THE Securities and Exchange Board of India (Sebi) has finally made changes in the characteristics of liquid funds that caused considerable heartburn and churn in the October market crash. Sebi has now mandated that liquid fund schemes and plans will, with effect from February 1, 2009, make investment in debt and money market securities with maturity of up to182 days only instead of the current level of one year. With effect from May 01, 2009, securities with maturity of up to 91 days only should be purchased.

The regulator has further said that the nomenclature ‘liquid plus scheme’ should be discontinued since it gives a wrong impression of added liquidity. In another order, Sebi has barred fund houses from offering indicative portfolios and indicative yields in their fixed income (debt) products.

Experts say the changes might bring cheers to savvy investors who park their extra cash in liquid fund schemes. The October 2008 turbulence had caused huge redemptions as a large number of corporates, faced with a credit crunch and in need of working capital, exited fixed maturity plans, liquid and liquid-plus funds. “Fund houses were rolling over their payment obligations to corporate houses. In some cases, some schemes which were supposed to mature in 180 days rolled over for 200 or 250 days, which isn’t the best thing to happen,” said Value Research CEO Dhirendra Kumar.

In another order, Sebi said that the indicative portfolio and yield might be misleading to the investors. “No communication regarding the same in any manner whatsoever, shall be issued by any mutual fund or distributors of its products,” said Sebi. “It is an obvious move as it is against the spirit of law for a MF house to provide indicative portfolio in conjunction to the yield. How can a fund house talk about its portfolio even before raising the sum?” said Kumar.

Sebi further said inter-scheme transfers of securities having maturity up to 365 days and held in other schemes as on February 01, 2009 will be permitted till October 31, 2009.

Relative Strength Index (RSI) is an extremely useful and popular momentum oscillator. The RSI compares the magnitude of a stock’s recent gains to the magnitude of its recent losses and turns that information into a number that ranges from 0 to 100. It takes a single parameter, the number of time periods to use in the calculation. In his book, Wilder recommends using 14 periods.

The RSI’s full name is actually rather unfortunate as it is easily confused with other forms of Relative Strength analysis such as John Murphy’s “Relative Strength” charts and IBD’s “Relative Strength” rankings. Most other kinds of “Relative Strength” stuff involve using more than one stock in the calculation. Like most true indicators, the RSI only needs one stock to be computed. In order to avoid confusion, many people avoid using the RSI’s full name and just call it “the RSI.”

Use in stock market:

1. Overbought/Oversold
Wilder recommended using 70 and 30 and overbought and oversold levels respectively. Generally, if the RSI rises above 30 it is considered bullish for the underlying stock. Conversely, if the RSI falls below 70, it is a bearish signal. Some traders identify the long-term trend and then use extreme readings for entry points. If the long-term trend is bullish, then oversold readings could mark potential entry points.

2. Divergence

Buy and sell signals can also be generated by looking for positive and negative divergences between the RSI and the underlying stock. For example, consider a falling stock whose RSI rises from a low point of (for example) 15 back up to say, 55. Because of how the RSI is constructed, the underlying stock will often reverse its direction soon after such a divergence. As in that example, divergences that occur after an overbought or oversold reading usually provide more reliable signals.

At the end of 2008, it isn’t an easy task to look ahead and see what stockinvestors should do.

However, there is a simple way to choose one’s investment strategy. I have always firmly believed that the only approach to investing that could possibly be of any use to the retail, non-professional investor would be one that doesn’t have to be fine-tuned according to market conditions.

If you needed to have even a vaguely correct idea of what lies ahead for the financial markets in order to decide which mutual fund to buy, then you’ve failed before you’ve even begun. So here’s a general outline of the investment strategy you should be following in 2009, and indeed in any other year, along with a list of five income and five growth funds with which to implement the strategy.

The first step is not to look at investments but instead at your own life and try and make a liberal estimate of how much of your savings you would need to tap into over the next five to seven years. This would include some sort of an emergency amount, plus predictable big-ticket expenses such as weddings, education, the down payment on a house and such things.

This is the amount you should hold in debt investments which could be anything from PPF to short-term debt mutual funds.

The rest should be in diversified equity mutual funds with a good long-term track record.

Any fresh investments into equity funds should be done gradually and continuously regardless of the state of the markets. Don’t invest in too many funds—four or five is enough diversification.

You’ll have to do a little bit of home work to find funds with a good long-term track record but it’s not difficult. Of course, investments can improve or degrade so these would have to monitored, perhaps, a couple of times a year.

As for insurance, make a liberal estimate of the amount of money your dependents will need if you die soon.

The initial investigations by the Registrar of Companies (RoC) into the Satyam scam has revealed that apart from other companies, HDFC Mutual Fund on January 2 offloaded 50 lakh Satyam shares.

Satyam’s price averaged Rs 177 on that day, still on its way up from the lows it had touched just a few weeks earlier, but several times the price it would be commanding just a week later, when the price fell to Rs 6.3 on January 9.

On January 5, two days before Raju’s ‘‘confession’’, ILFS Financial Services also opted out, selling 35 lakh shares on a day when the price averaged Rs 168.22.

