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The Volatility-Proof Shield


 The investing should be more of a healthy habit with good composer rather than impulsive. The volatility in the market escalates the investor’s anxiety which makes the investor to overreact to the market chatter buzz of short term news and the usual or unusual market movements often leads to the investor going berserk and they inappropriately reshuffle their asset allocations and thereby potentially fracturing their usual ability to achieve the long term investment goals.

One should always keep in mind that there are several unseen speed breakers which affect the market trends—change in the global economy, natural disasters, current global as well as domestic national news, change in the central bank policies and even the changes in the policies by the government impacts the domestic bourses. It would be far better for the investors to stay focused on the long term economics and the market expectations and not fall prey to the fear of the volatile markets.
 So one should always have market volatility in perspective, focus on the long term investment goals and always maintain decorum of portfolio discipline and it is only then that the investors will be in a better state to manage their various investments. One thing is for sure that the past is surely no guarantee of the future trends so it will always hold true that those investors who can see much beyond the short term volatility will rule the roost and thereby make much better investment decisions.
The reasons for the fluctuations of the market prices:-- The stock prices move upwards or downwards and frankly speaking no one knows exactly when the next upswing or hitting the tank may occur, but one thing is for sure that there will be so many well dressed experts doing bla bla postmortem of the market at the end of the market hours.
However there are various reasons when the market nose dives:--

1) The profitability of the company.
2) Better returns in some other investments like bonds.
3) The rise in the interest rates.
4) The upward trend in the inflation.
5) The geo-political issues at national as well as the international levels affect the country’s economy.

A)     The Word Volatility is not a Taboo:-- Most of the time the investors overlap these two words- risk and volatility, these two words are in no way synonyms. Risk is simply the potential for loss which may occur based upon the various factors. On the other hand the volatility arises from the random price movements which are a natural market phenomenon. Actually without volatility one just cannot dream of any opportunity of profit. Volatility actually drives the ups and the downs in the markets which in turn help in forming and sustaining the market trends as well. In laymen terms the volatility is nothing but the variations or fluctuations in the prices of the financial assets such as the stocks, exchange rates or the interest rates over a given period of time. So it is very important to understand the fact that the volatility is not a fall in the markets but it is simply a series of rise and fall in unsystematic order. Yet everybody is so concerned about the volatility during those phases when the prices decrease or go through the correction phases. So it is for this reason that in a very bullish markets most of the sheepish investors hardly gives a damn that the markets are exhibiting that volatility.

B)     Risk Management:-- The basic fact remains with all the stock market investments that they all carry a certain degree of risk, so the risk of losing money is an integral part with stock market investments. The risk is usually determined by the volatility factors which are merely the degree of the speed of the fluctuations in the value of the investments and also the market risks which are triggered by the macro-economic factors in addition to the sentiments for any given company’s shares or fixed interest securities. One of the simple ways to handle the risk factor is to categorize the investments into various risk baskets, and it is always advisable for all the investors to take a medium to long term approach in investing in the equities. Whereas it solely depends on your objectives and the risk taking appetite which will obviously be a healthy blend of the equities, cash and the fixed interest securities.

C)      Clarity of the Time Frame:--One should always select suitable investments according to one’s investment goals and segregation of the time frames  can improve your financial well being, so one should always take some time off and devote to make ones selection carefully and these efforts will definitely pay off. Hold on tight with your decisions and let the time work to your advantage. As you know that all the financial instruments carry some percentage of the risk factors which can only be countered by the time frame for which it has been invested, just for example that the equities are usually for the long term say 3-5 years, and another way to manage the risk is just to review your investments with your representative periodically and keep making fine adjustments to cater to the circumstances and your individual needs. By matching the risk and the investment time frame you can chose best amongst both the worlds, the investment returns commensurate to the risk you can take and manage the volatility associated with the investments. You should understand and ensure that you are well versed with the time suited for the investments as well as the risk associated with it by undertaking the risk assessment tests.

