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This interconnectedness has even hit high-quality corporate and mortgage bonds, which are traditionally expected to hold up when stocks decline. Recently, investors have fled various types of bonds to seek the safety of U.S. Treasurys, hurting the liquidity and prices of other bonds. The average intermediate-term bond fund, which typically invests a majority of its money in high-quality bonds, was down 4.2% for the first nine months of 2008.
Separately, high-quality municipal-bond funds have been hurt partly because of worries about the financial strength of the bond insurers that back many muni bonds. The average municipal national intermediate fund is down 2.4% so far this year.
Investors in natural-resources and precious-metals funds have been whipsawed. These funds initially held up as the broad market declined. But in the past few months, these funds have fallen sharply as the prices of oil, gold and other commodities have fallen.
Natural-resources funds are down an average 22% so far in 2008 and precious-metals funds are down 26%. Advisers typically recommend only small investments in such funds.
The recent market volatility has provided a chance for investors to reassess whether they are comfortable with the amount of risk they are taking in their portfolios. Investment adviser Roger Gibson, of Wexford, Pa., says investors hardly think about risk when the stock market is doing well, and may even resist diversifying or putting money in bonds.
Now that the risk is staring investors in the face, they can re-examine whether they are "sleeping well at night," he says.
...
In reply to:
An Ugly Market`s Lessons for Investors
Posted by :
sambala
It`s been almost a year -- a long and painful year for investors -- since stock-market benchmarks including the Dow Jones Industrial Average hit record highs last Oct. 9. The stormy markets since then have caused much upheaval for mutual-fund investors, but also highlight important lessons.
Chief among them: Some supposedly safe investments aren`t as secure as investors thought. And diversification doesn`t always prevent losses in the short term.
Looking at the 12 months through Sept. 30, the Dow industrials fell 22% (before dividend income). Fund investors didn`t find many places to hide because almost all types of funds, including those which invest in bonds, precious-metals stocks and foreign stocks, were hit.
Very Few Winners
Of the 69 stock- and bond-fund categories tracked by research firm Morningstar, only eight had positive returns for the 12 months through September. These are funds which invest in U.S. bonds, short-term municipal bonds and -- the big winner, up 22% -- "bear market" funds which bet against the stock market.
Looking at 2008 to date, meanwhile, the average diversified U.S.-stock fund is down 20% through Sept. 30, according to Morningstar.
One of the biggest surprises this year came from problems with investments which were perceived to be safe. These include money-market funds, which strive to maintain a $1 share price, and ultrashort bond funds, which had been marketed as conservative investments which provide better yields than money funds.
Last month, a big money fund, the $62 billion Reserve Primary Fund, saw the value of its holdings fall to 97 cents a share, due to its investments in Lehman Brothers Holdings, which filed for bankruptcy protection. Concerned about a possible run on other money funds, the U.S. stepped in with a plan to temporarily back the funds.
Also in the past year, several ultrashort bond funds lost 10% to 30% of their value, because they were holding exotic investments which became hard to sell amid the credit crunch and which fell in price.
This reiterates the need for investors to pay attention to the risks of their investments, and not rely on what a broker or marketing material may describe as safe. Also, "it points to the risks of chasing yield," says Christine Benz, director of personal finance at Morningstar.
Reserve Primary Fund`s 12-month yield of 4.04% as of Aug. 31 was the highest among 2,100-plus money funds tracked by Morningstar -- far above the average 2.75%.
Ms. Benz says that if investors find that their money fund has higher than average yields, they should dig into what`s driving that. "If the expense ratio isn`t rock-bottom and yet the fund is at the top of the chart, that could be an indication" of higher risk, she says.
Limits of Diversification
One unsettling phenomenon this year has been that asset classes including stocks, bonds, commodities and real estate have all fallen, though to different degrees. Investors often figure that diversifying their holdings among various asset classes will make it less likely that their overall portfolio will post a loss.
