Sunday, May 23, 2010

Weekly Market Outlook 24th-28th May 2010

Ambani brothers call for truce, cooperation

Ambani brothers --Mukesh and Anil -- on Sunday announced they would work to end their differences and create an environment of cooperation and collaboration between business their groups.
"All existing non-compete agreement between the two groups executed in January 2006 cancelled," said a statement from the Anil Ambani.
The statement comes within a few days of the Supreme Court declining to give any relief to younger brother in the gas dispute.
"A new, simpler non-compete agreement executed limited to only gas-based power generation. RIL (Mukesh) and RNRL (Anil) will expeditiously negotiate gas supply arrangement as per the Supreme Court order and hope to conclude negotiations very soon," it 


Short covering might push Nifty above 5,000 mark
Nifty continued its downward move this week after breaching the crucial 5,000 support level. It moved lower to test 4,850 levels later in the week but rebounded from here and managed to hold the important 4,900 support level by the end of the week. Nifty is expected to continue taking cues from global markets for its movement. Incase the global markets do not show any signs of recovery Nifty is expected to breach its immediate major support at 4,900 to test 4,850-4,800 level. A strong rebound can be expected anytime during the coming week due to short covering from the lower levels.

Stocks to Watch:
1) TATA Steel - Buy
2) ICICI Bank - Buy


Global woes continue to tow domestic market down, benchmarks down by more than 3%
Sentiments in the Indian markets continued to be dominated by global woes causing Nifty to dip below 5,000 levels. During the week, market did post some gains tracking Larsen & Toubro's optimistic guidance for FY11 and jump in oil major ONGC after the government more than doubled the price of natural gas produced from nomination blocks. However, sustained selling by foreign institutional investors towed the indices to lower levels. For the week ended May 21, 2010, FII sold equities worth Rs. 2,981.90 crores. Sensex wrapped the week losing by 548.99 points (or 3.23%) at 16,445.61 and Nifty at 4,931.15 down by 162.35 (or 3.18%). High volatility could be witnessed next week ahead of the expiry of the near-month May 2010 contracts on May, 27, 2010. Also the Indian Depository Receipt issue of Standard Chartered Bank will be focus next week.


US Treasury Secretary visiting UK and Germany to resolve the European economic crisis
Looking ahead to next week, the movement of global market would largely depend on the meeting between US treasury secretary and top economic officials of UK and Germany to heal the European economic crisis due to which euro has lost its shine. Weakness in euro has hampered the exporters all around the region. Further, the F&O expiry and some important macroeconomic data in the next week may push the equity markets up.


Bond price may remain firm on rising deposit with banks and falling confidence in Eurozone economy
Bond yields fell last week to a five and half months low tracking rise in US treasury price and surge in FII inflow into the debt market. For next week, government bonds prices are expected to remain as banks are required to park 25% of their outstanding deposit in government bonds which are already touching as all time high. Further, the diminishing confidence in Euro may push demand for government securities.


Crude could bounce back on expected rebound in Euro
Crude oil prices ended substantially lower for the week on the ongoing worries of global economy recovery. Crude price may rebound from last week's steep fall as Euro is expected to bounce back against the greenback. Gold prices fell during the week in line with the fall in other commodities. Gold prices may continue to fall in the coming week as investors would move from safe investment options like gold to equities on the speculation that equities market may rise.





Weekly Index Snapshot: Corrective up-move possible in indices


The continuing sovereign debt crisis in Europe saw the euro hitting new four-year low against the dollar and increasing US jobless claims forced the global equity market to finish the week lower. Investors started to shift from riskier assets to safer ones as the global pressures mount relentlessly.
Nevertheless, the US and European markets rebounded from intra-day lows on Friday, its biggest decline in a year, as traders speculated that markets may have plummeted excessively in the week.
The euro also recovered and made its first weekly gain against the dollar in six weeks.
Brazil's benchmark index Bovespa stock index bounced the most among the emerging equity markets.
Sensex (16,445.6)
Despite a smart recovery from its intra-day low of 16,551 and closing at 16,835 on Monday, the Sensex failed to sustain that level in the subsequent trading sessions. Inability to move above 17,000, a psychological resistance level subsequently makes this level an important resistance to watch out in the near future.
Further, a 2.7 per cent fall led to the penetrating of the 200-day moving average on Wednesday and also the immediate support level of 16,500. This signals strengthening of the short-term downtrend. Overall, the index fell by 549 points or 3.2 per cent.
Since the early April peak of 18,048, the Sensex has been on a short-term downtrend. We understand that the index is currently testing the key support level of 16,440-16,500 zone, as it managed to get better from its intra-week low of 16,187.
There is an increase in volume traded in last three trading sessions and weekly volume also increased the most since second week of March.
The 14-day relative strength index has entered into the bearish zone from the neutral region early last week and is hovering at 34 levels. The 14-week relative strength index is slipping towards the bearish zone in the neutral region, 40-60 levels. This implies that the downtrend trend is getting strength.
On the other hand, the index is testing the lower boundary of the Bollinger Bands implying that a bounce is possible in the near-term.
Hence, we don't rule out a corrective up move to 16,743, where the 200-day moving average is positioned and a move above this level, can take the Sensex higher to 17,000 levels in the upcoming week.
To mitigate the short-term downtrend the Sensex has to move beyond 17,330. A reversal from 200-DMA or from 17,000 would be mean resumption of the short-term downtrend and the Sensex can test 16,200 or 16,000 in the medium-term.
Nifty (4,931.1)