D)     Investments For The Long Term Always Pays:--When the stock markets moves unexpectedly most of the investors think alike that is shifting their investments elsewhere like the money market fund . One should always remember that the short term volatility is never going to cast shadow on the long term trends. A security can be highly volatile on day to day basis but in the long term they reflect stability as well as growth. While some of the investments maintain purchasing power over a long set of period but can wildly fluctuate in the short term. Another thing is that the assets with higher short term volatility risks such as the stocks always tend to have higher returns over the long term than the less volatile assets such as the money markets.

E)      Diversified Basket: -- Just go by the old saying that never put all your eggs in one basket which will inculcate the basic understanding of diversifying your portfolio which will obviously reduce the intensity heat of the volatility if your assets have a little or no co-relation with one another. One of the best ways would be to diversify your portfolio by the company, industry, country and the asset class. This is one of the reasons why the successful investors always have a combination of equities and fixed income investments in their portfolio. Just by diversifying your investments into different types of stocks by company, industry and the country you spread out your exposure of the risks. If one company is performing badly chances are that the other sectors remain untouched by the heat. So just keep in mind that your portfolio should meet your present financial situation, your risk bearing capacity and your long term investment goals as well.

F)      Never Try To Time The Market: -- The most successful timing of the market requires three aces namely a reliable green signal to indicate you when to get in and exit the stocks or bonds, gold or various other investment types. Now the ability to interpret those signals correctly and the discipline to act upon it. Usually the market timing could be tempting but that is rarely successful, because while trying to time the markets you tend to miss some of the best days of the markets or may hit the bull’s eye by investing on some of the worst days of the markets. So it is always advisable to keep investing regularly or may be systematic investment plan, because always trying to time the market throughout your investment tenure over the long term will always reduce the chances of your returns in place of enhancing the returns.

G)     Systematic Investment Plan (SIP):- This is the path of investing in the mutual funds; SIP involves investing in the mutual funds by investing a fixed amount of money at regular intervals instead of pumping in huge amount of money.  In SIP one can invest as little as Rs 500/-  in the mutual fund scheme at a pre specified intervals may be monthly or quarterly, this route of investment thereby allows you to capture the highs and lows of the markets and averages your cost of investments over a period of time. A disciplined manner of investment avoids your risks of timing of the markets which in a way keeps the sentiments away from interfering with your investment decisions based on the market’s volatility. And when the markets go on the correction spree the investors end up in buying up some more of the units.

H)     Systematic Transfer Plan (STP):- Most of the investors are aware of the word SIP but many of them are unaware of the STP. STP is a good choice if you are looking to invest in a big lump sum amount in a phased manner. Under a STP an investor can transfer a fixed or a variable amount from one mutual fund scheme to another within the same fund house at a pre defined intervals. Usually the investor’s pump large amount of money in a debt fund from where a regular amount is transferred at periodic intervals like daily, weekly, monthly or quarterly basis into a specified equity oriented funds. Take for an example an investor may invest few lakhs in a debt fund and opts for an STP of Rs 5k or 10k on the first of every month for the next 20 months or so in an equity fund. The benefit of STP is that such transfer’s average the cost of purchase and thereby mitigates the market related risks such as timing the markets and also offers the benefit of the rupee cost averaging. An STP is of two types- the fixed STP and the capital appreciation STP. In a fixed STP investors transfer a fixed sum of amount from one investment to another. But in a capital appreciation STP the investors take the profit from one investment to invest in another. The working of the STP is of such a manner that the transfer from one fund to another is considered as redemption and new purchase for the taxation purposes, and so when the money from the growth option of a debt fund is transferred before completion of the three years it will attract short term capital gains tax as this is going to be considered as a redemption from the debt fund and these gains will be added to your income and taxed as per the tax slab. The main thing is that since the future is not predictable and yes whatever has happened today, yesterday can be beautifully analyzed and described by various experienced experts, but looking at the present with clarity the volatile and the asymmetric returns. So expanding the investment holding period over the years and decades has historically proven to have improved the risk/return profile of your portfolio. The uncertainty is the obvious part of any investment and so is the volatility which is hand in glove, but your perspective can affect the investment decisions you made during the down turns of the markets. If an investor who views the volatility in the market as negatively will always tend to make irrational decisions. So treat the bearish market as an golden opportunity for you as an investor to build a strong foundation for your portfolio on the back of the lower costs of the units.          

