How to Tweak Your Investment Strategy when Gold Prices are Rising?

How to Tweak Your Investment Strategy when Gold Prices are Rising?
20/08/2019

The big news in the last few weeks was the rapid rally in the price of gold. Gold prices are rallying; not only in the international markets, but even domestic prices of gold are gradually inching closer to Rs.40,000/10 grams. This is already a life-time high for gold prices in India.

International gold prices are already at the highest level in the last 6 years, although it is much lower than the peak of 2011; when gold had scaled $1850/oz. The decision to tweak your portfolio strategy will predicate on whether this rally is temporary or sustainable?

Historically, gold has rallied structurally when the global economic and geopolitical uncertainty has been at a high. For example, through the 1970s in the midst of the Arab oil embargo, the price of gold went up from $35/oz to $850/oz. Later in 2008, post the Lehman crisis the price of gold nearly doubled in 3 years to $1850 by September 2011. There are signs of global uncertainty in 2019 too. The US-China trade war is showing signs of escalation and that is impacting global GDP growth. A no-deal BREXIT is likely to push Europe into a slowdown. Above all, the US yield curve is showing inversion with the 2-year bond yields exceeding the 10-year bond yields. In the last 70 years, this indicator has correctly signalled a slowdown in 80% of the cases. In short, there is a strong case for gold.

How to tweak your investment strategy vis-à-vis gold?

While gold continues to be a peripheral asset in most portfolios, here are a few points to remember about gold in your portfolio, especially in the current scenario.

  • The normal allocation to gold in your long term portfolio should be in the range of 10-15%. Since this looks like a structural rally in gold, it would be an opportunity to increase your allocation to gold to 15%. That will not only enhance portfolio returns but also give greater stability to your overall portfolio mix.

  • Secondly, you can also look at gold as part of your peripheral trading portfolio too, while keeping your core gold allocation at 15%. That means; instead of going long on equities from a long term perspective, trade long on gold ETFs to make the best of the gold price movement. After all, gold gives sharp price movements only once in 3-4 years and you can design your trading strategy to make the best of it.

  • There are a lot of investors who store their funds in foreign currencies within the RBI permitted limits. A sharp rally in gold prices is normally a vote against most fiat currencies. That is hardly surprising considering that easy money policy in the last 10 years has made paper currencies less valuable. If you are looking at currencies, then it may make a lot more long term sense to look at gold as a currency.

Gold rally also has an impact on your equity strategy

This is the more interesting part of the gold price rally. Apart from having an impact on your gold strategy, it also has an impact on your stock market trading strategy. Check the chart below.

Chart Source: Bloomberg

If you look at the comparative chart of the Nifty and spot gold, the relationship is clearly negative. We have just plotted the relation for the last 1 year when both the Nifty and gold have been quite active and volatile in the market. But what really strikes you is how gold and equities have diverged as shown in the shaded portion above. What does this chart tell us about equity strategy?

  • Historically, gold and equities have moved against each other. When growth expectations are high, equities automatically tend to perform better and gold tends to stay tepid or loses value. To that extent any sharp rally in gold must be taken as a lead indicator of likely weakness in equities. You need to look at ways to tweak your stock portfolio and buy stocks online accordingly.

  • Look to reduce weightage in stocks that have been part of the last rally and also sectors like capital goods and metals that are most vulnerable to an economic slowdown. These are highly sensitive and have a high multiplier dependence on GDP growth.

  • Focus on shifting more of your existing equity portfolio into defensive sectors like FMCG and other consumer driven sectors which may see weaker demand but are not structurally threatened. You need to alter your stock market trading strategy to effectively balance your portfolio.

A gold rally is an advance warning system for any stock market. It is time to act on your portfolio and tweak accordingly!

Next Article

How Can You Invest In Direct Mutual Funds?

How Can You Invest In Direct Mutual Funds?
01/09/2019

Direct plans of mutual funds enable the investor to save on costs. Direct Plan investors are not charged the distributor and trail commissions. For an average equity fund, this reduces the Total Expense Ratio by 60-70 basis points. This makes a big difference over longer periods.

