How to make money in the stock market

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How to make money in the stock market

Sandeep Shanbhag, Moneycontrol.com


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February 08, 2007 15:24 IST

"What's happening to the markets? Its crazy."
"Should I be investing at these levels? Would there be any upside left?"
"At this level, isn't the market poised for a steep correction?"
"Taking exposure at this level would be foolish. Think its better to stay in cash."

If the above statements sound familiar, its simply because you are not alone -- everyone is facing a similar dilemma. As the Sensex creeps above 14,500, investors are ecstatic on one hand and petrified on the other.

The other day, one investor chided me for recommending a particular mutual fund scheme. His ire was not against the scheme as such, but against me for actually having the temerity to suggest investing at a level of 14130.

After this, how much steam would the Sensex have left in itself, he demanded of me rather indignantly? Instead wouldn't he be better off keeping his money in a liquid fund and wait for the inevitable correction to arrive?

Sound logic indeed, but the problem is that sometimes the inevitable doesn't happen! They say, memory is short, investor memory even shorter. Please remember, we have been waiting for the "inevitable correction" ever since the Sensex started moving up from 6K levels. From six to seven, seven to eight and so on till now in the early teens, the "inevitable correction" is yet to take place. Chances are teenage will pass ever so quickly.

Does this mean the index will keep going up? I don't know. Will the inevitable happen inevitably? Again I don't know. So then what do I know and why am I writing this?

Well, what I do know with a fair degree of certainty in this uncertain market is that it is volatile. Extremely volatile! From 12,600, it can fall to 8,900 only to bounce back to 14,100, all in a matter of six months!

Now since we know for certain that the market is volatile, lets see how we can take advantage of the same. For this, I have constructed a forecast - an extremely pessimistic, ultra conservative forecast. In which, I have assumed that the Sensex, over a two year time frame, goes up by just 8%. Yes, you read that right. Over two years, 8% or 3.94% p.a.

Have a look at the accompanying table. We assume a two-year investment time frame. We begin on January 1st, 2007 when the Sensex was at 13942. Column A contains the Sensex value over two years at every three months intervals. At the end of two years, on January 1, 2009 let say the Sensex is at 15063, an absolute increase of just 8% or an annualized increase of 3.94%.

A
B
C
D
E
F
Sensex
Date

Units
NAV(Rs.)
Amount (Rs.)
13942
January 1, 2007
Purchase
66.67
150.00
10,000
10000
April 1, 2007
Purchase
92.95
107.58
10,000
12000
July 1, 2007
Purchase
77.46
129.10
10,000
10600
October 1, 2007
Purchase
87.69
114.04
10,000
11500
January 1, 2008
Purchase
80.82
123.72
10,000
10500
April 1, 2008
Purchase
88.52
112.96
10,000
11500
July 1, 2008
Purchase
80.82
123.72
10,000
12000
October 1, 2008
Purchase
77.46
129.10
10,000
15063
January 1, 2009
Sale
652.38
162.06
105,725
3.94%
<----------------------------Return---------------------------->
23.41%

Now have a look at columns D, E and F. This is a mutual fund scheme that closely tracks the Sensex, so much so, that the fall and rise in the NAV is identical to the fall and rise in the Sensex value. So lets say its an ETF based on the Sensex.

The investor invests Rs 10,000 on January 1, 2007 (when the index was at 13942) at an NAV of Rs. 150. Every three months, Rs. 10,000 is invested, irrespective of the Sensex or the NAV value. After two years, on January, 2009 the investment is redeemed.

The net return works out to an outrageous 23.41% p.a.

To Sum

That then proves that --- it doesn't matter whether the market is overheated or not ---it doesn't matter whether it will post a 45+% return this calendar year or not --- it doesn't matter if there is a correction --- as long as the market is volatile (which by definition it is) and more critically as long as you invest at regular intervals, it is possible to make money.

Sporadic investments done in fits and starts aren't going to get you anywhere. Regular investment and regular investment alone is the difference between a winner and a loser. So if you want to win in the markets, follow these simple steps:

Disregard the index value. It is irrelevant in your investment process.
Choose a plain vanilla equity diversified fund with a good track record.
Invest as much as you can, whenever you can.
Invest for the long-term

Happy investing!

The writer is Director, A N Shanbhag NR Group, a tax and investment advisory firm. He may be contacted at sandeep.shanbhag@moneycontrol.com

For more on mutual fund investments, log on to www.easymf.com.


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A	B	C	D	E	F
Sensex	Date		Units	NAV(Rs.)	Amount (Rs.)
13942	January 1, 2007	Purchase	66.67	150.00	10,000
10000	April 1, 2007	Purchase	92.95	107.58	10,000
12000	July 1, 2007	Purchase	77.46	129.10	10,000
10600	October 1, 2007	Purchase	87.69	114.04	10,000
11500	January 1, 2008	Purchase	80.82	123.72	10,000
10500	April 1, 2008	Purchase	88.52	112.96	10,000
11500	July 1, 2008	Purchase	80.82	123.72	10,000
12000	October 1, 2008	Purchase	77.46	129.10	10,000
15063	January 1, 2009	Sale	652.38	162.06	105,725
3.94%	<----------------------------Return---------------------------->				23.41%