For Indian Stock market crash is inevitable…

For Indian Stock market crash is inevitable…

Indian equity has outperformed the global peers and became best performing market for the year by giving 6% return till august 2010 and this performance came up due to the consistent pumping of money by foreign funds .Global investment managers were in search of growth pockets to invest the money after the financial crisis to find best geography for the growth. The obvious choice was emerging markets however in emerging markets India was certainly the winner due to its growing GDP and consumption story so Indian market have received 60,329 crores of fund till September 2010.

Month	FII	DII
Jan	-302.9	-1,311.10
Feb	2,113.50	-697.4
Mar	18,833.60	3,806.40
Apr	9,764.50	1,616.50
May	-8,629.90	98.7
Jun	10,244.60	-1,092.50
Jul	17,120.60	-4,404.80
Aug	11,185.30	-3,169.60

The domestic mutual funds were the net seller in same tome by taking out 5151 crore between Januarys to September in the same period may was the only month when domestic funds were buyer by putting mere 98 crore in market however FII investment was positive in every month except January and may

Significant amount of money finds their way in developed market economy however those markets are flat or negative at this point of time.

FIG: FII and DII investment

Festive seasons are around the corner and funds have habit to reward their investors near Christmas so the FII profit booking is bound to come .Fundamentally Indian market is standing on the one leg because domestic funds and retail investors are sitting sideline while FII are consistent in the buying side when they turn negative the scenario will be bearish .Foreign funds don’t have option because only in emerging market they are in profit so they will sell some of their holdings in coming month precisely by October 2010.

Global perspective:

Following big losses for developed world equities in August, the rally was to be expected, because global markets were technically oversold. We are now entering what are normally the worst two months for markets and we will see new lows hit in October, at which point the market will discount the prospect of the mid-term elections in US ,in euro zone credit problem is still persisting Ireland is looking to spread their problem soon .

The indication has been coming from the bond market, which last month began to tell us there is really bad news out there. Following substantial buying in August, we have seen some selling but this will not last long enough.

Global market statistics in august.

US INDEX	JULY CLOSE	AUG HIGH	AUG CLOSE	%GAIN /LOSS
Dow Jones	10466	10698	10014	-4.30
NASQAQ	2254	2305	2104	-6.21
S&P 500	1101	1127	1049	-4.72

American markets were worst performing market in august, series of bad economic news propel the selloff at the wall street and the august emerged as the worst month for equity market in USA. Dowjone industrial average lost 4.30% of their value, NASDAQ composite lost 6.21% due to selloff in the technology sector, and S&P 500 lost 4.72% .There was only seven trading session when market went up.

EURO ZONE	JULY CLOSE	AUG HIGH	AUG CLOSE	%GAIN /LOSS
FTSE 100	5258	5410	5225	-0.62
CAC	3643	3777	3490	-4.19
DAX	6147	6351	5925	-3.61

Euro zone contributed similar manner as American indices here FTSE 100 was the best performer in the pack who lost slightly more than half percent while CAC of France lost -4.19% and DAX of Germany lost -3.61% in august only.

ASIA	JULY CLOSE	AUG HIGH	AUG CLOSE	% GAIN /LOSS
NIKKI	9537	9694	8824	-7.47
STRAIT TIMES	2987	3014	2950	-1.23
HANG SANG	21029	21294	20536	-2.34
SHANGHAI	2637	2687	2638	0.03

Asian market performance in august were better than developed world although NIKKI of japan tumble 7.47% while Hansang LOST 2.43% and strait times lost -1.23% however Shanghai composite closed flat in august.

INDIAN MARKET	JULY CLOSE	AUG HIGH	AUG CLOSE
SENSEX	17868	18401	17971	0.57
C&X NIFTY	5367	5543	5402	0.65

Indian market emerged as the winner in the September where all the market were crumbling in the august the Indian indices kisses their 31 month high although due profit booking lost their most of the gain in spite of this market able to close in green for the month where most of the market closed deep in red.

Amida research desk

How to analyse risk involved in investment...

There are five main indicators of investment risk that relate to the analysis of stocks, bonds and mutual fund portfolios. They are alpha,beta,r-squired standard deviation and the Sharpe. These statistical measures are historical predictors of investment risk/volatility and are all major components of Modern portfolio theory (MPT). The MPT is a standard financial and academic methodology used for assessing the performance of equity, fixed-income and mutual fund investments by comparing them to market benchmarks.

All of these risk measurements are intended to help investors determine the reward parameters of their investments. In this article, we'll give a brief explanation of each of these commonly used indicators.

1. Alpha
Alpha is a measure of an investment's performance on a risk-adjusted basis. It takes the volatility (price risk) of a security or fund portfolio and compares its risk-adjusted performance to a benchmark index. The excess return of the investment relative to the return of the benchmark index is its "alpha".

Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio's return. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%. For investors, the more positive an alpha is, the better it is.