The KYC process remains the same, irrespective of whether you opt for the Direct Plan or the Regular Plan. Also you have to register with the AMC or the aggregator once. The investor can either do a lump sum investment or follow SIP route through the Direct Plan. Once your SIP is registered as a Direct Plan, then it continues that way. You can convert a Regular Plan into a Direct Plan by writing to your fund. How do you invest in Direct Mutual Funds?

Direct Plan Investing Through AMCs

Walk into the nearest office or Investor Service Centre of the AMC of your choice. If you are a first time investor, then you will have to complete your KYC and you will be allotted a ‘Folio Number’. Once folio number is allotted, subsequent investments can be done online. Ensure that you specifically check the Direct Plan box in your application. The only challenge in this approach is that you will have to obtain a distinct folio number for each AMC.

Direct Plan Investing Through Fund Registrars

Registrars are the record keepers and folio managers of all mutual fund accounts. There are two key players viz. Karvy and CAMS. You can register with either registrar online to invest in Direct Plans. Of course, when you approach a registrar, you can only invest in funds for which they are the registrars. In fact, when you submit an application to your AMC, it is processed by the registrar only. So, this is an extension of the first method.

Leveraging MFUs and Fund Aggregators

Mutual Fund Utilities (MFU) or aggregators are an agnostic platform to invest in mutual funds. You will have to take a one-time registration and obtain a Common Account Number (CAN). Once the CAN is obtained, you can map all your existing folios to that particular CAN and they would be treated as Direct Funds. The advantage is that you don’t have to interface with multiple AMCs and the MFU aggregates and gives you requisite analytics for better decision making. The challenge is that you can only deal in the funds where the AMCs have tied up with the MFU. This platform is convenient and centralized.

Direct Plan Investing Through Investment Advisors, Online Direct Investment Portals

The challenge in the above 3 methods is that you still have to be self-driven. As an investor you need to take all the decisions including screening, selecting and ensuring that funds are in sync with your long term goals. One alternative is to go through on online platform of Registered Investment Advisor or through a Robo Advisor. These platforms provide investment recommendations to investors on the basis of certain details keyed in by the investor. 

Direct Plans Of Mutual Funds – How To Make The Choice?

Investing through Direct Plans requires that you are comfortable with a self-driven approach to investing in mutual funds. While mutual funds offer diversification and professional management, they are also exposed to the vagaries of the markets and macros. You must be confident to handle these gyrations. Ideally, Direct Plans are for investors who have the time, wherewithal and resources to spend in making investment decisions. Otherwise, you are better off opting for a Regular Plan and letting your broker advice you appropriately.
Next Article

The Difference Between Regular and Direct Mutual Fund

The Difference Between Regular and Direct Mutual Fund
01/09/2019

Browse through the NAVs of mutual funds either in the pink papers or the AMFI website and you will find that the same growth or dividend scheme of a mutual fund is subdivided into Regular plans and Direct Plans. Have you ever wondered what are these Direct Plans and Regular Plans? Let us check out a live NAV table first.

Date Source: AMFI

In the above table, you will find that the DSP Top 100 Equity Fund is subdivided into Direct Plan and Regular Plan. You will also find that the Direct Plan has a higher NAV compared to the Regular Plan. Before comparing Direct Plans and Regular Plans, let us briefly dwell on the brief history of Direct Plans.

A Brief History of Direct Plans

Prior to 2009, fund houses charged investors entry loads on mutual funds to cover selling and distribution costs. In August 2009, SEBI banned the collection of entry loads from mutual fund clients. However, the official model of Direct Plan came only from January 2013 when SEBI asked all fund schemes to classify into Direct Plans and Regular Plans.

Currently, funds are allowed to debit their annual expenses up to a ceiling of 2.25% of the AUM in case of equity funds to the fund NAV. This is called the Total Expense Ratio (TER). The fund does not bill the distribution and trail commission costs to Direct Plan investors. Hence, Direct Plans are subject to lower TERs and the NAV are higher. Here are three key points.

