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Sunday, May 31, 2009

Stock Markets Fall - Corporate FDs Rise

At a time when stock markets zigzag, what would be the right investment arena? Corporate FDs or equities?

THE sharp fall in the equity markets has changed a lot of things including India Inc’s fund raising plans. This, in turn, has changed investment avenues for retail investors. Till about a year ago, the only way for retail investors to participate in a company’s growth was to buy equities either in the secondary market or invest in primary issues (IPO) or rights issue.

However, the primary market option currently is almost closed with the virtual drying up of the IPO market. Bearish sentiments and lack of investors’ confidence due to wild volatility, on the other hand, has decreased the participation of investors in the secondary market. In such a situation, India Inc is now approaching the potential investors through fixed deposit (FD) schemes.

In fact, FD schemes are not new to India Inc. Earlier, every major company had an FD department and it was considered to be one of the main sources of funding. However, this way of funding decayed slowly as it became easier for companies to raise funds through equity and quasi equity. Besides, equity has no direct servicing cost (except earning and dividends expectations of shareholders), where as interest on FDs is a fixed cost and that has to be paid in all circumstances.

The wheel has now turned a full circle and newspapers are now flooded with advertisements by corporate houses inviting public to entrust their savings with them. To make the deal juicer, most of them are offering interest rates that are significantly higher than bank deposits. But, how attractive are these corporate FD schemes? Do they score over bank deposits or other traditional sources of assured returns only because former offers greater returns? For many investors corporate FDs can be lucrative substitutes for bank deposits. They not only offer higher returns, but many of them also structured similar to a bank FD with facilities, such as premature withdrawal, cumulative accrual of interest, TDS (tax deduction at source) cut up to a certain limit (Rs 5,000) etc.

However, investors should know that bank deposits are insured up to a maximum of Rs 1 lakh per customer and the way banks are regulated in India, it is difficult for retail customers to lose their money.

In contrast, corporate deposits have no such insurance and the investor is solely at the mercy of the company and its financial fate. Given this, it makes sense to invest in corporate FDs that have high credit ratings and are known for their financial soundness and credible past performance. Though corporate FDs look riskier, they carry higher interest rates.

While most corporate FDs are currently offering pre-tax interest ranging from 7–12%, for 1-3 years tenure, interest rate offered by a bank is between 10.25% and 11% for a three-year period. For one year, banks are offering 8.5-9% and there is no TDS up to an interest income of Rs 10,000 a year.

So, is higher interest rate a tempting one to invest his money in corporate deposits? Or is equity investment in these companies still a preferred route? A comparison of the current dividend yields on the company’s stock with post tax return on its FD will give an answer. The sharp fall in stock prices of most companies has led to a spike in the dividend yield, based on the dividend payout last year. Tata Motors, for instance, is available at a dividend yield of over 11% as compared post-tax FD return of 7.6%. Dividends are also tax-free in the hands of the investor. The only catch being that dividends are slave of earnings and they tend to rise and fall in line with profit growth. In the near future, market expects most companies to cut dividend payouts. However, as soon as profit growth resumes, dividends pay out will catch up and the stock prices also will begin to soar. This way, equity investors get the best of both the capital appreciation and cash flows in the form of annual dividends payouts.

But, if equity has its advantages, there are risks, too. The biggest shortcoming here is the market risk associated with equity investments. Equity is a risk capital and returns are a function of external macroeconomic environment.

FDs, on the other hand, are relatively riskfree and, in most cases, post-tax returns from FDs are much higher than the tax-free dividend yields. The risk here, however, is that of creditworthiness of a company. Meanwhile, fear of the company defaulting has become prominent after the Satyam fiasco. But, in such cases, default applies to both debt and equity investment.

Investors are thus advised to go for well known companies that have a strong and credible standing in the market. Unlike a bank FD, where high interest rates usually dominate the investment decision over the choice of bank, the integrity of the company should be given the highest priority in case of corporate FD. A few basis points should not matter, for the assurance that the capital is in safe hands.

Saturday, May 30, 2009

Debt instruments safer in volatile markets

Here I have tried to lists out some investment options that are relatively safer in volatile market conditions

The stock markets are on a downward trend from the beginning of this year. Volatility in the markets is also quite high. There are many factors that contribute to negative market sentiments. For example, a persistent high inflation rate (especially the core inflation rate that is driven by basic commodities), rising commodity prices in global markets, anticipated slowdown in the global economy etc.

Foreign investors were investing heavily in emerging markets. They are now taking out money, especially from emerging markets. Large foreign investors are bearish on global growth and expect the global economy to deteriorate. They believe that in the era of a global slowdown, emerging markets will under-perform their global peers. Foreign institutional investors (FII) have taken out around $5 billion from the domestic markets so far this year.

