Good time to start SIPs

Yet, tens of thousands are making this costly mistake.


Tens of thousands of investors, Reserve Bank of India data show, are making a costly mistake. This is to stop their Systematic Investment Plans (SIP) in equity and balanced mutual funds when the stock market enters a correction phase after a boom. RBI’s 2008-09 annual report said around 400,000 investors had closed their mutual fund SIP accounts.


These investors do not realise that continuing SIPs in a volatile or falling market is as important as systematic investments when the market is in a bull phase. For, if a person invests through an SIP, there are good chances that his investments will fall less than a lumpsum investment made at the wrong time. When the market turns around, the investor does not miss the positive rally.

Financial planners say that investors are wary of putting money in equity when the markets are falling. They usually stop all equity-related investments and some even withdraw their investments at a loss. Obviously, these wrong beliefs are reaffirmed when investors find that SIPs underperform a one-time investment in a rising market, which does happen. But, the flip side of this argument is that SIP investments also decline less when markets are bearish.


“What investors do not realise is that lumpsum one-time investments need to be timed, and timing the market is not possible. Nobody can predict when to enter and exit. Whereas, with an SIP, investors can still manage better returns if they stay invested through an entire market cycle,” said a financial planner.

This method of investment is more relevant in a market situation like Thursday’s. Most of us are bullish about the long-term growth story of the country. While one can expect good returns over the long term, experts suggest it is not going to be a smooth journey. There would be volatile periods like the ongoing one. Investments through an SIP can ensure steady returns. This should be clear if one understands the way an SIP functions.

One can equate SIPs to the recurring deposit. The investor can put in a small fixed amount every month and withdraw it later. It allows the person to participate in the stock market without trying to guess its movements.

In an SIP, the fund allots units for the investments made. This means, when the market rises, the investor gets less units but when markets undergo a correction, he receives higher units. This way, the investor gets to average the cost of his purchase.

Saving small sums every month for a long tenure can work wonders with investments when the money starts compounding. A person who is saving Rs 5,000 every month for 20 years will end up with a corpus of Rs 75.80 lakh if the average return of his investments is 15 per cent.

After the ban on entry load, banks have started taking commissions for one-time investments, whereas SIP investments are done at no cost by some of the banks. This is an added benefit.

The best part is that SIP investments can start as low as Rs 500 per month. But, this does not mean that SIP is only fit for small investors. “The benefit of SIPs is relevant to all classes of investors,” said Brijesh Dalmia, director, Dalmia Advisory Services. Even for the high net worth investor, SIPs reduce the chance of investing at the wrong time and losing their sleep over a wrong investment decision.

The benefits of SIP do not stop here. Financial planners say regular investing also ensures financial discipline, key to building and managing wealth over a person’s lifetime. “Inculcating this habit is essential for long-term wealth creation,” Dalmia said.

Article published in Business Standard, dated 19th Feb 10.
(http://www.business-standard.com/india/news/stopping-your-sip-now-is-bad-strategy/386137/)

Mayuresh's blog: The dollar decline to continue... why??? Read for the reasons

http://economictimes.indiatimes.com/Features/Emerging-markets-to-provide-strong-returns-Schroders/articleshow/5300313.cms

The dollar decline to continue... why??? Read for the reasons

We should expect to continue to see dollar weakness. There will obviously be short time periods, short periods where the dollar has a bounce but there are three underlying factors that would give you ongoing dollar weakness, one is obviously the economy that is low growth, high debt, underlying, weak economy in the US, indeed this crisis is probably knocked off 50 basis points from their trend growth.

The second reason why you should expect dollar weakness is because of the clear announcement from all of the high reserve countries China,
Middle East, all of the countries at high reserve want to diversify their reserve base away from the dollars. They won’t do it quickly to lead to a crash in the dollar but they will over coming weeks, months and years diversify away from the dollar into other currencies.

The third reason for dollar weakness is a significant change in trade patterns. To give you one example today emerging countries export more to China than to the US. We have seen a massive increase in the importance of emerging in global trade, a reduction in the importance of the US. All of these three factors would lead you to believe that the dollar will probably weaken from here and emerging currency should strengthen. That would suggest that the carry trade is probably going to be in place for sometime to come.

