making sense of the markets

8/3/2019 Making Sense of the Markets

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Fidelity’s Guide

to Making

senseof the markets



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1. Investing can be rewarding

but is often uncomfortable

2. A place for cash

3. Strategies for successful investing

4. When is the best time to invest?

5. The miracle of compounded returns

6. Making the most of allmarket conditions

It is always difficult to be sure you are making the right

decisions about how your money should be invested,

but it is even more challenging when markets are going

through a period of volatility. Fidelity believes that the

best way to approach investment decisions is to make

sure that you have the right types of investments to

achieve your long term goals and to think of the future

in terms of years rather than days or months.

We hope this short guide helps you make successful

decisions about your investments and keeps you on theroad to meeting your financial goals.

Making the

right decisions

Contents

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“Nothing ventured, nothing gained” applies just

as much to the stock market as it does to other

aspects of life. Most investors realise this in

theory, but may not feel so sure about it when

they have to face the reality of a falling market.

This is only human – when markets are buoyant

and your portfolio is going up in value, you

probably feel you have made a good choice.

But that won’t stop you questioning your

investment decisions when things are more

volatile and you see your investment fluctuate invalue.

1. Investing can

be rewardingbut is often

uncomfortable

When stock markets are going through one oftheir inevitable periods of turmoil, it can bereassuring

to take a long term perspective and remember that you are investing for years, rather than days ormonths. This may remind you that there is plenty of time for the markets to recover from any

temporary setbacks. And you will see that the only way to benefit from the stock market’s potential

for significant long term growth is to endure periods when things look a bit more worrying.

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The market decline of 2000–03, which is when the tech bubble burst is clearly visible on the

chart. However, when seen in the context of a 32-year view, the boom of the 1990s seem to be

a distortion, after which market performance corrected itself and then returned to the long term

upward trend.

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Long Term Performance of the BSE Sensex

Source: Bloomberg, ICRA MFIE, based on BSE Sensex, 3.4.1979 to 04.11.2011Past performance may or may not be sustained in the future.

Another benefit of taking a long term view is seeing for yourself that the general trend in stock

markets has been positive, even though there have been sharp falls. The graph below shows how

much the Indian market has grown since 1979, when the BSE Sensex was launched. It is

interesting to note that the largest fall in the Indian stock market - on 6th March 1986 - barely

registers as a blip, even though the market fell by more than 13% on a single day. This is because

it recovered in a matter of weeks.



How the markets have performed over the last five years

Source: ICRA MFIE, AMFI, 31.10.06 to 31.10.11Past performance may or may not be sustained in the future.

Oct 06 –

Oct 07

Oct 07 –

Oct 08

Oct 08 –

Oct 09

Oct 09 –

Oct 10

Oct 10 –

Oct 11

Shares 53.05% -50.66% 62.40% 26.02% -11.62%

Gilts (I-sec Composite Index) 7.22% 9.47% 8.11% 5.63% 4.96%

Cash (Crisil Liquid Fund Index) 7.41% 7.71% 6.24% 4.33% 7.98%

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The real value of investing for the long term

Research by Fidelity shows that over the last 32 years, the probability of investors losing money

over a one-year or three-year period would have been relatively high - 30% and 15% respectively - if

they had invested in a fund tracking the Indian stock market. However, the probability of losing

money on a similar investment over ten years would have been as low as one percent - this has

also been true for most international investments. The message is that the longer you invest for, the

more likely it is that you will benefit from the long term growth potential of the stock market.



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It is always a good idea to have some money

set aside in case of emergencies. Enough to

cover three months’ living expenses is often a

rough guide to how much you may need. And for

most of us a bank account is a safe place to

keep cash. It is also useful for short term savings

– putting money aside for a new car, a holiday

or the deposit on a house.

However, with a long term investment, the

security of cash has to be balanced against the

risk that it will not generate the level of returns

you are hoping for.

The spectre of inflation

A potentially more serious threat to your bank account is the damage that inflation can cause.

Rising prices could mean that the real return on your savings is very small. For instance, if your

account pays 8% but inflation is 6%, you are only making 2% in real terms. You then have to take tax

into account – for an investor in the highest tax bracket, this will result in a negative real return.

If inflation is higher than 6%, as it is at the moment, the effect on your real returns will be evenworse. A reduction in interest rates would also cut into the returns on your savings.

2. A place

for cash



3. Strategies for

successfulinvesting

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Ensure that your investments are

right for you

Different investments suit different people atdifferent stages in their lives. And each one has

its own level of risk and reward. The basic rule of

thumb? The greater the risk, the greater the

potential reward. And vice versa. It is also

important to think about your own temperament

– if you find it too worrying that your investment

might occasionally go down in value, you shouldperhaps weight your portfolio towards more

secure holdings.