Direct Funds Have Lower Expense Ratio

The TER on Direct Plans is lower since the distribution and trail fees are not billed to them. However, there are other costs too in a mutual fund. Mutual funds have to incur operational costs, fund management fees, auditor fees, registrar charges, execution costs, statutory costs and brand expenses, among others. Even if you are holding a Direct Plan, these expenses will still be charged to you. It is only the distribution and trail commissions that are not billed to your NAV. In a typical equity fund the regular plans will have a TER of around 2.25% while the TER for a Direct Plan will be 60-70 bps lower. This cost saving each year enhances your return over the longer period of time.

Direct Plan Does Not Involve Any Intermediary

Direct Funds are simple in nature and the process of investing, especially through an online platform is easy as you do not deal with any intermediary. You can invest directly and make your own investment choice. Just ensure that the NAV in your statement actually reflects the Direct Plan NAV as available on the AMFI website.

Choose Direct Plans If You Can Make Financial Planning Decisions Independently

The common question is - who should opt for a Direct Plan. There are no hard and fast rules. If you are savvy enough to manage your financial planning and investments on your own, then you can consider Direct Plans. When you invest via Direct Plans you do not get the benefit of the advisory services of a broker or financial advisor. Hence, you need to make your choice of Direct Plan after due consideration. Ensure that you have the time and resources to make your financial planning decisions independently.

Next Article

Sensex Breaks Below 38,000. Is This Time To Be Cautious?

Sensex Breaks Below 38,000. Is This Time To Be Cautious?
05/09/2019

Between May 6 and May 8, 2019 the Sensex lost nearly 1,200 points in a vertical fall. It was triggered by an exasperated Donald Trump tweet on his intent to raise tariffs on Chinese imports from 10% to 25%. Global markets reacted in unison as nearly US$13 billion was wiped out for every word that Trump tweeted. India was not spared as the Sensex dipped below the psychological level of 38,000. What should investors really do?

Source: BSE (May 9, 2019)

The one-month chart of the Sensex is quite revealing. After crossing the 39,000 mark multiple times, the Sensex had faced tremendous pressure before it ascended further. Should traders and investors be cautious at this point?

A. There is a global angle to this correction

The big trigger for the correction was an escalation of the trade war. By now it is clear that this is not just a war over import duties, but a much bigger war of two of the largest economies trying to assert their economy supremacy. The US remains the market that every country looks up to and China is the only country that can absorb all the minerals and metals produced in the world. China is unwilling to commit anything on intellectual property rights and that is the bone of contention. A prolonged trade war will mean that there could be an impact on growth in US and Chinese GDP. That will surely rub off on global demand. Secondly, there is a limit to which China can retaliate because they run a trade surplus in the range of $400-500 billion with the US (as per US Census). The other option is to devalue the Yuan. That could have a weakening impact on currencies including the rupee. Hence the trade war will continue to be an overhang on the Sensex.

B. Domestic macros are a challenge too

There are a number of domestic challenges too. Despite two rounds of rate cuts, there has been little impact on lending rates. The rupee has been extremely volatile and the RBI has been using swaps to infuse domestic liquidity into markets. There is the more immediate challenge on top line growth in consumer sectors like FMCG and auto where the slowdown is obvious. Despite all the efforts of the government, farm incomes have not improved and weak rural demand is putting a limit on growth.

C. Banking holds the key for now

We have seen in the past that if the Sensex has to go up decisively, then banking stocks have to perform exceptionally well. That is hardly surprising considering that banking and financials account for 38% of the Nifty basket. Amidst this, PSU banks are struggling to recover from the NPA pile accumulated over the years. Then, there are the potential NPAs pertaining to IL&FS, ADAG group and sectors like power and telecom that are not yet accounted for. When you add these up, the question “where is the trigger for a market rise” continues to haunt.

