IS IT RIGHT TIME TO INVEST IN STOCK MARKET FOR LONG TERM INVESTOR?

The last 1 year Indian market is falling / correcting. Major indices ( nifty & sensex ) almost corrected by 27-28% from there peak which is created in Nov 11. Most of the stocks corrected more than 50% from there respective peak. It has been historically observed that our market correct for 12-18 months ( exception  correction which started in 2000  almost continued for 3-3.5 yrs.)  and in this correction it is all ready passed  12 months so lot of investors must be thinking is it right time to invest?
It has been observed that in long term equity has been given best post-tax return than any  other financial instrument. The following 3 ways will give best possible returns in equity market.
1) Doing S.I.P. in 4-5 best diversified equity funds.
2) Investing when valuations are cheap according to fundamental analysis.
3) Investing when bottom is formed according to technical analysis.

FUNDAMENTAL ANALYSIS : - According to fundamentals it has been observed that when sensex / nifty P/E starts trading above 25 our market forms top, and when it starts trading below 12 it forms bottom. At present nifty P/E is around 17.25, so according to historical average our market is just undervalued ( not cheap, to become cheap it has to fall 25-30% more ) so there are fair chances it will correct more. But this may or may not happen you never know, it may create bottom here. So if some one waits for cheap valuation he may miss the rally.

TECHNICAL ANALYSIS :- Technically our market is in down trend since Jan 11. Right now it looks like that if on daily closing basis nifty closes below 4625, it may go down to 4400-4500 and may be up to 3600-3900 level. But once again you never know and it is really difficult to catch exact bottom.
      Technically there is strong support in 4625-4700 area , so it may form bottom around these levels.
Historically it has been observed that whenever previous year's low was broken our market corrected for 25-30% from that level. The 2010 low ( 4675 ) has been taken out intra day on 23 & 24 NOV. but it was not taken on daily closing basis. If nifty gives daily and weekly closing  below 4625 there are fair chances that our market will give correction of 20- 30% from this level.
       So whether long term investor should invest at these level or wait ?

According to our view---- first decide out of investable money how much amount you will not require for at least next 5 years. And invest that much money according to one of the following solutions--

SOLUTION 1) -- Invest that money in equal installments for next 12 months.

                     2) -- (A) Invest 30% of that money at current level and if market don't fall much below current level then remaining 70% whenever there is long term up trend according to technical analysis.
                              (B) Invest 30% at 4400 level and if nifty don't fall much below then remaining 40% whenever there is up trend according to technical analysis.
                              (C) Invest remaining 40%at 3900 level.

                    3) -- Invest only after whenever there is long term up trend according to technical analysis. Which will be approximately 15-20% above from bottom level.
ACCORDING TO PRESENT SITUATION TECHNICALLY THERE WILL BE UP TREND ONLY IF NIFTY CLOSES ABOVE 5400 ON WEEKLY TIME FRAME., THIS LEVEL WILL CHANGE ACCORDING TO FUTURE PRICE ACTION.
 Out of the 3 above solutions we think option 2 is good one.

For investment choose 15-20 fundamentally good companies and invest equal amount or choose 5-6 best diversified equity mutual funds and invest equal amount within them.

 If someone is all ready invested in equity market then he  should allocate fresh money only if his equity exposure is less than ideal asset allocation according to his age. THE THUMB RULE IS 100 - AGE , that much % should be in equity. So if someone is 45 yrs. old then 100 - 45 = 55% should be in equity.
                        
DISCLAIMER: This Blog is meant for sharing my trading ideas only and no calls to be taken as trading recommendation. Visitors please do your own research or consult your advisers for safe trading.

MUTUAL FUNDS

In jan 2008 I presented power point presentation regerding FINANCIAL PLANNING to 15-20 colleagues. I have checked if any of my colleague have started investing in diversified equity mutual funds since then what would have been his compounded annulised returns.

