Wednesday, 10 August 2011

Markets tumble; should you stop your SIP?

On Tuesday 9 August 2011, 11:59 AM
Markets fell by 340 points yesterday and has fallen 260 points already today. For people like us markets means Sensex! So what to do?
I have so many panic SMS coming to me! The worst thing to do is to stop the SIP! Remember if you had a COMPULSORY SIP….you would have continued to invest, right? Treat the SIP as an EMI of your dreams….
Markets are driven by 3 factors — Earnings of the companies, the future expectations (price-earning ratio) and the liquidity in the market. In the current market earnings are at their peak — the next couple of quarters is likely to see flat or slowing down of the earnings. This itself reduces the price expectation (or the p/e goes down) and the Greece problems (Euro) and the US down grade might mean some FII money could get pulled down.
So the market is surely headed down, correct?
Well not so fast. What I told you in para 1 is known to everybody in the market — so you could argue that all this is already played out and therefore the market will remain stable. Difficult to say.
MY PERSONAL view is that some shares in everybody's portfolio would be overpriced and therefore STILL worth selling.  Some shares would be worth buying. For example I think the portfolio of Tata Investment Corporation would have come down — so the share will come down in sympathy. However if you think the portfolio is good, the share may be a good buy. Frankly to me it does not make any difference — I hold TIC in my portfolio — and I do enter and exit this share once in a while. When the market falls, the nav of this share falls, but the discount also increases…so it becomes a good buy. It is the only finance company which is purely into investing. I prefer this to any other fund scheme especially when the markets are low.
Are the markets low? Is the fall over? Frankly I do not have an answer to both the questions.
Can the market go down to 15,000 Sensex? No answer again.
Let us ask the question a little differently….
Will people stop brushing their teeth? Shampooing their hair? Buying a motorcycle? Buying a car? a house? Taking a vacation? I guess the answer is simple…Something people postpone (Mahindra Holiday Resorts, Sterling Resorts), but Hindustan Unilever, Colgate, PnG, Gillette, Hero Honda….will continue to earn money.
So one quarter may be bad, 2 quarters may be bad….but then interest rates will start going down, and markets will revive. We have seen this happen, have we not. A day is followed by a night….of course there is waning and waxing of the moon…and like they say…kabhi kabhi Amavyas ho jati hai! So relax. Stop watching TV….or watch Discovery.
If you are in the mutual funds continue your SIPs — those people who continued their SIP in 2008 and 2009 are better off compared to those who shut it in 2008 waiting for the market to improve!
The author P V Subramanyam is a Chartered Accountant by qualification and a financial trainer by profession. Writing being a passion he also regularly pens his thought in his blog

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