Here is a broad description of some investment options:

Gold and Real Estate are traditional investments and due to their 'physical' nature are not liquid.

PF, PPF, NSCs and Post Office Savings are long term national savings avenues that help you save

for retirement besides offering tax benefits. But when it comes to true blue financial investments,

there are three main asset classes: Cash, Bonds and Equities.



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• Cash is good for an emergency fund or a short term goal like a holiday, but you may find the

returns disappointing over the long term, and you need to remember that their value will be

eroded by inflation.

• Bonds (or loans issued by the government and large companies) can provide better returnsthan bank accounts but cannot offer the same level of security. Although bond funds do not

have as much growth potential as stock market investments, they tend to be less volatile.

Investors often opt for bonds when they need to reduce risk – perhaps in the years leading up

to their retirement.

• Equities offer the most growth potential over the long term, but you need to accept that there

may be periods when the value of your investment falls sharply.

As the years go by, it is important to check your portfolio regularly to make sure that it still suits

your long term strategy. If an investment has done particularly well, you may find that it now

accounts for a disproportionate share of your overall portfolio and you need to do some

rebalancing.

In addition, you will probably need to adjust the weights of your investments from time to time –

for example, reduce the amount of risk you are exposed to as you get nearer to retirement.



Keep calm

If you are confident about your long term strategy, you do not need to react to short term

movements in the market. You will know that your investments have time to ride out the storm and

perhaps even go on to take advantage of any further growth.

It is important to be patient with the stock market and to avoid knee-jerk reactions and rash

decisions in response to worrying news.

“The worst mistake a private investor can make is to be sucked into markets when

they are high and the prevailing mood is the most optimistic, only to then get

shaken out at times like this when prices are falling and the outlook is uncertain.

It normally takes many years to recover from this experience.”

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Anthony Bolton, President - Investments, Fidelity Worldwide Investment



When the stock market is volatile, it can be very

tempting to move out. For example, if you think

that the market is likely to fall even more, you

might consider selling investments so that you

can buy them back when they are cheaper.

This may sound like a good strategy in theory,

but in practice it is extremely difficult. Even expert

fund managers who spend all their time

watching the market cannot tell for certain when

prices have reached either their top point, when

it might be good to sell, or their lowest point,

when it would be good to buy.

4. When is the

best time toinvest?

The problem is compounded by the fact that markets tend to rise very soon after they fall, and the

rises are often concentrated into short periods of time. For example, on 13th October 2008, in the

midst of the recent market upheavals, the BSE Sensex leapt by 781 points – one of the biggest

one-day rises it had recorded to that point. If you try to time the markets, it is all too easy to missdays like that.

Of course, you should always remember that the value of investments can go down as well as up,

so you may not get back as much as you invest.

Think about time, not timing

Because it is difficult, if not impossible, to predict how the stock market will move from day to day,

Fidelity believes it is time, not timing, that is the key to investment success. By this we mean that the

longer you stay invested, the more opportunity you will have to benefit from the stock market’s

potential for impressive long term growth.

If you put off making an investment because you think prices have further to fall, there is a risk that

you will miss out on the significant rises that often occur in the early days of an upward trend.

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Conversely, if you sell an investment because the markets are falling and the news is full of gloomy

predictions about the economy, you may find you have come out of the market at exactly the

wrong time, just before the start of a recovery. It is worth remembering that markets tend to move

in advance of the economy. In other words, share prices can start recovering before the economy

shows signs of emerging from the doldrums.

The best course is to choose investments that you feel confident about and take a long term view,

accepting that there will almost certainly be difficult times along the way.

The risk of missing a recovery

The graphs show how the Indian stock market has fared through three severe bear markets.

No one knows for sure when a market has reached the bottom of a trend. So an investor who

waits until things look more positive risks missing the initial part of a recovery, when the most

significant gains may be made.

1992: the stock market crash

Time to recover: 28 months

(2 years and 4 months)120,000

100,000

80,000

60,000

40,000

22-Apr-92 17-Jun-93 12-Aug-94

20,000



The graphs show how long the market took to return to its previous level after the three events occurred. We started with a notional Rs.100,000investment just before the event, then used returns of the BSE Sensex (Source: Bloomberg) to show how the Indian stock market fluctuated untilreturning to the starting value of Rs. 100,000. Remember, indices are not a representation of a financial product - they do not take account of costs ortax and do not reflect the performance of any individual portfolio of stocks. Past performance is not an indicator of future performance.

