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RBI beats expectations with 50 basis-point rate cut
The Reserve Bank of India (RBI) made a surprise rep...
FundsIndia Strategy: Guard yourself from risks in debt funds
When we say ‘limit’ your risk, we clearly mean that the
debt ...
If we look around the world today, it does not present a
pretty picture. Industrial countries are still struggling, with
a...
www.fundsindia.com
FundsIndia Features: Reports that help you with investing
For the touchy-feely ones among us, these emo...
www.fundsindia.com
Our goal is to build a bank unlike any other. Our goal is to present ourselves to the market and
the cu...
www.fundsindia.com
Whoever swims the fastest, whoever is the most efficient, and whoever has the least amount of
fat on th...
www.fundsindia.com
HDFC Bank
HDFC Bank, for the past three months, has declined
sharply from a high of Rs. 1,120, and has ...
1 Which two regulatory bodies merged recently?
2 In 2008, which real-estate company had to enter into
a staggered repaymen...
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Think Fundsindia October 2015 - Fundsindia.com

Guard yourself from risks in debt funds

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Think Fundsindia October 2015 - Fundsindia.com

  1. 1. www.fundsindia.com RBI beats expectations with 50 basis-point rate cut The Reserve Bank of India (RBI) made a surprise repo rate cut of 50 basis points (a basis point is 0.01 per cent) through its September 29 Monetary Policy Statement, taking the repo rate to 6.75 per cent. The RBI Governor did what he usually does – surprise the markets. Only this time, it was with a rate cut that was higher than the analyst consensus estimate of 25 basis points. The RBI’s policy actions mean the following: the RBI has explicitly stated that it is frontloading its policy actions. It hopes that investment activity in the economy will likely respond to certainty about the extent of monetary stimulus in the pipeline, low transmission notwithstanding. This raises the bar for any rate cut in the next 3-6 months, as the ball is in the court of government and private companies to revive investment, or evince interest at least. With the low base effect in inflation waning by late 2016, food inflation risks not entirely abating, and with the constant changes in the global environment, the RBI could well hold, or delay any further policy moves. That essentially means that the game in the bond market may be a long drawn one, and more rate easing could be due later, provided the bulk of RBI’s conditions (inflation, deficit, global environment, commodity price) for such accommodation are met. The current rate cut is clearly a boost to the debt market. A rally caused by easing yields could lead to capital appreciation in gilts as well as corporate bonds. RBI’s willingness to accommodate, based on further data, suggests that there could be room for more rally in debt. That means gains may accumulate over a longer period than at one shot. For the stock market, a 75 basis-point rate cut until June resulted in just around a 35 basis-point transmission in terms of lowering borrowing costs. The 125 basis-point cut, in all, certainly leaves much more scope, in part at least, for borrowing costs of companies to ease. If this happens, improved margins, both from lower input cost and interest cost could bring cheer to companies with debt in their books. We do not expect such a rate cut to immediately translate into investment activity since the capacity utilisation (in manufacturing) is said to be around 70-72 per cent, leaving scope for improved utilisation before any fresh capacity addition can happen. Vidya Bala Head – Mutual Fund Research FundsIndia.com October 2015 I Volume 08 I 10 Greetings from FundsIndia! “Mutual funds are subject to market risks.” These seven words mandated by the regulator as a part of all mutual fund related communications have been a scarecrow for potential investors. As mutual fund investors know, risk can be a good thing; something that is an inevitable part of anything that is better than the ordinary. A risk-free endeavour will always yield a pedestrian experience compared to treading outside the beaten path. At FundsIndia, we view risk as a positive change agent that is vital for the growth and progress of individuals, and of the society at large. We have started an initiative to underscore this point. www.riskisgood.com has been started as a social platform to share stories about risk-taking. We aren’t just talking about financial risks; we’re talking about all kinds of risks. These would be stories illustrating that risk, rewards, and learning form the golden triangle of life. Check out the site and inspire us with your own experiences with risk. Thanks Happy investing! Srikanth Meenakshi Co-Founder & COO FundsIndia.com www.riskisgood.com
