, the fund is well poised to capitalize once the market stabilizes. Considering all factors, the fund is a relatively safe investment in a falling market and would be a value buy once the market stabilizes. I recommend buying the scheme.

Investors should make use of market volatility in the coming weeks/months to enter into schemes listed above. Some salaried investors may need to look at dates set by employers for tax-proof submissions and then decide on the time of investment. Ideally, the best time to invest would be closer to Nifty support levels. I have pegged medium term Nifty target at 1800.

Market Technicals

S&P CNX Nifty 2920.40 -192.40(-6.18%)

All important medium term support levels mentioned earlier still hold. On the monthly charts, 2857 is the level to watch for Nifty. If Nifty breaks this, then the next level to watch would be 2657. I maintain my bearish stance on S&P CNX Nifty.

Satyam fiasco

Satyam NSE 40.25 -138.7(-77.51%)

This day would probably marked in history. Satyam's scandal of not reporting factual numbers is a serious dent on companies of its size and holding. This too will pass, but there are some key takeaways:

- First and foremost, I have always said that it is important to integrate ethics with leadership. And this should happen right from the grass-root level. With each demanding circumstance, the credibility of leadership is tested. People irrespective of nationalities, geographies and races, need to understand the important of ethics. Everything else comes second.

- Mr. Raju's letter to the board cites no knowledge of the scandal on the part of senior management or board members. Its hard for me to believe that no one else knew about the scandal. It brings me to question the roles of Satyam's senior management including the CFO and some key people in important functions! What did the auditors do? Were they merely employed to sign the dotted line?

- At the grass root, it is clear from Mr. Raju's letter to the board that the fear of being taken over is the primary motive behind the scandal. First, what can companies do to prevent this? Well, I believe, promotors and associated parties need to have a majority stake if they want complete control of things. A minority stakeholder cannot assume total control at all times. If you look at companies like Infosys, the promotor holding is as low as 16.51%(as on Sept '08) whereas the public holds the majority. Institutional investors command a higher weightage than promotors. So, there is ample chance to fear a takeover in case of Infy. Even though, the current circumstances may not warrant such an event, the future looks uncertain. The bottom line is - If companies are averse to a takeover or merger, it is safe for them to have substantial promotor holding. If not, one must leave it to what the majority shareholder wants.

- I believe there are many more companies like Satyam who have fudged data. Companies need to pay heed to the warning and report factual data. If not, another "Satyam" among them isnt a distant probability.

This too will pass, but for Satyam, the road has come to the end within a few days! What took over 20 years to build has now collapsed like pins. Satyam would probably need to be re-branded after acquisition or otherwise.