The year 2011 started on a good note for markets globally; however the trend could not be sustained

for long due to the recurring uncertainties that has enveloped the global environment. The markets were subject to negative events around the world - firstly, the natural disasters in Australia and Japan, political tensions in the Middle East, monetary tightening measures undertaken by Central Banks in the emerging economies to tame inflation and the worries over US recovery and Euro zone debt crisis. The final blow to these depressing sentiments came in the form of downgrading of US long-term sovereign credit rating from AAA to AA+ by Standards and Poors (S&P) ratings agency on 5 August 2011.This has led to an adverse reaction among the market participants as all the major global indices ended in red on 8 August 2011, when the markets opened after the weekend. This bloodbath on the street along with the correction that followed in the next couple of days, created a panic among retail investors. Consequently, investors who joined the herd started selling their existing portfolios without even giving a second thought to the benefits of staying invested for the long term. As far as the view on the downgrade is concerned, we are of the opinion that this was done as the rating agency believed that the measures taken by US to control its deficit was insufficient. We continue to believe that the dollar will remain as the worlds reserve currency at least in the near term. Furthermore, this downgrade will not have any direct impact on the overall growth trajectory and a default by the US government on its debt obligations is a not likely to happen. How should investors play in volatile markets? First of all, Indian investors should keep in mind that the Indian economy is basically dependent on domestic consumption and is not export-led unlike other emerging economies. However this does not make us completely decoupled from the rest of the world, but the impact of the negative global events will definitely be much lesser on India as compared to other Asian markets. As far as Indias macro environment goes, we believe that RBIs continuous increase in rates since March 2010 have definitely had an adverse impact on corporate profits and in turn growth. However, since commodity prices are on a downward spiral, we are expecting inflationary tendencies to cool down as a result of which RBI may put a stop to further hikes in interest rates. The fact that India is currently undervalued along with the positive long-term growth story makes a strong case for investing into equities for all those investors who are ready to take little bit of short-term volatility. Hence, instead of selling investments which were made with a view to achieve long-term goals, investors should continue to hold onto their existing investments. In addition to this, investors should also start taking exposures in the market either through the SIP route or lumpsum and in this way, take advantage of every dip that the market provides. The corrections happening in the global markets can also be used as an opportunity by Indian investors to enter the same through the global funds launched by the mutual fund houses. Global funds are those funds that invest directly into the equities of a group of countries/a single country or into a parent fund which works on a particular theme like

gold/agriculture, real assets etc. Currently there are ~30 global funds in the market and offer documents for 16 more funds focusing on different themes and countries like Latin America, USA, Indonesia, etc have been filed with SEBI.Although the sentiments on the global front continue to remain negative yet we are of the view that the attractive valuations for most of these markets can be used as an opportunity to enter the same. Indian investors are generally in favour of holding a portfolio consisting only of domestic funds; however we believe that an exposure of 5%-10% into global funds will help in geographical diversification along with minimizing concentration risk. Investors when taking a call on these funds should keep in mind the taxation element (If more than 65% of the allocation in the portfolio is towards international markets, then the taxation mode will be similar to debt funds) and also the currency and geo-political risks that goes along with these funds.