Sometimes in down markets, "in the short term, diversification doesn`t work," says Ross Levin, a financial adviser in Edina, Minn.
In the long run, however, asset classes don`t stay highly correlated, he says. Thus, investors are best served by sticking to their long-term asset allocation plan, even if it doesn`t seem to be working in the short run.
The worst-performing fund categories so far in 2008 are those that invest in foreign stocks, especially the more risky emerging markets. Stock funds that invest in Asia excluding Japan -- a category that includes funds that focus only on China or India -- are down an average 43% through Sept. 30. This is a sharp reversal from last year, when these funds topped the charts with an average return of 48%.
Not Immune to U.S. Pain
When economic problems began in the U.S. last year, many observers thought they wouldn`t much impact countries like China and India, which had rapid domestic economic growth. But it turns out that these countries, too, are being impacted by a global slowdown. That spillover effect, combined with withdrawals from these markets by increasingly risk-averse investors, has sent these markets crashing.
"Globalization and other factors have led to much more interconnectedness in the financial markets," says Kurt Brouwer, a financial planner in Tiburon, Calif.
Cont..... 
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It`s been almost a year -- a long and painful year for investors -- since stock-market benchmarks including the Dow Jones Industrial Average hit record highs last Oct. 9. The stormy markets since then have caused much upheaval for mutual-fund investors, but also highlight important lessons.
Chief among them: Some supposedly safe investments aren`t as secure as investors thought. And diversification doesn`t always prevent losses in the short term.
Looking at the 12 months through Sept. 30, the Dow industrials fell 22% (before dividend income). Fund investors didn`t find many places to hide because almost all types of funds, including those which invest in bonds, precious-metals stocks and foreign stocks, were hit.
Very Few Winners
Of the 69 stock- and bond-fund categories tracked by research firm Morningstar, only eight had positive returns for the 12 months through September. These are funds which invest in U.S. bonds, short-term municipal bonds and -- the big winner, up 22% -- "bear market" funds which bet against the stock market.
Looking at 2008 to date, meanwhile, the average diversified U.S.-stock fund is down 20% through Sept. 30, according to Morningstar.
One of the biggest surprises this year came from problems with investments which were perceived to be safe. These include money-market funds, which strive to maintain a $1 share price, and ultrashort bond funds, which had been marketed as conservative investments which provide better yields than money funds.
Last month, a big money fund, the $62 billion Reserve Primary Fund, saw the value of its holdings fall to 97 cents a share, due to its investments in Lehman Brothers Holdings, which filed for bankruptcy protection. Concerned about a possible run on other money funds, the U.S. stepped in with a plan to temporarily back the funds.
Also in the past year, several ultrashort bond funds lost 10% to 30% of their value, because they were holding exotic investments which became hard to sell amid the credit crunch and which fell in price.
This reiterates the need for investors to pay attention to the risks of their investments, and not rely on what a broker or marketing material may describe as safe. Also, "it points to the risks of chasing yield," says Christine Benz, director of personal finance at Morningstar.
Reserve Primary Fund`s 12-month yield of 4.04% as of Aug. 31 was the highest among 2,100-plus money funds tracked by Morningstar -- far above the average 2.75%.
Ms. Benz says that if investors find that their money fund has higher than average yields, they should dig into what`s driving that. "If the expense ratio isn`t rock-bottom and yet the fund is at the top of the chart, that could be an indication" of higher risk, she says.
Limits of Diversification
One unsettling phenomenon this year has been that asset classes including stocks, bonds, commodities and real estate have all fallen, though to different degrees. Investors often figure that diversifying their holdings among various asset classes will make it less likely that their overall portfolio will post a loss.
Sometimes in down markets, "in the short term, diversification doesn`t work," says Ross Levin, a financial adviser in Edina, Minn.
In the long run, however, asset classes don`t stay highly correlated, he says. Thus, investors are best served by sticking to their long-term asset allocation plan, even if it doesn`t seem to be working in the short run.
