PICKING winners and avoiding losers is an artthat is honed over many years. There is no fin-ishing line and there is no magic formula thatwork in perpetuity. Take the case of RajeevGupta, a steel businessman who started invest-

ing in stock markets three years back. The 30-year-oldmade the most of the bull run on Dalal Street till Januarythis year and earned a big fortune out of the equity mar-kets. A college dropout, Gupta’s life was in a fast lane as hebecame an overnight celebrity in his friends’ circle. Butpost-January crash, Gupta realised that what goes around,comes around. Gupta’s portfolio, a combination of penny,small-cap and mid-cap, shed value by 20 times in the nextsix months. Some of the stocks even got delisted.

Gupta got a lesson of his life — you can’t ignore theanalysis part while picking up a stock. To make sure youdon’t commit such a mistake, here’s a layman’s guide onhow to interpret key fundamentals to your advantage.

FIRST THINGS FIRSTFor starters, fundamental analysis looks at historical per-formance data of a company to forecast the future per-formance. It researches both company specific fundamen-tals such as dividend yields, earnings, book to market ratio,price earning ratio, working capital, along with macroeco-nomic data indicators, such as exports and imports, mon-ey supply, interest rates, inflation rates, foreign exchangerates. In the words of Nitish Ojha, fund manager (equity),Taurus Asset Management, fundamental analysis is an artof picking good stocks and avoiding bad ones. “The inten-tion is to gain insight into how a listed entity will performover the short and long term. Though by no stretch ofimagination, it’s a perfect science,” he points out.

Technical analysis, however, uses mathematical timeseries of historical prices and copious volumes of otherstatistical models to predict future stock prices. “It is based

on the rationale that history will repeat itself and that thecorrelation between price and volume reveals marketbehaviour. Prediction of price is made with current pricetrends and patterns. The most commonly used technicalanalysis tool is moving average combinations,” says AlexMatthew, head of research, Geojit Financial Services.The other commonly used technical tools are oscillatorssuch as stochastic, moving average convergence/ diver-gence (MACD) and relative strength index (RSI), vari-ances, co-variances, candle sticks, fibonacci series, elliotwave theory and others.

DECODING THE MATRIXWhile a section of investors swear by fundamental analy-sis, a sizeable section believes that technical analysis is abetter bet to gain insight into future movement of stockprices. “Sharing from my experience, in the long run, Ihave seen prices almost always revert to the fundamentalvalues. However, in the short run, periods of over reactionor under-reaction are ubiquitous,” says Ojha. Matthew,

however, thinks that only a combination of fundamentaland technical analyses can provide an investor with theright answers. For instance, if an investor wants to invest inequities, he should understand the market dynamics andglobal factors that can affect the stock market such as infla-tion, GDP growth, currency movements, apart from otherworld markets’ performance.

Also, he should have a sound back ground and goodknowledge of companies and their sector. “For this, ratioanalysis comes handy. After you are through with thesector and the stock through fundamental analysis, tech-nical analysis can be incorporated,” Matthew elaborates.For example, if you select ‘capital goods sector’, use thetechnical analysis and find out the sectors performancethrough its index known as capital good sector index,which is available on BSE website, www.bseindia.com. Ifthe index is witnessing bullish trends, then you can in-terpret the stock using technical analysis to find out theentry and exit levels.

GAUGING THE FEARWith the market on a downturn and volatility high, ana-lysts consider that as investors, it is pertinent to track thevolatility index of Nifty and CBOE volatility index, whichprovide a much clear picture of the market. For the unini-tiated, if the volatility is above 30%, then the market is saidto be very fragile in nature, above 40%, then one can ex-pect uncertain market conditions and if the volatility indexis above 50%, it can be dangerous. If the volatility is lessthan 20%, it is good for buying stocks.

