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While equity is the most volatile asset class, it is also the most performing one. Indian equities are seen as the best bet towards wealth creation in future. “Owning Indian assets is like buying a call option on global growth. Cost of entry in Indian equities is much less than the cost of not owning them,” says Sanjeev Patkar, director Research, Institutional Equity broking, Almondz Global Securities. However, in volatile markets, individual investors find it difficult to take a call on their equity investments. Hence, here are some points that one can visit:

Asset allocation: It may appear as a cliché, but it remains the foundation of all investment strategies. No matter what the market condition is, one should not overstep the boundaries outlined by the strategic asset allocation. This ensures that in bad markets, you end up buying some amount of equities and in euphoric times, you do not go overboard.

Dividend yield: It helps you decide the chances of you being a winner in equity market. Dividend represents the distributable profits of a company. It is a cash payout and seen as a real picture of a business. High-dividend yield stocks are relatively good in bad times and inclusion of such stocks in your portfolio helps. Mutual fund investors can refer to the portfolio dividend yield, if available. There are investors who prefer to invest keeping in mind the dividend yield of benchmark index. The higher the dividend yield, the higher is your chances of making money.

Price earning ratio and price to book ratio:
These two ratios are preferred by the analyst community while valuing stocks. The lower the ratio, the more attractive the stock, other things remaining the same. A point to note, consistency in business performance — read higher profits with better efficiency consistently — leads to premium attached by the markets.

Valuation of a stock need not remain constant. Depending on the business performance and the market sentiment, valuations change. A consistent performer at the lower end of the valuation bond is an ideal situation for a value investor. Investors can also refer to these ratios of the benchmark index. If you invest in equities when they quote low on valuation parameters, you stand to gain more than what you gain in times when everybody is interested in stocks.

Interest rates: Low interest rates are conducive to equity markets. As interest rates rise, the burden of interest goes up and the corporate earnings falter to that extent. Also, cheap money allows consumers to leverage and increase the economic activity leading to growth. Hence, rising equities are seen as an outright spoilsport by equity investors.

A thumb rule used by a section of equity investors to estimate earnings is to use the reciprocal of interest rates as expected earnings. For instance, if the yield on a 10-year government bond is 8%, investors would be looking at a price to earnings multiple – 1/8 X 100 or around 12.5 times. If interest rates jump up to 10%, the ideal earnings multiple would fall to 10 – (1/10 X100).

Buying growth: As we approach first quarter results, the valuations are already stretched. S&P CNX Nifty quotes at a P/E of 22.18, P/B of 3.77 and a dividend yield of 0.93. These numbers are readily available in index statistics on the National Stock Exchange website. Even if one factors in 20% growth in the first quarter, the valuations surely are far away from the attractive zone. “Markets have remained range bound for the past nine months and we have seen a time correction. Given the growth scenario, over the next 2-3 years investors should do well,” says Amit Nigam, senior portfolio manager- Equities, Fortis Investment Management. Investing decisions at this juncture is a difficult call for most investors as they witness domestic growth surrounded by uncertainties in overseas market in the short term.

Avoid extremes: Going gung-ho on India story is as dangerous as not investing in it. It is better to strike a balance when you take equity call. Anticipating a fall is one thing. But selling everything out of equities and moving into cash with the hope of buying at lower level is just not the solution. One should stick to his strategic asset allocation and instead play within the same asset class. Markets can remain irrational for a long period of time.

Also, high growth periods bring in better valuations for an extended period of time and not investing in markets due to such premium price tag cannot be justified. If you are worried about short-term risks in equities, better cut down your exposure to leveraged companies and small- and mid-cap stocks. Go with large-cap stocks or large cap-oriented mutual fund schemes.

In the long term, good quality businesses with consistent performance track record will do well and those who invest in them will do far better.

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.

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.

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 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. 

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.

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

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.

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!