PFRDA WISHES TO PROTECT INTEREST OF MEMBERS FROM MARKET VOLATILITY
FUND managers overseeing the government’s new pension scheme (NPS) may be allowed to invest only in stocks that comprise benchmark indices — the 30-share Sensex of the Bombay Stock Exchange and the National Stock Exchange’s 50-stock Nifty — as the pension regulator looks to protect the interests of members from market volatility.
The Pension Fund Regulatory Development Authority (PFRDA), which will regulate NPS, may issue a direction in this regard, its head. Keeping in mind the recent global financial crisis and the stock market turbulence. It is not prudent to allow fund managers to put people’s money in just any stock without looking at their fundamentals. The NPS will be available to all individuals from April 1, 2009, and is mandatory for all government employees who have joined service after January 1, 2004.
While savings under NPS from central and state government employees are expected to rise to Rs 6,000 crore soon from Rs 1,700 crore now, contributions from private individuals are expected to add a substantial amount to the scheme’s corpus. PFRDA has set up a panel headed by HDFC executive chairman Deepak Parekh to suggest investment options for contributions from private individuals who could choose more potentially rewarding schemes as per their risk appetite.
The panel is expected to suggest various schemes having a mix of debt and equity options with varying risk appetite. It could recommend equity-focused schemes where up to 60% of savings could go into equity. For the members who do not choose an option, the default option may be a lifecycle fund, which would invest more in equities initially and, as the individual grows old, could shift to safer debt instruments. The panel is expected to submit its report in a month. Under NPS, only 15% of the total funds are allowed to be invested in equities. The investment pattern followed is similar to that followed by the Employees Provident Fund Organisation (EPFO): only 5% of savings can go directly into equities while another 10% can go indirectly via equity-linked mutual funds.
Provident fund trusts operated by private organisations will get greater flexibility next year when the government allows them to invest in equities up to 15% directly or indirectly.
PFRDA has allowed three fund managers — LIC, SBI and UTI Asset Management Co — to manage Rs 1,700 crore of central government employees’ savings. This is expected to go up to Rs 3,000 crore when arrears from a recent wage revision are added. Besides, another Rs 3,000 crore from state government employees are expected to come under PFRDA as five states have signed deals and 17 others have indicated their intention, the official said.
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Tuesday, March 31, 2009
PFRDA WISHES TO PROTECT INTEREST OF MEMBERS FROM MARKET VOLATILITY
Monday, March 30, 2009
PUT simply, short selling involves the selling of financial assets or securities (stocks, bonds) that do not belong to the person selling it but have been borrowed generally from a broker or a brokerage firm. Short selling works on the premise of making money over the fall in the price of the asset. The process can be explained using the example of stocks. There are always certain stocks in the market, which are overvalued and overpriced owing to different reasons. A short seller predominantly looks out for such stocks, which are sooner or later, expected to see a fall in their prices. The short seller then borrows these stocks from a lender and sells them when the prices are still high. The short seller then waits for the prices to dip after which he buys back the same stock and returns it to the lender. The short seller thus makes a profit as he manages to buy the stock back at a rate, which is lesser than what he makes out of the sale of the stock.
WHAT ARE THE REGULATIONS ON SHORT SELLING?
Depending on the country, there are strict regulations on short selling including restrictions regarding the type of assets that can be sold and the time period within which this trading activity needs to be performed. If there are any dividends or rights that come from the stock during the course of the loan, the short seller needs to pay these back to the lender. You may also need to open a margin account to indulge in short selling. However, you will need to remember that in addition to being profitable, short selling is also very risky. While short sellers use many ratios to predict whether the price of the asset will fall, there is always the chance that prices may see a hike, which can bring considerable losses to the short seller.
WHY DID THE US RECENTLY BAN SHORT SELLING?
The Securities and Exchange Commission, which acts as a financial regulator in the US banned short selling of financial stocks on September 19 as they felt that it has contributed towards the fall in stock prices of the banks and could aggravate the financial crisis. This was as an attempt at boosting the confidence of investors in the securities market. However, the ban came to an end on October 8. Market regulators in countries like the UK and Australia have also introduced bans on short selling.
IS SHORT SELLING ALLOWED IN INDIA?
Short selling was practiced in India till 2001 but was banned by Sebi, after the Ketan Parekh scam. It was revived early this year. In India, now both retail and institutional investors are allowed to indulge in short selling. Despite bans in different parts of the world, Sebi has declined the need for a ban on short selling in India.
Sunday, March 29, 2009
SECURITIES market regulator Sebi is in the process of firming up a policy to push retail participation in mutual funds in an effort aimed at neutralising or lowering the impact of large outflows by corporate or institutional investors as happened recently.
The regulator is now weighing the option of segregating the investments of corporate and retail investments so that retail investors are not impacted if corporate investors exit from schemes early, a source said. What this could mean is that fund houses would be told to float separate schemes targeting institutional and retail investors, a practice which is prevalent overseas. “In such a scenario, if a large corporate investor pulls out money from a scheme, then the other corporate investors need to worry and not retail investors as is the case now,” said a person associated with the proposed changes that are underway. Sebi is already in talks with the industry as the regulator and the government look at addressing the issue, which exposed the weak links in the financial sector.
The mutual fund industry was rocked last month after large corporate investors pulled out some investments in debt schemes due to a liquidity crunch which gripped the financial markets and also on concerns related to the credit quality of the debt paper in some of the fixed maturity plans (FMPs) floated by some fund houses. The redemptions coupled with the erosion in the value of the portfolio of schemes due to the battering of stocks led to a steep fall of close to Rs 97,000 crore in the assets under management (AUMs) of the industry from Rs 5,29,000 crore in September to a little over Rs 4,31,000 crore in October — a period during which most fund houses witnessed on an average redemptions of 20%.
The large redemptions made by corporate investors had put some of the fund houses under severe pressure, prompting the Indian central bank to open a special facility to banks to lend to asset management companies in need of funds to meet redemption needs.
55% of total AUM with large investors
THIS has raised concerns within the policy establishment in India on the impact that large corporate or institutional investors can have on mutual fund schemes if they choose to pull out their money prematurely.
Such a move by large investors leaves retail investors for whom the mutual funds were designed as an investment vehicle vulnerable, without severely penalising those corporate investors who exit early. According to one estimate, corporate investors account for a little under 55% of the total assets under management of mutual funds. These investments are spread across mainly short term products such as liquid or liquidity-plus schemes which invest mainly in gilts and other securities and FMPs where the investment is in pass through certificates issued by realty firms, commercial paper and debentures.
The regulator’s worries centre around the fact that such a substantial share of institutional money in mutual funds if pulled out abruptly can cause instability and dent the confidence of investors. “This is an issue on the table and we are weighing some options,“ an official who did not want to be identified said. Sebi has already stopped approving fresh filings for FMPs which provide an early exit clause to investors.
The disproportionate share of corporate funds in mutual funds can be attributed to the tax arbitrage opportunity on offer. For investors of FMPs — the tax incidence works out to a little over 22% for long term while investments in safe avenues such as fixed deposits would have been taxed at a higher rate.
Fund houses also provide a lot of incentives to corporate investors in terms of entry loads and other benefits to grow their assets. This helps them boost their AUMs and in turn their valuations. Since many asset management companies do not invest in a distribution network, corporate money comes in handy. This is reflected in the fact that at least 80% of the retail assets of Indian mutual funds is accounted for by eight major cities and towns in India. And of the total assets of the industry, equity schemes account for just about one-third with debt schemes making up for the bulk of it. Corporate money in equity schemes is reckoned to be just under 5%.
Saturday, March 28, 2009
The Securities and Exchange Board of India in its board meeting decided to fix the structural flaw in fixed maturity plans.
It was decided that no early exit will be allowed in any scheme of mutual fund in the nature of a closed-end scheme. The schemes which have been approved earlier but not yet launched will also have to be amended accordingly. It will be obligatory for the asset management company to list the close ended schemes. The board also decided that for such close ended schemes the underlying assets will not have a maturity beyond the date on which the scheme expires.
This regulatory obligation will save fund managers from distress sale if investors decide to redeem their money before maturity. This is with an intent to guard the interest of the remaining investors. The order will also drive fund managers to be disciplined in building their portfolio as fund have been debarred from buying bonds of longer maturity than their own.
For investors, the order will mean a compromise on the interim liquidity and NAV realisation as closed-end listed funds generally trade at steep discount to their NAV. In any case, FMPs’ ownership profile makes them unsuitable for listing. There are a very large number of FMPs which serve a fairly limited pool of investors. Under the circumstances, the existence of a liquid market for any individual Fixed Maturity Plans (FMP) is unlikely.