D. You can sense the market risk in the VIX

The volatility index is also called the Fear Index as it is indicative of the caution in the markets. Historically, VIX and Sensex have had a negative correlation. This time around, the VIX has moved up from 14 levels to 26 levels over the last couple of months and shows no signs of abating. That is a clear indication of high levels of risk that markets are assigning at current levels. When the VIX is elevated at higher levels, each bounce is met with aggressive selling. VIX also reflects that the rupee is coming under pressure due to a consistently widening current account deficit.

What should investors really do at these levels?

While caution is warranted, the Sensex has shown a tendency to bounce each time the trade war has tampered. Once the rattling gets subdued, we could see the Sensex bouncing again. Other than the weakening consumer demand, all the other factors are temporary. Weak consumer demand appears to be the only structural issue and that may predicate on how the new government that assumes office deals with demand push. While traders can be choosy about timing, investors should stick to quality stocks and adopt a phased approach to investing. The more these things appear to change, the more they happen to remain the same!

Next Article

Top 6 Equity Investment Myths That You Must Overcome

Top 6 Equity Investment Myths That You Must Overcome
07/09/2019

In a way, investing myths are perpetuated over the years; partly by history and partly by your conditioning. There are some popular myths that almost all traders and investors appear to be victims of. Let us look at 6 such popular myths about investing that need to be debunked.

Myth 1: In long term investing, returns matter more than risk

Back in 2007, Nokia was a world leader in mobile phones and Forbes had even featured Nokia in a cover story calling them “invincible”. The same year, Apple launched its i-Phone and was followed by Samsung’s smart phone. In less than 4 years, Nokia was on the verge of bankruptcy. Imagine what would have happened to an investor who had ignored risk while investing in Nokia. The reality is that more investors made money in the equity markets by focusing on risk than purely on returns. Once you are able to measure and control risks, the returns will automatically follow. You invest with finite capital and that is why risk matters.

Myth 2: Equity investing is more risky than debt; so stick to bonds

This statement is technically correct because as an asset class equities are riskier than bonds. But there is a time definition that comes in here. In the short to medium term equities are definitely riskier than bonds because returns on equity can fluctuate. But let us talk about the longer term. In the long term both equity and debt carry risk. Look at the number of bond issuers who have defaulted in the last 1 year and you will understand the risk in debt. Secondly, when you are looking to create wealth in the long haul only equity investing can get you to your goals. In the long run, the risk of not taking any risk is much more for your portfolio. That is why equities automatically become low risk over the long term. Of course, you need to stick to quality equity stocks in this case.

Myth 3: I am a long term investor so charts are not for me

There is a general myth that fundamentals are for long term and technicals are for the short term. While that could be intuitively correct, it risks missing the wood for the trees. Charts are the key to any long term investor because it gives two very important signals. Firstly, even if you have identified a fundamentally strong stock, the timing of entry does make a difference to your returns and charts can help here. Also, charts can identify breakouts, which can be useful for long term investors.

Myth 4: Large caps are a better bet than mid caps

That is not necessarily true because some of the large caps of today were mid caps a few years back. There are examples like Lupin, Sun Pharma and Bajaj Finance. You can actually make big profits in equities if you identify a quality stock when it is still a small cap or a mid cap. Once it becomes a large cap there are scores of analysts and fund managers chasing the stock and it becomes overcrowded. Also, mid-caps create wealth because of more focused business models and lower levels of debt.

Myth 5: A great company can be bought at any price

That is not correct. A great company can be awesome at a certain price but can be expensive at a higher price. If you had bought L&T in 2011 or SBI in 2010 it would have taken you ages to recover your price. Both are outstanding companies! However good the company, if you are looking for stock market outperformance then the price of entry matters! That is why investing requires that you keep looking out for bargain sales in the stock market. Investors who bought quality stocks in 2009 or 2013 would have surely done a lot better than the others.