MUTUAL FUND SCEME                  SIP RETURNS              ONE TIME  RETURNS

BIRLA SUNLIFE                                        22.6 %                                 9.0 %
FRONTLINE EQUITY

BIRLA SUNLIFE MIDCAP                          22.22 %                               4.56 %

FI BLUECHIP                                            23.31 %                               8.55 %

FI PRIMA PLUS                                        21.1 %                                6.22 %

HDFC EQUITY                                         31.02 %                               13.7 %

HDFC TOP 200                                        26.59 %                               12.08 %

ICICI PRU DYNAMIC                                 24.37 %                                9.85 %

ICICI PRU TOP 100                                 19.12 %                                5.12 %

RELIANCE GROWTH                               20.91 %                                5.94 %

RELIANCE VISION                                   18.22 %                               2.65 %

SBI MAGNUM CONTRA                           15.57 %                               2.85 %

These returns are from 1 feb 2008 to 1 apr 2011. Incidently the market had top in jan 2008, and crashed due to global financial problem, eventhough one had started at peak then also his S.I.P. returns are good. Always remember TIME IN THE MARKET IS MORE IMPORTANT THAN TRYING TO TIME THE MARKET. Also from above table it is clearly visible that s.i.p. is better than one time investment, it saves our skin eventhough by badluck we start investing at the top of market this clearly indicate that DISCIPLINE IS VERY VERY IMPORTANT FOR EQUITY INVESTMENT.

JUST SEE THIS LINK     http://www.valueresearchonline.com/story/h2_storyview.asp?str=16861

SHORT/ MEDIUM/ LONG TERM INVESTMENT

All of you must have heard about short term, medium term and long term investment. But have u ever thought what is really meant by short/medium/long term and how it affects your decision regarding choosing the investment vehicle? Let’s try to find the answers.

FROM THE TRADERS PERSPECTIVE -----holding period for different time frames is as follows

SHORT TERM --- from few minutes to few hours, for this purpose he analyzes 5min or 15 min time frame charts technically.

MEDIUM TERM --- from few hours to few days, for this purpose he analyzes hourly / daily chart.

LONG TERM --- from few days to few weeks, for this he analyzes daily/ weekly chart.

Most of the traders don’t consider fundamental analysis but they rely on technical analysis.

FROM THE INVESTOR PERSPECTIVE ----- here there is lot of variation regarding holding period for different time frames in general public as well as experts. I personally follow following holding period for different time frames

SHORT TERM --- up to 3 years.

MEDIUM TERM --- 3 to 7 years.

LONG TERM --- more than 7 years.

The main reason for which we invest is to meet our future goals, which could be either short, medium, or long term in nature. You can able to decide in which product you  will invest if you can able to take decision regarding for how much period you are going to invest.

SHORT TERM objectives are usually met through debt assets, which are less volatile, as one cannot take risk with short term capital. Assets like fixed deposit, recurring deposit, P.P.F., MUTUAL FUNDS LIKE fixed maturity plans, short term debt funds, liquid funds are used for short term investment.

MEDIUM TERM objectives are usually met through combination of debt and equity assets.

LONG TERM objectives such as kid’s education and their marriage ( of course if you start your investment/ financial planning in early age then only this will become long term goal !!! ), and for retirement I think equities is the ideal asset class. This can be done by direct stock investment or equity mutual funds.

               Historical data shows that equities provide the highest returns among all asset class after adjusting for inflation. The investment risk associated with volatility may be higher in initial period it smoothens out over long term.

              Past studies have reported that returns from equity over long term have been in the range of 12-15% annualized. In fact, if you look at the most recent data (as on 31 march 2011), the BSE SENSEX has generated a compounded annualized return of 17.6% over the last 10 years. Let’s look the returns of  some of the diversified equity mutual funds over the last 10 years which I suggested here --- http://kolhapuritrader.blogspot.com/2011/04/best-equity-diversified-mutual-funds.html

1)      FRANKLIN INDIA PRIMA PLUS – 27.95%

2)      FRANKLIN INDIA BLUECHIP – 26.88%

3)      HDFC TOP 200 – 31.65%

4)      HDFC EQUITY – 32.92

5)      ICICI PRUDENTIAL TOP 100 – 22.94%

This is one method to decide in which asset class to invest, the other method is according to ASSET ALLOCATION will post regarding asset allocation later.