Prajna Capital

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• Stock Market downturn and Investor behaviour
• Investors err in seeking complex solutions
• Reliance Equity Opportunities Fund

Stock Market downturn and Investor behaviour Posted: 04 Oct 2013 03:52 AM PDT Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)     Endowment effect helps explain investor behaviour during bear markets   In one of the early experiments on behavioural finance, American economist and behavioural scientist Richard Thaler documented the now famous endowment effect. People attach a higher value to the goods they own, compared to the price they would be willing to pay for acquiring something similar. The price we are willing to accept is higher than the one we are willing to pay. The bear markets test this behavioural bias that investors suffer from. When our investments do not perform as expected and the prices begin to correct in the initial stages of the bear market, we suffer from the endowment effect. We refuse to sell a loss-making share we bought, or book a loss in a mutual fund we hold. We are still biased by the memories of the bull market prices. While our willingness to pay a high price has dropped, the willingness to accept a lower price for what we hold is absent. After a prolonged period of pain, when the prices continue to drop, we suffer from a sense of regret. Regret reduces, and eventually nullifies, the endowment effect.   Behavioural economists point out that decision-making is tough when it is associated with regret. However, a prolonged fall in prices in the financial markets leads us towards the inevitable need to regret the excesses of the past, and admit that we may have made a mistake. We are then willing to sell, or accept a selling price that is equal to the price at which we may be willing to buy. The endowment effect is gone since the ownership of a losing stock is not associated with the pride that creates a mental premium. When regret turns to disappointment, the endowment effect actually reverses completely. Psychologists define disappointment as involving five elements. The outcome is uncertain; we expect a positive outcome; we believe we deserve a positive outcome; the negative outcome surprises us; and we are unable to control the outcome with our actions. Most investors are currently disappointed with their investment decisions. At this stage, they are willing to sell in distress and accept a price that is even lower than the one they may be willing to pay. The seeds of reversal in the downmarket cycle lie in this turning around of the endowment effect. Consider the other side of the fence, where sit those who want the investors' money. The businesses that were set up in the boom cycle would have been optimistic about outcomes. Not all of them would have the merit of becoming successful, but would have attracted capital from optimistic investors all the same. When the cycle of opportunity begins to change, these business owners also suffer from the endowment effect. How many business leaders would have told investors that they may have made a mistake? DLF continued to hold that its sales would pick up; Suzlon was confident about managing its debt; the Future group was still expanding its retail footprint; Kingfisher felt that all it needed was some foreign capital; and Educomp had reinvented the K-12 markets for education. None of these business owners gave the impression that they were holding a losing business. Over the period that the economic downturn has played out, we have seen regret leading to closure of outlets, branches and units. When regret has converted to disappointment, we have seen distress sales, closures, search for strategic buyers, and prices and valuations that are too distant from the optimism of the past. The willingness to give up what was once owned and considered precious is the known outcome of disappointment. From divorces and break-ups to job changes and business closures, the ability to give up what is not working marks the end of the cycle which began with the craving for ownership. In the financial markets, this reversal leads to creative destruction. The money that is lost in the ventures that have not been working is written off. Money no longer flows into bad business proposals. The need for careful selection returns. Businesses and investors are too cynical to take on risky projects with unknown outcomes. The distress, arising from the unwillingness on the part of both businesses and people to invest, turns into cynicism. In an environment where even the best business propositions look shaky, the scope for a poor quality project to come in reduces. The audacity of throwing money in businesses without due diligence turns into vigilance about every rupee being invested. Tomorrow's winning businesses emerge from this churn. Investors are tuned to looking at the past and are dismayed by the loss of value in what they owned yesterday.    Businesses learn to let go of the past and begin to give up what was once precious. When the evidence of the latter action starts to become visible to the investors, the cycle would have turned. Investors now suffer like the jilted lover. Seething with disappointment, angry about the way things have turned out, and cynical about relationships. The normal response is to sulk, find fault, remain depressed, and be unwilling to act. Psychologists counsel the disappointed, asking them to not blame themselves, but try to find new friends to be with, and new activities to pursue. To those like investors, who cannot look beyond their love for markets, humour is the prescribed medicine. Lectures such as these, about cycles, are indeed cruel and run the risk of being shrugged off. Perhaps it's time to bring those cartoonists in. Happy Investing!! We can help. Call 0 94 8300 8300 (India) Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C. Invest Tax Saving Mutual Funds Online Tax Saving Mutual Funds Online These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving) Download Tax Saving Mutual Fund Application Forms from all AMCs Download Tax Saving Mutual Fund Applications These Application Forms can be used for buying regular mutual funds also Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds ) ICICI Prudential Tax Plan Invest Online HDFC TaxSaver Invest Online DSP BlackRock Tax Saver Fund Invest Online Reliance Tax Saver (ELSS) Fund Invest Online Birla Sun Life Tax Relief '96 Invest Online IDFC Tax Advantage (ELSS) Fund Invest Online SBI Magnum Tax Gain Scheme 1993 Invest Online Sundaram Tax Saver Invest Online Edelweiss ELSS Invest Online ------------------ Best Performing Mutual Funds Largecap Funds Invest Online DSP BlackRock Top 100 Fund ICICI Prudential Focused Blue Chip Fund Birla Sun Life Front Line Equity Fund Large and Midcap Funds Invest Online ICICI Prudential Dynamic Plan HDFC Top 200 Fund UTI Dividend Yield Fund Mid and SmallCap Funds Invest Online Reliance Equity Opportunities Fund DSP BlackRock Small & Midcap Fund Sundaram Select Midcap IDFC Premier Equity Fund Small and MicroCap Funds Invest Online DSP BlackRock MicroCap Fund Sector Funds Invest Online Reliance Banking Fund Reliance Banking Fund Tax Saver MutualFunds Invest Online ICICI Prudential Tax Plan HDFC Taxsaver DSP BlackRock Tax Saver Fund Reliance Tax Saver (ELSS) Fund Gold Mutual Funds Invest Online Relaince Gold Savings Fund ICICI Prudential Regular Gold Savings Fund HDFC Gold Fund Invest in Tax Saving Mutual Funds Download Any Application Forms Buy Mutual Funds Online Invest Online Buy Gold Mutual Funds Invest Now

