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Wednesday, January 21, 2015

The makeover of the Mutual Fund Industry


The equity indices started off the blocks decently in 2014 and picked up momentum especially after the 16 of May, what triggered the market was a slew of announcements made by the government like deregulation of the diesel prices and approving the new gas policy and LPG subsidy as well and the subsequent falling of the crude prices along with the strong inflows of FDIs into the Indian shores ensured great appreciation for the Indian markets.

Evidently the S&P BSE and the CNX Nifty both clocked close to 30% and this surge along with the inflows in equity oriented categories lifted the assets of Equity and ELSS categories by almost 76% and 48.37% respectively. The stock markets traded at an ever all time high coupled with the strong inflows received in the equity fund categories, and the AUM of the mutual fund industry clocked newer highs of 10.90 trillion by the Nov-14 end.

The HDFC Mutual Fund was at the no-1 position till Sept 14 with an average AUM of 141,481 crores, following it was the ICICI Prudential MF witnessing a growth of 31.35% and the Reliance Mutual Fund average assets grew by 19.11%, close to the heels was Birla Sun Life AMCs and the UTI AMCs average AUM gained by close to 12%. The Birla Sunlife AMC acquired the mutual fund segment of ING Vysya and the Kotak Mahindra took over the domestic schemes of the Pine-Bridge Mutual Fund.

 Just to help the mutual funds spread its reach the capital market regulator Sebi allowed the distributors to use the stock exchange as a platform for the non demat transactions as well for the redemption or the sale of these financial products and so also raised the minimum net worth of asset management companies from Rs 10 crores to Rs 50 crores.

 In order to get more ownership towards the fund performances another concept was introduced which is the concept of seed capital of 1% of the amount raised by each scheme which is to be invested by the fund houses in the open ended schemes subject to a limit of Rs50 lakhs, further more even the EPFOs to invest up to 15% of their corpus in the equities and so also the mutual funds. Just to boost the transparency and the quality of the disclosures the AMCs has been directed by the Sebi to disclose the AUM from different categories of the schemes like equity and debt schemes etc, and the AUM from B-15 cities, the contribution of the sponsor and its associates in the AUM of schemes, the sponsor group, non sponsor group distributors etc.

A huge drive is on for the investor’s awareness regarding the mutual funds in regional languages in print as well as the electronic media. So also the mutual funds have been directed to disclose their Monthly Asset under Management (AUM) on the monthly basis on their websites and also disclose the same with the Association of Mutual Funds in India (AMFI).  Even the minimum subscription amount of the debt oriented and the balanced schemes at the time of the new fund offer to Rs 20 crores on half yearly rolling basis is to be maintained for the open ended debt oriented schemes. Still going one step ahead the holding period for the long term capital gains has been increased to 36 months from the 12 months in the Union Budget of 2014 if the investors redeem units of the Debt, Gold, MIPs and the Fund of the Funds before 36 months then the capital gains will be taxed at the personal income tax rate of the investor. AND just to remove the tax arbitrage the rate of tax on the long term capital gains is increased from 10% to 20 % now on any transfer of the units of the Mutual Funds other than the equity oriented funds.

Even the investment limit U/S 80C is now increased from I lakh to 1.5 lakhs in the budget -14. And among the asset classes the equity was the biggest to gain in terms of the highest amount of the inflows received and so also the gained upon the grand growth in the AUM. As the Indian equities received ample interest from the overseas FIIs investor last year pumping more than one trillion in the Indian Equities and so also the mutual fund investors showed interest in the domestic equities by pumping in close to Rs 43,000 crores in the equities till the Nov of 2014.

Thus in the year 2014 the mutual fund industry underwent through the consolidation process. So all you have to do is to invest in the mutual funds as the mutual funds always enjoy an upper hand over the direct stocks in terms of the diversification, flexibility, transparency, low transaction cost as well as the track record as here you can easily spread your risk across sectors and stocks in the option of the diversified investments. This diversification reduces the risk significantly because all the stocks do not move simultaneously and hence provide better downside risk protection than the stocks comparatively. And commencing in the mutual fund investing at a low cost one can always plan to invest in monthly installments through the systematic investment plans (SIPs). 