The Nifty retreated 162 or 3.2 per cent over the previous week. In line with the Sensex, the Nifty also recovered from intra-week low of 4,842 on Friday. This recovery has led to the formation of a hammer pattern in daily candlestick chart, signalling a near-term reversal.
Moreover, Nifty testing lower boundary of the Bollinger Bands and the daily Stochastic Oscillator reaching the oversold levels also project a near-term corrective up move.
The Nifty can head higher to 5,000 and then to 5,100. A reversal from either level would pull the Nifty lower. The immediate key supports the Nifty can test are 4,850 and then 4,750.
A move above 5,150 would negate the short-term downtrend that has been in place since early April peak of 5,400.
Last week the S&P CNX 500 (4,101.6) index slipped 135 points. After testing our support level of 4,070, the index rebounded strongly on Friday. The index stays in the short-term downtrend that started from April. However, presence of strong medium-term support at 4,050 and 4,070 range signals that the downtrend could be arrested in the near-term. The immediate supports are at 4,050 and 3,975. Key resistances are at 4,150, 4,200 and 4,250 levels.
Global Notes
Both the US Dow and S&P 500 index tumbled 4 per cent last week. Japan's benchmark Nikkei 225 index plunged more than 6 per cent.
Among commodities, gold tumbled $57 an ounce or 4.6 per cent last week following its life-time high of $1248.8. Crude was very volatile last week. It plummeted as much as 10.3 per cent to intra-week low of $64.2 a barrel before rebounding to close at $70.

Pivotals
Reliance Industries (Rs 995.7)
In line with our expectations, RIL slipped below Rs 1,020 and reached the lower boundary (Rs 990) of the short-term sideways consolidation range given last week. After tumbling almost 5 per cent last week, the stock is testing an important support zone of Rs 990 and Rs 1,000. A stronger decline below of Rs 990 can pull the stock lower to Rs 966, which is the lower boundary of sideways consolidation range. This level is also a crucial medium-term trend deciding level.
An emphatic fall below Rs 966 would imply that RIL is heading for a medium-term downtrend and in this scenario, it can fall to Rs 910 in the forthcoming weeks. However, as long as the stock trades above Rs 966 we reiterate our medium-term forecast of sideways consolidation in the range between Rs 966 and Rs 1,150. Short-term trader should tread cautious at this point. A move above the immediate resistance of Rs 1,050 is required for initiating fresh long positions. Next resistance is at Rs 1,100.
State Bank of India (Rs 2,271.5)


The stock achieved our first target of Rs 2,150 on Monday, touching intra-day low of Rs 2,141. Thereafter, the stock bounced up and was volatile for rest of the sessions. It however managed to finish with 2.2 per cent gains. The short-term trend has been sideways for the stock, ranging between Rs 2,200 and Rs 2,320 since late April.
As the stock is facing significant long-term resistance band of Rs 2,300-2,320 once again, inability to break though would result in a sideways movement. A decisive move above Rs 2,320 can take the counter higher to Rs 2,380 and then Rs 2,450. On the other hand, a dive below Rs 2,200 will see the stock re-test its key support at Rs 2,150 and then at Rs 2,100.
Tata Steel (Rs 509.4)
Tata Steel declined, as anticipated last week, to our price target of Rs 500. The stock ended lower in last five successive weeks, with 7 per cent decline in the previous week. Volume trades were above average in all 5 trading sessions last week, which signals a cautious note. The medium-term trend is down for the stock since its April 15 peak of Rs 701. As long as the stock trades below Rs 610, the trend remains down. However, we don't rule out a near-term pullback rally or a corrective up move to its immediate resistance level of Rs 530 or to Rs 558, as the stock has fallen steeply and is testing key support at Rs 500.
Failure to move beyond Rs 530 can pull the stock down to Rs 500. Supports below Rs 500 are Rs 472 and Rs 446.