Source: ET 4th Dec 09, http://economictimes.indiatimes.com/Features/Emerging-markets-to-provide-strong-returns-Schroders/articleshow/5300313.cms

Further, consensus thinks the dollar is going to continue depreciating and therefore the dollar carry trade is pushing investors towards buying gold and emerging markets. There used to be a carry trade on Yen when the yen was at 120. Now, it is at 88. Things can change. I think the dollar carry trade could be over by the first quarter. If this is correct, the dollar is going to strengthen. The weaker the dollar, the higher the US deficit. So, a weaker dollar and higher oil and commodity prices do not make sense to me.

Once this carry trade reverses, funds will be quick to withdraw money from emerging markets. We might see even more volatility for markets in the first quarter if this happens.

Airlines turning around

Quoting Business Standard: Rise in corporate travel and low fares the drivers; 26 per cent growth in August raises hopes.

After being in the doldrums for over a year, the $14-billion Indian aviation industry is showing signs of recovery. Carriers, as well as experts, expect 10 per cent growth in passenger traffic against their earlier prediction of not more than 5 per cent.

Last year, passenger numbers dropped 10.5 per cent. In August, domestic sector traffic rose 26 per cent year-on-year, which is the first time in almost a year that a double digit growth has been recorded.

“After registering a fall of 10.5 per cent in 2008-09, the industry was expected to grow marginally. But considering the growth registered in the last three months, it is poised to grow by 10 per cent this fiscal,” said Mahantesh Sabarad, a senior aviation analyst with Centrum a leading financial company.

However there are others who are more optimistic. “The growth in the aviation industry would be one and a half times the gross domestic product. With good times around, the sector is going to witness 14-15 per cent growth,” said Rajeev Batra, executive director, KPMG.

“Surely, the revival has come much earlier than was anticipated. Our projections for the year were that the market would revive in the third quarter of this financial year but it revived early in August,” said Kapil Kaul, CEO (Indian sub-continent and West Asia), Centre for Asia Pacific Aviation in India.

Airlines say various factors are behind the revival. Corporate travel, which is nearly 30 per cent of the business, is limping back to normalcy. Airlines have been able to keep rates low. The average airline ticket price has come down from Rs 3,956 in 2008 to Rs 3,400 in 2009.

“This rise in the numbers has come because of lower fares and it remains to be seen how much the airlines would be able to take forward the lower fares,” said Ajay Prakash, general secretary, Travel Agents Federation of India.

“Yes, airlines should concentrate on improving yields from last-minute travel. The norm worldwide is that if you buy tickets at the last minute, you pay more but here the tickets sold at the last minute are brought down to cheapest level,” said Mohit Srivastava, head of online sales at Makemytrip.com, a travel portal.

After three consecutive hikes, Aviation Turbine Fuel (ATF) prices were slashed by 3.2 per cent in line with softening international rates. The average reduction works out to Rs 1,285 per kilolitre. ATF accounts for 40 per cent of the total operation cost of the airlines.

Analysts and industry players also say that the good figures will continue, as the markets are reviving and the market looking upwards.

“Yes, It is a revival. There is financial stability in the market and the market is responding to the present fare structure, which will broadly remain,” said Nikhil Vohra, an aviation analyst.

“The figures show a revival. The August figure last year showed a fall of 16.5 per cent, so there is also a base affect. But even month on month the growth is of 1 per cent,” said Sabarad.

It is also widely felt that this growth trend is to continue and in the coming months. “This revival in August has come on reasonably cheap fares and the upsurge in the market and this is to continue,” said Batra.

“August figures have been good because of aggressive pricing by the airlines and September figures are also looking brilliant,” said Srivastava.

I am very bullish on Spicejet, even though it has increased tremendously over the last 3 trading sessions. Its the only Indian airline company that is making money, while others are losing money. I expect a smart increase in profitability for the airline.

More analysis on Spicejet will follow.

Ailing airlines

Richard Branson once said, “To become a millionaire, start with being a billionaire and then start an airline!”