Thursday, January 15, 2015

Get Ready For the Quantum Leap

There is going to be a multi dimensional makeover of India very soon as India is now the manufacturers and investors paradise!!!! Be it the economic ties, reboot of indigenous defense and security manufacturing in the defense sector, and tapping the untapped natural resources, clean climate technologies, nuclear, banking sector, agility in innovation, cultivating the specialists in IT, financial and data analytics, petroleum, retail, infrastructure, agri, smart cities, industrial corridors, SEZ , R&D etc and this will not only boost the employment generation but also boost the economic opportunities in India. And this time India is not going to wait to get into the thick of action until the cow to returns home. More FDIs will be pumped up and the top investing countries in India are: - Mauritius, Singapore,U.K,Japan,USA,Netherlands etc                                                                                                                                                                        
India is all set to sell its stakes in more than one public sector enterprises by March 2015 to make disinvestments on top priority to search for revenues to meet the fiscal deficit target of 4.1% of GDP. Like the sale of 10% stakes of coal India will fetch a massive Rs24, 000 crores in a single shot within the next month, and sale of 5% of both Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) as well.

The effects are already seen in the banking sector already, for example the housing finance companies as most of these firms have shares cheaply valued rose close to between 10% -50% also because they are favorites amongst the investors like the GIC Housing Fin, Canfin Homes, India Bulls etc as they are the best performing amongst the finance companies and also the rate cuts is expected and the other drivers for the valuation are the high growth and the core profitability. Strong loan growth for home lenders in near future is possible with falling borrowing costs and the mortgage rates remain stable and the incremental cost of funds for the housing finance companies have fallen up to 70 bps as the bond borrowings is about 40 to 68 bps of the total borrowings of the leading Housing Finance companies and the housing finance segment is to remain up to 20% during the next 24 months.

 The treasury gains as well as the stable net income dually will boost the profitability of the banks as the loan demand remained a bit subdued as the net profitability of the banks is expected to grow at around 27% with the backing of strong treasury profits with some pressure on lenders and so also the profitability from core activity will be a bit stressed. The profitability of private sector banks to clock 17% and that of the state owned banks will surge towards 41%

 The World Bank has assessed a 6.4% growth for India this year and on the track of high growth path of 8-9% and India happens to be ranking at 169 in business ranking and India is soon to get under the 50 ranking in the world. To start the New Year with a volatile January will end this month with an icing on the cake. 

Tuesday, January 13, 2015

The art of re-investing

The word ‘Investment’ is a very old investment was done for future comforts, lifestyle securing the future and capital preservation, income generation and capital generation so on the investing industry is constantly evolving and so many options and alternate options can leave even the seasoned investor baffled and confused; actually investing is an art of appreciating the wealth known, understood and applied habit by a very select few. The word investment means simply means the money committed for the future income is called an investment it could be in fixed income instrument like the bonds, fixed deposits or preference shares and the other is the variable income investments such as a business ownership in equities or even property ownership Investing is done with the purchases of goods which are not for immediate consumption but for the future with the sole purpose of creation of capital or the goods which are fairly capable of providing other goods or services, the expenses incurred in education and the health is simply investment in human capital whereas the expenses incurred in research and development comes in the category of intellectual capital. Moreover the return of investment (ROI) is the main measure of any organization’s performance. The mutual fund industry came into being in 1963 when the Unit Trust Of India (UTI) in the year 1963 as an initiative by the government of India and of course the Reserve Bank Of India and later on in the year 1987 the SBI Mutual Fund became the first non UTI Mutual Fund in India came into being. Later on in the year of 1993 heralded the new era in the Mutual Fund Industry which was the entry of private companies in this sector. In the year of 1992 Securities and Exchange Board of India (SEBI) act was passed and SEBI Mutual Fund Regularities came into being and the Mutual Fund industry has not looked back and has grown exponentially ever since as even the foreign institutions have come up with the acquisitions and joint ventures and the year 1995 saw the establishing of a nonprofit organization—The Association of Mutual Funds in India with the sole objective to promote healthy and ethical marketing practices in the mutual funds industry in India. SEBI has made AMFI certification as compulsory for everyone engaged in marketing of mutual fund products.   One mode of investment is the Mutual Fund and as the name suggests the mutual fund is a investment instrument which definitely allows several investors to pool their resources in order to purchase stocks, bonds and other securities and these collective funds are called Assets Under Management (AUM) are then invested by an expert fund manager who is appointed by a mutual fund company called Asset Management Company (AMC), and the total underlying holding of the fund is called the portfolio and each of the investor owns  a portion of this portfolio in the form of units.
The Mutual Fund: - The word Mutual Fund in itself is too terrifying alien for many and simply too terrific for the select few. The word Mutual Fund appears to be another financial jargon but once understood than one can gain a lot in financial terms.