  2. 2. FundsIndia Strategy: Guard yourself from risks in debt funds When we say ‘limit’ your risk, we clearly mean that the debt space is not devoid of risk. The risk arising from the interest rate cycle, called the duration risk, affects most medium to long-term debt funds. Credit risk (risk arising from exposure to debt instrument companies that do not have top credit quality) is a conscious decision that fund houses choose to take, and therefore, does not affect all funds. While you have little choice but to ride out duration risk, if you take it, here are ways to limit credit risks in debt funds. Time frame based category choice With equity funds, your time frame is clear – it has to be long-term. With debt funds, time frame has, however, a larger role to play in the choice of your funds, and thereby, the risks you assume. When you have a short time frame, you cannot be taking duration risks or credit risks. You need to be reasonably sure of getting back your capital, and earn returns that are slightly better than other liquid options such as your saving bank account. If you have a short time frame of say less than 1 year, you should be happy to stick to liquid and ultra short-term funds, and not venture beyond that. These categories have low-risk papers, and even if they do have commercial papers of corporate houses, their duration is too short to balloon into unforeseen risks. Avoid unless you understand In recent years, there have been a number of funds that have a stated strategy of digging deeper into the credit space for higher yields, or looking for temporary mispriced opportunities in the corporate credit space. Either which way, unless you understand the overall credit cycle of the corporate world, and whether you are riding on top or bottom of such a cycle, it may not be an easy call to ride this high-risk category. Investing in this category is akin to investing in sector funds in equity. You should know when to enter and exit, and for that purpose, understand the cycle of that sector. Also, funds with such strategies would sport low-to-medium portfolio maturity, but require a reasonably long time frame, overall, for the accrual to deliver. So, if there is a mismatch of time between your own horizon, and what the fund ideally requires you to hold, you may lose. Long story short, this game is not for everybody, and definitely not for those merely using debt for asset allocation purposes. So, how should you take exposure to corporate opportunities, if at all? Move on to the next point. Play it safe with ‘diversified’ debt funds If you have a medium-to-long time-frame (two years and more), look for a fund that has a diversified approach; that is, a mix of gilts, corporate bonds, and a bit of allocation to short-duration papers such as certificates of deposits, and commercial papers. This should give you adequate exposure to corporate opportunities, as well as play the duration game through gilt. Funds in the dynamic bond and income accrual category sport this kind of profile. But then, one of the funds that had Amtek Auto was a short-term fund, and ended with higher risks. What do you do about it? Here again, such rare instances are inevitable. You cannot be sure that every AAA or AA paper is of a high credit standard. What you can do, though, is to ensure that single instrument exposure to AA-rated or a lower instrument is not over www.fundsindia.com Vidya Bala The recent news of Amtek Auto’s problems with its debt, and the holding of its debt instrument in a few mutual fund schemes raised a debate on whether debt mutual funds are indeed safe. While such a debate may be a never ending one – it came up during 2008 Fixed Maturity Plan (FMP) troubles, the 2013 liquid fund mark down, and now - let us focus on what you as an investor can do to limit your own risks with debt funds. We have to have the discipline to stick to our strategy of building the necessary institutions and creating a new path of sustainable growth. For this, we need the cooperation of business, not impatience and pressure for quick impossible fixes. Dr Raghuram Rajan, Governor, Reserve Bank of India
