Markets crashed today by a record percentage; then trading was frozen at around 10.15 AM. After an hour, when the trading resumed the crash continued! This is the record crash in the entire history of stock markets in India. Sensex crashed by 550 points when the first halting happened, and a further crash of 230 points has resulted in a further halting for two hours. Sensex has crashed so far by 787 points (15.5%). Nifty has crashed by 276 points (17.5%).
Foreign based hedge funds are thought to be the reason behind the massive crash. A hedge fund, unlike a standard investment mutual fund will employ a variety of methods to enhance the fund value. Besides buying and selling stocks, the hedge fund will also buy put options, call options and short selling as methods of making money. The hedge fund is basically highly risky and short term oriented. Unlike a foreign institutional investor who has a longer time horizon on his investments, the hedge funds have probably adopted (a) cash in on forward options (b) cut the losses and run, and not wait for the volatile next few days.
The result is thinly traded volumes and massive stock depreciation.
However there is a lot more to the "India story" than this short term crash. This crash is not like the stock scam induced crash of the past engineered by Ketan Parikh or Harshad Mehta. So investors needn't worry.
With no government yet at the centre, there is bound to be uncertainty and any number of statements from non-portfolio holding Manmohan Singh, Pranab Mukherjee and Jairam Ramesh. Let Sonia Gandhi take over the administration and appoint her council of ministers quickly and that may help in arresting this decline.
Also this opens up some interesting investment options - particularly the much maligned PSU stocks. Some of the PSU stocks are now so attractive just on their dividend yield. Dividend income is tax free, and because the government relies so much on them for its income, thiese companies keep declaring significant dividend. Since the key ones are in the oil sector (IOC, HPCL, BPCL, GAIL etc.), they are also profit generating. The dividend yield at current prices and past dividend pay out is as much as 8-9% and may now be even 10%+.
So a prudent investor can reap a lot of rewards even in the depressed market climate!