If you diligently follow the above processes and inno-vate along the way, more often than not, you will be ableto make realistic assumptions of the future performanceof the company and the inevitable corresponding pricemovement of stock prices.

aman.dhall@timesgroup.com

Maynard Keynes is alleged to have said: “When thefacts change, I change my mind.” Investors and lendershave moved from trusting anybody to trusting no-body. The fear driving today’s breakdown in financialmarkets is as exaggerated as the greed that drove theopposite behaviour a little while ago. But unjustifiedpanic also causes devastation. It must be halted, notnext week, but right now. The time for institution-by-institution and country-by-country approach is over. Ittook the regulators time realise the full dangers. Maybeit was errors at the US Treasury, particularly the deci-sion to let Lehman fail, that triggered today’s panic.

First of all, the panic must be dealt with. This has al-ready persuaded some governments to provide full orpartial guarantees of liabilities. These guarantees dis-tort competition. Once granted, however, they cannotbe withdrawn until the crisis is over. So Europeancountries should now offer a time limited guarantee(maybe six months) of the bulk of the liabilities of sys-tematically important institutions. In the US, howev-er, with its huge number of banks, such a guarantee isneither feasible nor necessary. This time-limited guar-antee should encourage financial institutions to lendto one another. If it does not do so, central banks mustlend freely, even on an unsecured basis, to institutionstoo systematically significant to be allowed to fail. Bythese means, the flow of credit should restart. But gov-ernments cannot allow banks to gamble freely withthe public money. During the period of the guarantee,governments must exercise close oversight over theinstitutions they have decided to protect.

Meanwhile, India must be careful to draw the rightlessons from the US crisis. Liberal finance is not a badthing in itself, but certain bits of the system need tin-kering. For one, the role of credit rating agencies,somehow not highlighted in the midst of this crisis,needs to be critically looked at by regulators. Second,we must understand that while financial inclusion is agood thing, too much of it, too fast may be counter-productive. This is not to argue that everyone shouldnot have access to a bank account: they certainlyshould. But banks and fi-nancial institutions need tobe more prudent in givingtoo much credit to high riskborrowers. Third, policymakers must keep track ofasset bubbles, usually acommon occurrence intimes of excess liquidity,and disincetivise bubbles.This is tough to do and car-ries the risk of over correc-tion. But regulators shouldstart thinking about broadguidelines.

Global pain in the US andEuropean financial markets during this week had adisastrous fallout on the Indian markets which was re-flective of a new 52-week low for both the Nifty andthe Sensex. Moving swiftly RBI, announced two quickCRR cuts —which will further infuse fresh liquidity.

On the domestic macro front while crude pricescontinued to soften further and dropped below the$80 per barrel level and Inflation numbers for thisweek also continuing to moderate on the lower side to11.80%, the news on the IIP numbers front for themonth of August 2008 was extremely shocking. IIPgrowth for August, 2008 recorded a growth of just1.3% against a consensus estimate of 5.5%, and com-pared to last year corresponding month number of10.9% which is the lowest since October 1998. Re-flecting the weak macro environment both globallyand for India, IMF has cut its world growth forecast to3% from 3.9% earlier and downgraded India’s GDPgrowth this year to 6.9% from 7.4% estimated earlier.The rupee also witnessed a fall of 3% to touch a high ofRs 49.30 per $ this week which is the biggest weeklydecline since November 1997. In fact one has observeda total dollar outflow of $7.9 billion during this weekwhich is the single biggest outflow seen till date withcumulative foreign exchange reserves standing at$283.94 billion as on date.

The markets have broken all earlier support levelsand now are in a totally different orbit as far as down-side is concerned. The market sentiment has beenbadly hurt by the continued FII unwinding seen tilldate and ‘fear factor’ has now clearly gripped the mar-kets resulting in panic selling across the board. Mar-kets may take some more time to stabilise and for nor-malcy to return. Nervousness is likely to continue thisweek. However, the oversold status of the marketsmay give some intermittent bounce back rallies,which could be used by panic struck institutional in-vestors or hedge funds for further offloading.