For all practical purposes, this order strips FMPs of their feature of premature encashment. Investors will now have to approach FMPs as investments that have a genuine lock-in.
However, this fix applies only to all new funds to be launched. This will not save existing fixed maturity plans from the problem caused by premature redemptions.
Friday, March 27, 2009
Over time, as different asset classes produce different returns, the portfolio’s asset allocation changes. To recapture the portfolio’s original risk and return characteristics, the portfolio must be rebalanced to its original asset allocation. The primary purpose of rebalancing is to maintain a consistent risk profile. Periodic rebalancing will help avoid counterproductive temptations in the market. For example, in this seemingly falling market, rather than be tempted to follow the crowd, who are busy dumping popular stocks, the imbalance created by erosion of the equity component can be used by to book profits on debt portion and buy into equities to bring back the allocation to the original ratio.
The balancing act
To get all the asset classes back to their original allocation percentages would entail the following:
Selling part of the debt or cash and investing the proceeds into equities or vice versa Putting in fresh one-time investments into equity/debt to raise their percentages in the portfolio Start a systematic investment plan / value average to counter the volatile market.
How often should one rebalance?
Though the frequency is entirely dependent on the investor, the portfolio size as well as market conditions will impact the overall returns’ expectation of the portfolio. The main idea is that the periodic interval between successive rebalancing acts should be constant. Some of the other factors affecting rebalancing are:
Cost of transactions
If one decides to rebalance the portfolio once in six months, he needs to factor in short term capital gains, brokerages and entry exit loads. Hence it is advisable to rebalance once a year for long term portfolios and half yearly rebalance for short term portfolios.
High correlation among the returns of asset classes means that they tend to move together. When the returns of all the assets in the portfolio move in the same direction, the asset allocation weights tend to remain unchanged, reducing both the risk of significant deviation from the target allocation and the need to rebalance.
High return volatility increases the fluctuation of the asset class weights around the target allocation and increases the risk of significant deviation from the target. Greater volatility implies a greater need to rebalance. In the presence of time-varying volatility, rebalancing occurs more often when volatility rises.
Thursday, March 26, 2009
Analysis on the status of debt options in the present market conditions
Considerable action was seen on the monetary policy front over the last six weeks. The Reserve Bank of India (RBI) announced sharp cuts in the cash reserve ratio (CRR) and the repo rate. There has been a 3.5 percent cut in the CRR - 1.5 percent cut in the last one month. This is one of the sharpest cuts in key monetary policy parameters in such a short span of time. The intention of the RBI and the government is to ease the liquidity crunch and provide a boost to consumer sentiments by way of low interest rates.
The inflation rate is also coming under control due to the slowdown and dip in the rates of many essential goods such as crude oil, metals and manufacturing products. Softer monetary policy measures are expected to influence the returns from debt instruments, but investors should weigh different options carefully before making any changes in their portfolios.
Outlook on debt options:
- Bank fixed deposit (FD)
Bank FD has given good returns in the last one year due to higher interest rates prevailing in the market. Also, bank FDs are quite safe as they are under the control of the Reserve Bank of India (RBI). Interest rates have peaked as the RBI has started cutting interest rates and signaled a softer interest rate regime in the near to medium terms. Most banks are still giving higher interest rates on FDs as they are looking to raise additional capital, but the time is not far when they will start cutting interest rates on deposits. Low risk appetite investors should hurry to get locked-in at higher interest rates before interest rates start cooling off.
- Debt funds
Debt instruments' yield will come down due to the recent rate cut by the RBI. The yields on debt instruments are almost at a peak and the measures to infuse liquidity may keep interest rates in check over the short to medium term. But debt instruments and debt funds are still a good option for investors with a low risk appetite.
The yield from debt instruments will come down slowly and gradually as banks are reluctant to reduce rates sharply. Debt instruments also accumulate capital gains in a falling interest rate (falling yield) scenario. Investments in debt instruments are good options for the short to medium term investor, in the current market situation.
- Liquid funds
Liquid and liquid plus funds allow an investor to park his money for a short period of time. Pure liquid funds invest in money market instruments, short-term corporate deposits and treasuries with maturities of less than a year. On the other hand, liquid plus funds invest in slightly longer-term paper to generate better returns. Investors with a short-term horizon (15 days to a couple of months) can invest their surplus money in liquid and liquid plus funds.
- Other debt-based instruments
There are several other innovative debt-based instruments available in the market now. Private banks have come out with these modern debt instruments. The time period is fixed in these instruments and they provide capital guarantee, similar to bank fixed deposits. The returns are linked to some market variables like the Sensex, Nifty etc.
These instruments offer a very attractive rate of return - 12 to 16 percent. However, investors need to look at the target portfolio of investments carefully before taking investment decisions.
Wednesday, March 25, 2009
Purchasing Power of money decreases with time. So how to calculate the Purchasing Power of money? Lets say, a family's monthly expense is Rs 50,000. At an inflation rate of 5 per cent, how much will be the purchasing value of that amount after 20 years?
Inflation increases the amount you need to spend to fetch the same article and in a way reduces the purchasing power of the rupee. Here, Rs 50,000 after 20 years at an inflation of 5 per cent will be able to buy goods worth Rs 18,844 only.
Formula: Reduced amt.= Present amt. / (1 + inflation) ^no. of yrs
Type in: =50000/(1+5%)^20 and hit enter. You will get Rs 18,844, which is the reduced amount.
Tuesday, March 24, 2009
The events that unfolded last week were so extraordinary that the former Fed chief Allen Greenspan called it 'a once in a century occurrence'. In the latest Wall Street crisis investment bank Lehman Brothers filed for bankruptcy protection, the Bank of America took over Merrill Lynch and the Federal Reserve provided an USD 85 billion bailout for insurer American International Group, all of it happening almost at the same time.
In fact, the story of Lehman Brothers was scripted in the mortgage market crisis last year. The firm was a major player in the market for sub-prime and prime mortgages. The company had a relatively small balance sheet, and was heavily dependent on the mortgage and repurchase markets for short-term funding. As the mortgage markets did not recover, the company had huge write-offs.
Its efforts to raise capital failed. The company's expectations of being bailed out by the government did not work out. Lehman had reached its end, setting off a domino effect in the global stock markets. The global financial markets collapsed like a house of cards as the giant pillars of Wall Street went bankrupt. Unlike Lehman Brothers, AIG, Freddie Mac and Fannie Mae were luckier. The US bailed out some of its major financial institutions.
The upheaval on the Wall Street put pressure on the rupee. There was a shortage in dollar liquidity in both domestic and global markets. The overnight cash rates jumped to 14 percent on Tuesday here, the highest since April 2007, from around nine percent last week. They eased to around 10 percent on Wednesday. As the US dollar rose against other currencies it became unattractive to invest in emerging markets. On Tuesday, the central bank also allowed banks to borrow more by relaxing the statutory liquidity ratio (SLR), while expanding the liquidity adjustment facility scheme to avoid liquidity crunch that was developing.
The Reserve Bank of India (RBI) has sprung regularly to the rupee's defense, buying it in the currency market and removing a shortage. After the rupee's biggest one day fall in a decade on Tuesday, the RBI injected 47.36 billion rupees into the banking system. The Reserve Bank of India (RBI) has sprung regularly to the rupee's defense, buying it in the currency market and removing a shortage.
Flight to safety
The foreign institutional investors (FIIs) had been investing in India and other emerging markets in the form of carry trades. Many large institutional players who had borrowed in dollars and invested in India, faced a double whammy of unfavourable exchange rates and rising costs of funding. Investors had to sell off their investments to avoid negative returns. They also unwound currency swaps that had been used to fund their assets in India and elsewhere.
In the four weeks to September 14, foreign investors sold a net USD 7.9 billion of Asian stocks outside Japan. The finance ministry says, in India, the FII funds are flowing into debt markets, including government securities, even as there is slight pullout from the equity segment. Overall, the withdrawal of funds seems to be slight compared to the inflows in the past five years. In 2008, FIIs have withdrawn more than USD 7 billion so far. This is not too high compared to the inflows of USD 52 billion over the last five years. The question however remains whether they will pullout more funds during these 'extraordinary times'.
India's large foreign currency reserves have helped in these times. It had swelled to nearly USD 300 billion, among the highest in the Asian continent. Indeed, the RBI was roundly criticised earlier for keeping such large funds idle. Now if the FIIs withdraw funds in large quantities the country will not face a solvency issue like many Asian countries did in 1990 during the Asian financial crisis.
The RBI is now being lauded for its prudent policies. The ADB's Asian Development Outlook Update said India's financial systems were healthy and had so far been relatively immune to the US credit crunch. However, it felt if the sub-prime crisis worsens significantly, India is bound to suffer some serious financial effects, including an abrupt reversal of the capital inflows that have held up well so far.