The global airline industry is in tatters, thanks to the record high levels of jet fuel prices compounded with slowing traffic due to an impending global economic slowdown. The recent surge in the crude oil prices to record highs has caused jet fuel prices to escalate to its highest levels. This translates into higher operating costs for the airlines. Jet fuel costs now account for approximately 40% of the airlines’ operating costs. In 2007, fuel expenses accounted for approximately 29% of airlines’ total operating expenses, while in 2002, jet fuel costs comprised of approximately 12.5% of the airline industry operating expenses. Rising fuel costs are compounded with slowing traffic both in terms of passengers and cargo. Global air passenger traffic has declined due to increased ticket prices due to the application of fuel surcharges by the airlines compounded with constrained purchasing power due to high inflation rates, especially in emerging markets. The impact of inflation in emerging markets on global air passenger traffic is severe owing to an air travel boom from 2003-2007. The global economic slowdown has impacted the growth in air freight. This is reflected in a significant drop in cargo growth to 1.3% in May 2008, significantly down from a 4.3% y-o-y cargo growth in 2007.

Airlines world wide are trying new measures of liberating themselves from this vicious circle of low revenues and increased costs. One such measure of increasing the passenger load factor is the rationalization of the airline’s route network. Currently, airlines operate on a number of unprofitable routes, where even the break-even load factors are not achieved. Due to this, although the variable costs such as passenger servicing charges are reduced, fixed costs such as fuel costs and airport landing and parking charges remain the same. Therefore, on these routes, the airline operates with higher operating cost per passenger. In view of this, efforts are being made to rationalize the airlines’ route network, by either reducing or altogether stopping services on such routes or employ smaller aircraft to such routes. However, I believe that the benefits of rationalization of routes will be partially offset by high cost of flying for passengers due to levy of fuel surcharges. Owing to this, air travel demand is likely to be affected further, as passengers already reeling under high inflation are subjected to higher costs of flying.

The recent fuel price spike is another very significant issue bothering airlines worldwide. To mitigate the impact of increased fuel prices, airlines worldwide are trying to hedge their fuel requirements. Almost every airline company in the world, save for Ryanair, are hedging their fuel requirements. The prime example would be Southwest Airlines. According to media reports, Southwest Airlines’s fuel hedging plan is the most successful program of its kind in the airline industry. According to the Associated Press, Southwest Airlines has saved approximately US$3.5 bn since 1999. In 1Q 08, Southwest Airlines’s net profit was US$34 mn, which was exceeded by its hedging gains of US$291 mn. This is because Southwest Airlines has hedged 70% of its fuel requirements at US$51 per barrel, relative to the prevailing spot prices of more than US$140 per barrel. However, majority of the airline companies were not wise enough to hedge at such levels. Therefore, they are left with no other option but to hedge at higher prices. In addition, hedging at higher levels restricts airlines to hedge a lesser proportion of their fuel requirement. This leaves the airlines exposed to high fuel prices.

According to the International Air Travel Association (IATA), when the fuel price per barrel goes up by US$1, the fuel bill of the airline industry as a whole increased by US$1.6 bn. IATA estimates that if crude oil prices keep hovering around US$135 per barrel level, the airline industry could face a loss of US$6.1 bn in 2008. I am of the opinion that the airline industry’s structure is not sustainable given the prevailing high fuel cost environment, worsened by slower traffic growth. Although, the airline industry has improved its efficiency levels over the years, especially after 2002, when it recoded a loss of US$11.3 bn, with the average oil price being for the year being US$25 per barrel. This level of price in 2002, translated into a fuel bill of US$40 bn for the global airline industry. Since then, fuel efficiency has improved 19%, sales and marketing unit costs have plummeted by 25% and ex-fuel costs declined 18%.

In line with IATA forecasts, I believe that 2008 and 2009 would be years of very weak performance from the airline industry. I believe that crude oil will average US$101 per barrel in 2008 and then decline to an average of US$49 per barrel in 2009 and increase to US$68 per barrel in. I believe that the performance of the airline industry would improve from 2010 onwards, given stabilizing fuel price, induction of new fuel efficient aircraft ordered in 2006 and 2007. Furthermore, I view the ongoing consolidation going in the airline industry as a positive coupled with the anticipated benefits arising out of the newly signed open-skies agreement between the US and Europe.