Investors err in seeking complex solutions Posted: 04 Oct 2013 02:49 AM PDT Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)     Advisers are at pains to convince clients to follow the KISS principle: 'Keep it simple, stupid!' Investors are prone to making mistakes. Even the best of fund managers make mistakes. But small investors, mainly because of their lack of knowledge and understanding of the investment process, are prone to making mistakes which are even psychological in nature, rather than analytical. There are mainly three situations when retail investors make mistakes while planning their investments. First, there are decisions which are based on emotions rather than on logic. Second, when they act under peer pressure and spend money, forgetting about their ability to meet those expenses. And then, most investors believe that a simple investment solution cannot be the best solution. They look for complex solutions even if the final result is barely different from the one which one can arrive at with a simplistic approach. Investors, especially retail investors who barely have any exposure to investment processes, often take investment decisions based on their emotions rather than on sound logic while planning their finances. For example, owning a house is often considered as a symbol of financial success, even though real estate is usually very illiquid and at times, although rarely in India, has depreciated in value. Another example of emotional decision-making is one's inclination to invest most of his/her money into one asset class rather than going for a proper portfolio allocation. Such decisions are often based on the grounds that the asset class in question had performed well for the past few months or year. Although pure investment logic says that if an asset class has outperformed other assets classes by a substantial margin, in all probability that asset class would start underperforming very soon. So rather than putting a major chunk of one's money in that asset class, one should allocate a smaller portion there. But being driven by emotions, most investors usually do the opposite. Peer pressure is another influential factor for investors to forgo logic while investing. Often it happens that a group takes an investment decision and then another person, closely associated with the same group, takes an investment decision influenced by the same group although this particular person's risk profile and needs for investments are markedly different from the other members of the group. Often we see major influences of friends, family members, social groups, etc, in arriving at one's own financial decision-making. When one is constructing a portfolio, often seasoned investment managers prefer to follow the KISS principle — 'keep it simple, stupid!' However, most investors don't accept that a simple portfolio could be rewarding in the long term. For them, simple is difficult. They often look for a portfolio that would involve complex strategies, forgetting that for them it's much easier to understand and keep track of a portfolio with simple strategies. There are some other common mistakes also that investors commit, financial planners and advisers say. One of them is to not have any timeframe for an investment. Ideally, all investments should be done with a goal and a timeframe in mind. Over-leveraging is another mistake that's common among investors. This happens because often an investor cannot, or fails to, properly calculate his/her income and expenditure. For example, such an act often leads to a situation where one takes up a monthly outflow, say an EMI, which he/she cannot fulfill in the long run. Another common mistake among most retail investors is to prefer investments which save taxes for them even if there are investment options that can give them better posttax returns than the tax-saving ones. Investors should always look for investments which give them better post-tax returns. Tax-saving products should be one of the options, but it should never be the first option or the only option. On this page, the article by Umang Papneja gives some more examples of how investors make mistakes while taking financial decisions. Happy Investing!! We can help. Call 0 94 8300 8300 (India) Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C. Invest Tax Saving Mutual Funds Online Tax Saving Mutual Funds Online These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving) Download Tax Saving Mutual Fund Application Forms from all AMCs Download Tax Saving Mutual Fund Applications These Application Forms can be used for buying regular mutual funds also Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds ) ICICI Prudential Tax Plan Invest Online HDFC TaxSaver Invest Online DSP BlackRock Tax Saver Fund Invest Online Reliance Tax Saver (ELSS) Fund Invest Online Birla Sun Life Tax Relief '96 Invest Online IDFC Tax Advantage (ELSS) Fund Invest Online SBI Magnum Tax Gain Scheme 1993 Invest Online Sundaram Tax Saver Invest Online Edelweiss ELSS Invest Online ------------------ Best Performing Mutual Funds Largecap Funds Invest Online DSP BlackRock Top 100 Fund ICICI Prudential Focused Blue Chip Fund Birla Sun Life Front Line Equity Fund Large and Midcap Funds Invest Online ICICI Prudential Dynamic Plan HDFC Top 200 Fund UTI Dividend Yield Fund Mid and SmallCap Funds Invest Online Reliance Equity Opportunities Fund DSP BlackRock Small & Midcap Fund Sundaram Select Midcap IDFC Premier Equity Fund Small and MicroCap Funds Invest Online DSP BlackRock MicroCap Fund Sector Funds Invest Online Reliance Banking Fund Reliance Banking Fund Tax Saver MutualFunds Invest Online ICICI Prudential Tax Plan HDFC Taxsaver DSP BlackRock Tax Saver Fund Reliance Tax Saver (ELSS) Fund Gold Mutual Funds Invest Online Relaince Gold Savings Fund ICICI Prudential Regular Gold Savings Fund HDFC Gold Fund Invest in Tax Saving Mutual Funds Download Any Application Forms Buy Mutual Funds Online Invest Online Buy Gold Mutual Funds Invest Now