Since the stock markets are in a sideway movement and not doing very well, equity funds are also not delivering good returns. In fact, most of them delivered negative returns over the last six months and many investors lost their money in equities and equity-based funds. Global stock market analysts' valuations in the domestic markets were overstretched last year. This is why investors witnessed huge corrections this year. Some analysts feel the domestic markets will remain in a sideway movement in the short to medium term (next six months or so) perspective.

Here are some safer investment options in volatile market conditions:

  • Tax-saving options

Since the markets are quite volatile and risky for investments, investors can concentrate on completing their tax-saving limit under Section 80C and keep the option open for investments in the stock markets during the later part of year. There are various options available for investors. Provident fund is one. The primary feature of these instruments is to build a fund for long-term needs (retirement). Insurance is another. Investors can look at investing in life and medical insurance in the present time to fulfil their insurance needs. The primary feature of insurance is to provide risk cover to investors against any unforeseen future event.

  • Potential equities

Investors with moderate to high risk appetite and a long term investment horizon can look at investing in blue chip stocks of select sectors. Many blue chip stocks are trading at attractive valuations in the market. Investors can invest in these sectors based on a careful analysis.

  • Debt mutual funds

Debt mutual funds invest in safe instruments like corporate debt, money market instruments, call money etc. The main objective of debt funds is preservation of principal, accompanied by modest returns. Debt funds are ideal for investors who want to take very little risk, are uncertain about the interest rate scenario or who are uncertain about what they should do with their money in the short term.

  • Cash

Investors looking to invest in stock markets should keep some amount of liquidity at their disposal. The valuation of some stocks and sectors will become quite attractive if the market goes through another fall of 5-10 percent. Investors should identify a few stocks and watch them to make investments.

Bank deposits are good for short-term investors. Short term bank fixed deposits yield 6-7 percent returns. Nowadays, many banks offer funds sweep-in and sweep out facility where a balance beyond a certain limit automatically gets converted into a fixed deposit and banks pay fixed deposit interest on it. This type of arrangement can be an option for the short-term horizon.

Friday, May 29, 2009

Choices in mutual funds depending on risk appetite

The past few months have been difficult for investors who reposed complete faith in the stock markets. Millions of rupees of investors in the stock markets were wiped away as the index plunged. Global crisis, the foreign institutional investors' (FII) large-scale withdrawals and the economic slowdown affected the market performance adversely. Investors in mutual funds weren't spared either. It was a horrible fall for equity funds where as much as half of their worth was eroded.

Mutual funds were considered a safe and solid investment that yielded good returns over the past few years. But this time the gains over the last two years were almost completely washed away. High interest rates and slowing economy left a huge dent behind. But some investors believe it is the right time to fish in the stock markets for value picks. For other investors who do not want to shun the markets altogether, yet play it safe, mutual funds are the only alternative.

Mutual funds can be classified on the basis of risk and investment tenure:

A) Equity funds

Here, fund managers make major investments in the stock markets. Investors can either select a dividend reinvestment option or growth option where money is reinvested. The aim is to provide capital appreciation and reap good returns by taking high risks. The fund manager may lock your money across a wide array of companies from big bluechip ones to new start-ups. Owing to this, equity funds are volatile in nature.

RISK: HIGH Investment horizon: Long term - five years or more

B) Debt funds

Debt funds invest in securities like bonds, corporate debentures, government securities (gilts) and money market instruments. Unlike growth funds that provide capital appreciation, the aim of debt funds is to provide regular income. Income funds aim to make regular payouts to the investors. Investments in government securities is considered the safest. If interest rates fall, the NAV is most probably set to increase. If rates go up, NAV is set to fall.

Risk: Medium to low. Sometimes when returns are low, inflation could erode the returns. Investment horizon: Not long in an inflationary economy.

C) Money market funds

In case of money market funds, the fund manager invests in instruments like treasury bills, certificates of deposit and commercial paper. The returns are much higher than ordinary bank accounts. Liquid funds are one of the safest and are highly liquid.

RISK: LOW Investment horizon: Short

D) Balanced funds

Here, investments are made in a balanced mix of debt instruments, convertible securities and equity. Fund managers try to reduce risk of capital erosion and provide regular income. Investors can expect capital appreciation as a large chunk of money is put in equity markets.

Risk: Medium Investment horizon: Long

E) Sector funds

Investments are made in stocks of companies belonging to a particular sector like infrastructure, automobile, or FMCG. Since there is not enough diversification and money is invested in a particular sector, it may carry high risks. Returns may be very high if the sector performs well. If the entire sector collapses or slows down, the investor could lose his money.

RISK: HIGH Investment horizon: Long

F) Index funds

These funds aim to mimic the performance of a particular index like BSE or Nifty. Securities that form a part of the portfolio are in the same proportion as the composition of that index. NAVs of such schemes rise or fall with the rise or fall in the index.