Stock Strategy: Consider going long on Triveni Engg
Triveni Engg (Rs 98.4): The stock has been in a downtrend. As long as it stays below Rs 125, the outlook would remain negative. However, after a recent fall in May, the stock hit its crucial support and bounced back. It appears the stock could sustain this pull back. It has an immediate resistance at Rs 107-109 levels and may test this level in the current pull back rally. However, a close below Rs 90 can take the stock lower to its next support at Rs 76.
F&O pointers
Triveni Engineering May futures (lot size: 3,850) added open interest on Friday, indicating accumulations of fresh long positions, despite the expiry being round the corner. Options however weren't that active. Rollover of open positions is very low, indicating that traders may not be willing to bet for longer term on the counter.
Strategy: Traders can consider going long on Triveni Engineering with a stop-loss at Rs 90 and for a target of Rs 109.
Shift the stop-loss to Rs 104, if the counter crosses that level so as to protect the capital.
Unitech (Rs 69.2): We expect the stock to move in a narrow range, around Rs 70. The stock has been in a downtrend after touching Rs 87 in April. It now finds crucial support at Rs 66. A fall below its key support level could drag it down to Rs 55. Only a close above Rs 83 would change the short-term outlook to positive. In that event, it has the potential to reach Rs 115.
The counter added open interest on Friday, despite weak closing. This indicates accumulation of short positions. Trading in futures and options presents a neutral trend, as both call and put shed open interest. Unitech futures (market lot 4,500) saw a moderate rollover of 22 per cent.
Strategy: Traders can consider setting a short straddle on Unitech by selling both 70 call and put of May. While call closed at Rs 1.45, the put ended on Friday at Rs 2.40. This strategy is valid only for first two days. It also involves margin commitments from traders. While the maximum profit is the premium collected, the loss could be unlimited, if Unitech swings decisively in one direction (either up or down). The maximum profit will be generated if the underlying hovers around Rs 70.
Follow-up: Last week we had advised traders to consider going short on Cairn India and Ashok Leyland. Both the recommendations have hit the projected target.

Sizzling Stocks

ABB (Rs 827.3)
ABB had a spectacular start last week following the announcement of the parent making a voluntary open offer to shareholders of ABB. The stock jumped 29 per cent to an intra-day high of Rs 869 on Monday and finally ended the day's session with 23.5 per cent gains. The volume traded was extra-ordinary and this upward reversal is supported by a positive divergence displayed in the daily relative strength index. The stock concluded the week with almost 23 per cent gains.
The stock has been on an intermediate-term sideways consolidation from June 2009 in a broad range between Rs 650 and Rs 875. The stock is currently trading just below the upper boundary. An emphatic close above Rs 875 can take the stock higher to Rs 1,000 in the medium-term. Medium-term investors can initiate fresh purchase above Rs 875 with stop-loss at Rs 795. However, inability to surpass Rs 875 would drag the stock lower to Rs 750 or Rs 700 in the medium-term. Investors with long-term horizon can stay invested with a deeper stop-loss at Rs 640.
Educomp Solutions (Rs 484.8)
The stock crashed by Rs 119 or 20 per cent over last week. Since October 2009 peak of Rs 1,017, the stock has been on an intermediate-term downtrend. Following the penetration of an important support level of Rs 650 in the second week of May, the stock's downtrend got accelerated and witnessed sharp falls. The stock is trading slightly above one of its long-term support range of Rs 430 and Rs 450. The daily relative strength index, which has reached oversold region, is at 14.9 levels. Investors with high risk taking ability and medium-term perspective can make use of declines to buy the stock with stop-loss at Rs 430 and target of Rs 555.
Longer-term investors can consider staying invested in the stock with deeper stop-loss at Rs 394 and target of Rs 600 and then Rs 650. —
Strong & Weak stocks FOR 23rd May Monday 2010
This is list of 10 strong stocks: 
Pir Health, Federal Bank, Hind Petro, ABB, ONGC, Indusind Bank, Tata Tea, BPCL, Dr Reddy & Glaxo. 
And this is list of 10 Weak Stocks: 
Aban Off shore, Educomp, RNRL, Hind Zinc, MTNL, Moser Bear, JP Associates, HDIL, Triveni & Punj Lloyd.
The daily trend of nifty is in downtrend 

SPOT/ CASH INDEX LEVELS FOR 23rd May Monday 2010

NSE Nifty Index  4931.15 ( -0.33 %) -16.45      
123
Resistance4971.135011.12   5075.53  
Support4866.734802.32 4762.33

BSE Sensex16445.61 ( -0.45 %) -74.07      
123
Resistance16559.2216672.84 16858.93
Support16259.5116073.42 15959.80



FII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores)
CategoryDateBuy ValueSell ValueNet Value
FII21-May-20101831.383371.7-1540.32

DII trading activity on NSE and BSE in Capital Market Segment(In Rs. Crores)
CategoryDateBuy ValueSell ValueNet Value
DII21-May-20102053.481236.56816.92