  3. 3. If we look around the world today, it does not present a pretty picture. Industrial countries are still struggling, with a few exceptions, to grow. Our fellow BRICS nations all have deep problems. Indeed, India appears to be an island of relative calm in an ocean of turmoil. What is different, and how can we be assured that it will continue? Growth must be obtained in the right way. Of course, India is not in the same situation today. But with the world being an inhospitable place, we have to work hard to strengthen our current recovery, and put it on a more sustainable footing Edited extracts from a speech by Dr Raghuram Rajan Governor, Reserve Bank of India 5-10 per cent in the fund you choose. When an illiquid bond instrument accounts for 10 per cent of your Net Asset Value (NAV), then any default can hurt you. If it is lower at say one-to-three percent, it means less harm. Do a quarterly check, or ask your advisor for one to understand the fund you hold does not have such concentrated exposures. Go for funds with larger AUM As retail investors, you may be impacted by a large redemption placed by institutional investors (who are major investors in debt funds), if the asset size of a fund cannot take that impact comfortably with sufficient liquidity. Hence, look for funds (within the category fitting you) with large assets of Rs. 1,000 crore, or over, in case of liquid or ultra short-term funds, and at least Rs. 400-500 crore for medium-to-long-term categories. Don’t chase yields taking credit risk When you see a fund with top returns in equity, you are tempted to pick it. The same happens with debt. The question is whether it fits you. No debt fund would be able to have a higher yield to maturity (the yield of instruments in the portfolio), unless it goes for risks, or takes bets that the category, on an average, does not take. So a simple thumb rule is – ‘higher returns must come at higher risk’. It may not be worth taking such risks if you chose debt to simply hedge your equity portfolio, and provide a bit of diversification. Debt funds, as a category, are often misunderstood by retail investors. Remember, banks, whose primary job is to lend, have large Non Performing Assets (NPAs) in their books, despite all their due diligence. Hence, to expect mutual funds to be free of such issues would be unrealistic. Be surprised that mutual funds have managed to keep their ‘bad loans’ reasonably low. As an investor, you do know that debt fund is a better vehicle to ride than traditional options in terms of returns and taxes. Events such as the present one will also help you ride it, with lower risks. Vidya Bala Head – Mutual Fund Research FundsIndia.com www.fundsindia.com “Rule number one: Don’t lose money. Rule number two: Don’t forget rule number one.” Warren Buffett, Chairman, Berkshire Hathaway A lesson from Brazil Further, Brazil’s government funded development bank hugely increased subsidized loans to corporations. Certain industries were favored with tax breaks while price controls were imposed on gasoline and electricity, causing huge losses in public sector firms. Petrobras, the national oil company, which was supposed to make enormous investments in oil drilling, instead became embroiled in a corruption scandal. Even as government pensions burned an ever-larger hole, budget deficits expanded, and the political consensus to narrow them has become elusive. While the Brazilian authorities are working hard to rectify the situation, let us not ignore the lessons. Perhaps Brazil offers a salutary lesson. Only a few years ago, the world was applauding the country’s thriving democracy, its robust economic growth, and the enormous strides it was making in reducing inequality. It grew at 7.6 per cent in 2010, and had discovered huge oilreserves, which the then President Lula likened to “winning a lottery ticket”. Yet the country is expected to shrink by 3 per cent this year, and its debt just got downgraded to junk. What went wrong? Paradoxical as it may seem, Brazil tried to grow too fast. The 7.6 per cent growth came on the back of substantial stimulus after the global financial crisis. In an attempt to keep growth high, the New York Times says the central bank was pressed to reduce interest rates, fueling a credit spree that overburdened customers are now struggling to repay.