Focus shifts from inflation to growth
Many analysts are of the opinion that the interest rate cycle has peaked due to fall in the price of crude oil. The focus may now shift away from abating inflation to declining economic growth. The ADB report said growth in India was likely to expand only at 7.4 percent in 2008 against the April forecast of eight percent. In 2009, India's growth will be only seven percent according to the report. However, India's growth rate prediction seems to vary widely from nine percent quoted by the government to seven percent quoted by foreign entities.
Currently, negative trading sentiments are outweighing economic fundamentals. But if history is any guide, buying good stocks when they are reasonably priced and hanging on for five years or more has tended to be the best thing you can do with your money.
Monday, March 23, 2009
PROMOTERS of listed Indian companies may have to acquire at least half the public shareholding in their firms to become eligible for delisting, going by a proposal being considered by capital markets regulator Sebi.
The proposed norms for delisting by companies, which is expected to be approved by the regulator shortly and then notified, will mean that promoters will have to buy at least half the non-promoter holding, keeping the threshold limit of 90% intact. The rules now in vogue allow a company to opt out from listing its shares on an exchange or delist if promoters acquire 90% of the share capital of the company. The new regulations being considered effectively implies that a promoter with a shareholding of over 80% will have to not just acquire another 10% to delist shares but an additional half of the remaining public holding after the 90% threshold limit. In other words, once the promoter has acquired control of the 90% of the share capital of a company, he will have to still buy out 5% of the remaining 10% public shareholding. However, for promoters holding up to 80%, the new rule will not make much of a change from the existing delisting rule, while those holding more than 80% will have to buy more shares to abide by the new rule. The new rules will, however, retain the two crucial criteria of the existing regulations — the minimum threshold level for opting out of listing on a exchange will continue to be 90% promoter holding and the price discovery through a reverse book building mechanism.
The new delisting norms will be introduced very soon. We have send the new proposed delisting norms to the law ministry for approvals, which is expected to come shortly. According to sources, under the new rules, the acquisition of shares by promoters for their companies to qualify for delisting is likely to hinge on their shareholding levels. Incidentally, this will ensuring that more shares will have to be obtained from public shareholders before delisting. Sebi has also decided to retain the present reverse book building exercise, rejecting an alternative price mechanism based on a fair value determined by a rating agency plus a premium of 25%.
The reverse book building method is followed only in India. Reverse book building allows shareholders to tender their shares at a price of their choice while providing the acquirer the freedom to accept or reject the offer. Once the reverse book building process is complete, the final price is determined as the price at which the maximum shares are tendered. According to the listing agreement, all companies are required to maintain a public holding of 25% for continuous listing. However, some companies have been allowed to maintain a public holding of minimum 10% if their market capitalisation is more than Rs 1,000 crore and their share capital is more than 2 crore shares or such companies which have diluted less than 25% of their equity at the time of their IPO. Under the current rules, the minimum promoter shareholding threshold for delisting a company is 90% and 75%.
Sunday, March 22, 2009
Life has changed in many ways after the recent attacks on Mumbai. There is a newfound aggression among voters who have turned more demanding on their elected representatives. On the stock markets, though the attack did not make a negative impact, the developments after the attack have been interesting. One interesting development has been the cabinet reshuffle which in turn has pushed up the bar of expectations. The general consensus is that the new FM's team will usher in reforms and rate cuts to boost spending on the infrastructure front. At a time when the private sector has been left to combat liquidity and slack demand conditions, a helping hand is expected to come from higher public spending.
While the stock market was indifferent to both terror attacks and cabinet reshuffle, there is a feeling that the weak sentiment in the domestic economy is more to do with emotion. Many argue that companies have turned over-cautious in the wake of global developments and are going all out to curtail costs.
While life hasn't been easy for many employees, the corporate actions in the last 1-2 months are likely to shorten the life of the slowdown, as many have begun to believe. While no one is expecting the current quarter to be impressive, the forthcoming two quarters will offer an insight to the coming financial year. With elections round the corner, the process of recovery of the domestic markets is expected to begin from the third or fourth quarter. The argument is that by then the new government would be in place here, and the US would have completed a major portion of its journey through recession.
It is in this background that investors are being advised to begin the process of investing through accumulation, though a bull run is not in sight at least for the next 18-24 months. While it is easier to jump into equity during good times, the prospects of good returns are high when you play the waiting game for the bull run. Since market returns are directly in proportion to the staying power of the investor, those who take a long-term view of more than two years have little to complain in the current environment. Though many argue the current bearish phase in equity markets across the globe is more painful than in the past, the process of recovery could be in much faster this time due to a global push. More importantly, the domestic economy is in a better growth phase than in the past despite being a more globalised economy.
As a result, fresh investors making an entry at the current market level have very little to worry about as they have the advantage of buying into equity at three-year old prices. Such an opportunity may not exist with other options. Since equity allows investors to invest in small lots and at regular intervals, investors can allocate a good portion of their corpus for their future portfolio. While the weakness and market volatility may rattle many, the fact is volatility is an integral part of equity investments and lack of it will take the sheen out of it. Even if you are not a trader, the fluctuation in stock prices should please you as it provides an opportunity to pick your stock or fund at regular intervals. Next time, when you read about a 500-point swing in the index, look at it as a good day for your equity shopping.
Saturday, March 21, 2009
NHPC, Oil India To Go Ahead, Dozen Others To Wait For Now
DESPITE all the hoopla over disinvestment picking up pace following the Left’s withdrawal of support to the UPA government, only two public sector companies may get listed during 2008-09. These two companies are NHPC and Oil India.
Plans were afoot to list around 15 public sector companies, including heavyweights such as BSNL, RITES, Coal India and Cochin Shipyard, but public offers of most of these companies are stuck for various reasons. According to government sources, the plans for listing many PSUs have been deferred due to reasons ranging from no or little requirement for raising capital, corporate governance issues and possible protests from employee unions.
The government is all for listing of public sector units as it unlocks tremendous value and creates good corporate governance. The companies, however, need to clear regulatory and internal hurdles as per a senior official in department of disinvestment (DoD) said. The department has informally conveyed to some PSUs not to go ahead and file the prospectus, and instead do a reality check first. Taking a cue from the BSNL IPO fiasco, the government has also asked PSUs to gauge employee sentiments before starting IPO procedures.
The government has set no targets on how many PSUs will be listed this year. We’ve conveyed to the PSUs that they should only come out with an IPO if there is a need for fresh capital. They need to review whether the issue will add to profitability. RITES, for example, is not going for an IPO since it does not require more capital now.
The government has also asked the PSUs to create an understanding among its employees so that there is no problem at the time of filing the draft red herring prospectus. “There have been issues in the past when the process has been stalled because of opposition from the employees,” the official said.
Earlier, the government had asked the PSUs to expedite the process of appointing independent directors on their board to meet Securities Exchange Board of India’s listing norms. Both Oil India and NHPC had to file their prospectus again because they didn’t have the required number of independent directors.
Friday, March 20, 2009
As soon as realisation hits that a new year is upon us, there is another one that lurks around the corner. And that is the start of a new financial year. Which means, you have till March 31 to complete your tax planning exercise. So if you have not completed your investments under Section 80C, you have a little more time to get your act together.
If one takes a look at the past year, what would seem more appealing would be the fixed return instruments like National Savings Certificate (NSC) and Public Provident Fund (PPF). After all, at least you are guaranteed a positive return there. The equity markets are in the doldrums and don’t look like they will be reviving anytime soon. But what investors tend to forget is that investing in equity is not a short-term investment. Even though equity has the potential of delivering phenomenally over the short term, the risk of capital erosion is also very high. To truly benefit from equity, one should have the patience to stick around for at least three years. But the ease of exit makes it virtually impossible for the investor to curb the natural instinct for flight in times of crashes. One mistake is to offload all shares and run when the market heads for a downturn. The other is choosing to avoid equity altogether till a recovery is on its way. The truth is one can never really say when the market is going to make a U-turn. But if one gets into the market with the intention of hanging on for a while, it will eventually pay off.
The good thing about an Equity Linked Savings Scheme (ELSS), is that it has the lowest lock-in period when compared to the other options under Section 80C. The minimum period of three years ensures that the investor puts in money that he will not need for a while. The other options start at a minimum of five years.
If we look at the ELSS category over the past five years, on an average it has delivered annualised returns of more than 12 per cent. This is much higher than the returns you will get on the other instruments under Section 80C, which will average between 8 and 9 per cent. The tax implications are also luring. You get a tax benefit when you invest in an ELSS scheme, dividends are tax free and when you sell the units after three years, you pay no tax (long term capital gains tax is nil). This makes it score higher than bank fixed deposits and the NSC. And, in terms of returns and lock-in, it scores over the PPF too.