SUPPORT & RESISTANCE LEVELS FOR MONDAY

Company Name  Exchange LTP* R1 #1 S1 @1 R2 #2 S2 @2 R3 #3 S3 @3
Aban Offshore Ltd. NSE 681.00 695.12 658.47 709.23 635.93 731.77 621.82
ABB Ltd. NSE 827.70 832.97 819.47 838.23 811.23 846.47 805.97
Educomp Solutions Ltd. NSE 484.90 499.43 470.93 513.97 456.97 527.93 442.43
Federal Bank Ltd. NSE 312.10 317.13 305.73 322.17 299.37 328.53 294.33
GlaxoSmithkline Consumer Healthcare Ltd. NSE 1619.85 1653.18 1563.28 1686.52 1506.72 1743.08 1473.38
Hindustan Zinc Ltd. NSE 970.80 1001.77 918.07 1032.73 865.33 1085.47 834.37
IndusInd Bank Ltd. NSE 185.60 192.45 180.90 199.30 176.20 204.00 169.35
Mahanagar Telephone Nigam Ltd. NSE 56.40 57.38 54.73 58.37 53.07 60.03 52.08
Mahindra & Mahindra Ltd. NSE 538.35 551.77 515.07 565.18 491.78 588.47 478.37
Moser Baer India Ltd. NSE 58.40 59.95 55.70 61.50 53.00 64.20 51.45
NSE Index NSE 4931.15 4971.13 4866.73 5011.12 4802.32 5075.53 4762.33
Piramal Healthcare Ltd. NSE 502.75 572.42 460.57 642.08 418.38 684.27 348.72
Punj Lloyd Ltd. NSE 131.95 134.47 128.27 136.98 124.58 140.67 122.07
Punjab National Bank NSE 990.20 997.58 982.08 1004.97 973.97 1013.08 966.58
Tata Motors Ltd. NSE 709.85 723.93 686.13 738.02 662.42 761.73 648.33
Tata Steel Ltd. NSE 509.25 519.07 493.37 528.88 477.48 544.77 467.67
Tata Tea Ltd. NSE 1098.15 1112.37 1074.47 1126.58 1050.78 1150.27 1036.57
Triveni Engineering & Industries Ltd. NSE 97.80 101.17 92.22 104.53 86.63 110.12 83.27
   *LTP stands for Last Traded Price as on Friday, May 21, 2010 4:05:04 PM
    #1R1   stands for Resistance level 1                         @1S1   stands for Support level 1
    #2R2   stands for Resistance level 2                         @2S2   stands for Support level 2
    #3R3   stands for Resistance level 3                         @3S3   stands for Support level 3
    
    The levels given above are with respect to previous closing price on the NSE / BSE. 
Metals: Sheen dulled by global slowdown


In the backdrop of metals hitting a weak seam, here's a look at the prospects for investors in aluminium, copper and zinc stocks.