RISK: HIGH Investment horizon: Long

Thursday, May 28, 2009

Gold ETFs glow gets brighter

Investors are slowly warming up to the idea of exchange traded gold schemes from mutual funds. This isn’t surprising since they have given an impressive 20%-plus returns in the last one year. The uncertainties in the economic environment is another reason why investors are parking money in gold, as it has always been considered a hedge against uncertainty in troubled times.

Investor interest in gold ETFs is slowly picking up. I won’t say there are huge inflows, but we have certainly seen incremental flows into the fund. In between, there was lull when gold prices peaked.

We are getting a lot of enquiries on gold ETFs. This is mainly because of excellent returns in the last one year, which is almost double than that of debt schemes. Also, people are not able to take a call on the stock market. They want to park their money in a safer place till they are confident about the future course of the market.

However, investors should be realistic about expectations on gold ETF returns, warn financial advisors. Most of the gains are because of the volatility in the (US) dollar rate. At one point, the dollar touched 52; in a single day there was a movement of Rs 1.25. During such times gold is expected to give good return. However, these kinds of returns are not sustainable. For that to happen, the dollar should crack by 15% or more. It will sure weaken but not that much. Another scenario is the US government devaluing the currency, which seems very unlikely. However, this doesn’t mean investors should overlook gold as it will not give impressive returns in future.

According to financial advisors, gold should always be a part of every investor’s portfolio. You can expect 10-15% returns from gold. But it is important to include gold in your portfolio because it’s a great way to diversify your portfolio. It always hedge you against uncertainty in troubled times such as the current one. Gold gives stability to your portfolio and buying gold ETF is the best way to do it.

Wednesday, May 27, 2009

Go global. Is it the time to invest in Global Markets?

Still one can bet on global funds as a means of portfolio diversification.

Coming after a week when financial giants have collapsed and the world looks on in confusion, it may seem strange to say that investors should still look towards investing in global funds. But financial advisors still believe that you should consider global funds as a means for portfolio diversification and gaining exposure to different asset classes, investment styles, sectors and so on. To make things easier, this article gives you the how and why of investing in global funds.

MORE Diversification / OPPORTUNITIES

Investors should view global funds as giving them the chance to participate in opportunities and themes that are not available in the country such as investing in gold mining or metal companies or those sectors which are highly regulated in India like oil and fertiliser and to benefit from the boom in these sectors. Global funds also help you make the most of the strengths and the growth characteristics of other countries, which are governed by different, factors and have different cycles. Geographical diversification thus helps you reduce risks and brings more consistent returns.

CHECK THE CORRELATION

For those who are still raising their eyebrows in scepticism, and are concerned about the interlinked nature of economies, financial experts have a few explanations. In spite of an increasing integration of global markets, the correlation between India and other markets, whether developed or emerging remains low, somewhere between 0.3-0.5. This means that even a basic level of geographical diversification can add stability to an investor’s portfolio. Also, while certain markets have corrected sharply, there are others that did not face correction to that extent, owing to large domestic consumption and a powerful investment cycle. However, investors need to remember there will always be some markets which are underperformers and others which are out performers and that they need to look at systematic investments into global equity funds to mitigate the impact of event risk.

Investing via the global fund route also gives you the added benefits of an experienced fund manager or a team of experts who follow the course of the market and handpick stocks that will help them achieve their investment objectives.

PROFIT ROUTES

If you are convinced that global funds may be a good option for you, then the next step is to determine their mode of functioning. Many global funds invest directly into reputed stocks abroad. However, some others choose to invest via a fund-of fund route, where the money you invest in a global fund is further invested in a mutual fund, which then invests in stocks in a particular country. You need to watch out as this could make a slight difference to your expenses. In case the fund takes a fund-of-funds route, the investor does not have to pay a double entry load. However, there is a double layer of expense ratios, which may affect the returns in a fund-of-funds. As per regulations in India, mutual funds are subject to a cap of maximum of 2.5% on expenses. The same will apply in the case of global funds run from India.

KNOW THE MARKETS

While most investors interpret global to mean the US or Europe, global funds do not go by this definition. On the contrary, many of the funds today are looking at Asia and other emerging economies as well, which show good potential for growth or have some inherent strengths or natural resources. While it is crucial to look at the track record of the fund house and to determine whether its investment objectives are on the same track as yours, it is also imperative that you know a little more about the economy that you are investing in.

Investors need to believe and back the theme that they are investing in by dedicating the required time for the investments to perform. Hence, proper due diligence by the investor in terms of a feasibility analysis of the economies being invested in is critical. The other factors that could aid you in your decision are liquidity, transaction costs and risk-return ratios of the fund.

DIVISION OF INVESTMENT

Another thing you need to keep in mind is that global funds do not always invest entirely in global stocks. On the contrary, you will find that many of the global funds in the market are seen to invest about 65% in the domestic market and allocate only the remaining 35% to global investments. “With 65% in Indian equities, investors enjoy the prevailing tax benefit of long term capital gains applicable to all Indian equity funds. There are also other funds that invest 100% in global stocks and ultimately it is up to you to decide what suits your investment plans. However, experts recommend that investing in global stocks should only be undertaken after one has suitable exposure in domestic markets.

