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.

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.

It is learnt that Hindalco Industries, the flagship company of the Aditya Birla group, are on the right path even during the time of economic meltdown, all their projects are on track and they are not postponing any of their plans.

It is learnt that Power Grid Corporation of India (PGCIL) is all geared up to get a part of the supplementary USD 3-billion loan the World Bank (WB) will provide to India by July 2009.

Unitech, the realty major, in order to better manage telecom business has decided to merge all of its eight telecom subsidiaries. Each of these subsidiaries has licenses for three to four circles and together they cover all 22 telecom circles in the country.

Reliance Petroleum (RPL) announced on December 25, the commissioning of its refinery in a Special Economic Zone (SEZ) at Jamnagar, Gujarat in India, commencing its crude processing. The secondary processing units are now under synchronization and commissioning. The entire refinery complex is expected to attain full capacity shortly. _ In order to ensure uninterrupted supply of fuel for its safeguarded nuclear power plants, India will acquire up to 50% ownership in uranium mines in Russia, Kazakhstan and a few other countries. Certain new uranium mines are explored in these countries and India is ready to invest in order to acquire ownership in these mines.

Country’s largest public sector trading agency MMTC is entering into partnership with 4th currency futures exchange to pick up to 15% equity in the exchange at an investment of Rs 225 million.

The government has decided to review the PSU`s projects on fortnightly basis as SAIL`s capacity expansion plan to reach 26 million tons steel production by 2010 seems to be a dream due to its slow progress. The Department of Industrial Policy and Promotion (DIPP) in the commerce ministry suggested that the foreign direct investment (FDI) ceiling for the tobacco industry should be reduced from 100 to 74%.

Jaypee Hotels announced that it has received approval from its board of directors for the merger of the company with parent firm Jaiprakash Associates. 

Nava Bharat Ventures plans to buyback a minimum of 735,295 shares of face value Rs 2 each, for an aggregate amount not exceeding Rs 500 million. The buyback will be made at Rs 170 a share, which represents a premium of 42.44% and 42.02% to the closing price on BSE and NSE, respectively, on Dec. 11, 2008.

Mauritius-based Swiss Finance Corporation has increased its stake in Amtek Auto to over 8% following acquisition of shares from the open market. 

Life Insurance Corporation of India (LIC) has increased its stake in HDFC Bank to over 5% following acquisition of shares from the open market. LIC purchased 158,519 shares from the open market hiking its stake in the company to 5.01%.

US-based Zydus Pharmaceuticals, a subsidiary of Cadila Healthcare, has received final approval from the US Food and Drug Administration (USFDA) to market Acetazolamide capsules, in the strength of 500 mg.

Vardhman Textiles on Wednesday, December 24 said its board approved buyback of foreign currency convertible bonds (FCCBs) that were issued in 2006, subject to the approval of the Reserve Bank of India (RBI) and other terms and conditions governing the buy-back of FCCBs.

GVK Oil & Gas, a wholly owned subsidiary of GVK Power & Infrastructure, has signed a production sharing contract with the ministry of petroleum and natural gas, government of India on Dec. 22, 2008. 

Deciding to invest in a sector may not be challenging but choosing the sector definitely is.

One of the ways to pick a sector is to look at its medium-term prospects. Though sector funds are riskier than diversified funds, invest in a sector which has a good potential in the near term. Hence, the investment tenure too should be a minimum of 2-3 years like diversified funds.

While choosing a sector, avoid investing into a sector which has seen a sharp rise in a short span of time. Though retail investors always tend to chase sectors which are in the news or companies which have seen a sharp upside, such a strategy will only increase the waiting period for investors.

For instance, the flood of IPOs from the construction sector had taken the share prices of many construction and realty sector stocks to dizzying heights, a year ago. Now the sector heads the list of non-performance ones and those who didn’t book profits earlier, have seen huge erosion in value. As a result, investors who made their investment at higher levels will have to wait for a good 3-5 years to see good returns. In fact, one of the big risks associated with a sector is that the performance tends to get cyclical and the investor should have the ability to hold on to his investment.

Besides keeping away from hot sectors, investors would also be better off if they choose sectors which are more dependent on domestic consumers. For instance, sectors like FMCG, retail, services, infrastructure and media are a reflection of the economy though policy changes relating to the sector could have some short-term implications. Infrastructure, for instance, is a typical example which offers good growth potential in the long term.

Rajiv Mundra has a keen eye for the markets and he has the following post on his Google Group.

Details here Buy & go to sleep for 4-5 years!

While the financial crisis has felled several international banking giants, closer home, it is the banking sector funds that have outperformed all other categories of funds over the last three months.

Seven of the 10 top performing mutual fund schemes during the July-September quarter were banking schemes, including banking ETFs, says data provided by Value Research. 

The banking sector funds have given an average return of 4.72 per cent for the period, while Gold ETFs have given a 4.26 per cent average return. Equity diversified schemes have recorded negative returns of 5.62 per cent, according to the research firm.

The benchmark index, Sensex, was down by 4.47 per cent, and the S&P CNX Nifty down 2.95 per cent during the July-September quarter.

The banking stocks performed well as they had under-performed badly in the months before the quarter, said Mr Satish Ramanathan, Head of Equities, Sundaram BNP Paribas Mutual Fund.

While the BSE-Bankex was up by 9.51 per cent for the three months ending September 30, it had fallen by more than 23 per cent during the first quarter of the financial year.

While Gold ETFs couldn’t give returns as high as banking funds in the three-month period, they have logged the highest returns of all categories during September, as well as for the six months ended September 30.

Investing in the equity market directly is exciting and rewarding over a long period.

But the volatility and the information overload make it a very difficult task.

It is important to understand that everyone has different financial goals and risk appetite. So the first step would be to be aware of your own financial goals and your risk profile before you take a d ip into the Stock Markets!

CERC has issued draft guidelines for tariffs for the period 2009-14. The proposed guidelines has retained the 14% ROE for tariff fixation. However, it has proposed to link incentives based on plant availability as against the earlier practice of incentive based on PLF. There has been change in depreciation charges which is aimed at avoiding front-loading of tariffs.

Fuel efficiency norms tightened. If implemented, may reduce fuel cost savings for generators like NTPC

The new guidelines propose linking incentives to plant availability as against the earlier practice of plant load factor (PLF). Several power generators including NTPC and NLC have earlier favoured incentive based on plant availability. According to them, generator can only ensure availability of the station whereas generation schedule depends on demand by the customers. Plant availability is within the control of the plant management while the generation depends on available demand from the SEBs

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Depth and breadth of private banking space has now increased. You see significantly large private banks. And the private sector is getting market share. I feel the valuation of PSU banks continue to trade at a discount.

People are talking of reforms in financial sector in general and banks in particular. Will that increase activity in PSU bank stocks?

We have to pay for the subsidies. There is no other way than through the capital receipts. The gap can’t be filled with revenue receipts. Capital receipts can come only via disinvestment.

But, disinvestment doesn’t necessarily mean selling off. It could be like the selling of 3G licence. It could be through public sector IPOs.

Business is booming as usual. Biggest consumption and raising per capita income means they are at slight premium to the indices. From business point of view, they will feel pangs of liquidity. We are little unsure if they can quote at the non-cyclical valuations they are quoting at this point, which shouldn’t be the case