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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.
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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%
5
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
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3. Strategies for
successfulinvesting
7
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.
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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
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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
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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.
12
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.
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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
14
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.
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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
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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
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