2. Beta
Beta, also known as the "beta coefficient," is a measure of the volatility,or systematic risk of a security or a portfolio in comparison to the market as a whole. Beta is calculated using regression analysis, and you can think of it as the tendency of an investment's return to respond to swings in the market. By definition, the market has a beta of 1.0. Individual security and portfolio values are measured according to how they deviate from the market.

A beta of 1.0 indicates that the investment's price will move in lock-step with the market. A beta of less than 1.0 indicates that the investment will be less volatile than the market, and, correspondingly, a beta of more than 1.0 indicates that the investment's price will be more volatile than the market. For example, if a fund portfolio's beta is 1.2, it's theoretically 20% more volatile than the market.

Conservative investors looking to preserve capital should focus on securities and fund portfolios with low betas, whereas those investors willing to take on more risk in search of higher returns should look for high beta investments.

3. R-Squared
R-Squared is a statistical measure that represents the percentage of a fund portfolio's or security's movements that can be explained by movements in a benchmark index. For fixed-income securities and their corresponding mutual funds, the benchmark is the US Treasury bills and, likewise with equities and equity funds, the benchmark is the S&P 500.

R-squared values range from 0 to 100. According to Morningstar a mutual fund with an R-squared value between 85 and 100 has a performance record that is closely correlated to the index. A fund rated 70 or less would not perform like the index.

Mutual fund investors should avoid actively managed funds with high R-squared ratios, which are generally criticized by analysts as being "closet" Index Fund In these cases, why pay the higher fees for so-called professional management when you can get the same or better results from an index fund.

4. Standard Deviation
Standard deviation measures the dispersion of data from its mean. In plain English, the more that data is spread apart, the higher the difference is from the norm. In finance, standard deviation is applied to the annual return on investment of an investment to measure its volatility (risk). A volatile stock would have a high standard deviation. With mutual funds, the standard deviation tells us how much the return on a fund is deviating from the expected returns based on its historical performance.

5. Sharpe Ratio
Developed by Nobel laureate economist William Sharpe, this ratio measures risk-adjusted performance. It is calculated by subtracting the risk free rate of return from the rate of return for an investment and dividing the result by the investment's standard deviation of its return.

The Sharpe ratio tells investors whether an investment's returns are due to smart investment decisions or the result of excess risk. This measurement is very useful because although one portfolio or security can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater an investment's Sharpe ratio, the better its risk-adjusted performance.

Conclusion
Many investors tend to focus exclusively on investment return, with little concern for investment risk. The five risk measures we have just discussed can provide some balance to the risk-return equation. The good news for investors is that these indicators are calculated for them and are available on several financial websites, as well as being incorporated into many investment research reports. As useful as these measurements are, keep in mind that when considering a stock, bond, or mutual fund investment, volatility risk is just one of the factors you should be considering that can affect the quality of an investment.

source:Investopedia.com

There are five main indicators of investment risk that relate to the analysis of stocks, bonds and mutual fund portfolios. They are alpha,beta,r-s standard deviation and the Sharpe. These statistical measures are historical predictors of investment risk/volatility and are all major components of Modern portfolio theory (MPT). The MPT is a standard financial and academic methodology used for assessing the performance of equity, fixed-income and mutual fund investments by comparing them to market benchmarks.

All of these risk measurements are intended to help investors determine the reward parameters of their investments. In this article, we'll give a brief explanation of each of these commonly used indicators.

1. Alpha
Alpha is a measure of an investment's performance on a risk-adjusted basis. It takes the volatility (price risk) of a security or fund portfolio and compares its risk-adjusted performance to a benchmark index. The excess return of the investment relative to the return of the benchmark index is its "alpha".

Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio's return. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%. For investors, the more positive an alpha is, the better it is.

2. Beta
Beta, also known as the "beta coefficient," is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is calculated using regression analysis, and you can think of it as the tendency of an investment's return to respond to swings in the market. By definition, the market has a beta of 1.0. Individual security and portfolio values are measured according to how they deviate from the market.

A beta of 1.0 indicates that the investment's price will move in lock-step with the market. A beta of less than 1.0 indicates that the investment will be less volatile than the market, and, correspondingly, a beta of more than 1.0 indicates that the investment's price will be more volatile than the market. For example, if a fund portfolio's beta is 1.2, it's theoretically 20% more volatile than the market.

Conservative investors looking to preserve capital should focus on securities and fund portfolios with low betas, whereas those investors willing to take on more risk in search of higher returns should look for high beta investments.

3. R-Squared
R-Squared is a statistical measure that represents the percentage of a fund portfolio's or security's movements that can be explained by movements in a benchmark index. For fixed-income securities and their corresponding mutual funds, the benchmark is the U.S. Treasury Bill and, likewise with equities and equity funds, the benchmark is the S&P 500 Index.