RISKS

You should, however, not neglect the risks involved with investing abroad. The performance of global funds can easily be influenced by any political, economic and regulatory developments in the country of investments. Moreover, there is always the risk associated with sudden rises and dips in the exchange rate. However, currency delivers only a small component of a fund’s performance.

Tuesday, May 26, 2009

Global pensions lose $5 trillion in 2008

GLOBAL pension fund assets in the 11 major pension markets fell by $5 trillion in 2008 hit by volatile markets, a Watson Wyatt report said on Monday. The study said that over 2008, global pension assets fell to $20 trillion from $25 trillion, a fall of 19% which took assets below 2005 levels.
Another reason for the decrease was lower government bond yields, which pushed pension liabilities further up. Pension schemes calculate their liabilities against AA-rated corporate bond yields — if yields fall, liabilities rise and vice versa.

Watson Wyatt said it had selected government bond yields to facilitate liability comparisons across the 11 countries. All countries in 2008 saw significant negative growth in pension assets, the study noted, except for Germany, which was protected by its high allocation to bonds.

Despite losing market share in the past 10 years the United States, Japan and the United Kingdom remained the largest pension markets in the world, accounting for 61%, 13% and 9% respectively of total pension global fund assets.

Australia emerged as the fastest-growing market and the country with the highest proportion of defined-contribution pension vehicles. Assets invested in defined-contribution pension schemes, account for 45 percent of global pension assets, up from 30 percent in 1998. Pension schemes also changed the way they invest their funds in the five years to 2008.

In the seven most-developed pension markets, which include the United Kingdom, the Netherlands and the United States, equity allocations fell to 42 percent from 51 percent in the five years to 2008, having reached a high of 60% in 1998. During the same period bond allocations increased to 40 percent from 36%. Alternative investments allocations like real estate, extent hedge funds, private equity and commodities, grew to 17% from 12%.

The pensions system is being tested on every level. Most notable in 2008 were the impacts on it of credit and collateral risk as well as greater issues around liquidity and volatility.

Fund Fall

  • All countries in 2008 saw significant negative growth in pension assets except for Germany

  • Over 2008, global pension assets fell to $20 trillion from $25 trillion, a fall of 19% which took assets below 2005 levels

  • Apart from market volatility, another reason for the decrease was lower government bond yields, which pushed pension liabilities further up

  • Assets invested in defined-contribution pension schemes, account for 45 percent of global pension assets, up from 30 percent in 1998

  • Alternative investment allocations like real estate, extent hedge funds, private equity and commodities, grew to 17% from 12%

Monday, May 25, 2009

Goldman Sachs defers India Mutual Funds operations

GOLDMAN Sachs Asset Management Company India has deferred its plans to set up mutual fund operations in India, on account of unfavourable market conditions. According to people familiar with the development, the wholly-owned arm of the Goldman Sachs group is unlikely to launch mutual fund operations here at least in the next year or so.

This has been conveyed to the employees who were roped in for the proposed mutual fund, and has resulted in several staff members heading for the exit. Goldman Sachs officials declined to comment on the matter.

Goldman has recalled its chief executive officer for the venture, Adam Broder, who had shifted base to Mumbai last year for the assignment. Its chief investment officer is believed to be moving back to Hong Kong to take up his previous assignment of managing portfolios of private clients.

Top officials at other mutual funds confirmed that they have received a number of enquiries for jobs from the staff of Goldman AMC, recently.

The company had received the approval from market regulator Sebi to start mutual fund business in India early September last year, when the equity markets were already in a state of turmoil. With markets showing no signs of recovery and the outlook remaining bleak at least for this year, the global financial giant joins the list of other entities, which have deferred their plans to launch mutual fund operations in India. Other domestic financial firms such as Motilal Oswal and Matrix Financial Services are believed to be going slow with regard to the launch of their asset management businesses.

Established mutual fund houses are finding it difficult to get business in equities nowadays. In such a scenario, it would be next to impossible for a new fund house, however, renowned it is globally to start one now.


Mutual fund houses, which had launched their businesses during the peak of the equity bull-run till early January 2008, have incurred heavy losses due to lack of enough revenues visa-vis the higher costs, amid the sharp decline in markets. While some houses are believed to have cut down their operations to the bare minimum to just service existing clients, a handful of them are believed to be on the block, but have not found enough buyers on account of adverse market conditions.

Sunday, May 24, 2009

Buying a home early makes financial sense

The earlier you buy property in your earning years, the better it is for you financially

The high economic growth in the past five years has brought about a big change in the life of the average person. Many young people are joining work early and earning high salaries. Many of them are either single or newly-married with lower financial commitments. There is higher disposable income in their hands. Home loans are relatively easy to get and mortgage rates are getting cheaper. So, the journey of wealth creation now starts in early 20s.