The writer is CEO, Reliance Money

Normalcymay take

more time

S U D I P B A N D Y O P A D H Y A Y

PICKING the right mutual fund out of more than 3,000options in the market can be really tough. But if you de-cide your investment strategy and fit it to your personalgoals, things get much simpler. A mutual fund scheme’sinvestment strategy describes the fund manager’s ap-proach to building a portfolio. Most equity mutual fundsfall into one of the three categories: index funds, active-ly managed funds and enhanced index funds. Withineach strategy there are a wide range of options.

UNDERSTANDING THE DIFFERENCE Index fund managers attempt to replicate the perform-ance of a benchmark index, say BSE’s Sensex or NSE’sS&P CNX Nifty, by creating a portfolio that mirrors thecomposition of the chosen index. In other words, thereis no effort to beat the index, merely to earn the samereturn. Index funds are also called passive funds due totheir passive investing style. Active fund managers seekto outperform the market as a whole and attempt tomeet this goal with a combination of smart stock pick-ing, market timing and asset allocation decisions. En-hanced index funds, not a commonly used term, fallsomewhere in between the two. They aim to track anindex, but also attempt to generate higher-than-marketreturns by straying from the index in order to take ad-vantage of market timing, specific stock selections,and/or leverage. See the chart for a brief summary of all

the three types of funds.

FITTING INTO YOUR PERSONAL GOALS As with any financial decision, choosing an investmentstrategy largely depends on your personal goals, as wellas other considerations, including the asset class you’reinvesting in, fund management and operating costs, in-terest in tax efficiency and your risk tolerance. And youhave plenty of choice. The mutual fund industry in In-dia is still in a nascent stage, and new schemes are beinglaunched almost by the day. Given the perplexing arrayof funds and schemes to choose from, it’s imperativethat you understand what suits you best and what willmeet your financial goals.

Your choice of investment strategy may depend onyour perception of the financial markets. The two com-mon market perceptions are whether the markets are‘efficient’ or ‘inefficient’. This is an age-old debate inwhich proponents of efficient market theory argue thatprices fully reflect all the available information on a par-ticular stock and/ or market and hence no investor hasan advantage in predicting a return on a stock price be-cause no one has access to information not alreadyavailable to everyone else. So when markets are per-ceived as efficient, it becomes harder and nearly impos-sible to beat the market. Index funds and enhanced in-dex funds can be smart choices if you think the markets

are efficient and because they seek to offer performancesimilar to the market average and in the long run re-turns from the markets will be higher than any activemanagement.

In contrast, in an inefficient market, some securitieswill be overpriced and others will be underpriced andfund managers may be able to gather informationthrough their research and analysis that is not widelyavailable to the public and be able to outperform the mar-ket average. Consequently you may favour activelymanaged funds if you think that markets are inefficient.

Most markets, particularly Indian markets, are inef-

ficient and skilled fund managers have the potential toadd genuine value for investors. The more inefficient amarket is, the easier it may be for skilled active man-agers to outperform the particular market as a whole.Financial markets of developed countries are more ef-ficient than those of developing economies and hencein India, the opportunity to outperform the markets aregreater, which is also reflected in the performance of ac-tive funds vis-à-vis index funds.

In addition to your personal view about whether themarkets are efficient or inefficient, it’s important tomake decisions in the context of your long-term finan-cial plan. So consider all your options before choosing aparticular investment strategy.

MAKING THE RIGHT CHOICE Choosing an investment strategy is largely a matter ofmaking informed decisions, with few right or wronganswers. Identifying the strategies that is best alignedwith your personal goals is a smart way to keep your fi-nancial plan on track. You can also benefit from includ-ing different investment strategies in your portfolios.The key is to stay focused on your long-term goals andchoosing your investment strategies accordingly. And itis imperative to understand that if you invest in equityyour investment horizon should be at least three yearsas equity funds are not advisable for short term.

WEEK AHEAD

The marketshave broken allsupport levelsand are in a

totally differentorbit as far asdownside isconcerned

INCOME EARNED ABROAD & TAXA resident Indian has ESOPs allotted tohim by his employer which are tradedonly on Nasdaq. He will be liable for cap-ital gains if he exercises the option andsells them now. Will the gains be taxableas other income?

