Sensex to hit 20000 by January 2011

The markets in the developed world have been turbulent over the past few months. In spite of this Indian bourses have kept their nerve and not seen any major breakdowns. This is the most important indicator, that gives the confidence to me that the SENSEX to touch 20,000 in the short term and 23,000 by September 2011. The fourth quarter, however, according to him may be tricky in terms of earnings.

The western market is expected to grow at a slow pace of 1-2%. And, “There are a lot of funds investing in Indian and foreign institutional investor (FII) flow is likely to stay unless there is any external shock.”

When we see the past behavior of Indian market and the fund flow the market is soaked the domestic selling and recorded outflow from the fund due to 3G spectrum. The mutual funds in India seen selling in last quarter however in the same period FII seen accumulating the Indian stocks and strengthening their position in the Indian holding. This is looking first series of serious investment of foreign player and this is looking like the continuous trend because there are only few pockets are now in world where growth can be predicted so India has become the heaven for investment.

So the coming October market is going to take a sharp fall and that fall will be golden opportunity to get in to the Indian market

Advantages of Mutual Funds for Investors

Professional Management

Mutual funds offer investors the opportunity to earn an income or build their wealth through professional management of their investible funds. There are several aspects to such professional management viz. investing in line with the investment objective, investing based on adequate research, and ensuring that prudent investment processes are followed.

Portfolio Diversification

Units of a scheme give investors exposure to a range of securities held in the investment portfolio of the scheme. Thus, even a small investment of Rs 5,000 in a mutual fund scheme can give investors a diversified investment portfolio ,with diversification, an investor ensures that all the egg is not in the same basket. Consequently, the investor is less likely to lose money on all the investments at the same time. Thus, diversification helps reduce the risk in investment. In order to achieve the same diversification as a mutual fund scheme, investors will need to set apart several lakh of rupees. Instead, they can achieve the diversification through an investment of a few thousand rupees in a mutual fund scheme.

Economies of Scale

The pooling of large sums of money from so many investors makes it possible for the mutual fund to engage professional managers to manage the investment. Individual investors with small amounts to invest cannot, by themselves, afford to engage such professional management. Large investment corpus leads to various other economies of scale. For instance, costs related to investment research and office space get spread across investors. Further, the higher transaction volume makes it possible to negotiate better terms with brokers, bankers and other service providers.

Liquidity

At times, investors in financial markets are stuck with a security for which they can’t find a buyer – worse, at times they can’t find the company they invested in! Such investments become illiquid investments, which can end in a complete loss for investors. Investors in a mutual fund scheme can recover the value of the moneys invested, from the mutual fund itself. Depending on the

structure of the mutual fund scheme, this would be possible, either at any time, or during specific intervals, or only on closure of the scheme. Schemes where the money can be recovered from the mutual fund only on closure of the scheme, are listed in a stock exchange. In such schemes, the investor can sell the units in the stock exchange to recover the prevailing value of the investment.

Tax Deferral

As will we know by this time that the mutual funds are not liable to pay tax on the income they earn. If the same income were to be earned by the investor directly, then tax may have to be paid in the same financial year. Mutual funds offer options, whereby the investor can let the moneys grow in the scheme for several years. By selecting such options, it is possible for the investor to defer the tax liability. This helps investors to legally build their wealth faster than would have been the case, if they were to pay tax on the income each year.

Tax benefits

Specific schemes of mutual funds (Equity Linked Savings Schemes) give investors the benefit of deduction of the amount invested, from their income that is liable to tax. This reduces their taxable income, and therefore the tax liability. Further, the dividend that the investor receives from the scheme, is tax-free in his hands.

Convenient Options

The options offered under a scheme allow investors to structure their investments in line with their liquidity preference and tax position.

Investment Comfort

Once an investment is made with a mutual fund, they make it convenient for the investor to make further purchases with very little documentation. This simplifies subsequent investment activity.

Regulatory Comfort

The regulator, Securities & Exchange Board of India (SEBI) has mandated strict checks and balances in the structure of mutual funds and their activities. These are detailed in the subsequent units. Mutual fund investors benefit from such protection.

Systematic approach to investments

Mutual funds also offer facilities that help investor invest amounts regularly through a Systematic Investment Plan (SIP); or withdraw amounts regularly through a Systematic Withdrawal Plan (SWP);or move moneys between different kinds of schemes through a Systematic Transfer Plan (STP). Such systematic approaches promote an investment discipline, which is useful in long term wealth creation and protection

Market trend ..Dollar is dictating the term

Indian markets has shown the different behavior pattern in last two months .Global markets has seen significant decline in June and July but nifty and sensex outperformed the global insides.The FII who were the main driver of the Indian indices although domestic fund houses were the net seller in the market due to liquidity crunch created by the 3G spectrum bid . Indian mutual fund industry has seen lowering of AUM.

Now when world markets is rallying from last 15 days the Indian indices is not catching them this is the primary indicator of the fact that from now onward global markets are going to outperform the Indian market in coming month.