Property as an asset

Easy availability of home loans, declining loan rates and tax concessions imply that with the right amount of planning you can easily buy that dream home early in life. When you analyse it thoroughly, the first house purchase is not just to fulfill your dreams but also to provide for a secure place to live in through the golden years of your life - after retirement.

Due to the improved living conditions and access to better medical facilities, life expectancy is increasing. This has led to a situation where you will be spending approximately the same number of years in retirement that you would have spent in your active working life. Having a house where you can stay comfortably in then becomes a necessity rather than a choice.

Arriving at the budget

Starting early provides you with the ability to finish off the first housing loan while you are in your early 40s. This gives you the added luxury of buying a second house for investment purposes. However, to get all this right requires proper planning. Hence, a lot of thought and planning has to go into the buying process. It requires long-term financial planning.

The right financial planning practice starts with asking a few questions. These questions throw up many surprising answers and help in understanding your needs better. For example, do you have enough cash resources to cover expenses for at least the next two months? It seems like a simple question, but is a very relevant one. It helps you provide for contingencies before you venture out to invest or take a housing loan.

Some questions you have answer while buying a house:

  • What type of house do you need?

The kind of house you need will be based on a host of factors like proximity to schools, offices, shopping centers and medical facilities. Making a list of all the items you need in your house in the order of priority. This helps your selection process because it weeds out choices that do not find favour.

  • How will you fund the down payment?

Even though banks are funding a substantial part of your housing costs, you will have to arrange for your contribution upfront from your personal savings. This will be no less than 15-20 percent of the value of the house. You also need to cover at least a part of the closing costs. So, the first step towards owing your own house is saving up for down payment.

  • How big a loan should you avail?

If you are buying a house with borrowed funds your home specifications will depend upon how much you can borrow and how much you can raise as down payment. The mortgage lender will work out your loan eligibility in both scenarios. The quantum of loan can be either linked to income or to down payment. It pays to be prudent and limit your EMIs to no more than 35-40 percent of your net take-home pay if you do not have other loans.

  • What should be the loan tenure?

Another major decision you will have to make will be the length of loan tenure. Generally, the longer the loan the costlier it becomes. A five-year difference in the loan tenure could set you back by a couple of lakhs. So, the general philosophy should be to pay back the loan as early as possible. If you have an early start, you will be in a position to settle your first loan and be eligible for another housing loan for your second house.

  • Insurance and taxes

These are expenses that are not factored in the calculations before buying the house. These increase the cost of ownership. For any home loan borrower, it makes sense to get insurance so that in the unfortunate event of his untimely death the loan can be settled with the insurance. Further, a home insurance to cover your home and its contents will stand you in good stead.

Asking the right questions to yourself before buying a house will help you get the maximum value for your money

Saturday, May 23, 2009

Claiming deduction on Leave travel assistance (LTA) amount

This outlines some conditions you need to meet to get this deduction

Leave travel assistance (LTA) is an important component of an employee's salary. The LTA amount is received from the employer for undertaking a travel. LTA is eligible for deduction under the Income Tax Act subject to compliance with specified conditions.

According to the provisions of Section 10 of the Income Tax Act, in the case of an individual, any travel concession or assistance received is exempt if it is received from his employer, for himself and his family, in connection with his proceeding on leave to any place in India. It is also exempt if it is received from his employer for himself and his family, for travel to any place in India after his retirement or termination of service. The amount exempt cannot exceed the amount of expenses actually incurred on the travel.

The amount exempted under Section 10 should be the amount actually incurred on the travel. The journey should be in India only. The exemption is available for the farthest place by the shortest route when a circular journey is undertaken.

In order to claim the exemption, an assessee must produce original proofs of expenses - tickets etc. The tax benefit is for actual fare only. Hotel, food, sight seeing, local conveyance etc are not allowed.

The exemption is available to an individual for two journeys performed in a block of four calendar years commencing from the calendar year 1986. The current block is calendar year (January to December) 2006 to 2009. Any fixed sum paid by the employer to an employee as LTA, on the basis of a self declaration made by the employee, is not exempt from tax. Where a travel concession or assistance is not availed of by an individual during any such block of four calendar years, it may be carried forward. The travel concession or assistance amount can be availed of by an individual during the first calendar year of the immediately succeeding block of four calendar years, and it will be eligible for exemption.

Some points to be noted for exemption:

  • Fare amount: If the journey is by air, the air economy fare of the national carrier by the shortest route to the destination is the amount allowed for deduction.

  • If train connection exists: If the place of origin of journey and destination are connected by rail, but the journey is undertaken by any other mode of transport, other than by air, the air conditioned first class rail fare by the shortest route to the place of destination is the amount allowed.

  • When no train connection exists: If the place of origin of journey and destination are not connected by rail, the amount eligible for exemption is the first class or deluxe class fare of any transport by the shortest route to the destination.