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120,000

100,000

80,000

60,000

40,000

20,000

1-Sep-00 12-Oct-01 22-Nov-02 2-Jan-04

2000: the tech meltdown

Time to recover: 47 months

(3 years and 11 months)

2008: the stock market meltdown

Time to recover:?

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The effect of compounding

Amount

you investeach month

Time you invest for

10 year 20 year 30 years

Rs. 1,000 Rs. 184,166 Rs. 592,947 Rs. 1,500,295

Rs. 2,000 Rs. 368,332 Rs. 1,185,894 Rs. 3,000,590

Rs. 5,000 Rs. 920,830 Rs. 2,964,735 Rs. 7,501,475

These figures are based on hypothetical

investment that grows at the rate 8%compounded monthly and are forillustrative purposes only.

5. The miracle of

compoundedreturns

The key to this simple, but extraordinarily

powerful concept is the way in which, given

enough time, even apparently trivial amounts of

money can turn into sizeable sums. In other

words, the longer you invest for, the more you

benefit from the “snowballing” effect of

achieving growth not only on the original amount

you invested but also on all the growth it has

achieved in earlier years.

The table below shows how much growth you

might achieve with a monthly investment over 10,

20 and 30 years. For example, if you invest

Rs.1000 a month in a fund that grows by 8% on a

monthly compounding basis you will have Rs. 1,84,166 after 10 years. The benefit of compounding

is evident when you look at the returns over 30 years – Rs. 1,500,295 - far more than eight times

the value of a ten-year investment.

The powerful effect of compounding is another important reason why it usually makes sense to

maintain a long term investment strategy, rather than changing your investments in response to

short term market movements.



6. Making the

most of allmarket

conditions

A SIP or monthly investment plan can be a

good way to maintain a long term investment

strategy and is a useful way of being

disciplined about saving for the future – you will

soon start thinking of your regular payment asan essential part of your budget.

Monthly investments also give you a way to

benefit no matter how the markets are

performing:

•

if the market goes up, the units you alreadyown will increase in value

• if the market goes down, your next payment

will buy more units

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A further benefit of regular saving is that you can capitalise on a phenomenon known as “rupee

cost averaging”, which is illustrated in the table alongside. It compares the returns achieved from alump-sum investment of Rs. 60,000 and a series of six monthly investments of Rs. 10,000 each.

The regular saver finishes the period with an investment that is worth more than that of the

lump-sum investor – even though the starting price, finishing price and average price are exactly

the same. It sounds unlikely, but it’s true. Check the figures for yourself!



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1 20 60,000 3,000 10,000 500

2 18 - - 10,000 556

3 14 - - 10,000 714

4 22 - - 10,000 455

5 26 - - 10,000 3856 20 - - 10,000 500

Total invested (Rs) 60,000 60,000

Average price paid (Rs) 20 19

Total number of units bought 3,000 3,110

Value of investment after 002,26000,06six months (Rs)

LUMP SUM INVESTOR REGULAR SAVER

Month Unit Price(Rs.)

AmountInvested (Rs.)

UnitsBought

AmountInvested (Rs.)

Units*Bought

The power of rupee cost averaging

This example uses assumed figures and is for illustrative purpose only.* Fractional units ignored. There is no guarantee that the cost averaging willresult in better returns that lump-sum investing.



Risk Factors: Mutual funds, like securities investments, are subject to market risks and there is no guarantee against loss in the scheme or that

the scheme’s objectives will be achieved. • As with any investment in securities, the NAV of the Units issued under the scheme can go up or

down depending on various factors and forces affecting capital markets • Past performance of the Sponsor/the AMC/the Mutual Fund does not

indicate the future performance of the scheme. Please read the Scheme Information Document and Statement of Additional Information

carefully before investing. Statutory: Fidelity Mutual Fund (‘the Fund’) has been established as a Trust under the Indian Trusts Act, 1882, by FIL

Investment Advisors (liability restricted to Rs. 1 Lakh). FIL Trustee Company Private Limited, a company incorporated under the Companies Act, 1956,

with a limited liability is the Trustee to the Fund. FIL Fund Management Private Limited, a company incorporated under the Companies Act, 1956, with

a limited liability is the Investment Manager to the Fund. Fidelity, Fidelity Worldwide Investment, the Fidelity Worldwide Investment logo and F symbolare trademarks of FIL Limited.

fidelity.co.in

1800 2000 400

We're

here

to help

Fidelity has a long history of helping people meet their

financial goals. We have a range of brochures about our

products and services and a number of free guides on

key investment topics. Please contact us if you would like

copies of any of these publications or more information.

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making sense of the markets

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