Investor’s pool their money ----- the expert fund manager invests this pooled money in the securities----- the income and the dividends thus generated is distributed between the share holders accordingly, it offers multiple ease of the money being managed by an expert with diverse portfolios affordability as well as liquidity as well as the tax savings. As an investor you simply own the units which only represent the portion based upon the amount invested by you as an investor so all the investors are also called as the unit holders. The growth in the value of the investments along with the other various incomes earned from it are given to the unit holders or the investors in proportion to the number of the units owned by them and that too after all deductions of expenses incurred.

There are certain myths correlated with the Mutual Funds and one of them is that the mutual funds is the cup of tea of the experts in financial fields only and the investments are done only for the long terms only where as the fact is that the investments in the mutual funds can be done for a day to even for few weeks however the investments done for long term have some advantages over the short term investments. People usually also associate the  mutual funds with the equity funds whereas it is not entirely true, the mutual funds invest in variety of assorted instruments varying from equity and debt and within the debt the investment can also be done in debt instruments which mature within a day from money market instruments varying maturity from 1 to 10 years . People also have a misconception about the mutual fund with low NAV to be better than the one having higher NAV, what matters is the return on the invested funds ultimately. Mostly people think that they need to have large sum to invest in the mutual funds whereas most of the funds today allows an investment as low as Rs1, 000/- with no upper limit on the investment amount and infact even for the equity linked saving instruments the amount is as low as Rs500/- and moreover there is no monthly or annual maintenance charges even if you do not transit further.  Then there is also SIP facility which enables you to invest in small amounts on regular basis and moreover you do not need a Dmat account to invest in a mutual fund as you can invest in multiple ways like offline by filling up a form and also online through a choice of various websites. If you do have a Dmat account than you can consolidate your mutual funds holdings of course along with the other holdings in the Dmat account, you can buy mutual fund from the same mediator from where you buy and sell shares in the exchanges. One more misconception is that the NAV have reached the peak but it only reflects upon the market value of the shares held by the fund on any given day and basically the NAV is high only due to the good performance over a period of years. To understand NAV, just like as the share is given a price so similarly a mutual fund unit has an NAV it only represents the market value of each unit of a fund or the price at which an investor can buy and sell the units. The NAV is calculated on the daily basis which only further reflects the combined market value of the shares, securities or bonds held by a fund on any given day.

One must however understand how the mutual funds works and also its power as well as the benefits, let a take a case of one crate of cold drink having 24 cans costing Rs 400. Let us say that four friends wish to buy the can of cold drink but the retailer sells only the crate and each of the friend has Rs 100 only so these friends decide to pool in their money and purchase the crate of cans, each friend gets six units of can if equated with mutual fund and the cost of one unit of can simply divide the total amount with the total no of cans that is 400/24=16.66 and conversely if you multiply the number of units 6 each with cost per unit you get the initial investment of Rs 100 each that is 16.66 x 6=100 which happens to be the initial investment cost. This is just a case where each friend is a unit owner or unit holder in the crate of 24 cans which is collectively owned by all the four friends and each of the friends is a part owner of the box.