The worst-performing fund categories so far in 2008 are those that invest in foreign stocks, especially the more risky emerging markets. Stock funds that invest in Asia excluding Japan -- a category that includes funds that focus only on China or India -- are down an average 43% through Sept. 30. This is a sharp reversal from last year, when these funds topped the charts with an average return of 48%.
Not Immune to U.S. Pain
When economic problems began in the U.S. last year, many observers thought they wouldn`t much impact countries like China and India, which had rapid domestic economic growth. But it turns out that these countries, too, are being impacted by a global slowdown. That spillover effect, combined with withdrawals from these markets by increasingly risk-averse investors, has sent these markets crashing.
"Globalization and other factors have led to much more interconnectedness in the financial markets," says Kurt Brouwer, a financial planner in Tiburon, Calif.
Cont........
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Dear SATIJA
In fact this is the most appropriate time to invest. The Great Indian Equity Sale is on. Just go on shopping spree. But choose the funds carefully. Better to invest in Large Cap oriented funds ( preferrably 5* or 4* valueresearch rated funds) and invest thru SIP only.Better to decide your asset allocation depending upon your investment goal, investment horizon and risk profil and stick to that.
Happy investing.
Regds
Ashport...
In reply to:
Investment in Mutual Funds & NFOs
Posted by :
SATIJA
Sir / Madam,
Is this the right time to investment through SIP in equity related / global market / commodity mutual funds keeping in mind the three years horizon. Kindly advise. P. Satija
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Sir / Madam,
Is this the right time to investment through SIP in equity related / global market / commodity mutual funds keeping in mind the three years horizon. Kindly advise. P. Satija...
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The good opportunity to buy blue chip stocks at rock bottom price.
Harish Dhupar...
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He called them “the financial weapons of mass destruction”. ‘He’ was ‘Warren Buffet’ and ‘them’ was ‘Derivatives’.
Boy, the world’s smartest investor could not have been more right.
For proof, look no further. First, the world’s fourth largest investment bank, Lehman Brothers, went belly up and then the world’s largest insurance company, AIG, needed a bailout in the land of market economy. A principal reason: Losses due to extensive exposure to Credit Default Swaps (CDS).
What is a CDS?
We explain with a simple example.
Stripped of jargon, a CDS is an insurance contract. Okay, the high priests of finance would call it a derivative but that is a piece of minor detail. Now, suppose, Bank X has lent money to various entities which are non-A grade (read sub-prime) accounts.
To cover the risk that these accounts may default, the Bank sells the risk to someone willing to buy the risk. Suppose this buyer is AIG. In effect, the bank is swapping the risk of default (hence the word credit swap) for cash. If the borrowers fail to pay, AIG settles. Of course, for buying the risk (a k a swap), AIG takes a fee.
Some numbers will help us understand this better. Suppose Bank X wanted to de-risk loans aggregating Rs 200 crore. Suppose AIG charges Bank X Rs 5 crore to guarantee the Rs 200 crore exposures. Suppose AIG assumes that there is a 3 per cent probability that Rs 100 crore of the Rs 200 crore would devolve, that is, go bad — it provides 3 per cent of Rs 100 crore, namely Rs 3 crore in its books for estimated liabilities. That leaves it with a profit of Rs 2 crore on the transaction.
So far, so good. But competition does strange things to organisations. Someone like Lehman to out gun AIG may assume a 2 per cent risk of default and, hence, it may do the deal with Bank X for a lower price of, say, Rs 4 crore. At 2 per cent risk, it would provide Rs 2 crore (Rs 100 cr x 2 per cent) only and, hence, report a profit of Rs 2 crore. As undercutting turns rampant, assumptions relating to the underlying credit going bad becomes more aggressive, at some point becoming zero!
Now, if in the end, 7 per cent of the debt goes bad it would lead to a liability of Rs 14 crore (Rs 200 cr x 8 per cent) on Lehman who sold the CDS, whereas Lehman would have provided only Rs 2 crore in the books. Phew.