Thursday, March 19, 2009
IT Firms will see their EBITDA margins plunge below 20% over the next 3 years
TOP Indian tech firms such as TCS, Wipro and HCL will see their EBITDA margins, a measure of operating profit, plunge below 20% over the next three years, as these companies move more information technology projects to India, and align their operations with rising wages apart from the currency fluctuations.
Leading outsourcing customers such as General Electric, Royal Bank of Scotland and Bank of America plan to increase their offshore outsourcing in order to lower their cost of managing IT in the US and UK, where billing rates are more than twice of what can be achieved by sending work to offshore locations such as India.
It’s going to be growth vs margin dilemma for us — till now, we have protected our margins and fared better than the likes of IBM and EDS. However, in the long run, I would say that even 15% of EBITDA will stand much better than our rivals who hardly achieve 10%.
EBITDA (short for earnings before interest, taxes, depreciation and amortization) margins, reflect a firm’s profitability. While HCL Technologies is expected to see its EBITDA decline by half from 22.2% in 2008 to 11.2% in 2011, country’s biggest software company TCS could see its margins go down from around 26% last year to 18.2% over next three years. Country’s third biggest tech firm Wipro is also expected to see its EBITDA decline from around 20.1% last year to 13.5% by 2011, the brokerage firm said.
Barring Infosys, the top four Indian software firms will see their EBITDA margins go below 20% over the next three years, the report added. Infosys is expected to see its EBITDA decline from 31.4% to 23.6% by 2011. This sharp decline in margins can also be attributed to the currency fluctuations. A large proportion of Indian tech firms’ costs are rupee denominated, and at a time when the revenue growth (primarily in US Dollar) is expected to be lower, their rupee costs will not see any significant decline. Moreover, the rising wage costs are also expected to impact the margins.
While revenues for the top tech firms will grow at 15% during next three years, the impact on EBITDA is expected to be more severe—just 2% growth.
The fall in EBITDA growth is far worse (23% to 2%) as the cost base does not change much, while the revenue drop-led profit-drop is significant.
As India’s tech biggies deliver more IT projects from the country, they will have to manage with billing rates of anywhere between $18 to $27 per man hour. In comparison, a typical application development and maintenance project executed in countries such as US and UK will command hourly rates in excess of $60.
Meanwhile, country’s second biggest software exporter, Infosys continues to protect its margins. Margin is a function of how efficiently you run a company Infosys chief executive S Gopalakrishnan told in an interview. “We have chosen a profitable growth and have balanced our portfolio by using multiple levers such as fixed price contracts,” he added. Cognizant, which maintains its operating margins in the range of 19-20% even at a time when Indian offshore rivals are trying to protect their 20-30% margins, says it follows a different model.
Cognizant has consciously maintained its operating margins in the 19 to 20% range (non-GAAP) and reinvested anything in excess of it back into the business for industry-leading revenue growth a company spokesperson said. This lower operating margin, compared to its top-tier offshore competitors, is also reflected in its higher SG&A (Selling, General and Administrative) which is in the 23 to 25% range.
Wednesday, March 18, 2009
After CRB Capital, one of the biggest Non-Banking Finance Companies (NBFCs) collapsed in 1996, RBI came out with a long list of dos and don’ts that forced hundreds of NBFCs to shut shop. Those were the days when long queues of depositors outside bankrupt NBFC offices were a familiar sight. It raised a hue and cry, made headlines and often forced the local MP (who could also have been a member of the Parliamentary standing committee on finance) to call up RBI and ask, “What’s this all about?”
It was a social issue, political embarrassment and a pain for the regulator who, after a point, felt enough was enough. Rules of the game were changed: NBFCs were asked to chip in with more capital, while raising deposits from the public — up until then the main source of NBFC finance — became almost impossible and within a few months, a large number of NBFCs surrendered their licences. The few that survived were big enough to take care of themselves.
Everyone thought NBFCs were history. Now, more than a decade later, NBFCs have returned to haunt the regulator. No one is willing to lend them money, and few have the cash flow to clear old loans that are coming up for repayment.
How did they get into this mess? Before that, why did they flourish? A cleaner or a truck mechanic, who graduates to become a driver and five years later decides to buy a used truck to build his own dream fleet, will not get bank finance. But an NBFC knows exactly what he wants — how much loan he can sustain, how he will repay it and, more importantly, how best to recover the money if he fails to pay. An NBFC did what a high-street bank couldn’t. It was also smarter than a bank in regular businesses like consumer loans for auto, two-wheeler, washing machines and televisions. The NBFC model was also a window for big banks, many of which floated finance companies, to enter into businesses the parent couldn’t due to stringent RBI rules. So, if a bank couldn’t generously lend against shares beyond a point, the NBFC did; if the bank had reached its exposure cap to a particular business house, the NBFC gave the additional loans; or, if a promoter was looking for money to raise his holding through a creeping acquisition, he turned to NBFCs for money. Bankers have a word for this: regulatory arbitrage.
It went on beautifully. The problem arose when the money market went into a tailspin. Almost overnight, it exposed the touch-and-go business model of NBFCs, which was giving five year loans with two-year or one-year or even six month money. Hardly any NBFC today relies on public fixed deposits. Instead, they borrow from banks and most importantly, place debentures with mutual funds (MFs). It’s quicker, simpler, cheaper and, unlike an FD default, bad loans don’t necessarily mean bad press (There are instances where the promoter of a failed NBFC had morphed into the owner of a new software firm; or the shareholders of a pharma company quickly distanced themselves from the NBFC they had once backed. Few complained, too).
Raising money from MFs was even more attractive. With banks, the NBFC had to give a minimum 25% margin — meaning, it had to pledge collaterals worth Rs 125 for a Rs 100 loan. With MFs, there was little or no margin; besides, there were savings on stamp duty as long as the debentures you placed with the fund were secured — even if that security meant that a Rs 500-crore debenture issue is backed by Rs 5-crore office space in Ahmedabad or anywhere in Gujarat — the state which offered such a duty exemption.
Most MFs didn’t care whether the NBFC was in a position to service the loan. Instead, they left the job to credit rating agencies. So, as long as an NBFC debenture had a good rating, there were takers. But what has deepened the crunch is the duration mismatch between the money raised and the money lent. Banks and MFs had no interest in buying five-year or 10-year bonds of NBFCs. They were game for six months to three years, while NBFCs gave loans which were for five years. So, at the end of six months, the NBFC had to raise new money to repay the previous six month loan. This is fine when things are hunky dory, but not when the credit market has frozen and banks choose to hoard cash and not lend. NBFCs were also reluctant to float long-term debentures where the interest rate was higher and credit rating lower. Cheaper, short-term money was far too tempting (Bankers also have a word for this: interest arbitrage).
There was also a little symbiosis between MFs and NBFCs: NBFCs drew their full bank lines to park with MFs, helping them prop up the monthend asset under management number; in return, MFs bought NBFC papers. Today, this model is under scrutiny. It’s generally agreed that NBFCs have a role to play in capital formation, fostering entrepreneurship, backing SMEs and fuelling the consumption boom. Perhaps, they can do it better than banks. But they aren’t banks — they can’t borrow from RBI, can’t raise low-cost funds through savings or current accounts and can’t run a mismatch for years the way banks can.
If they are lucky, a few of them will eventually get a banking licence, or merge with a bank. Till then, they will have to stick to financing less volatile assets (say, trucks and cars rather than stocks), and find cheaper source of funds, like floating tier-II bonds or placing long-term papers with insurance companies. All this will take time. While new rules can be framed to quicken the change, the immediate need is bank loans to keep them afloat. The market today cannot afford defaults by NBFCs — it’s just not a few thousands of depositors losing money; it can impair the financial system. Bankers ought to know best.
Tuesday, March 17, 2009
CAPITAL market regulator Securities and Exchange Board of India (SEBI) is set to revise its rules to make it mandatory for mutual funds to list close-ended schemes — both equity and debt — on stock exchanges. The proposed changes are aimed at protecting asset management companies and unit holders from the risks arising out of abrupt, heavy withdrawals by large institutional investors and to discourage early or premature withdrawals by investors.
Over a month ago, several fund houses came under severe pressure after institutional investors pulled out funds owing to a liquidity squeeze. Later, the Reserve Bank of India opened a window for banks to access funds for lending to mutual funds to help them tide over the situation. These events prompted Sebi to undertake a review of the structure of MFs, especially debt schemes, taking into account the systemic risks.