  4. 4. www.fundsindia.com FundsIndia Features: Reports that help you with investing For the touchy-feely ones among us, these emotions come into play even on seeing any / all industry or market news. There’s drama (when the markets go sliding up or down), action (buying / selling), romance (oh, the way high returns kindle our heart), tragedy (need I say anything here?), and more! Whoever said that investing is a boring affair has clearly not known investing well enough. Your investment film typically involves the following star cast: The main protagonist of your film, the hero, is, of course, your investments. He is truly, madly and deeply in love with ‘high returns’ – his beloved. In spite of all the obstacles in his way, he keeps working hard to make sure he wins her heart. Now there is another main protagonist who is central to the success of this film – the heroine’s father, whose approval and blessings are important for your hero’s ‘happily ever after’ with his beloved. Introducing – investment reports aka the heroine’s father. Says Gopalakrishnan Upadhyaya, Head of Products, FundsIndia.com, “Investing money is the easiest part about investing. It’s the tracking and maintaining of investments that’s challenging. That’s why we’ve made investment reports available to every investor at FundsIndia.com. These require minimal effort on an investor’s part for they are updated automatically, and stored online.There is no hassle at all as there is no paperwork involved. Moreover, they can be downloaded in just the click of a button whenever an investor would like to review his investments.” To make sure your investment film is a blockbuster hit, you can use investment reports to your advantage at www.fundsindia.com by simply logging in to your account, and selecting ‘Reports’ from the top menu. A few of the reports available to you are: 1. Holdings Reports – This report gives you instant information on your current investment holdings. 2. Transaction Reports – This is a detailed report on all your investment transactions with FundsIndia. You’ll know exactly how much you’ve invested, how many units you’ve purchased, when you’ve invested, and more – all in one report. You get two variants in this report – a fund-wise report, and a chronological report. 3. Capital Gains Statement – This report features your capital gains for the current financial year, or for a period you specify. You can get the current update on realized, un-realized, short-term and long-term gains for all your investments in a single place using this report. 4. Systematic Investment Plan (SIP) Reports – You can download an instant report of all the SIPs (SIP, STP, SWP, VIP, and VTP) you have set up on the FundsIndia platform. 5. Portfolio x-Ray, Instant Reviews, and Portfolio Analysis – Yup, there’s more to ensure you get your capital’s worth at FundsIndia.com! Have you ever felt like investing is similar to witnessing a grand film on screen? For one, investments evoke the same myriad emotions we’d feel much as we do when watching a spectacular movie. To experience a trailer of what we’re telling you, just open your account dashboard and take in what you see. Noorain Mohammed These tools will help you take stock of where your portfolio currently stands, where you wish to go with it, and what needs to be done in order to reach your desired goal, and more. You can read more about these reports by clicking here.
  5. 5. www.fundsindia.com Our goal is to build a bank unlike any other. Our goal is to present ourselves to the market and the customer in a ‘hatke’ (different) manner. The experience has to be ultra convenient. The customer has to get the sense that he is treated with respect and responsiveness. Rajiv Lall, Managing Director, IDFC Bank Filing taxes – These reports are exactly what you need at the time of filing taxes. Last minute computation worries? Say goodbye to them once and for all! Compare performance – Your FundsIndia dashboard provides substantial information on the performance of your investments at a glance. If you would, however, like specific information on how your investments have done over specific years, and if you’d like to compare that performance, then all you need is any one of these reports. Track performance – Track how much you’ve invested, and when, to analyse your investment behaviour with these reports. You can also download the transaction history of individual funds / folios, and check their performance over a specific period of time. Moreover, you get detailed insights on the age of individual investments, your unrealised short-term and long-term returns, number of active / inactive SIPs, etc. Easy format – These reports can be downloaded as Excel sheets / PDFs as per your convenience. While Excel sheets make computation easier (if you’d like to analyse the XIRR, conduct a regression analysis, etc. of your investments), PDFs are easier to print and maintain, or to just print and save in a folder on your laptop. See?! Investment reports can be so helpful when it comes to tracking and maintaining your investments. Q & A Q: Please provide a comparison between equity funds and liquid funds in terms of their returns. I understand that if we redeem units before one year, an exit load will be charged, and no