Just when everything about the global economy seemed to be dandy again and the world seemed well on its way to buying new cars and refrigerators, and building roads, ports and rail-lines in a trend that raised the hopes of miners and metal producers, last month has been a rude shock. Prices of aluminium, copper and zinc are down by 18, 17 and 26 per cent in just over a month. The Indian BSE Metals index is also down 20 per cent in the same span.
With early signs of China hitting the brakes and Europe running into a tree, thanks to Greece, everyone is getting jittery and sceptical again. Is the panic warranted? Is this the right time to dive in and buy metal stocks? Here's a look at the prospects.
ALUMINIUM
The outlook for aluminium can be summed up in one word: overcapacity. With China's capacity of 18 million tonnes of primary aluminium far exceeding the 13 million tonnes of production, reports indicate heavy stockpiling of aluminium in warehouses across China through the first quarter of 2010.
With stimulus spending underway, China imported 1.4 million tonnes in 2009, however it is expected to become a net aluminium exporter in 2010, a situation which is likely to keep global prices under check. Aluminium prices, which currently stand at $2,000/tonne, are up 60 per cent from the lows of early-2009 but are still well below their late-2008 peaks of $3,300. A further recovery in prices is hampered by the substantial capacity overhang.
Globally, capacity additions in the Middle East and China, among other locations, are expected to add 8 million tonnes of capacity over the next four years, adding fuel to the over-capacity fears. All this does point to a weak price scenario for aluminium, especially if the Eurozone recovery or Chinese demand come into question. LME warehouse trends also show a build up in aluminium stocks in recent months with about six million tonnes of aluminium inventory stocked away globally.
In a weak global scenario, Indian aluminium-makers appear slightly better placed. India has a total capacity to produce 1.3 million tonnes of finished aluminium, with Hindalco, Sterlite (including Vedanta Aluminium) and Nalco accounting for almost all the capacity. Indian aluminium majors have a distinct advantage of own mines with high quality bauxite ore and captive power, one of the high-cost components in aluminium production.
These advantages make them among the lowest-cost producers of aluminium in the world. Indian finished aluminium production is expected to more than double by 2012, through a combination of brownfield and greenfield expansions by the existing players. However, import fears that cap the upside of several other industries loom in aluminium as well.
India's only large pure-play domestic aluminium exposure is Nalco, which has enjoyed stellar operating profit margins of 50 per cent since FY06. But strong prospects seem to be priced into the stock, whose P/E stands at a huge premium to most other commodity stocks (226 times trailing earnings).
Nalco's cost structure may be impossible to dent, but its realisations are globally linked. However, its more reasonable price, thanks to plenty of cash, low debt, high-quality mines and robust business model make Nalco the preferred exposure in the aluminium space. The company saw its net profit margins have between 12 per cent at the bottom of the cycle and 37 per cent at the top (FY07), which is in contrast to several global aluminium majors.
COPPER
Copper has the most sanguine outlook among the three metals under consideration. According to the International Copper Study Group, close to 18.5 million tonnes of copper is likely to be produced in 2010, against the demand for 17.9 million tonnes. The close to 600,000-tonne overhang is expected to be halved in 2011, as demand is expected to outpace supply.
The overhang is reflected in copper prices correcting only 17 per cent over the past month (currently at $6,600/tonne), they are only 25 per cent lower than the pre-crisis peaks of mid-2008. Global inventory levels, indicated by LME stocks, have remained low and are not of much concern yet. Globally well-dispersed smelter capacity will, however, keep competition tight.
In India, copper smelters, which process copper concentrates into usable copper, produce over 640,000 tonnes of the metal, while domestic demand stands at around 520,000 tonnes. Demand, which grew at 5.3 per cent in 2009, is expected to further accelerate to 7 per cent because of demand from the power and automotive sectors. Hindalco and Sterlite are two major domestic copper producers accounting for almost the entire domestic capacity.
With Sterlite planning to almost double capacity, the scenario is likely to mirror international the overhang. The lack of domestic sources for copper concentrates despite adequate domestic copper reserves is a major hindrance. The massive shortfall is bridged by importing concentrates from top producers such as Chile, Australia and Peru, among others.
Hindalco's Indian operations provide exposure to both copper and aluminium. The standalone business boasts of very healthy margins and a robust business model, but the overseas Novelis arm, which may yet add long-term value to the business has not done the same for the stock.
Uncertainty in one of its major markets, Europe, and snail-paced recovery in another — the US — has marred its operations. While Novelis may prove a good play in the long run, the price paid in 2006 is likely to haunt Hindalco for the next two to three years. Hindustan Copper has had a stellar run (rallying close to 150 per cent) in a year, but its volatile operating margins and limited float make it a wait-and-watch candidate.
ZINC
The outlook for Zinc is possibly the most dicey call of the three metals, considering how closely tied it is to the steel and the Chinese cycle by virtue of one of its largest applications being in the galvanised steel segment. About 12.4 million tonnes of refined zinc is to be produced in 2010, which is 400,000 tonnes more than the expected demand of 12 million tonnes.
Here again, if the fears of dampened Chinese demand and a dipping Eurozone offtake kick in, demand could fall well short of supply. Zinc prices stand at just under $2000 a tonne, up 82 per cent from the lows of 2008 but well short of the peaks of late 2006-early 2007, which were north of $4000 a tonne.
India's largest zinc producer is Hindustan Zinc. The company recently acquired the zinc assets of the Anglo-American mining group, taking its total production to just under 1.5 million tonnes of mined zinc With brownfield steel capacity additions underway and the demand for cold-rolled galvanised steel products remaining buoyant, Hindustan Zinc has a solid home market to bank on.
However, the global overcapacity scenario is likely to keep realisations on a tight leash in the event of a slowdown. The company's high margins could take a hit with the recent acquisition of Anglo-American's zinc mines At just under 10 times its earnings this company may turn out to be a good buy, even given the murky outlook for zinc, considering the quality of underlying assets and a dominant market position. The domestic outlook for steel, and thus zinc demand, is far more stable than the global one.


Focus on debt, equity & gold
Financial Planning.



I will be retiring in 10 years. My family comprises my wife, father (72) and a son in Class VII. Our investments are spread across bank fixed deposits (48 per cent), corporate fixed deposits (6 per cent), direct equity (13), Govt securities including PPF (18), debt mutual funds (11) and the balance in the form of land. My investment is Rs 20 lakh in all these. Anticipating changes in interest rates, all our deposits are invested in schemes of less than one year. Mutual fund investment in equity is from debt (floating rate and short term) through STP over 1-3 years.
We have two flats – one self-occupied and the other let out. The let-out house has a home loan liability of Rs 16 lakh. Seven years of the loan is left. About 70 per cent of the EMI is met through rental income; net of this our current EMI outgo is Rs 30,000.
Our monthly expenses including school fees and EMI is Rs 30,000. After meeting all our expenses we have a monthly surplus of Rs 1 lakh.
Our current concerns are: For my son's education at today's cost I would require Rs 25 lakh for a basic professional course combined with a good MBA. How much should I save on monthly basis to reach this goal? Our total investment is Rs 2.65 crore this includes our investment in two residential flats and other assets of Rs 20 lakh. Do we need further diversification across assets? We have a moderate risk profile. I do not have any employer sponsored pension. For my standard of living, an inflation adjusted income of Rs 20,000 will be sufficient. Our health status is good and we expect a minimum life expectancy of 75 years. Suggest investment avenues to build retirement corpus for the next 10 years. We have two life insurance policies with sum assured of Rs 5.3 lakh maturing in 2015 and 2026. As I am covered by group health insurance provided by my employer, I have no separate medical insurance and I do not intend to increase the insurance cover for life and health.
Name withheld on request
Solution
A common trend witnessed over the last 5-8 years is that retail investors put a lot of money in real estate. The distribution of asset allocation for real estate is 50-70 per cent of their total investment. Your asset allocation too is in line with this trend.
Even after considering your moderate risk profile, your exposure to equity is very miniscule. As you have another 10 years for your retirement it is better to step up your allocation to debt, gold and equity rather than real estate. We have suggested a portfolio with relatively less risk profile based on your current standard of living and surplus.