1) Debt Mutual Funds:- There are various types of funds and it all depends upon the need which is to be catered either the long term or the short term investment plans and you must choose the funds accordingly as the debt funds depend upon borrowing so there are certain conditions laid down when one borrows like the assurance of returning the principal amount, the interest rates and so also the time frame when the amount will be returned. The money is required by everyone to run its operations it may be the companies, state or the central governments. They offer various debt instruments like debentures, G secs, T bills etc and the mutual funds buy the debt which are issued by them. The debt funds bring the stability in your investment portfolios because they are lower in risks as compared to the equity funds although a little riskier than the liquid fund and their aim in itself is to generate steady returns as well as sustaining your capital by investing in government securities NSD, CPs bonds and other fixed income securities and also lending money to corporate and organization in anticipation of fixed interest rates and therefore investing in the debt mutual funds is ideal if one is looking for higher returns than the liquid funds over a medium term horizon of a quarter to 24 months.

2) The Equity Mutual Funds:- Unlike the debt funds here you just have no assurance of the principal, rate of interest or the tenure while investing in the equity funds, as when you invest in the equity mutual funds you are as a owner of a particular company in which you have invested in as per your extent of investment. So just like the owner of that company even your profit is also linked with the performance of the company the more are the profits of the company the better is the share price and hence even your gains are better too. More the risk more are the gains and so even the equity funds also carry  the potential of returning high outputs and just to counter the risks the mutual funds are invested in multiple companies and multiple sectors and this diversification of investments helps in minimizing running into a risk. In case of long term investments one needs some guidance to counter the inflation.

 3) Hybrid Mutual Funds:- They are also called as liquid mutual funds too, and liquidity in financial terms simply means how fast can you get back your investments, a highly liquid  asset is as good as hard cash. The Hybrid funds have minimum risk factor and can give you returns better than the returns of a savings account as they are invested in faster manufacturing debt securities and this makes them as little less risky because here the concept is that more closer the debt instrument is towards its maturity the greater are the chances of you getting the principal amount as well as the interest too. Although the savings account is best option for the emergency funds and going by its name the savings is a saving option and it offers the highest liquidity as you can access the amount through bank during emergency. Just in the case when you have some amount in excess to the emergency funds then the liquid funds are a good option to invest in for a period ranging between 10 to 60 days as upon valid redemption of your request you get your money back on the next working day itself. Hybrid funds are the combination of various asset classes like debt and equity in their portfolios having hybrid blend of funds.

The Mutual Funds are not even flexible but also liquid too, because different people have different patterns of earnings as well as spending and so the investments need to be flexible too from investing in the money markets to equities with a minimum amount of investing as low as Rs500/- and has no upper limit of investment and in case of the open ended funds even daily investment and withdrawal is permissible and you can receive the investment in 1-5 working days with incurring ant maintenance charges  on the portfolios, here you can invest directly or through asset management company of mediator too. So we can say that the mutual funds are safe as well as transparent too because the mutual funds publish a monthly sheet which points out at all the aspects about the scheme u have invested in and also the rating of the company in case of a debt fund and more so NAV is also published on the websites daily. More over the mutual funds also helps you to diversify your investments thereby minimizing the risks, spreading your investments always helps you lowering the risks in multiple companies as well as multiple sectors.

Making a habit of investing at an early age helps as it maximizes the end returns in the long terms. One must be able to analyze the investment amount as well as the investment instrument and the risk taking capacity as when you are at the start of your career you have lot of time by your side to attain your financial targets as well as calculated risk taking capabilities investing in equities, large, middle and small cap funds and a mix of diversified equity funds. Then in the middle of your career you are at the major earning capability of your life generally speaking so you can leverage your targets as you are a bit relaxed and settled in your life as you are done away with major EMIs and children heading for the higher education and this is the stage you should shy away from any of the risk prone investments that is investing in the debt funds a little bit in the high yielding equity and investing in properties also go for the diversified as well as the balanced funds too and as you are nearing your retirement stages one must head for the least risk zones of investments wherein you must focus upon with priority of safety and growth of your savings at this stage do not try to invest in property assets but invest in short term debt funds and be your usual self of a disciplined investor.