Reliance Equity Opportunities Fund Posted: 04 Oct 2013 12:57 AM PDT Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   We like this fund for being malleable enough to change its market capitalisation according to the prevailing environment and profitably rotating its portfolio across sectors.   Strategy The scheme aims to invest in stocks across those sectors and industries which drive the country's growth and are influenced by the ongoing economic reforms and infrastructural changes. As per the fund manager, the fund tries to take thematic bets, of which some are very offbeat and non-benchmark related. The fund generally doesn't hold more than 10 per cent in cash.   Performance The fund first came into limelight in 2009 when it beat the category average by 25 per cent, after consecutive years of below par performance. It has been outperforming most of its peers since then and even managed to curtail its losses better in the market crisis of 2011. In its 8-year history the fund's portfolio emphasis has changed several times; from large- and mid-cap to multi-cap to now mid- and small-cap. Its top winners include HCL, SBI, Cummins India, Aurobindo Pharma, Jindal Saw, Shopper's stop, Hathway Cable and Datacom, Sanofi India and Divis Laboratories (highest allocation of 8 per cent). The list of misses has names such as Future Retail, Jindal Saw and Torrent Power. Surprisingly, the fund is not gung-ho about the FMCG theme and has just 3 per cent allocated to it for the past four years and is instead overweight on healthcare and services, benchmark-wise. The dominant sectors of the fund include automobile, financial, healthcare, services and technology. Happy Investing!! We can help. Call 0 94 8300 8300 (India) Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C. Invest Tax Saving Mutual Funds Online Tax Saving Mutual Funds Online These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving) Download Tax Saving Mutual Fund Application Forms from all AMCs Download Tax Saving Mutual Fund Applications These Application Forms can be used for buying regular mutual funds also Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds ) ICICI Prudential Tax Plan Invest Online HDFC TaxSaver Invest Online DSP BlackRock Tax Saver Fund Invest Online Reliance Tax Saver (ELSS) Fund Invest Online Birla Sun Life Tax Relief '96 Invest Online IDFC Tax Advantage (ELSS) Fund Invest Online SBI Magnum Tax Gain Scheme 1993 Invest Online Sundaram Tax Saver Invest Online Edelweiss ELSS Invest Online ------------------ Best Performing Mutual Funds Largecap Funds Invest Online DSP BlackRock Top 100 Fund ICICI Prudential Focused Blue Chip Fund Birla Sun Life Front Line Equity Fund Large and Midcap Funds Invest Online ICICI Prudential Dynamic Plan HDFC Top 200 Fund UTI Dividend Yield Fund Mid and SmallCap Funds Invest Online Reliance Equity Opportunities Fund DSP BlackRock Small & Midcap Fund Sundaram Select Midcap IDFC Premier Equity Fund Small and MicroCap Funds Invest Online DSP BlackRock MicroCap Fund Sector Funds Invest Online Reliance Banking Fund Reliance Banking Fund Tax Saver MutualFunds Invest Online ICICI Prudential Tax Plan HDFC Taxsaver DSP BlackRock Tax Saver Fund Reliance Tax Saver (ELSS) Fund Gold Mutual Funds Invest Online Relaince Gold Savings Fund ICICI Prudential Regular Gold Savings Fund HDFC Gold Fund Invest in Tax Saving Mutual Funds Download Any Application Forms Buy Mutual Funds Online Invest Online Buy Gold Mutual Funds Invest Now

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