Most of your goals can be achieved without taking higher exposure to risky assets such as equity.
Education
The milestone year for undergraduate education is 2016-17. The present value of Rs 15 lakh inflated at 6 per cent the sum required at the start of the UG course will be Rs 20 lakh. As the undergraduate goal is short term, asset allocation suggested is 50:50, in debt and equity.
Assuming tax adjusted return on debt is 6 per cent and 15 per cent in case of equity (based on your comfort you can structure between direct exposure and mutual funds); the average return works out to 10.3 per cent. If you can save Rs 25,400 for 60 months you can reach the education goals well in advance. Even if you fall short of target by 2016, the amount can be achieved as the outflows would be spread over at least the next three years.
The other cushion in your case is that the maturity of children's plan is close to your goal. For MBA if the present value of Rs 10 lakh is inflated at the above-mentioned rate till 2020, you will require Rs 18 lakh and to achieve this you ought to save a monthly sum of Rs 8,600 assuming similar returns as your first investment.
Pension
The present monthly requirement of Rs 20,000 or Rs 2.4 lakh per annum, inflated for 10 years at the rate 8 per cent (6 per cent assumed for inflation and 2 per cent accounted for increase in standard of living) would mean that you would require an annual income of Rs 5.2 lakh at the age of 60.
Considering your present state of health, we have presumed your life expectancy as 80 years rather than 75 years as stated by you.
If you have a corpus of Rs 1 crore at the start of your retirement, it will suffice for the next 20 years provided you earn interest adjusted for inflation and standard of living.
To accumulate the pension fund you need to save Rs 48,000 for the next 120 months at a return of 10.3 per cent. Alternatively if you plan to utilise the rental income as part of pension needs, then monthly saving will come down by more than 50 per cent assuming your rental income grows at a rate of 10 per cent for every block of five years. If you do so, the monthly surplus will be close to Rs 40,000 after meeting the investment needs for other goals. The same can be used judiciously to build an estate for your son.
For this investment you can have asset allocation mix of 50:40:10 in debt, equity and gold in that order.
Insurance & MF
It is surprising to see such a large portfolio without a term insurance. Considering your goals and liability you definitely need at least a decreasing term insurance for Rs 50 lakh. Regarding the health insurance you may be covered under the group health insurance, but once you retire you are exposed to the vagaries of health. Hence it's advisable to take health insurance at least 4 years before retirement to cover any pre-existing disease.
Your investment in HDFC Top 200 is a good choice. You can consider DSPBR Equity Fund ahead of the HSBC Equity to build your MF portfolio. Both the Reliance Schemes you have mentioned are performing well; you can continue your SIP.


'Very few fund managers can consistently beat the index'


We all assume that investors come to us so that we shoot the lights out! But a vast majority of investors want just a bread-and-butter return that is substantially higher than other fixed-income options. Everyone wants to drive a Ferrari, but when it comes to driving on Indian roads, we all plump for a Maruti.