A review of rules relating to close-ended schemes of mutual funds is under way and the Sebi board is expected to discuss changes to the regulations, a person familiar with the development said. Funds may also not be allowed to repurchase units through the buyback facility window. According to the proposal being considered, there will not be any exit opportunity for investors through the fund. Instead they will have to do so through the exchange. Currently, in a close-ended scheme, the fund offers a window for investors to redeem their units periodically.
The changes under way will imply that the fund will no longer have to bear the cost associated with huge redemption. An investor who wants to exit can do so through the stock exchange — he, therefore, will have to find a buyer. The onus is no longer on the fund house to provide the window and ensure liquidity.
Effectively, this will mean that funds with a fixed tenure will now truly be close-ended schemes, which could be traded like an exchange-traded fund. This will also address the issue of asset-liability mismatch at some fund houses to a certain extent, besides helping to do away with the exit load that is imposed when unit holders move out.
All close-ended schemes—both debt and equity—may have to be listed
Close-ended schemes will be freely traded, akin to an exchange-traded fund
RBI’s cumulative liquidity support to MFs & NBFCs stood at Rs 4,300 crore
MFs’ AUM as on stands at Rs 4.2 lakh crore
FMPs fell from Rs 73,602 crore to Rs 49,246 crore, an erosion of close to Rs 24,000 crore
Monday, March 16, 2009
How you can gauge volatility of a stock and evaluate stock value
The stock market movements over the past few weeks can be best described as unpredictable. It goes a few impressive points up, only to slide back after a few days. The upward and downward fluctuations can create panic among investors. Returns on stocks become increasingly difficult to predict over the short term. It may be a reaction to global market conditions, high oil prices, world economy and soaring inflation. Volatile markets torment investors.
How do you measure market stability?
A measure of volatility gives ample information for an investor to base his decisions. The time to enter, buy or sell, are critical decisions that depend on market moods. Shrewd investors find volatile markets or crashes an ideal time for picking value stocks at bargain prices. Since these are purchased at discounted rates, it gives a sufficient cushion for the long-term investor. Though scouting for bargain stocks may appear a lucrative proposition, one must not grab a poorly performing stock that is heading downwards.
Investors can use the Beta value of a stock to understand its volatility. In simple terms, it's a measure of individual stock risk relative to the overall stock market risk. Hence, if the stock fluctuates more than the general market, its beta remains greater than one. On the contrary, if the Beta is less than one, it means that the stock's price swings are less than the market's.
Consider a stock with a Beta of two. This implies that this stock is twice as volatile as the market. A Beta value of one indicates that the stock is moving in sync or proportion with the market in general.
A highly volatile stock means its value can potentially be spread out over a larger range of values. So its price can be expected to change dramatically over a short time period in either direction. A less volatile stock means that its value does not fluctuate dramatically. Any associated price movement is at a consistently steady pace spread over a time frame.
Volatility is a measure of dispersion around the mean return of a security. The statistical unit of standard deviation is a measure of volatility. This parameter gives an idea of how a stock is tightly grouped around an average. A small standard deviation means the price is tightly bunched together. A large standard deviation means the price is spread apart.
With globalisation, the domestic markets are no longer immune to global trends and happenings. Further, foreign institutional investor (FII) inflows and moods impact the market as a whole. The domestic economy is no longer independent of the world economy. Hence, it becomes important to understand the cause of volatility and devise a long-term strategy. Invest in stock markets with a long-term perspective.
If the market movement exhibits high volatility, investors need to review the value of their portfolios more frequently. It is usually observed that when the stock markets are bound upwards, the volatility tends to decline. Volatility tends to rise in falling markets. The higher the volatility, the riskier is the security.
Sunday, March 15, 2009
TIGHT financial markets will likely aggravate the down cycle in the real estate sector and lead to a sharp fall in property prices and defaults by few developers, Deutsche Bank said. Reiterating its underweight rating on the sector, the investment bank forecasts further downside in realty shares, which have declined roughly 33% so far this year.
“We are yet to see a sharp fall in fundamentals for the sector in terms of a sharp fall in property prices, defaults by developers to banks, and a sharp decline in revenues and profits,” Deutsche said in a recent client note.
The investment bank opines that a severe down cycle in the sector now seems inevitable with the reversal in economic growth, low property prices, slump in mortgage rates and under-supply of units.
“We forecast major shortfalls in net cash flow, with asset-liability mismatches in a tight financial market environment and a currently cautious central bank. Most developers will not acknowledge a significant down cycle, but their financials (slowing growth, falling margins, rising debtors and gearing) and actions indicate otherwise,” Deutsche said.
The sharp rise in banks’ lending rates in the last couple of years has driven up the cost of acquiring property significantly, deterring prospective buyers to defer purchases. Sharp jump in land and raw material prices have made it all the more difficult for developers to make property more affordable.
“Despite the large equity raising and the sharp increase in sector profits, aggressive land chasing and the sharp increase in debtors have resulted in absolute debt levels increasing sharply in the last 18 months. Thus most developers have high gearing ratios,” Deutsche said, while assigning Indiabulls Realty and DLF ‘hold’ rating and Puravankara and Sobha Developers ‘sell’.
Drawing parallels to the state of Tata Motors, which recorded strong growth in the mid 90s until an economic slowdown with high debtors forced write-offs, resulting in a huge loss in 2000-01, the investment bank said India’s realty sector is reflecting trends similar to those experienced by the auto major in 1996-97.
The Tata Motors stock, according to the investment bank, climbed from a base of Rs101 in 1992-93 to peak at Rs564 in 1996-97 before falling to Rs40 in 2000-01. Deutsche notes, “ Despite weak demand and slow sales, developers have not yet been willing to reduce their property prices. It seems that they are prepared to hold properties rather than reducing their property prices since they have made significant profits during the last 2-3 years. However, the same is not true for the secondary market.”
India's largest real estate developer DLF has already anounced 20 - 25% rate cut accross india both for new and existing cutomers. In near future other players may also follw the same.
Saturday, March 14, 2009
THIS could be the first instance of policy makers in India learning lessons from the Wall Street collapse. The finance ministry and regulators are looking at the possibility of banning credit rating agencies (CRAs) from providing allied services to clients whose debt instruments they rate.
The government feels that when ancillary services such as consultancy and financial advisory are offered by the rating agency to the client which it rates, the former may be constrained to please the latter — a favour that would help in developing the market for their allied services. This would lead to the rating agency compromising on rating and make investors misjudge the worth of the securities they buy. This is in addition to the larger conflict of interest involved in accepting fee from the same entity whose instruments they rate.
The proposed regulatory framework for credit rating agencies would explicitly address the conflict of interests grappling these entities, which is highlighted by the ongoing financial turbulence in the US. Accounting and auditing firms, whose integrity is important for regulators and investors, face a similar restriction worldwide. An auditing firm that does statutory auditing of a company’s financial statements cannot give advisory services to the entity as it is feared that it may affect the client’s independence.
In India, Standard and Poor’s has more than 43% stake in leading credit rating agency Crisil, while Moody’s Investment Company India holds 28.5% in Icra. The Fitch group has a 100% subsidiary here called Fitch India. CARE Ratings is a domestic player with IDBI Bank, Canara Bank and SBI as major shareholders.
The government is aware that preventing rating agencies from doing allied business might escalate the cost of their rating services as cash flow from other businesses may dry up. It is aware that sometimes firms cut corners because of institutional constraints and not necessarily because of greed.
Rating agencies, in the meantime, have told the government that their other businesses are run by subsidiaries, which are separate legal entities operating at an arm’s length.
They are run by separate CEOs who do not interact with the chief of their parent firm. The government is now examining how much revenue these agencies generate from their allied businesses. A final view would be taken only after considering feedback from stakeholders, it is understood.
Friday, March 13, 2009
The interest rate of company fixed deposits varies from company to company and investment tenure. Generally, the rate of interest given by the company is one to two per cent more than what is given by the Bank Fixed Deposits (FDs).
But unlike Bank FDs, which are risk-free, the company FD is not risk-free and carries a high risk of default. Company Deposits are rated by different rating agencies like ICRA, CRISIL etc. Higher the rating safer the investment is.
One can invest in FMPs, which are more like an FD, but are more tax efficient.
Debt funds with low average maturity could also be considered as they carry lesser interest rate risk.
Thursday, March 12, 2009
REFLECTING tight liquidity conditions in the money market, banks have pulled out close to Rs 38,000 crore in the last four months from various mutual fund (MF) schemes. According to the latest Reserve Bank of India (RBI) figures, total MF investments dipped to Rs 27,691 crore as of Feb 12 09 from a high of Rs 59,700 crore as of May 08.