Monday, January 5, 2015

Indians Broadbanded

The year of 2014 will be the milestone year and remembered and go down in the history as a broadband year, it took almost a decade for India to grow from 10 million to 100 million internet users and it took just three years to grow from 100 million to 200 million internet users and still bettering its growth in less than three years that is 200 million to 300 million in just one and a half years flat. 

The effect is also evident in the growth of the online consumers which sprung from 35 million online consumers to 100 million and this is impacting all the industries fundamentally, the first segment to get effected is electronic sector and smart phones in particular and in the coming times we will see sale of the brands skyrocketing from figure zero. Of late was the online sale of motorcycle this is the era of digital sales. None of the mode of internet is left untouched like social media, television, mobiles, e-commerce, local and digital advertisements, they all are flooded with this new revolution. That’s for sure India will have 1000 million internet users by 2020, and India is the world’s No-1 mobile internet user and we are far ahead and we will always remain at the top position, because we are at 50% were as in other countries the maximum figure of the mobile internet user are not more than 15%.

 It was just a few years back that E-commerce was an alien name is today a $5billion industry and will be $15 billion by the next yearend and will clock $50 billion by 2020. It is close to 35 million Indians buying products online and is headed to touch 100 million soon. These are the times where we are witnessing quantum change overnight like Tata Housing got 10,000 registrations for online booking of the homes. Even the online viewership of YouTube on mobile is growing by the leaps and bounds. Online bookings, reservations, online education, healthcare etc. Just wait for the 4G and more to happen as the future is approaching quicker than expected.

Merge to Surge

The times are changing in the Indian shores if we take a keen look at the spree of mergers have taken the world by surprise that is making the impossible possible in most of the merger cases. First is the surprise merger of Tata Power with ICICI, well it is the marriage of skill and money with a pledge to turning around the power plant from the troubled waters by adhering to the regulatory norms solving the intermittent fuel supplies and petty issues like high debt and low demand and looking into these aspects the Tata Power and ICICI Venture did float a Rs6, 000 crore fund by buying the sick power plants for the investors and of course their mutual benefits.

 ICICI will be responsible primarily for both the organizing both debt as well as equity funding for all such acquisitions and of course Tata Power is the India’s largest integrated power company in the private sector is to charge for handling the operations and maintenance aspects.

Another game changer was handshake of JSW Energy with JP Power Venture eventually where JSW Energy acquired two flagship hydropower plants of Jaiprakash power Baspa and Karcham Wangto in Himachal for Rs 9,700 crores. The third snowball is the merger of Sun Pharma and the Ranbaxy Laboratories where the Sun Pharma had to pay around Rs17, 000 crores. Similarly was the surprise springing by the merger of Flipkart and  Myntra with Rs 2,000 crores.  Likewise the coming together of Kotak Mahindra and ING Vysya, Piramal and Shriram Group.  The urge to succeed brings even the poles apart characters together take for example when there is fire breaks out in the forest and a small wood is flowing in the river, than you can find the staunchest enemies like rat, snake, cats and dog clinging together for their dear to that piece of log afloat in water.

Sunday, January 4, 2015

Sensex sizzles to dazzle past 2015


The mood on the dalal street is very upbeat and is carry forward from the last year is a good sign for the investor’s sentiments to start a new year as there was a sharp rally in mid and small cap shares as retail investors renew their interest in such stocks just on the news flows but in the absence of FIIs inflow contrary to the fact that the mid and the small caps had lost steam as the valuations were stretched. This year the investors are carrying the euphoria of the best Bull Run among the three bull runs we have had in this decade, although there was some correction in December last year.

 Now the investors will have to do the reality check and do not expect miraculous marathon to be repeated because the macro indicators are still a bit weak, and it is just a matter of time when the business friendly reforms like land, labour and power sector are imposed pretty soon and it is just a matter of two years when the sailing will be very smooth and India will be sitting pretty at the saddle to gallop far ahead and thereby have no competition.