KRISHNAMURTHY VIJAYAN, MD AND CEO, IDBI MUTUAL

In an interview , Mr Krishnamurthy Vijayan, IDBI Mutual's Managing Director and CEO makes a cast-iron case for why Indian investors should choose an index fund over so-called actively managed ones. He argues that beating the index is getting more difficult even for seasoned managers. The high churn in the mutual fund industry and the difficulty of predicting who will win make index funds the simplest solution for investors.
Excerpts from the interview:
Why has IDBI Mutual Fund started out with an index fund instead of an actively managed one? You were talking about the feasibility of having a wholly index-based fund house in India. Can you explain that?
It is my view that today, very very few fund managers are able to consistently add value to the index. A good number of fund houses have shut shop, moved on. Then, as the Indian market has become more and more efficient, the number of active funds outperforming the index is declining. The margin of outperformance too is diminishing.
We wanted to start off with a flagship Nifty fund because Nifty stocks account for around 60 per cent of the traded volumes. It provides sufficient diversification to investors, covering 50 stocks from 22 sectors. And the index itself is actively managed by competent people who apply liquidity and quality parameters to select the best of breed stocks.
Why should the investor settle for index returns, when some equity funds do much better?
Let's look at it this way. There are 64 fund houses that have, at various times, obtained mutual fund licences in India. Of those, about 22 have, in one way or another, exited the business. And of these, I would say only 4-5 funds have consistently delivered good returns. The rest have been mainly flashes in the pan — one good year, a couple of bad ones, and so on.
For the investor, this causes a lot of post-purchase dissonance. He buys a fund and sees the market going up, but his fund's NAV remains below Rs 10, sometimes for years. When the Indian market was in its early stages, a select club of individuals could make outsized returns based on information not generally available to the public.
As markets became more efficient, information came into the public domain, the disclosure rules also became more stringent. That still allowed room for professional managers to do better. But today, when there is a large mass of humanity armed with information, outperformance becomes very difficult.
For the investor, the dilemma is who is this person who is good enough to outperform that market? And am I willing to take the incremental risk required to get that outperformance? The average investor's answer would be 'No'. When you can get a good average return that is superior to other options in the market such as debt instruments, that should be enough. Given that the index in India is consistently delivering a 20-25 per cent return, it thus makes sense to pick up an index fund.
Over the past few years, the proportion of active funds doing better than the index has been at 70-80 per cent. Only in 2009 did that drop to 60 per cent. Will active funds really find it difficult to do better than the index over the next few years?
My view is that not only will the incidence of underperformance continue, but that it will increase! First of all, even 60 per cent is not a great proportion. Two, these numbers are influenced by a survivorship bias, where funds that disappeared or have languished are simply not taken into account.
Three, research shows that, in any given year, the fund that gets the maximum fresh money is the top performing fund for the preceding year. Surprisingly, that fund is never the top performer over the next few years. Funds are typically able to make it to the top when they are tiny, but revert to mean when they become larger!
The category average returns that you see for equity funds are also misleading. Divide funds into quartiles based on returns and you will find that the index is looking much better than a good number of the active funds. Above all, we should look at what the investor wants. We always assume that the investor comes to us so that we shoot the lights out! But the fact is a vast majority of investors want just a bread-and-butter return that is substantially higher than prevailing fixed interest options. Everyone wants to drive a Ferrari, but who really buys one? When it comes to actually driving on Indian roads, we all plump for a Maruti!
I think the core portfolio of an investor only needs to be in bluechip stocks built up over a period of time. That is where an index comes into play. That is why every pension fund making a foray into a new market only takes an index exposure. Thirty or 40 years down the line, fund houses of today may not be around and neither will the fund managers, but the indices will still be around.
With SEBI trying to reduce the cost structure in the mutual fund business, there appears to be a shift to low-cost products. Are index funds also in line with this objective?
When there is very low premium to active management, the only way to deliver good returns to the investor is by reducing the management fee. By reducing the fee from 2.5 per cent (for active funds) to 1.5 per cent (for index funds), the investor gets an effective 40 per cent discount.
If you look at any diversified equity fund, about 70 per cent of the holdings are in index stocks. Where holdings are substantially outside the index, the funds don't weather market declines very well.
If investors need to buy the index, why not Exchange Traded Funds? Why have you used the open-end structure instead? Open-end index funds in India seem to have a very high tracking error.
The tracking error on Indian index funds has arisen largely because they either take cash calls or derivative calls and not because of their structure. You see, fund houses in India are psychologically active managers of money. The moment you take the leeway to be active, you tend to take on these calls.
To be completely passive, you need a lot of discipline. ETFs have a few disadvantages. One, today, the market for ETFs is quite small, as people like to buy from the issuer. The impact cost of buying an ETF (from the market) is high. Two, for a retail investor it is best to invest in the markets through a SIP, you can't do this in an ETF.
Three, upfront loads have been banned on mutual fund products. Yet while buying an ETF you will be paying an upfront brokerage. Internally, we have set a guideline that the tracking error on the IDBI Nifty Index Fund should be less than 1 per cent on the Nifty. We are also consciously adopting the Nifty Total Returns index as our official benchmark to factor in dividends.
Europe crisis may tell on StanChart public issue
Standard Chartered Plc may raise a lower amount of money from its upcoming issue of Indian Depositary Receipts (IDR) than when it announced the issue last week.
The 24-crore share issue, which opens on Tuesday, will have its price benchmarked against the closing price of the bank's scrip on the London Stock Exchange on Friday. The price band for the issue will be announced on Monday.
The bank's share price has slipped close to six per cent from a week ago, falling from £17.1 on May 13 to £16.09 at close on Friday.
The bank said it plans to raise between $550 million and $750 million through the issue (Rs 2,530-3,450 crore taking $1=Rs 46).
Since 10 IDRs constitute one share of Standard Chartered, the price of one IDR (assuming it on par with the LSE price), works out to £1.6.
At this price, one IDR of the bank should be priced around Rs 107 (£1=Rs 67), and the proceeds from the IDR issue would work out to Rs 2,568 crore. The crisis worsened last week in Europe where all the key markets took a beating. London's FTSE 100 dipped nearly eight per cent during the period.
Merchant bankers to the Standard Chartered IDR issue are, predictably, worried about this. "The price will be decided over the weekend. We will be keeping in mind the current market scenario and announce the price on Monday morning," said an official with a merchant banker to the issue.
One of the other merchant bankers said that the price band "need not be fixed at a premium to the price on LSE."
The price of the IDRs cannot be fixed at a high premium as that would give rise to arbitrage opportunities, say merchant bankers.
"The price will have to shadow the price on the LSE to avoid arbitrage opportunities which could arise due to difference in price on LSE and the Indian exchanges.
"A lot of hedge funds would take advantage of such differences," said the head of equity at an investment bank.
The pricing will largely be in line with the price of the listed stock in LSE. It is a fairly liquid stock and listed in two markets, London and Hong Kong.
When an Indian company raises funds through an ADR (American Depository Receipts) or a GDR (Global Depository Receipts), the price band is generally in line with the Indian stock price, said the head of research with a broking firm.
Along with timing of the bank's public issue in India, market men said that one more hurdle to the issue will be in the form of 100 per cent upfront margin money requirement for qualified institutional buyers (QIB). SEBI has asked QIBs to pay 100 per cent of the value of shares in all new issues at the time of application for IPOs from May 1 onwards.
Till May 1, QIBs were required to pay only 10 per cent of the total value of the shares at the time of application.
A merchant banker with the issue expressed concerns that this is one of the biggest worries for the issuer, even bigger than the current market conditions.
Mr Jagannadham Thunuguntla, Head of Equity at SMC Capital said that the issue might sail through but the bank may not be able to raise as much as it had hoped for. "This will be first public issue to happen after the change in rules from May 1. It will be interesting to see how the issue will shape up."