such exit load exists for liquid funds. An equity fund’s gain is, however, higher than that of any liquid fund if exited in the same duration. Then why should we choose liquid funds? A: Liquid funds and equity funds belong to different asset classes. Liquid funds are a class of debt funds that are highly liquid, and have low risks since they invest in very short-term, overnight bank treasury papers. They are meant to park money temporarily, can be exited at anytime, and still earn better returns than a banks savings account. Equity funds are a different ball game altogether. They invest in stocks (shares of companies), are subject to market risks, can be volatile in the short-term, and will hopefully, if you invest in the right funds, return well in the long term. As equities involve risks, to reduce the risk and enhance return potential, it requires a long holding period. Ideally, such a holding period should not be less than five years. To encourage investment in the capital market (equity market), capital gains tax exemption is given for a holding period of more than one year for equities and equity funds. To answer your question, expect only savings bank plus returns from liquid funds. Expect a few percentage points over inflation from equity funds in the long term. Check out our recommended list – FundsIndia Select Funds, to know the best funds in each category. Choose the right category of funds based on your risk profile, time frame, and savings. Invest through a Systematic Investment Plan (SIP) every month to reduce the volatility and risk in equity. Remember: equity funds are necessary to generate inflation beating returns for long-term goals such as retirement, children’s education, or marriage. Liquid funds are only for temporarily parking your money. Vidya Bala Head – Mutual Fund Research FundsIndia.com Download these reports and start using them to your advantage right away to give your investment film the fairy tale ending it deserves. Noorain Mohammed Senior Executive – Corporate Communications FundsIndia.com How these reports benefit you These reports benefit you in the following ways:
  6. 6. www.fundsindia.com Whoever swims the fastest, whoever is the most efficient, and whoever has the least amount of fat on the body will win the race. We are the lowest cost producers in India. As long as you are the lowest cost producer, especially in the airline business you are a winner. Aditya Ghosh, President, IndiGo The stock market is a capricious beast, up one month, and down the next. So how would you know whether you are following the rule of buying low and selling high? This is where a Systematic Investment Plan (SIP) makes a difference. There are other ways an SIP is useful to build wealth over the long term. Here’s how: First, it turns market volatility into an advantage. In an SIP, investments will be made at regular intervals - ideally, every month. Therefore, when markets slide, there is more unit accumulation at lower NAV (Net Asset Value). This leaves you with a higher number of units when markets pick up again, therefore improving overall return. You benefit from the effect of compounding. Second, it reduces the cost of investment. You are, in effect, striking bargains by buying more when equity markets are cheaper, thereby staying true to the maxim of buying low. In the past two decades, barring the bull run of 2003-2008, market cycles have generally lasted around two to three years. Therefore, it’s important that you continue your SIP, especially when markets are correcting, as that is the best phase for averaging out costs. If you had started an SIP in a large-cap fund for Rs. 5,000 in October 2010, when markets had already rallied after the 2008 crash, the worth of your investment surges far ahead once the proper 2013 rally takes root after years of dithering. The compounded annual return on your investment works out to 14.6 per cent. Not bad, is it? Third, it lets you gradually save up. If you notice, in the example, the amount saved at the end of five years is a good Rs. 3,00,000. It’s hardly possible for most of us to save such a high sum at one go. But goals such as retirement, or educating your children do require such high savings. To retire 20 years from now, for example, you would need a corpus of Rs. 2.2 crore to last for the next 20 years, assuming that your monthly expenses are Rs. 30,000 now. In an SIP, investments can start as low as Rs. 1,000, which can be increased progressively, as salaries and surpluses grow. It therefore helps build wealth over the years. Fourth, it brings discipline into your investments. An SIP does not need you to have the smartness to time markets. It simply introduces regularity in investing. Because an SIP is automated, you don’t have to remember to invest each month yourself either. Once the SIP is done, you can splurge for the rest of the month with a clear conscience! Allowing an SIP to continue will also eliminate the tendency to sell when markets turn gloomy, which can scupper your wealth building. Bhavana Acharya Analyst – Mutual Fund Research FundsIndia.com Equity Performance Snapshot Index 1 Year 5 Years 10 Years CNX Nifty -1.5 5.5 11.6 S&P BSE Sensex -3.1 5.3 11.5 CNX Mid Cap 11.8 6.7 12.8 CNX Small Cap 4.5 3.8 9.5 CNX 100 0.7 6.0 12.0 CNX 500 2.3 5.9 11.1 CNX Bank 11.7 7.1 14.1 CNX Energy -18.9 -5.5 5.4 CNX FMCG -1.2 15.6 16.7 CNX Infrastructure -9.4 -5.8 4.1 CNX IT 4.7 12.5 13.7 MSCI Emerging Markets -27.7 -6.1 1.8 MSCI World -9.5 5.6 2.4 Returns (in per cent as of September 29, 2015) for less than one year is on an absolute basis, and for more than one year on a compounded annual basis. How an SIP makes a Difference