In Indian scripts the heavy weight like Reliance Industries.NTPC, are breaking down and their performance will be key for the further move of the market without reliance we cant breakout from current level.Result season is over and there is no further trigger to drive the market from here onward.

DOLLAR INDEX:

Dollar index 88 to 80 in last two month due to strengthening of euro and other currency although the dollars has taken the support at 80 level and again rebounded towards 84 which is looking like a major resistance for the US Dollar.When the dollar will retreat from the 84 then the market will rally again in September.

So the hot dollars and cool stock is the theme of investment till the year end then 2011 will come with the new ray of strategy for investment world till then dollar move is important.

Crumbling stock market

My last post on bubble building has proven true in recent downturn of equity market.Global market has seen a significant downturn and indian market at the same time touched three month low in this sell off ,the holy grail of indian equity market FII has turned heavy seller and the effect was quite visible on the indian market.

Indicators:

The dollar index gone up to 81 due to demand of the dollar and this move has pressurized the commodity in shorter duration,base metal,crude,agro commodity has seen sell off .

however it looks like that fall is going to arrest for some time at least for two month we will be ready one further leg of downturn in may jun 2010.

Bubble is building

Future bubbles Dollar carry trade

Concept

The concept of carry trade is taken from the arbitrage world where people looks for the risk less opportunity to make money although involvement of risk is not nullified in the carry trade however modus operandi is almost similar to arbitrage.

Here's an example of a "U.S.dollar carry trade": a trader borrows 1,000 U.S.dollar from a U.S bank, converts the funds into Indian National Rupee and buys a financial assets for the equivalent amount in India it may be bond stocks debenture etc. Let's assume that the investment in India pays 6.5% and the U.S. interest rate is set at 0.25%. The trader stands to make a profit of 6.25% as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then she can stand to make a profit more than 62%.

The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the U.S. dollar will fall in value relative to the INR, then the trader would run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless the position is hedged appropriately.

Events

The easy money policy from the central bank’s around the Globe created ample liquidity in the markets, especially near zero rate interest rate policy by US Fed created huge outflow of dollar from the US and over supply of Dollar resulted as the deprecation of Dollar with respect to all major currency and emergence of carry trade, in this trade people takes money from the us due to the negligible interest rate regime over there and park those money in the high return securities around the globe due to this Global markets have rallied "too much, too soon, too fast" this year. but a correction is inevitable once fed will shed this policy the rising inflation is the one important indicator of which forced the regulator to think on easy money policy although it will not happen right away, as a cheap dollar will still encourage investors to seek higher-yielding assets for a few more months however time is short for the people betting on liquidity driven asset.

Recovery of U.S. dollar which is traded at the year’s low is depend upon the rise in interest rate which will led the repatriation of US dollar , but only in "six to 12 months from now, not any time soon."A correction might occur, but the risk of a correction is more in the medium term than in the short term, but the time when the correction will come it will sharp and painful for the equity markets around the globe.

The economist repeating their view that the U.S. economic recovery will be anemic, subpar and U-shaped, which should decipher into worse-than-expected corporate earnings and macroeconomic indicators, eventually forcing asset prices down.

Such a correction will be delayed, however, by a prolonged period of low interest rates and fiscal stimulus.

Many analysts are in the opinion that the real economy will surprise on the downside, especially when the stimulus fizzles out, but on the other side we will have the effects of policies, especially monetary and liquidity, that keep asset prices levitating.

Money wheel

Loose monetary policies around the world has resulted in continuous dollar inflows into developing economies and emerging markets like especially in Asia, which are likely to grow faster than developed world for several years.

The challenge for emerging market countries like Brazil, India will be to implement effective policies to curb excessive capital inflows that have led to appreciation in their currencies, to curb the inflow Brazil has imposed Tobin tax on inflow. The depreciating dollar is creating the risk for the exporter. The solution is probably along the lines of capital controls but capital control is the toughest step for the capital deficit emerging markets. Here money is chasing their growth with objective to get more return in shortest time and creating volatility in their markets. This is the reason behind the imposition of tax on inflow by Brazil.

Impacts

The beginning of carrying trade has infused the liquidity in the financial and commodity market around the globe. Chase of U.S.dollar pushed the Gold, Crude at their highest levels in 2009 and same effect has observe in equity around the globe Brazilian market has gone up by 145% on strong dollar flow. Dollar index came down sharply to their year high 89.62 on 4th march to the year low 74.17 on 26th November and take pullback from there. In the next six month when economy will come on growth path then inflation will be the primary agenda for the fed and they will increase the interest to suck the excess liquidity from the market. Rise in interest rate will trigger the unwinding of dollar carry trade. The unwinding of trade will create volatility in the stock market around the world it can led to another stock market carnage in the emerging market because significant amount of fund by FII and hedge fund has been pumped into the equity markets during their up move.

FIG:Dollar index 2009

Unwinding the trade will create negative impact on the local currency and unusual depreciation of the local currency will be disastrous for the exporters and their profit margin will be impacted