Officials at fund houses point out that most of the MF investments by banks are in liquid or liquid-plus schemes, which almost work as a current account as far as liquidity is concerned and yet earn a return, which the banks do not earn in a current account. Banks often park surplus funds in such schemes that helps them earn some extra return and yet retain the liquidity of the funds.
The tightening domestic liquidity in recent times has been primarily due to advance tax outflows and forex intervention. However, this is likely to be transient in nature once the quarter-end pressures are off and due to the liquidity measures undertaken by RBI. Liquidity conditions are tight and the surplus funds with banks is eroding which is forcing banks to liquidate their investments in mutual funds.
Besides, banks also have an option to offload their stock of surplus government bonds (Banks have to invest 25% of the deposit they mobilise in government bonds). Though they have also been selling surplus bonds, since MF investments are not zero risk unlike government bonds, banks would prefer offloading those investments which are more risky as it would require them to keep aside lesser capital.
Banks have been facing tight liquidity conditions for quite some time now as the central bank has been resorting to monetary tightening to rein inflation. The central bank has hiked the cash reserve ratio (CRR) —portion of bank deposits that needs to be parked with the banks — by nearly 200 basis points since April and has also hiked the benchmark repo rates in order to curb lending and contain the money supply growth.
However, banks seem to have adopted a different strategy with respect to their proprietary stock portfolios. Fortnightly data released by the RBI indicates that they have by and large been selling when indices were high and bought when prices fell. Individually, very few banks are said to have a huge proprietary portfolio. Market sources say that there could be some aggressive private banks and a couple of public sector banks who have a very huge balance sheet that their direct equity exposure is a very negligible component of their assets. Also, stocks are not as liquid as money market mutual funds schemes.
Wednesday, March 11, 2009
Eleven banks participated in the mock test carried out by the Bombay Stock Exchange (BSE) for the new IPO payment facility recently permitted by SEBI.
The first IPO in which the facility will be used is that of 20 Microns, which opens on Monday.
This facility, called the Application Supported by Blocked Amounts (ASBA), allows banks to block IPO application money in the applicant’s bank account till the time of allotment of shares. Only that amount proportionate to the share allotment will be transferred from the account.
The markets regulator has said that ASBA will be operationalised from Monday. . This coincides with the opening of the IPO of 20 Microns, the first issue in which the ASBA process will be used by investors.
“BSE has successfully tested its interface with 11 banks for participation in the ASBA (Application Supported by Blocked Amounts) process,” said a BSE news release.
The 11 banks that participated in the mock test were Bank of Baroda, Corporation Bank, HDFC Bank, ICICI Bank, IDBI Bank, Indus Ind Bank, Kotak Bank, Punjab National Bank, State Bank of India, SBBJ and Union Bank.
The exchange is in the process of testing the interface with other banks that have evinced interest in participating in the ASBA process, BSE said. Using this interface, the banks participating in the IPO process would be able to upload the bids with respect to their customers, into the electronic book of the BSE,
Tuesday, March 10, 2009
IS this the right time to buy? Shall I start averaging my portfolio? These are the questions uppermost in the mind of most retail investors. The not-so-savvy investors, who entered the market near the peak, are too stunned to react even as their portfolios continue to shrivel by the day.
But the million dollar question is: Will averaging help small retail investors?
Retail investors have very little choice, experts opine. It seems, they can only hold on to their investments. If they have money and there is no immediate cash requirement, investors can start buying stocks in small lots. They should buy large-cap stocks that have been showing growth over the past few years. Companies caught in the market rumours should be avoided.
The fall in the market has triggered big losses in the portfolio of majority of investors, barring a few lucky ones who managed to make a timely exit. Market-cap of stocks in the BSE 500 have seen a reduction to over 75% of what they stood at the beginning of the year. Stocks across the broad have declined, irrespective of fundamentals — strong or weak.
A look at the shareholding pattern reveals that ownership by retail investors in most companies has been rising in the past four quarters. For instance, retail shareholding pattern of the 1,300 BSE listing companies that have disclosed their latest shareholding pattern suggests that their holding has gone up from 9.5-10.3% whereas in the case of the foreign institutional investors, it has come down from 11.2-10.2% during the same period.
Retail investors have lost heavily in the market. There are instances where young professionals have invested on stock tips and now lost large part of their savings in the past few years.
Experts, however, say that any fresh buying should be in large-cap frontline stocks, as they would be the first one to go up in case of any positive changes in the market conditions
Others also suggest that the investors should have a re-look at the beaten down stocks in their portfolio. As the earning season is close by, investors can take their investment call on the basis of their performance. Even if they are losing 50% on a stock and it has posted bad results, they need to exit those counters. Investors can keep their ego aside.
Monday, March 9, 2009
AIG has borrowed nearly $150 bn from US Government ans its seeking more now. But hte total market cap og the company itself is $ 1 bn. Those of you worried about the state of AIG Mutual Fund can rest now.
The U.S. company was on the verge of declaring bankruptcy and needed up to $100 billion to stay afloat. Naturally, its shares plunged on Wall Street amid fears of its collapse.
But the government has come to the rescue of the American International Group (AIG).
Under the bailout deal, the U.S. Federal Reserve will lend AIG up to $85 billion to guarantee its short-term liquidity. But there will be a price for this lending hand. In return, the U.S. Government will take an 80% stake in the company with the right to veto the payment of dividends to shareholders.
This will save the company from bankruptcy. But it will need to sell assets to repay the loan, which will be due in 2 years' time.
An insurance company takes premium from people who've bought insurance and instead of investing it in safe instruments like bonds, starts guaranteeing CDS and other toxic instruments. We are in a situation where losses are being socialized and profits privatized.
Bailout may not be the right word. Bridge loan is the proper word. If we look at AIG's tentacles, they reach around the world. They touch all kinds of sectors and companies around the world. If it was left to fail, the effect of financial markets would be bad.
Meanwhile sources say, Tata AIG Life and Tata AIG General, AIG's largest business operations in India, have more than required solvency margins in Indian insurance JVs. Tata AIG insurance JVs together has nearly Rs 1500 crores in capital. Tata AIG policyholders & employees are safe & secure. Solvency in life insurance at 305%; general insurance at 176%. IRDA guidelines requires insurance business maintain 150% solvency margins. Tata AIG policyholders & employees are safe & secure. Insurance business fully funded as of now; no risk to business & policyholders. India insurance JV's employ nearly 9000 employees & there is no risk to staff. AIG India watching US situation on other businesses like PE, Asset management, Cons finance. AIG aircraft leasing business has 19-20 leased aircrafts with indian operations. AIG systems solutions, its captive bpo employs nearly 1100 employees. All AIG businesses in India continue to grow at a robust rate.
Below is the list of stocks held by Tata AIG in Indian companies :
- Elecon Engg.Co
- Action Construct
- McNally Bharat
- Tata Motors
- Tata Steel
- Zee News
Below is the list of stocks held by AIG Global Investment Corporation:
- AIA Engg
- Nucleus Software
- Sun Pharma
- Federal Bank
- Ipca Labs
- Bharati Shipyard
- Gayatri Projects
Sunday, March 8, 2009
AN investor-friendly measure adopted by Association of Mutual Funds of India (AMFI) has put distributors in a spot. As prescribed in Amfi’s best practices, the repealment of no-objection certificate (NOC) for shifting to a new financial planner (a mutual fund distributor or agent, in this case) has left a hole in the earnings kitty of large distributors.
Amfi had amended the clause regarding the no-objection certificate in a bid to empower investors over unscrupulous distributors. Freedom for investors to choose their distributor will, over the long run, promote healthy competition as distributors are forced to raise their service standards to retain customers.
However, the new rule is also being used as a weapon to poach businesses of other distributors by hiring well-networked relationship managers working with established product distributors. The modus operandi is simple. Fund distribution, as a business, is predominantly dependent on relationship managers, who push fund products to their regular customers. It is very rare for investors to approach the distributor directly for fixing problems or meeting requirements at the investor end. All aspects of investments (that the investor has with distributor) is taken care of by the assigned relationship manager.
The problem for distributor starts when the relationship manager quits the job and joins a new distribution firm. As a result of stiff targets, the relationship manager is forced to poach clients of his previous organisation to meet targets in the new firm. According to sources in the fund industry, most investors, invariably, agree to change the agent. There has been incidents where, relationship managers in dire desperation also forge the signatures of gullible investors and seek change in distributorship. The request to change distributor is forwarded to the asset management company.
In both the cases, the distributor (with whom the investor has account previously) loses out on loyalty commission or trail commission. In addition to the 2.25% entry load, fund houses pay around 0.5% per year of current investment value, as trail commission to the agents, for the period the customer stays invested in the fund.