  7. 7. www.fundsindia.com HDFC Bank HDFC Bank, for the past three months, has declined sharply from a high of Rs. 1,120, and has formed a strong base at Rs. 980. The stock needs to clear a stiff resistance at Rs. 1,100 to trigger a strong upward momentum, with a target of Rs. 1,220 in the medium term. Else, it could lead to sideways action in the short term. Accumulate the stock on declines. Crucial support level is at Rs. 980 and Rs. 940, while resistance level is at Rs. 1,100 and Rs. 1,160. Stop loss is Rs. 935. This column is targeted at investors who are registered customers of FundsIndia for trading and investing in equity as well as prospective investors who wish to open an equity account with FundsIndia. It was a volatile month for the Nifty with a mixed bias. After hitting a low of 7,540 on September 8, 2015, it faced strong resistance at 8,050, resulting in the formation of a consolidation band of 7,540 to 8,050. A pullback rally is expected in the short term. The latest 21-day simple moving average is at 7,831.2. The crucial support for Nifty is placed at 7,670, and its major resistance is at 8,220. The trend will turn positive only if the index closes above the 8,050 levels for a target of 8,300. A close below 7,830 will lead to further weakness to test at 7,540. Perumal Raja Technical Analyst (Equity Research Desk) FundsIndia.com Tata Consultancy Services Since the beginning of the year, TCS has remained volatile, building strong support at Rs. 2,400 levels, while its resistance is at Rs. 2,650 and Rs. 2,750. There is a strong consolidation building up in the Rs. 2,470 to Rs. 2,650 price band. The latest 100-day simple moving average is at Rs. 2,565. The stock can be accumulated on declines. A breakout above Rs. 2,650 will lead to a medium-term upward trend with the target at Rs. 2,900. Stop loss is at Rs. 2,350. Technical View Nifty Disclaimer: Mutual fund investments are subject to market risks. Please read the scheme information and other related documents before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements before choosing a fund, or designing a portfolio that suits your needs. Wealth India Financial Services Pvt. Ltd. (ARN code 69583) makes no warranties or representations, express or implied, on products offered through the platform. It accepts no liability for any damages or losses, however caused, in connection with the use of, or reliance on its products or related services. The terms and conditions of the website are applicable. Think FundsIndia, a monthly publication of Wealth India Financial Services Pvt. Ltd., is for information purposes only. Think FundsIndia is not, and should not, be construed as a prospectus, scheme information document, offer document or recommendation. Information in this document has been obtained from sources that are credible and reliable in the opinion of the Editor. Publisher: Wealth India Financial Services Pvt Ltd. Editor: Srikanth Meenakshi If you take e-commerce, the value created in five years will be substantially larger than the value that it existed at. So, it is a large opportunity, and somebody will win and somebody will lose. But it is hard for me to say who the winners are, and who the losers are. Vinod Khosla, Founder, Khosla Ventures
  8. 8. 1 Which two regulatory bodies merged recently? 2 In 2008, which real-estate company had to enter into a staggered repayment schedule with the mutual fund industry in India? 3 What is a basis point? (For example, you may have read headlines saying ‘RBI cuts rates by 50 basis points.’) 4 The debt woes of which company has recently impacted a few debt funds? Answers may be sent to quiz@fundsindia.com. Answers for September 2015 Investment Quiz: 1 A liquid fund invests in debt market instruments with maturity of less than 91 days. 2 State Bank of India 3 10% of the size of the fund (not exceeding 10% of the equity capital of the company) 4 James Kynge 5 Tim Cook The winner of the September 2015 Investment Quiz is Jay Shah www.fundsindia.com FundsIndia Select Funds Investment Quiz Tax Savings Funds These are equity-oriented funds with a lock-in period of three years, investment in which qualifies for deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act in the year of investment. Moderate Risk High Risk CanRobeco Tax Saver Axis Long-Term Equity Franklin India Tax Shield ICICI Pru Long Term Equity IDFC Tax Advantage Reliance Tax Saver Please click here for a complete listing of our preferred funds. @fundsindia.com: We have released a revamped equity section to provide improved user experience to our stock trading customers. We have and improved our transaction pages. You can share your feedback by writing to us at contact@fundsindia.com. 5 Name the person. He is the author of the books – 'The Intelligent Investor' and 'Security Analysis'. .

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