The growing chain
The story doesn’t end there. It is quite possible that Lehman Brothers to de-risk itself may buy a swap from someone else on the same loans.
This someone is willing to guarantee it for an even lesser fee because he makes more aggressive assumptions as to the outstanding going bad.
The result: a growing chain of CDSs on the same asset, with each one guaranteeing the previous one. And when the debt goes bad, the firm that holds the parcel pays through the nose.
AIG reportedly sold around $440 billion worth of CDS, which ended up in losses far greater than it had assumed. The ease with which banks could sell the risk clearly fuelled lending to bad accounts.
After all, you could do a crazy loan and the cover it with a CDS so long as there would be a greater fool to sell the cover. What got missed out in the race was that the CDS seller itself could, under the weight of CDSs, go turtle. And that was exactly what happened in the US.
A useful tool, through its blatant misuse, has shaken our confidence in the global financial architecture. Imagine what would have happened if these instruments had been further parcelled and sold to retail investors. Small mercies.
Curtsey: Hindu Business Line...
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where do you feel the market can break upto...
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a) mkts. may go even lower and MF`s are slow to respond to such movements;
b) even if someone invests in MF`s how does one select it (the one which has lost the most value in the past one year making it underpriced or an MF which has outperformed the mkt. last year). In any case, it is better to create one`s own portfolio of select stocks....
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Dear ritesh000004
Dont just ask half heated questions, please provide us the detail portfolio along with the age, investment goal, invest horizon and risk propfile, then we can suggest you.
Regds
Ashport...
In reply to:
ritesh000004
sir u have invested in many mutual funds like franklin asian equity,reliance natural resource......should i remain invested in these fund or exit..what is there future
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Indian market will be good for at least 2 to 3 years. Hence , inspite of current global issues , this will be right time for investing if chosen carefully and with lon term point of view....
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Hi All,
Can somebody explain the stand or the legal course of action.
For the past few days , we are hearing some news on the ICICI bank. If at all , something bad happens on the ICICI bank, what is the course of action for the Demat accounts held with ICICI bank. Are we secured?
I have few stocks and mutual funds invested through icicidirect. Is my portfolio safe with ICICI demat acct or even it gets effected when the bank collapses.
Can anybody answer?...
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sir u have invested in many mutual funds like franklin asian equity,reliance natural resource......should i remain invested in these fund or exit..what is there future...
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Read the article by Sandeep Shanbhag on this website -
You want to win in the markets. Take the following words of Calvin Coolidge to heart ---"Nothing in this world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent."
A six-year SIP was persistent enough. And look how much money it made.
- Sandeep Shanbhag
...
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Hello,
I am holding RNRL at 110 Rs. Should I exit or still hold at this movement?
I am a long term investor,
Dr Sanjiv Yadav
Singapore...
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Dear feroz83,
When you started SIP 19 months ago,Performance of all 5 Funds was GOOD. Since then, Performance of 4 Funds has declined. Performance of only Sundaram Tax Saver Fund continues to be GOOD.
You may Discontinue furter SIP in all the 4 Fund & start Fresh SIP in following Funds.
HDFC Growth Fund
ICICI Infra. / Focussed Eqity Fund
Reliance Quant Plus/ Equity Advantage Fund
IDFC Imperial Equity Fund
Sundaram Select Focuss Fund
P.C.Sharma
...
In reply to:
BEST TAX SAVING FUNDS
Posted by : feroz83
I have taken the following ELSS funds for 2 year SIP till now, where i have already completed 19 months with 5 months left.
SBI Magnum tax gain (D).
Sundaram Tax saver
ICICI tax saver
HDFC tax saver
Fidelty tax saver
How do you rate the above ELSS funds
I am a NRI and have purchase the all these funds through ICICI direct. DO you think DWS tax saving fund should be taken only becuase of the insurance coverage or rating on the performance Also ICICI direct doesn't provide insurance coverage for DWS funds
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