  • Where no public transport exists: Here, the air conditioned first class rail fare, by the shortest route, is considered.

Defining family

For the purposes of this clause, 'family' means the spouse and children of the individual; the parents, brothers and sisters of the individual; or any of them dependent on the individual. The exemption is available for a maximum of two children of an individual.

Friday, May 22, 2009

Equity investors should track market developments

The stock markets have been volatile over the last few days. They are in a sideways movement and trying to find the bottom after a fall of 20 percent a week ago. The market sentiments are not very positive at the moment and the recent developments are expected to dampen them further. Globally, governments and central banks are trying to cut rates and announce packages to improve business sentiments.

These are some of the major developments in the markets last few month:

A) Global

On the global front, another large US bank went into a financial crisis. The US government took quick measures to avoid the spread negative sentiments in the markets. The US government announced a bail-out package and agreed to shoulder the losses on the bank's risky assets.

China announced a large cut in interest rates and reserve ratio to boost the investor sentiments in the markets. Recently, the World Bank announced China's growth rate next year will come down to 7.5 percent. The European Union is also considering a large package to bring cheer to the business environment and investor sentiments.

The scenario worldwide is still looking quite gloomy as more bad news is coming in from large financial and industry houses. People looking at investing in the stock markets should remain extremely cautious and closely track the market developments. Investors with a low risk appetite, and inadequate exposure and understanding of the market dynamics should stay away from direct exposure to stocks at this moment.

B) Crude oil price drops

Crude oil prices are quoting in the range of USD 48 to 55 in the last few days due to lower demand in the global markets. The import crude basket of domestic oil marketing companies also has come down drastically. The oil ministry and government are considering a rate cut on petroleum products (mainly petrol and diesel).

The rate cut will result in a lowering of prices of commodities, and will reduce the inflation rate further. Analysts are expecting inflation to go below five percent by March 2009 due to the slowdown in the global markets, a sharp decline in crude oil prices, and the inflation base effect.

C) Currency

The rupee again depreciated vis-a-vis the US dollar. It was at its lowest level in the year, trading at around Rs 50 per USD. The rupee depreciation is not good from the perspective of the economy, as it results in imports getting expensive and increases the current account deficit.

Thursday, May 21, 2009

EPFO can pay 8.5% interest in 2009-10

THE Employees’ Provident Fund Organisation can comfortably offer 8.5% interest rate to its 4.41 crore depositors during 2009-10 and still record a surplus contrary to Rs 139-crore losses suffered by it for giving the same benefit during the current fiscal. The issue of return to the depositors would be discussed at a meeting of the ‘finance and investment committee’ (FIC) on Thursday, agenda for which lists that maintaining an 8.5% interest could still give the fund a surplus of Rs 6.4 crore on the investment made by the fund.

If EPFO maintains the interest rate of 8.5% on PF deposits, there will be a surplus of Rs 6.4 crore at an estimated income of Rs 12,994 crore in 2009-10. In case the interest is raised to 8.75%, the fund would suffer a loss of Rs 366.77 crore and the deficit would be still higher at Rs 739.94 crore if the rate of interest is fixed at 9%. FIC gives recommendations on financial matters to the apex EPFO body Central Board of Trustees (CBT), which takes the final call.

Wednesday, May 20, 2009

Canara Robeco Mutual Fund

There is reason to believe that Canara Robeco can shake off its dreary past. Though around for 20 years, Canbank Mutual Fund failed to capitalise on its early mover advantage. Now, with a new name, partner and management team, it is attempting to establish itself as a major player.

Last year, Robeco took a 49 per cent stake in the AMC. Robeco is the fund management arm of the Dutch co-operative bank Rabobank. As a result, Canbank Mutual Fund was rechristened Canara Robeco.

It's not just a superficial change in name but a serious attempt to clean up up its act. A Voluntary Retirement Scheme (VRS) was introduced and now there is some fresh blood in. The new outfit appointed Rajnish Narula as CEO and MD (ex-DBS Chola), Ritesh Jain as head of fixed income (ex-Kotak Mutual Fund) and Anand Shah as head of equity (ex-ICICI Prudential Mutual Fund).

Though the rebranding exercise currently underway will help in recall, the fund house will have to make its mark on the performance front. Its equity funds have never come close to the better funds in their categories. And it has been more than a decade since it has been able to sell an equity fund aggressively. Out of the six equity funds, there are no 5- or 4-star rated ones. Though each of the hybrid funds (equity and debt oriented) has a 4-star rating.

Having failed to make a dent in the equity space, this AMC by default has become a cash fund specialist. Out of the total Rs 4,450.01 crore that the fund house manages, Canara Robeco Liquid Retail and Canara Robeco Liquid Plus Retail together manage Rs 2,567.2 crore. Both are 4-star rated.