Saturday, March 7, 2009
THE present banking system is called a “fractional reserve banking system”, as the banks are required to keep only a fraction of their deposit liabilities in the form of liquid cash with the central bank for ensuring safety and liquidity of deposits. The Cash Reserve Ratio (CRR) refers to this liquid cash that banks have to maintain with the Reserve Bank of India (RBI) as a certain percentage of their demand and time liabilities. For example if the CRR is 10% then a bank with net demand and time deposits of Rs 1,00,000 will have to deposit Rs 10,000 with the RBI as liquid cash.
How is CRR used as a tool of credit control?
CRR was introduced in 1950 primarily as a measure to ensure safety and liquidity of bank deposits, however over the years it has become an important and effective tool for directly regulating the lending capacity of banks and controlling the money supply in the economy. When the RBI feels that the money supply is increasing and causing an upward pressure on inflation, the RBI has the option of increasing the CRR thereby reducing the deposits available with banks to make loans and hence reducing the money supply and inflation.
Does RBI impose on penalty on banks for defaulting on CRR deposits?
The RBI has the authority to impose penal interest rates on the banks in respect of their shortfalls in the prescribed CRR. According to Master Circular on maintenance of statutory reserves updated up to June 2008, in case of default in maintenance of CRR requirement on daily basis, which is presently 70 per cent of the total CRR requirement, penal interest will be recovered at the rate of three 3% per annum above the bank rate on the amount by which the amount actually maintained falls short of the prescribed minimum on that day. If shortfall continues on the next succeeding days, penal interest will be recovered at a rate of 5% per annum above the bank rate. In fact if the default continues on a regular then RBI can even cancel the bank’s licence or force it to merge with a larger bank.
Does CRR apply to all scheduled banks?
The CRR is applicable to all scheduled banks including the scheduled cooperative banks and the Regional Rural Banks (RRBs). The present level of CRR is 6.5%. Previously, there was a floor of 3% and ceiling of 20% on the CRR that could be imposed by the RBI; however since 2006 there is no minimum or maximum level of CRR that needs to be fixed by the central bank of India. At present, the RBI does not pay any interest to the banks on the CRR deposits. Prior to 1962, a separate CRR was fixed in respect of demand and time liabilities, however after 1962 the separate CRRs were merged and one CRR came into effect for both demand and time deposits of banks with RBI.
Friday, March 6, 2009
Falls Only 20% Compared To 30% Drop By Sensex
Not only have they managed to raise IPO money easily in London, now their stock prices too appear to have taken a ‘comparatively’ lesser hit. India-focussed companies listed on London’s AIM (Alternative Investment Market) have managed to stomach the correction in stock prices, better than sensex companies. This means, on an average, investors in these India-focussed companies would have lost less than investors in sensex companies.
Prominent companies, that are a part of AIM India Index compiled by The Times of India, are power project development firm KSK Power Venture, Bollywood film content distributor company Eros International, IT & ITeS dedicated SEZ investment firm Unitech Corporate Parks and Noida Toll Bridge Company, the operator of the Delhi Noida Expressway. Companies operating in NICE areas such as Dhir India Investments that invest in under performing assets and companies in India or gaming firm DQ Entertainment are also included in this index.
While the 30-share sensex has fallen close to 30% from January 10 (sensex hit its all time high of 21206 that day), the ‘AIM India Index’ — comprising 19 companies having business interests related to India has outperformed its much hallowed counterpart by falling only 20%, an analysis shows. AIM understands operating businesses better. Most investors on AIM are large institutions who are willing to wait for profits and cash-flows 3-4 years down the line and thus do not engage in active trading on a day-to-day basis.
Most stocks run up during bull runs, but only during the downturn is their true worth visible, feels many investment experts. In that light, the difference of 10% between ‘AIM India Index’ and sensex is extremely important. The trend also indicates that investor wealth was perhaps better preserved in equity markets such as AIM. In fact, if we remove the 6 real estate companies from the ‘AIM India Index’ (made of companies which have trading history from January 2008) — the fall will be much less sharper.
Excluding realty, the AIM India Index has fallen by less than 10% in just over 7 months in a scenario where major equity markets have lost anywhere between 20-50%. AIM listed realty companies are largely structured as funds and not operating companies. To that end, they should typically be less prone to swings in stock price.
The BSE Realty Index, tracking real estate companies, has fallen by over 62% from January 10 this year while the AIM listed realty companies focussed on India have fallen by 40% on an average, data from the analysis shows.
The AIM listed desi companies have also fallen less than the FTSE AIM All-Share Index (that tracks all AIM listed companies). In fact, AIM India Index performance is in line with the FTSE AIM 100 index, which tracks the top 100 companies listed on AIM. This performance could be the result of differences in perception. India is a consumption-driven story compared to others, which are more of investment-driven plays.
Thursday, March 5, 2009
If you are an earning member of your family, and there are members of your family who are financially dependant on you, you need life insurance. But how much life insurance do you need?
There are many factors that are relevant in determining the amount of life cover you should buy.
- Need for minimum protection
It is essential that a particular level of income should be maintained for the family even when its breadwinner is not around. Suppose a family's present needs are Rs 25,000 p.m. The extent of life insurance for its earning members should be such that interest income from the sum assured can meet the family's monthly expenses of Rs 25,000.
If one also wants to provide for the future fall in the purchasing power of rupee due to inflation, one must necessarily take policies for higher amounts. No widow, they say, has ever complained that her husband bought too much insurance.
- Current income level
Payment of insurance premium results in an outflow of disposable income. You may, therefore, not like to buy too much insurance. One might have to limit the quantum of insurance keeping in mind the cash flow problems that will be created as a result of the obligation of regular payment of insurance premium.
- Tax benefits
You should also take into account the tax benefit under Section 80C.
- Accumulating for specific needs
If you expect to spend a particular sum of money for the education and / or wedding of your children, you may like to buy an insurance policy for a specific sum to meet such a lump sum commitment.
- Present age
Your present age is a critical factor in deciding the quantum of insurance that you can afford. The rates of premium go up with the advancing age of the life assured. Hence, one can buy more insurance for the same premium at a younger age than at an older age.
The final decision rests upon a careful consideration and balance of all the above factors. The need for minimum protection may be quite high, but the current need for disposable income may not immediately permit buying adequate insurance.
You then have to make a compromise and buy extra insurance as and when you can afford it.
The 5 simple rules
In the event of any misfortune, well-planned life insurance can protect your loved ones from financial difficulties. However, in most cases, people find it difficult to estimate the correct value of insurance they need.
Partly this is because life insurance needs change through different stages of life. Young people with no dependants may not have much need for life insurance.
As one's family responsibility grows, life insurance needs too increase. Thus, a periodical review based on your family circumstances is required in order to ensure that the coverage is adequate.
There are several simple methods available to broadly estimate your life insurance needs. Five simple rules are:
1. Income rule
The most basic rule of thumb is provided by the income rule which holds that individual insurance cover should be at least around eight to ten times one's gross annual income. For example, a person earning a gross annual income of Rs 1 lakh should have about Rs 8 to10 lakh in life insurance cover.
2. Income plus expenses rule
This rule suggests that an individual needs insurance equal to five times your gross annual income, plus the total of basic expenses like housing or car loans, personal debt, child's education, etc.
3. Premiums as percentage of income
By this rule, payment of insurance premium depends on disposable income. In other words, one should decide the quantum of insurance after meeting the regular outgo from salary.
From the first two rules, you can make a broad estimate of the minimum insurance you should have. The premium as percentage of income rule can help you fine-tune your cash flow by committing an appropriate percentage of your income for paying life insurance premium.
4. Capital fund rule
This rule suggests that if you need Rs 1 lakh p.a. for your family needs, and assuming you do not have any other income-generating assets, you may like to create a capital fund of Rs 12.5 lakh (Rs 1.25 million) which can yield Rs 1 lakh (Rs 100,000) annual income @ 8% p.a. You may therefore buy a life insurance policy of Rs 12.5 lakh.
5. Family needs approach
This rule holds that you purchase enough life insurance to enable your family to meet various expenses in the event of key earning person's death. Under the family needs approach, one has to divide his family's needs into two main categories: immediate needs at death (cash needs), and ongoing needs (net income needs).
You may also like to keep in mind that if your family is reasonably wealthy and its protection needs relatively low, you can buy a smaller amount of insurance. Similarly, if your family members have independent earning capacity you may reduce your insurance.
There is a broad relationship between needs and assets over a period of time. Thus, not much life insurance is needed in the initial stage. The same is true in the empty nest stage.