Gold never Rusts: Invest in Gold ETF

The high and low pattern of gold will always be there but will never be the factor to sidetrack or sideline the gold for good, the gold may appear to be down but not out. The rainbow always has a golden lining on both the ends. Let us take one example that one day the world is free from all the ailments and the implications will be that all the pharmaceutical companies will have to be shut down as no one will ever fall sick, doctors, hospitals and the medical equipment manufacturing factories will come to a grinding halt, But this is only hypothetical and can never happen and same holds true in case of the gold.

The people may not always be attracted to the sheen of gold but on the other hand they are attracted to the gold merely due to the fear factor that just in case the going gets tough and when nothing works out positively, during the days when the tables are turned and the back is against the wall than in these tough times only and only gold is reliable. Some reasons are going against the gilt is that some of the major economies are experiencing down slides and due to this reason the investors are investing and reaping.

One does not require having knowledge of the rocket science to understand that there is no danger to the world economy but as usual the market by nature is very crabbed and grumpy, and it is because of the very checquerred nature of the investors in the share markets these countries like Russia, Brazil, Japan, China and some of the European countries as well registered bad financial health. Even if a small country like Greece fails to repay the debts caused high rated tremors on the Richter scale globally, something like what was the fall out globally after the crash of the Lehmann brother’s investment bank of US in 2008. Before the time the US cut the encouragement package and the start of the Greece crisis the gold had crossed $1, 800 per ounce i.e. Rs 35, 000/- per 10 grams now when the dust has fallen back in place the gold is $1, 100 per ounce and in the domestic markets it is Rs 25, 000/- per grams.

The Greece crisis is offshore for the time being and the morale of the bear has taken the stick, the old saying that the gold is history or the gold is money is sounding true once again, time and again. However there is one other opinion that the gold is non important metal except its ornamental use has hardly any other use but this theory of some school holds no good because gold has its own elite place in the financial markets since time immemorial just like the importance of horse in transportation and for communicating the telecommunication, so ultimately gold is natural money which has never failed to live up to the expectations and is an asset on any given time and this is a fact and that is why the gold has played a vital role in any central banks and the government’s various operations.

During the past six years  the Russia as well as the China have been the top most procurers of the gold, China has increased its holding by 60%  and so also the Russia has doubled its holdings, and in the last month when gold had dipped a bit Russia went for the kill and further increased its holding by 6.5%. Whenever the bubble of the economy bursts or the other factors which are going against Russia like the fall in the crude prices, and the competition in the arms race from the contemporary rivals US, even the France and Israel are emerging fast, so taking all these developments which may prove to be a bottle neck in the near future it is only the gold which will quench the thirst eventually. One must not forget that the governments and the central banks have a battalion of the economists to understand the economy, currency, gold as well as the markets and if they are giving so much weightage and importance to gold then there must be some concrete reason behind. After a brief hibernation period gold will be all set and raring to go.

So as an investor one can invest in the gold because the gold has a knack to beat the effects of both the inflation and the currency fluctuations as well and the gold has also time and again proved to be a economically secure asset during the time of recession. Whenever the times are difficult the gold has never failed to retain its value but on the contrary has always performed much better if compared to most of the other asset class. More over the gold has always been the insurance for any portfolio and has always managed to evade the value erosion. In short any portfolio if having gold is considered to be robust and less volatile if compared to those portfolios which are devoid of gold. The percentage of investment in the gold depends solely on the investor’s goals, objectives of the investment, the risk bearing appetite, liquidity, view of the market, economical, financial, political situation and the investment opportunities. The investment in gold should be 10% to 20% of the total portfolio investments. One should make a note that having gold in your portfolio will make it less volatile than the portfolio sans gold.