R-squared values range from 0 to 100. According to Morningstar, a mutual fund with an R-squared value between 85 and 100 has a performance record that is closely correlated to the index. A fund rated 70 or less would not perform like the index.

Mutual fund investors should avoid actively managed funds with high R-squared ratios, which are generally criticized by analysts as being "closet" index funds. In these cases, why pay the higher fees for so-called professional management when you can get the same or better results from an index fund.

4. Standard Deviation
Standard deviation measures the dispersion of data from its mean. In plain English, the more that data is spread apart, the higher the difference is from the norm. In finance, standard deviation is applied to the annual rate of return of an investment to measure its volatility (risk). A volatile stock would have a high standard deviation. With mutual funds, the standard deviation tells us how much the return on a fund is deviating from the expected returns based on its historical performance.

5. Sharpe Ratio
Developed by Nobel laureate economist William Sharpe, this ratio measures risk-adjusted performance. It is calculated by subtracting the risk-free rate of return (U.S. Treasury Bond) from the rate of return for an investment and dividing the result by the investment's standard deviation of its return.

The Sharpe ratio tells investors whether an investment's returns are due to smart investment decisions or the result of excess risk. This measurement is very useful because although one portfolio or security can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. The greater an investment's Sharpe ratio, the better its risk-adjusted performance.

Conclusion
Many investors tend to focus exclusively on investment return, with little concern for investment risk. The five risk measures we have just discussed can provide some balance to the risk-return equation. The good news for investors is that these indicators are calculated for them and are available on several financial websites, as well as being incorporated into many investment research reports. As useful as these measurements are, keep in mind that when considering a stock, bond, or mutual fund investment, volatility risk is just one of the factors you should be considering that can affect the quality of an investment

Less known investment option.

The Money Market

The money market is a subset of the fixed-income market. In the money market, participants borrow or lend for short period of time, usually up to a period of one year. These instruments are generally traded by the Government, financial institutions and large corporate houses. These securities are of very large denominations, very liquid, very safe but offer relatively low interest rates. The cost of trading in the money market (bid-ask spread) is relatively small due to the high liquidity and large size of the market. Since money market instruments are of high denominations they are generally beyond the reach of individual investors. However, individual investors can invest in the money markets through money-market mutual funds. We take a quick look at the various products available for trading in the money markets.

T-Bills

T-Bills or treasury bills are largely risk-free (guaranteed by the Government and hence carry only sovereign risk - risk that the government of a country or an agency backed by the government, will refuse to comply with the terms of a loan agreement), short-term, very liquid instruments that are issued by the central bank of a country. The maturity period for T-bills ranges from 3-12 months. T-bills are circulated both in primary as well as in secondary markets. T-bills are usually issued at a discount to the face value and the investor gets the face value upon maturity. The issue price (and thus rate of interest) of T-bills is generally decided at an auction, which individuals can also access. Once issued, T-bills are also traded in the secondary markets. In India, T-bills are issued by the Reserve Bank of India for maturities of 91-days, 182 days and 364 days. They are issued weekly (91-days maturity) and fortnightly (182-days and 364- days maturity).

Commercial Paper

Commercial papers (CP) are unsecured money market instruments issued in the form of apromissory note by large corporate houses in order to diversify their sources of short-term borrowings and to provide additional investment avenues to investors. Issuing companies are required to obtain investment-grade credit ratings from approved rating agencies and in some cases, these papers are also backed by a bank line of credit. CPs are also issued at a discount to their face value. In India, CPs can be issued by companies, primary dealers (PDs), satellite dealers (SD) and other large financial institutions, for maturities ranging from 15 days period to 1-year period from the date of issue. CP denominations can be Rs. 500,000 or multiples thereof. Further, CPs can be issued either in the form of a promissory note or in dematerialized form through any of the approved depositories.

Certificates of Deposit

A certificate of deposit (CD), is a term deposit with a bank with a specified interest rate. The duration is also pre-specified and the deposit cannot be withdrawn on demand. Unlike other bank term deposits, CDs are freely negotiable and may be issued in dematerialized form or as a Usance Promissory Note. CDs are rated (sometimes mandatory) by approved credit rating agencies and normally carry a higher return than the normal term deposits in banks (primarily due to a relatively large principal amount and the low cost of raising funds for banks). Normal term deposits are of smaller ticket-sizes and time period, have the flexibility of premature withdrawal and carry a lower interest rate than CDs. In many countries, the central bank provides insurance (e.g. Federal Deposit Insurance Corporation (FDIC) in the U.S., and the Deposit Insurance and Credit Guarantee Corporation (DICGC) in India) to bank depositors up to a certain amount (Rs. 100000 in India). CDs are also treated as bank deposit for this purpose. In India, scheduled banks can issue CDs with maturity ranging from 7 days – 1 year and financial institutions can issue CDs with maturity ranging from 1 year – 3 years. CD are issued for denominations of Rs. 1,00,000 and in multiples thereof.