The maximum need for life insurance arises during the mid-phase, when one is married and has children. In other words, one may go for life insurance so long as the asset-level is lower than the need-level. As highlighted in Figure 1, once the asset-level surpasses the need-level, the importance of life insurance declines.
Caution: Insurance is not investment You should always remember that life insurance is a protection and not really an investment because financial returns are rather meagre. (This is equally true of the life insurance portion of even a ULIP scheme.)
If you take inflation into account, there could even be a negative rate of real return at the time of maturity of your insurance policies. So, while it's important to secure your family's well being through adequate insurance of the lives of the earning members, over-investing is a mistake.
Wednesday, March 4, 2009
It's vital to revisit and monitor your portfolio at least annually to check on the status of your allocations and make sure your investment funds are performing as expected. Why?
Here's the rebalancing 'problem' in a nutshell. Let's assume you're an investor with a portfolio that includes $100,000 in stock funds (50 per cent of the portfolio) and $100,000 in bond funds (the other 50 per cent). For simplicity's sake, let's say the stocks have doubled in value to $200,000.
Note, however, that your portfolio's asset allocations are now 67 per cent in stocks and 33 per cent in bonds, a 17 per cent deviation from your original portfolio.
Depending upon your stage in life and your financial plan, this happy development may mean it is time to rebalance.
When is it time to rebalance your portfolio?
- Long-term investors should only rebalance when truly necessary, for example
- When significant gains (such as those from the bull market) or major losses have skewed your intended allocations
- When your investment objectives change
- When you need to shift your portfolio into more fixed income vehicles (bonds) as you enter retirement or plan to invest part of your savings for a shorter-term need;
- When stock or fund seems to be consistently and continually slipping compared with the benchmarks; or
- In the case of a mutual fund, when a proven manager leaves a fund and you are unsure about the replacement.
Research shows us that rebalancing too often accomplishes very little, except in extreme cases. In other words, take the time to choose your allocations correctly and stick with them: Rebalance annually and sell only the bottom quartile of your holdings based on performance.
Monitoring your investments is an important part of portfolio maintenance, but remember that buy-and-hold investors are long-term strategists. Life has a strange and unpredictable habit of forcing us to rebalance our lives as well as our portfolios unexpectedly. Rebalancing is as natural as replacing an automobile or anything else that wears out or just falls apart.Always remember that the object of rebalancing your investments is to focus first on your overall portfolio, not so much on individual stocks, funds or fixed income securities.
6 portfolio rebalancing Guidelines
Here are six crucial rebalancing rules, according to the American Association of Individual Investors Journal.
- Annual rebalancing: Remember that rebalancing does not need to be frequent - annually is sufficient. However, your actual portfolio allocations will be constantly changing due to varying performances and as you withdraw funds.
- Don't stray too much: Don't worry about straying from your desired allocation by a few percentage points, but straying by 5 per cent should start to become a concern, and straying 10 per cent will have a major impact on your portfolio's return. In between that range - it's a tough decision and will likely be dictated by your personal tax situation and personal preferences.
- Minimum commitments: At least 10 per cent of a portfolio must be committed to a market segment to have a meaningful impact on your portfolio. If your desired allocation to a particular asset class is only 10 percent, you would not want to stray below that amount by very much; in contrast, falling a few percentage points below a 30 percent desired level would be less of a concern.
- Discipline: Rebalancing provides a discipline: it forces you to sell high and buy low. In other words, when making specific rebalancing decisions, a savvy investor will take profits in the sales, while seeking value in the replacements.
- Don't get greedy: If you have a portfolio of mutual funds that have been very successful, consider selective pruning of individual holdings that have done well. In short, stay focused on your overall portfolio, without failing in love with any particularly hot funds.
- Focus on the long term: Enjoy the bull market while it lasts, but don't let several terrific years deflect you from a long-term strategy. In short, remember: The market does advance, but in cycles that go down as well as up. Plan your asset allocations for the long term through both phases.
Tuesday, March 3, 2009
It's interesting how laying hands on investment-related advice, i.e. the 'dos and don'ts' of investing, is rather easy nowadays. However, there is little information available on how to make the most of one's money.
Following some rather elementary tips can go a long way in not only saving money, but also deriving maximum benefit from it. Perhaps it's the demanding nature of our everyday chores that make us overlook these tips.
In this article, we discuss 4 tips that will help you make the most of your money.
1. Do not allow your money to lazy
Leaving money languishing in a savings bank account is akin to committing a cardinal sin in financial terms. At best, a conventional savings bank account can fetch an annual return of around 3.50%.
The smarter thing to do is to put that money to use by gainfully investing it. Of course, a provision needs to be made for contingencies. However, all monies over and above that should be invested.
For example, you could consider investing a portion of your surplus monies in a fixed deposit. Typically, a 1-Yr fixed deposit with a bank could earn a return of 8.00%-8.50%. If liquidity holds precedence over returns, you could consider investing a portion of your monies in a liquid plus debt fund.
This will ensure that the liquidity aspect is not compromised with; having said that, you still have the opportunity to clock a superior post-tax return vis-�-vis a savings bank account. And should you decide to get invested in alternative mutual fund schemes from the same fund house, the simple transfer/switch facility only adds to the allure of the option.
2. Use your credit card responsibly
The credit card is here to stay. The stereotypical image of an Indian who is averse to buying on credit is increasingly becoming passe. While few would dispute the convenience that a credit card can offer, there are potential perils that you need to beware of.
For example, the option to remit only the 'minimum amount due', instead of the entire dues. This is the minimum amount that must be paid for the purchases made, to avoid a penalty on account of non-payment of card dues.
The trouble is paying just the 'minimum amount due' can be a very expensive proposition in the final analysis, thanks to the prohibitively high rate of interest on the unpaid balance, along with the taxes.
We recommend that you always pay the entire sum due on the credit card. Buying on a credit card is fine so long as you can pay up the entire bill and do so religiously.
3. Avoid penalties
The cliche goes -- a penny saved is a penny earned. And penalties are the one area where every penny must be saved. A delay in payment of utility bills (like electricity, telephone, credit card and insurance premium, among others) results in a penalty being levied by the service provider.
Given the fact that most of us have become pressed for time, late payment of utility bills is commonplace.
Ensure that you pay up all your bills on time and steer clear of penalties. Consider opting for ECS (electronic clearing service) for paying the utility bills. Apart from the convenience that the ECS mode offers, you also stand to benefit from the discounts offered by certain service providers.
4. Track your expenses
Surprised? You might wonder how tracking expenses is related to augmenting your monies. Well, the two are closely linked. Tracking your spending habits closely can go a long way in helping you acquire a better control over your finances.
This exercise can help you weed out wasteful expenditure and come up with ways and means to save money. Depending on the particulars of each case, the solution might vary from going in for discount buys to cutting down on certain expenses.
However, the 'tracking' bit needs to be done methodically and over a long period of time. Using a tracking tool like MyPlanner can go a long way in helping you understand your expense and cash flow patterns.
Sunday, March 1, 2009
Certainly, there are just so many factors affecting share prices. For example, high oil prices, interest rates, GDP and CPI to name few. However, many beginners are focusing too much on the external factors than what can happen from the accounting perspective. They can easily get frustrated from their own ignorance. Therefore, before you think of getting cheated next time, spend time to read this article very carefully.
1) Dividend Effect
I love dividend as much as you do, but apparently, it does not comes for free. Simply because, the share price drops in the same value as the dividend paid after the ex-date. For instance, if Wal-Mart Stores Inc. decided to distribute $1 per share as dividend to its shareholders, its share price will generally drops from $49 to $48 per share after the ex-date.
So, do not comment so much in the future if the stock price drops after the dividend payout, because you took the money away already.
2) Bonus Issue
Bonus issue is additional shares given by the company to its existing shareholders. By doing so, the company is able to reinvest the dividend cash for better earnings growth. In fact, this is another way for the company to maintain its share price at cheaper rate without splitting the stocks. Bonus issue is also a good way to reward long term stock investor.
Ideally, the share price drops the same ratio of bonus issued. For instance, if the company is giving one new share for each four shares own by the shareholders, the share price will drop by 20%.
3) Warrants Exercise
With warrants, you have the right to buy shares from a company after the exercise date at specified price. As a result, its earnings will be diluted as more shares are sharing the same earnings pie. In general, the share price drops the same proportion of the number of exercised shares. For example, if the exercised share is 10% of the existing number of shares, the stock price will normally drops by 10% as well.
Unfortunately, unlike stock split, these factors are diluting the earnings per share (EPS) of the stock, which in turn will adjust the share price accordingly. That is why, the stock price will get affected if any of the events happen.
Although long term investors do not care much about it, stock traders (esp. swing traders, day traders, position traders) should consider these factors seriously.
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