You can invest in gold by two ways either the physical form of gold (gold coins and bars) through the banks and jewellery or invest in the non physical form Gold Exchange Traded Funds (GETFs) through the brokers or other authorized entities. The gold ETF are the mutual funds listed in the NSE and BSE. The investment objective of the gold ETFs is to provide the returns that before expenses closely correspond to the returns provided by the domestic physical gold price. You can buy the gold ETF and it is just like buying the gold in the electronic form and you of course can buy or sell them just like you buy or sell stocks of any company through your broker in NSE.1 ETF unit is equal to 1 gram of gold in spot and they are backed with high quality physical gold.

The salient features of the GETF are that it is so simple that you can buy just 1 unit, and 1 unit is equal to 1 gram of gold, since it is easy to buy so you can keep buying the unit by unit as per your convenience and requirements and keep on building the wealth. It is safe as the quality is assured and the d mat holding allows the security. Moreover the gold ETFs prices are available and are transparent on the NSE website and can be sold any time through your broker. GETF is easy to sell unlike the gold coins, bars and jewellery. The banks don’t buy back gold coins or the bars but in the case of the GETF you get the same price for your gold ETF unlike other forms of the gold and that too throughout India. The GETFs are in the d mat form so the worry of the theft is undone and you also save upon the charges of the locker. Another big advantage with the GETF is that there are no making charges as incurred in the case of the jewellery and if you buy gold from the banks which is also expensive as the banks also charge some premium for the purity. The physical gold prices may vary from state to state and also attract the VAT tax. The GETF has uniform price pan India devoid of VAT, you have to pay the brokerage only. Since the gold is actively traded in the exchange so one can easily liquidate the position during the market hours. Moreover the authorized safe keeper custodian source of the gold is LBMA (London Bullion Market Association) who are the approved refiners on behalf of the investors and the purity of the gold is 995 parts per 1000 that is 99.5% pure and this degree of purity is called 24 carat gold.

Moreover investing in the GETF does not attract the securities transaction tax (STT) since the GETFs are traded just like the stocks on the exchange hence the costs involved are similar to trading in the equities. The transaction charges in the GETFs are lesser than that of the trading in the equities that is Rs 1 per lakh in the GETF as against Rs3.5 per lakh of the turnover in the equities. All types of the investor individuals, corporate, institutional can invest in the GETFs. All you need to do is simply register yourself with a broker and fill up the KYC form, open a d mat account, post margins and you can start trading. Some brokers have also started offering the SIPs or even you can as per your convenience keep on purchasing a fixed number of the GETFs all by yourself as the gold units are automatically credited to your d mat account on t+ 2 days and there is no entry or exit load imposed by the fund, Since the GETFs are classified as the mutual fund scheme so you need not pay any security transaction tax or the wealth tax unlike in the case of the physical gold. All it takes is just some smart moves in investment not for today but invest for tomorrow. 

Mutual Fund

Types of Mutual Funds in India

There are three primary types of Mutual Funds by Asset Class in India.

1. Equity mutual funds: These funds invest maximum part of their corpus into equity holdings. The structure of the fund may vary for different schemes and the fund manager’s outlook on different stocks. The Equity funds are sub-classified depending upon their investment objective, as follows:

Diversified equity funds
Mid-cap funds
Small cap funds
Sector specific funds
Tax savings funds (ELSS)

Equity investments rank high on the risk-return grid and hence, are ideal for a longer time frame.

2. Debt mutual funds: These funds invest in debt instruments to ensure low risk and provide a stable income to the investors. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. Debt funds can be further classified as:

Gilt funds
Income funds
Short term plans
Liquid funds

Debt Funds rank lower on the risk-return grid and are suitable for shorter investment time frames.

3. Gold fund: A gold fund is a mutual fund that invests in 99.9% pure gold. This gold investment is a paper investment and does not attract any making charges that a gold jewelery would.

Gold Funds are a great option for those who want to buy gold for their kid’s wedding in few years.