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What to do now? Gilts, Nifty and No Predictions

A few comments have been mailed in asking “What to do now?”. I wish there was a universal answer but there is not. Here is what I am doing, and my needs are very different from those of others.

I am buying Gilt Funds. This is for my liquid portfolio. Things at play here:

  • The government is auctioning 10K crores on Monday. This is going to bring in supply of gilts into the market, which should keep prices low for the time being.
  • Interest rates are not likely to increase from here. When interest rates decrease, bond and gilt yields will decrease to match interest rates. Yield increase = rise in prices of bonds/gilts.
  • Then why not bonds? Why gilts? Because I don’t trust bonds anymore. Bond funds have gone and thrown money at avenues not quite safe – like buying Asset Backed Securities of transport finance companies and of personal loans, or loaning money short-term to real estate companies. These things will soon default, and I don’t want a default.
  • Gilts are also where you run to in a credit crisis. Look at the US t-bill yields – 0.4%! With those yields prices are extremely high. A combination of flight-to-safetly and falling interest rates should provide a good return.
  • Many gilt funds are investing in fixed deposits of nationalised banks. I don’t know yet, but those should be safe…still, I would rather pick up funds that invest in gilts mostly.
  • I like the Templeton India GSF – Treasury (Dividend) plan. I also am reasonably ok with Tata GSF Short Maturity plan. No entry or exit loads there. DO NOT invest in that fund. I tried to get in through Sharekhan and they held my money for an ENTIRE MONTH, before “rejecting” my application! Meanwhile the market value went up by more than 5%!
  • I have now bought Prudential ICICI Gilt Fund, Short Term Plan. Seems to be good, no entry/exit loads.

For equity, I am nearly out of everything (except for a few small mutual funds I have put money in and either can’t withdraw as they have lock-ins – tax funds – or don’t have the time to withdraw) But on a trading basis, I have started buying and am long the Nifty. I have a strategy on this and it’s too far fetched to talk about on the blog – but I’m playing for a 20% bounce from current levels. Essentially a target of 4000 or so.

I might consider buying a few stocks at certain levels – but only if they show their strength in their price. And of course, my pessimism about this credit crisis goes away (or there is momentum).

Now to questions: What to do if one has bought the Nifty? The answer demanded is a prediction – will it go up? or down? But that’s not the point. If you bought the Nifty, you bought it for a reason. You should have had a stop loss. If the stop loss is breached, sell. If it’s not, and your original funda – you had a funda the market would go up no? – still applies, then hold. If you don’t have a stop loss – set one NOW. If you have already lost too much, it’s too late to do anything; might as well book losses and figure out what else to do.

Same funda applies for stocks. Fundamentals are what they are – funny-mentals – and you can choose to rely on them; and if your faith still remains, stick on. If you don’t have faith in the companies, don’t hold their stocks. There will always be another day.

  • Anonymous says:

    >Hi Deepak,

    Great that you care that much for the blog visitors that you dedicated a blog entry to address our queries at a time when we are seriously looking for some guidance(though you are not obliged to do so).Thanks for that.

    If only you like to answer if i am not leveraged(i have 4 lots of nifty at average of 3450),have enough cash to meet MTM of any kind.Should i hold on.

    I know you will like to kick me as already you have answered it in a different way but just in case.

    Thanks and regards.

  • Deepak Shenoy says:

    >Anon: I won’t kick you 🙂

    But I can’t help you either – without knowing why you bought and if you had a stop loss. There might be some stop loss – say a 20% down move should take you out? If so the 20% hasn’t happened – so might as well wait – either that happens or you make a profit and decide when to exit.

    Best thing to do – write down when you will exit both on the upside and downside. Then, don’t do anything till either figure comes.

  • Anonymous says:

    >Hi Deepak,

    Thanks for answering that irritating question of mine.

    Now i have a question as a general trader of Nifty what should be the stop losses in percentage term in general.I think that should depend on various external factors but anyways what kind of risk/reward should i as a general trader look for in a generalized case.

    I understand that these are the things people understand by self analysis and practice,but i feel a Guru can definetly give a guideline or a set of some framework to work in.

    Please throw some light on this topic whenever you have some time to spare.

    Best Regards.

  • Deepak Shenoy says:

    >Depends on how much you allocate and the strategy you use. If you average a 100 points on teh win side, teh loss side should not be > 100? There's no "general" rule for it – you have to work out what makes it for you. Plus you could be a day trader, a swing trader or a long term trader – I wouldn't know a stop loss for you without more details…it's important that you learn the ropes yourself or read books like "Market Wizards" by Jack Schwager…(btw, I'm no guru)

  • Anonymous says:

    >it will be interesting to see if your 20% move comes inspite of the upcoming horrible Q2 results. I would bet on a short upmove which will quickly die down by October end to make a new LOW.

  • Anonymous says:

    >Deepak having followed your blog from a long time(that never means that i had done any favour to you)i have i think rightly concluded that you are indeed a Guru may be you wouldnt liked to be called one.

    For me Guru in any field is the one from whom you can learn something,i may be good at some things where i could be helpful to others as a mentor and they may call me a guru there in that field.Similarly for me you are a guru in this field.I do not have any hesitation in accepting that.

    Thanks for your answer.

  • Anonymous says:

    >Hi deepak, thanks for the bit on gilt funds, was much needed.

    Just one question, are the funds you mentioned (templeton and tata) short-term, or the medium/long term ones?

    How does this work? If my reasoning is that interest rates have peak and will head down now, but over the medium/long term then i go for a medium/long term fund? Since their bills are locked in at a higher rate?
    Or is a short term fund better since it offers flexibility – to the fund manager that is?

    Apologies for the ignorance 🙂
    You can club me to death when we meet 🙂