Over-reacting to short-selling?


Since short-selling helps in better discovery of prices, an artificial curb on such transactions might only further volatility.

Those of you who have been actively tracking equity markets for a while would agree that sometimes markets seem to just need an excuse to react to a piece of news — knee-jerk reactions that either drive stocks to new highs or cause them to fall flat.
This tendency to typically overreact to news may explain why equities, the world over, gave a big thumbs up to the Eurozone crisis loan package of over $1 trillion, while uniformly swooning following Germany's ban on naked short sales! Wondering what's with the hullabaloo on a ban on short sales and why it rattled markets worldwide? Read on.
First, the brass tacks. So, what exactly is short-selling? Well, short sale refers to transactions where investors sell a security in the financial markets hoping to buy it back when its falls. It is different from the typical 'long' market transactions where investors buy securities in the hope of price appreciation.
Nonetheless, both transactions involve transfer of the underlying securities from the seller to the buyer. Naked short-sales, however, are a tad different.
While in this too the seller makes a bet that the security concerned (stocks or bonds) will fall in price, here, the seller initiates the transaction without actually having the security to back it up. So, in naked shorts, the seller is essentially selling the security he/she doesn't possess, without first borrowing it or even ensuring that it can be borrowed.
German intervention
In an effort to bring some stability to European bond markets, the German Regulator recently put a ban on naked shorts of euro-denominated government bonds and credit default swaps based on those bonds (financial derivatives that are used against losses if a borrower defaults on its debt, or to speculate on the borrower's credit quality).
The regulator also banned short sales in shares of the country's 10 leading financial institutions. This ban will run up to March 31, 2011.
Interestingly, some European leaders had been for some time indicating the need for some form of regulation of naked short-selling. Some had even aired their complaints about how speculators had used credit default swaps on Greek Government debt to bet that the country would default on its borrowings.
While it is difficult to ascertain if this pressured the Greece to take refuge in the bailout money, Germany's move seems to second the opinion that speculators have been using CDS contracts to place bets on the creditworthiness of a country. The move is largely to bring in a temporary reprieve to the ailing credit markets there.
Snowball effect
Wondering how exactly an isolated move such as this managed to spook markets worldwide? Well, for one, Germany's ban on naked shorts raised concerns that other countries too might follow suit. And mind you, the concern isn't exactly unfounded.
In September 2008, around the time when the global credit scene was at its worst, UK Financial Services Authority had taken a similar step, imposing a four-month ban on short-selling of financial stocks. It was soon followed with similar measures by national market watchdogs in Australia, Portugal, Ireland, and even the US.
An interesting sidelight — it was perhaps the Securities and Exchange Commission of Pakistan that first felt the need to ban short sales that time; it had in June 2008 itself put a one-month curb on short sales. It had, however, also tinkered with the stock market circuit limits, revising the upper limit to 10 per cent and the lower circuit limit to a mere 1 per cent!
But if the ban is aimed at containing speculative sell-offs, why should markets react negatively to it?
Though the move will help stall speculative sell-offs against euro-denominated government bonds and select financial stocks, it is largely the perception that such bans are in essence inconsequential that seems to have triggered widespread selloffs.
While this again is difficult to substantiate, there are research papers that point to the futility of such exercises, citing past instances where such measures have done little to restore equilibrium to turbulent markets.
Further, since short-selling helps in better discovery of prices, an artificial curb on such transactions might only further volatility.
Also, eliminating short-sellers may only add to the woes as this may end up with the regulators also doing away with the short-sellers' buying power on significant market declines.
Wondering why Indian markets were rattled then? Well, though the growth picture in India is still promising, given the increasingly interconnected financial markets, it is but natural to catch cold even if it is Germany (and not the US) that sneezes first.
Disclaimer:
"I do not make any warranties, express or implied, as to results to be obtained from using the information in this e-letter.  Investors should obtain individual financial advice based on their own particular circumstances before making any investment decisions based upon information in this report.
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Arvind Parekh
+ 91 98432 32381