Myth 6: Investing is all about complex black box strategies

Black box strategies can give you better execution. You make big money by identifying a stock with great potential and holding on for a long time. Legendary investor Peter Lynch used to say, “A great idea should be so simple that you should be able to illustrate it with a piece of chalk”. Take Eicher Motors in 2009. A growing market, hardly crowded, low capital requirement and a high ROE was a classic combination to create wealth. That is how simple it is! Just keep your eyes and ears open.

Before you start investing, try to drive these myths out of your mind. It will make investing a lot simpler!

Next Article

3 Ways to Make F&O Trading Profitable!

3 Ways to Make F&O Trading Profitable!
08/09/2019

Futures and options derive their value from an underlying and this underlying could be a stock, index, bond or commodity. For now, let us focus more on futures and options on stocks and indices. A stock future/option derives its value from a stock like RIL or Tata Steel. An index future/option derive its value from an underlying index like the Nifty or the Bank Nifty. In the last few years, the F&O volumes in India have picked up in a big way and account for 90% of the volumes in the market.

However, F&O has its own share of myths and follies. Most rookie traders look at F&O as a cheaper form of trading equities. On the other hand, legendary investors like Warren Buffett have called derivatives as weapons of mass destruction. The truth obviously lies somewhere in between. It is possible to be profitable in online trading for F&O if you get your basics right.

1. Use F&O more as hedge than as a trade

This is the basic philosophy of how to trade in futures and options. One of the reasons retail investors get enthused about F&O is that it is a margin business. For example, you can buy Nifty worth Rs.10 lakhs by paying a margin of just Rs.3 lakhs. That allows you to leverage your capital by 3 times. But that is a slightly dangerous strategy to follow because just as profits can multiply, losses can also multiply in futures. Also, you need to have enough cash to pay mark to market (MTM) margins if the price movement goes against you.

The answer is to look at futures and options more to hedge. Let us understand this better. If you are holding Reliance bought at Rs.1100 and the CMP is Rs.1300, then you can sell the futures at Rs.1305 (futures normally quote at a premium to spot) and lock in profits of Rs.205. Now, whichever way the price goes, you profit of Rs.205 is locked in. Similarly, if you are holding SBI at Rs.350 and you are worried about a downside risk, then you can protect by buying an Rs.340 put option at Rs.2. Now you are protected below Rs.338. If the price of SBI falls to Rs.320, you book profits on the put option and thus reduce the cost of holding the stock. That is how you can make F&O work effectively by getting the philosophy right!

2. Get the trade structure right; strike, premium, expiry, risk

Another reason why traders get their F&O trades wrong is due to bad structuring of the trade. What do we understand by structuring of an F&O trade?

  • Before buying or selling the futures check for dividends and the see if the cost of carry is favorable or not.

  • When it comes to trading in futures and options, the expiry matters a lot. You can get near month and far month expiries. While far month contracts can reduce your cost, they are illiquid and exit can be difficult.

  • Which strike should you prefer in options? Deep OTM (out of the money) options may look cheap but they are normally worthless. Deep ITM (in the money) options are just like futures and don’t add value.

  • Get a hang of options valuation. Your trading terminal has an interface to check if the option is undervalued or overvalued based on the Black and Scholes model. Ensure that you buy underpriced options and sell overpriced options.

3. Focus on trade management; stop loss, profit targets

The last thing to focus on is how you manage the trade; more so when you are trading in F&O. Here is why!

  1. The first step is to keep a stop loss for all trades in F&O. Remember; this is leveraged business so stop loss is a must. Ideally stop loss must be imputed with the trade and not inserted as an afterthought. Above all, it is a strict discipline in online trading.

  2. Profit is what you book in F&O; all else is just book profits. Try to churn your money rapidly because in the F&O trading business you can make money if you churn your capital more aggressively.

  3. Keep tabs on maximum capital you are willing to lose and at that point rework your strategy. Never bet more than you can afford to lose. Above all, when markets are beyond your comprehension, stay out.

F&O is a great alternative in online trading. You just need to take care of the 3 building blocks to be profitable in F&O.