Sudha JayaramIn case of a resident Indian (presuming theresidential status is resident and ordinarilyresident), the gain arising on sale of shares al-lotted under employee stock option plan(ESOP) would be taxable under the head ‘in-come from capital gains’ in the hands of thetax payer. The nature of the capital gains —whether short-term or long-term — woulddepend upon the period of holding of saidshares. If the shares are held for not more than12 months, short-term capital gains wouldarise; else long term capital gains would arise.Also, levy of capital gains would have to be ex-amined vis-à-vis levy of fringe benefit tax,based on facts of the case.

UNEXPLAINED DEPOSIT IN BANKA friend’s family transferred money tomy account (Rs 1 lakh) so that I couldhand over the money to my friend whodoesn’t have an account. Is this ok? Will Ibe questioned by tax officials?

AnonymousIf your tax return is picked up for assessment(revenue audit), you may have to explain theabove debit and credits to the tax authoritiesalong with documentary evidence. You mayalso be required to substantiate that this is not

your ‘income’, per se. Therefore, it may be ad-visable to open a bank account for the benefi-ciaries of your friend and remittances made di-rectly into that bank account, to avoid any dis-pute at a later stage.

TAX TREATMENT OF HRA & LOANI bought a flat in Bangalore. The flat hasbeen given for rent whereas I stay in arented house. Can you please tell if I can

benefit from the housing loan I took topurchase the above flat? I do not ownany other residential property. My com-pany did not consider my housing loan aswell as HRA that I paid for the house onrent. They said that they will consideronly one, either HRA or housing loan (Rs1.5 lakh benefit if I stay in my own flat).Please advise.

ParthaAs per provisions of the Income-tax Act, 1961(the Act), an exemption can be claimed by thetaxpayer for the rent paid in respect of an ac-commodation (not owned by him) occupiedfor his residential purpose, subject to certainconditions. In respect of the let-out houseproperty, a deduction of the interest payableon the housing loan can be claimed by the tax-payer under the head ‘income from houseproperty’ (actual interest without any upperlimit). Further, a deduction under section 80Cof the Act is available in respect of the principalre-payment of the housing loan (maximumup to Rs 1 lakh). Based on the facts of the in-stant case, you can claim the HRA exemptionfor the rent paid by you, to the extent permis-sible under the Act. Also, you are eligible toclaim the deduction for the interest paid on thehousing loan (from annual value of the let-outflat) along with the deduction of the principlerepaid under section 80C of the Act.

M A N T R ABogged down by market turmoil and

don’t have a clue how to manage yourinvestments? SundayET has tied up withtop financial planners to take care of allyour worries. Just write in to our panel

of experts at moneyandu@indiatimes.com

M O N E Y

THE ECONOMIC TIMES ON SUNDAY

MUMBAI 12 OCTOBER 2008 11

RingsideVIEW

Shruti Jain

Senior vice-president

Arihant Capital Markets

Vikas Vasal, partner, KPMG India(These comments are based on the limited inform-

ation provided by the investors. The advice may varysubject to actual facts and circumstances of the case)

Tired of thecurrent pricevolatility andmarketmayhem? Tryresearch toolsto arrive at thecorrectinvestmentdecision.Aman Dhallreads thefineprint

Say it with STATS

Let your investment strategy decide mutual fund choice

AN

IMIS

HA

INVESTMENT FUNDASWhile 3, 9 and 18-day simple moving average

combination predicts the short-term trends, 200, 100, 50and 10-day moving averages predict the long-term trends

Buying signal happens when the short-term movingaverage line breaks through the long-term moving averageline from down. Selling signal happens when the short-term moving average line breaks through the long-termmoving average line from up

Efficient market theory holds that in an efficient market,new information is processed and evaluated as it arrives andprices instantaneously adjust to the news and correct levels