Corporate affairs minister P C Gupta said the priority for the government was to protect the interest of the over 3 lakh shareholders, employees and Satyam’s clients, both domestic and overseas. Asked to comment on the fallout of the episode for the credibility of India Inc, the minister insisted that Satyam was an “aberration

A portfolio is a combination of products and themes. Investors should plan and build the portfolio over a period of time, considering all options.

Over the last few days, there has been a growing consensus on the fact that asset classes are set for a free fall. While equity has been showing intermittent strengths at lower levels, it has been more on account of trading support than investment buying with long-term investors preferring cash or debt. In fact, in the last few months, the fund flow from the high net worth individual community to debt has been on the rise and besides bank deposits, income funds and gold have been the preferred bets.

In such a scenario, investors have to rely on a de-risking model to build a portfolio and reliance on a single instrument or option may not provide the comfort. Investors who prefer mutual funds can look at a combination of products to minimise risk. While the percentage of allocation for each scheme differs based on individual risk-taking ability and tenure of the investment, these options can be considered by a larger segment as portfolio components.

Here are some of those options:

Debt allocation

This has been the preferred option in recent times due to the economic environment. While fixed deposit is a product with assured returns, mutual funds (MFs) don’t offer the comfort of assured returns. However, MFs have a wide range of products ranging from income funds, liquid funds to ultra short-term bond funds for investors looking for a debt option. As they are more tax-efficient and also offer the flexibility of partial withdrawal, these products can be your option besides fixed deposits.
Allocate around 50 percent of your corpus towards these in the current market environment, while your short-term fund needs should be completely in debt.

Balance with risk

An ideal MF portfolio should reflect the risk-taking abilities of the investor and should have a mix of debt, equity, gold and other options that come up from time to time. For instance, the real estate portfolio management service (PMS) or equity PMS are some options that have been launched by mutual fund companies in recent times. As a result, investors should be aware of the changing market needs and should also have the liquidity to take advantage of such opportunities. For instance, while everyone expects the equity markets to test new or October lows in 2009, a smart investor would brace himself for such an event by building his liquid portfolio.

The management of risk is a key component of an ideal portfolio and that could be achieved through a single product or a combination of products, the latter is a better option though. For instance, balanced funds do take care of risk management but to a limited extent and would be an option for small sums. A senior citizen can allocate his corpus between fixed return products and balanced funds for his postretirement fund needs in the early stages of his retirement life. For him, such a combination can fulfil the needs of balancing with a couple of products. It may not be the case for a young investor who has different fund needs with different tenures.

Finally, portfolio creation is a long-term exercise and with respect to equity portfolio, the task extends over a longer period of time. In the case of equity, the approach has to be long-term and has to be a continuous process. For MF investors, there are plenty of products for such an exercise in the form of systematic investment plans (SIPs) and systematic transfer plans (STPs), and such investments can be through a combination of products across sectors.

It goes without saying that the Satyam affair has deepened the pall of gloom over equity mutual funds. Being a leading star of the country’s business firmament, Satyam has been a fixture in many mutual fund portfolios, and justifiably so. In mid-December, when the first inkling of problems at Satyam appeared, the company’s stock price fell sharply. At the time, a number of mutual funds reduced their holdings in Satyam. However, some funds also increased their holdings.

Although this looks like the wrong thing to have done now, that’s just in hindsight. At that time, it was a perfectly legitimate investment decisions either by a mutual fund or by an individual investor. The logic was that Raju’s attempt to take out cash for the Maytas acquisitions had been stymied. The shareholders’ revolt that Raju faced would discourage him from attempting anything similar in the future. The company’s business was intact, its massive cash bank-balance was intact, but its stock price had fallen. That added up to a reasonable case for buying the stock, which a number of mutual funds appeared to have done.

Some days later, it came out that members of Raju family had lost a large chunk of their stake in the company because they had taken loans by mortgaging their shares. As the price had fallen, they had been unable to redeem the mortgage and the lenders had sold off some of the shares. Most investors saw this as positive news. If Rajus were on their way out, then surely this was good news for Satyam. The case for investing in Satyam was actually strong at that point.

It was only on the morning of January 7, when Raju dropped the bombshell, did it become clear that Satyam’s fundamental numbers were cooked-up and no one could really guess how much the shares would worth. On that day, many mutual funds (and other institutional investors) sold their entire Satyam stake. Depending on the price they got, different funds’ NAV took a hit of different magnitude. Since funds’ declare their portfolio only at month end, we don’t know the precise magnitude of the loss.

However, the highest exposure that any diversified fund had to Satyam on December 31 was about 8 per cent. However, the average was just 1.5 per cent. For the entire mutual fund industry, December 31 holdings in Satyam Computers add up to around Rs 670 crore, which is by any estimate an extremely small part of MF investors’ equity holdings.

There’s no way that any investment manager or investment analyst can be blamed for not foreseeing the Satyam debacle. Everything boiled down to trusting Satyam’s accounts. Sure, there are companies in which investors expect such manipulations and those companies are treated accordingly. Mutual funds ignore them and the markets punish them with lower valuations than their published profits suggest. However, if the gap between expectation and reality is as wide as it was in the Satyam’s case, then nothing can be done.

However, as mentioned earlier, mutual fund investors’ losses in Satyam have been quite small. This demonstrates the value of diversification. If you are in non-specific funds that are diversified across sectors, then there are very little chance of serious damage to your portfolio.