The Indian economy will surge past the 6% mark and all drivers like private and public investments as well as the consumer and exports spending will be properly aligned. Neither the GDP growth nor the earnings growth has any meaningful correlation with the investment returns generated by the Sensex, on the contrary the investment returns are dependent on three different sets of dynamics:- the political and economical cycle in India, the reversion to the mean and then of course US monetary policy cycle and by all means the financial year end of 2016 the Sensex is headed for 50,000 mark as all drivers will be aligned by then.

To reiterate the point the Sensex seems to move in proportion to the Indian political cycle, as par the past experience the Indian economy seems to tread in a 8-10 year’s economical cycle coinciding with the decisive general elections in India eg- 1984,1991 and 2004, so when the Sensex’s three decades CAGR is mere 16% its CAGR in the first three years of each cycle is over 33% For example when the  reversion works well as well as a predictor of sensex bounces back over the period of five year cycle, and the last dynamic driver happens to be the US interest rate cycle like when the US government bond yield starts to rise owing to the Federal Reserve signaling tightening of the noose of the US rate cycle triggering the money to flow out of the US bond markets and into the global equities and need not to say here that the emerging markets and of course the Sensex benefits the most. So a rising US bonds initiates a rally in the Sensex. 

Saturday, January 3, 2015

Cure for the Hiccups of 2014


The year 2014 saw considerable changes in the investment zone which direct impact on your money and what measures you should take to avoid the hiccups being carry forward to this year:-

1)   Backwater logging:- Concerned about the fickle mindedness of the small investors the fund houses launched a convoy of closed ended equity funds, although these schemes had given a good returns due to the bullish markets, exiting them is not at all easy because if you want to exit before maturity than you will have to sell them at the stock exchange and the stock exchange had put 20% circuits on the prices so this implies that an investor cannot sell without incurring significant loss. So this year of 2015 avoid any new fangled ideas about investing as an open ended diversified equity fund would deliver the similar returns without compromising on the liquidity factor.

2)   The goose-bump investors:-The stock market rally of the year 2014 was totally disappointing for those investors who always suffer from the goose-bumps and who stayed on the footpath thereby avoiding to jump on the fast lanes awaiting the correction and finally decided to jump into the bandwagon when the markets were to too high. The data of the mutual fund shows that almost close to 70% of the total inflows in the equity funds in the last five years have flushed-in in the past five months. Usually the investors wait for the good days to make investments but its not that the good days give you good returns, one must jump into the band wagon systematically, one must bear in mind always that whenever one thinks of investing in stock markets or in the real estate the price always appear to be on a very higher side. So as a matter of advice in 2015 do not wait and try to time the market. A systematic calibrated investment approach is always more reliable. Because there is no such thing as HISTORY REPEATING itself in the stock market there are no fixed route but one thing is for sure that make regular systematic calibrated investment as your habit, it will never let you down.

3)   The higher interest rates:- After the bond prices hit a low in April and bounced back in anticipation of a rate cut as the inflation rate came down, also there were some feelers from the industry and nudges from the government did hardly have any positive signs from the RBI regarding the rates cut. Even the tax free bonds issued by the PSUs gained close to 20% and the long term gilt funds gave a return of 16.4% and in the coming months the time is for the fixed income as the drop in interest rates is imperative and so the long term bond funds are bound to do well. So as the long term bonds are volatile and to opt for the stability one can go for income funds or short-term schemes which are bound to give you reasonably great returns.

4)    Gold opportunity:- The international gold prices are volatile and however the domestic gold prices fell close to 8% because the government had reduced the import restrictions on the gold and if the situations improves further the government may cut the 10% of the import duty. So in this New Year make it a habit that your portfolio has 10% to 20% exposure to gold.

5)   The neo tax rules for the Non Equity Funds:- The 2014 Budget changed the tax rules for the non equity mutual funds thereby increasing the minimum holding period from one year to three years if they were to be treated as a long term assets. The option of paying the 10% flat tax on the long term capital gains was also waved. The tax at the moment is fixed at 20% with indexation which has done away with the tax arbitrage offered in the short term, so now the bank deposits are the better option than the short term FMPs of less than three years but conversely the long term i.e. over three years the debt funds continue to be more tax efficient than the fixed deposits. So do plan your investments accordingly.