A few years ago, the AMC showed some signs of a clean-up and merged some of the schemes. While this buried the performance record of some of its old funds, it was insufficient to enter into the league of major players of the industry

Tuesday, May 19, 2009

Principal Mutual Fund

This year, Punjab National Bank decided to exit from the AMC. The reason cited being the lack of performance by the fund house. As a result, Principal Pnb Mutual Fund changed to Principal Mutual Fund.
Though it has been around for a while, its AUM is not that high. Despite a broad collection of equity funds, the performance of the schemes has not been impressive. The exceptions are Principal Tax Savings and Principal Child Benefit, a hybrid fund.

Principal Mutual Fund has a complicated parentage. After being set up by IDBI in 1994, Principal Financial Services Inc (USA) became a deemed sponsor by acquiring 50 per cent stake in IDBI-Principal AMC.

The year 2003 was interesting. Principal bought out IDBI's entire 50 per cent stake in June that year. The AMC also filed a proposal with SEBI to acquire the management of all funds managed by Sun F&C.The very next year (2004) another change took place; the AMC was renamed Principal Pnb Asset Management Co. Pvt. Ltd. (in association with Vijaya Bank). This was the outcome of Punjab National Bank and Vijaya Bank becoming equity shareholders of the AMC.

Monday, May 18, 2009

Defining Long-term Gains

Debt funds including Fixed Maturity Plans (FMPs) and liquid funds when sold after 365 days from the date of purchase; then any capital gains/loss made on it would be treated as Long-Term in nature and the investor would be liable to pay Long-term Capital Gains Tax at the time of the redemption of units.

For Long-term investment in Liquid fund we can clearly see that the investors in the growth option would be better-off than the Dividend option. Tax calculation for Long term capital gains for both dividend as well as growth options are as follows:

Sunday, May 17, 2009

Government is recapitalising banks in India How to cash in

THE GOVERNMENT has announced the recapitalisation of public sector banks in the interim budget to infuse more capital into banks so that they can increase their lending and improve their liquidity. As per the Reserve Bank of India (RBI) norms, banks are expected to maintain a capital adequacy ratio (CAR) of 9% or higher. All Indian banks have higher CAR than the prescribed limit. However, it seems that the government intends all PSU banks to have a CAR of at least 12% (see table showing the list of PSU banks with CAR of 12% or less). This is what makes recapitalisation different in India from what is happening globally, especially in the US and Europe, where governments have to step in to save the possible bankruptcy due to erosion of capital. Indeed, the move will make PSU banks much stronger than earlier to face any eventuality.

However, what is good for banks may not be that good for their shareholders. This is because, when the government infuses more capital into banks, its percentage ownership increases at the cost of other shareholders. But, the story does not end here. It can very well be the case that post capital infusion, the profits grow to such an extent that despite of lesser percentage ownership, the shareholders are left with more money in their hands.

lets find out the impact of earlier recapitalisation on the performance of the banks. Logically, after the recapitalisation, banks should clean up their books and scale up the growth trajectory. We analysed the trend in profit growth during the financial years, after the increase in the paid-up equity capital. Apart from profit growth, we also tried to analyse the trend in interest income to find whether the bank could scale up lending with more capital in hand. In certain cases, banks did not do well after capital infusion. For example, for Bank of Maharashtra (BoM), the paid-up capital was up by Rs 100 crore in FY04. However, the interest earned grew by 7.7% and 4.5% in FY05 and FY06, respectively. The bank’s growth in interest-earned was not helped by the capital infusion. It shows that BoM could not lend more, as normally expected, with more capital. BoM’s profit declined post recapitalisation by 41.8% and 71.3% in FY05 and FY06, respectively. In the case of many other banks, though the interest income grew at higher rates post recapitalisation, the profit growth fell apart. UCO Bank’s interest income grew at a compounded annual growth rate (CAGR) of 22.4% during the period between FY05 and FY08 post the capital infusion in FY04. However, UCO Bank’s profits fell at a CAGR of 2.4% in FY05-08. This shows that high growth in lending may not necessarily translate into high bottom line growth. Similar was the case with IndusInd Bank and Andhra Bank.

Notwithstanding the dismal performance of a few banks post capital infusion, there were many big PSU banks, which did well after the recapitalisation. For instance, Bank of Baroda’s (BoB) paid up equity capital was increased by Rs 71 crore in FY06, and after that its interest earned grew by 27.7% and 31.2% in FY07 and FY08, respectively. Before FY06, the bank’s interest income was expanding at lower rates. BoB’s profit grew by 23.1% and 40.9% in FY07 and FY08, respectively. In this case, the recapitalisation was indeed helpful in revitalising the bank. Quite similar was the case with Allahabad Bank, Union Bank of India and Syndicate Bank among others.

In a nutshell, more banks have raised the growth trajectory after the recapitlisation. The key for shareholders is that the more stable the bank is, the more likely that it will actually grow at higher rates post infusion of capital. Hence, for investment purposes, recapitalisation will be more rewarding in the case of stable banks such as State Bank of India (SBI), Punjab National Bank (PNB), Bank of India (BoI), Union Bank of India, Bank of Baroda (BoB), Corporation Bank and Syndicate Bank.

Saturday, May 16, 2009

Brokerages bullish on education companies

THE government’s thrust on the education sector and the decision to set up model schools through private-public partnership has made brokerages bullish on the sector. ICICI Securities feels that even while consumer spending is declining across sectors, education spend is unlikely to witness any fall. It also expects the Right to Education Bill to be introduced in the parliament within a few weeks. In a recent report, the domestic brokerage has reiterated a buy on NIIT and maintained a hold on Educomp Solutions.

The government has significantly increased its education outlay to 5% of GDP from the current 3%. Also, it has recently announced setting up 2,500 model schools (of 6,000 schools) via public-private partnership at an estimated cost of Rs 93.2 billion. It also feels that education spend is the last item to be cut by private households in the current slowdown as it forms a mere 7-8% of the total consumption expenditure and parents want to provide the best to their kids.

Interestingly, ICICI Securities feels that in case of an economic downturn, innovative and cheaper modes of education like online mode, virtual classroom etc may be preferred. Overall, it believes education spend will have minimal impact given the importance of education to achieve and sustain economic growth over a longer period of time.

According to the brokerage, there are more than 100 million students that are currently out of the basic schooling system, which implies a huge potential for companies that are a part of the education sector. More than 100 million students are currently out of the basic schooling systems. ICT project tenders are floated predominantly in H2FY as the government would like to utilise its allocated budgets before the fiscal year end.

The companies which undertake large ICT projects (from setting up to operating computer education and other computer aided learning programmes for government schools) would be a key beneficiary from the increased impetus to education, it adds. The Right to Education Bill, which the brokerage expects to be tabled within few weeks, would bring more students within the education umbrella.

The brokerage has reiterated a buy on Educomp given its annuity-based unpenetrated Smart Class business model, high growth in ICT and perpetuity-based K-12 school business, all of which provide long-term high growth, better margins and predictable cash flows. ICICI Securities expects Educomp to raise its guidance for school addition in Smart Class business and positively surprise the market with strong Q3FY09 results.

Meanwhile, the brokerage has maintained a hold on NIIT with a target price of Rs 39 per share as it feels that the company is entering a seasonally weak H2FY with concerns on lower growth in individual learning solutions (IT and non-IT due to economic slowdown) and discretionary nature of US centric corporate learning solutions.

Friday, May 15, 2009

Build portfolio for long term equity portfolio

The domestic markets remained in a bear grip over the last one year due to the slowdown in the US and major European countries. The key market indices here lost over 50 percent during the last one year. Stocks in real estate, infrastructure and automobile sectors were among the worst hit during the last one year as they lost around 70 to 90 percent from their peaks 12 months ago. The market outlook for the short term still remains negative and investors are advised to exercise caution while investing in equities.

According to the current market situation, it looks like the first half of 2009 will remain bad for the markets and things will start improving in the later part of this year. The markets have already factored in much of the bad news and stocks in many sectors are available at attractive valuations. The possibility of further market corrections (10 to 15 percent) from the current levels still exists as more bad news comes from global markets. But analysts rule out a sharp decline in the markets from the current levels.

Experts believe that next few months will be a good time for long-term value investors to invest in carefully selected stocks and build a long term equity portfolio.

Here are some points an investor should keep in mind while building an investment portfolio:

Planning

This is one of the most important parts of investing. It deals with playing around with your hard earned money and fulfilment of your future objectives. Investors should keep in mind that they need to achieve a future objective from their investments by taking a calculated risk. It could be as simple as earning decent returns on investment.

It is important to set realistic expectations from your investment instruments. Expecting too much will force you to invest in high risk instruments without understanding them. Then the chances of losing money are much higher.

Stock picking

Identification of stocks for the equity portfolio is the next step. Investors should look at the trends and outlook of various sectors as the outlook of stocks and sectors keep changing based on the market conditions and company performance.

Some tips to help you identify stocks and sectors:

• Have a good understanding of your risk profile. This helps in isolating the aggressive and defensive stocks/sectors in your portfolio. Risk profile assessment includes your age, disposable income, financial background, family structure and number of earning members in the family.

• You should remain in constant touch with the market developments. You can get some investment tips from your stockbroker.

• Small-cap and mid-cap companies sometime give returns in multiples but it's more risky to invest in them. Small investors should always stick to well-known blue-chip companies, which have good liquidity in the market. Avoid investing in unknown small-cap companies.

• Accumulating stocks is another important step in building the portfolio. Although it is not possible to time the market, investing in a stock at the right price differentiates between a good and bad investment.

Patience is the key

Currently, the market is going through a bearish phase as negative news is flowing in from various quarters. Therefore, it is very important to have patience and not panic. It is advisable to accumulate stocks in smaller lots whenever the market corrects. In a bearish market phase, sometimes even fundamentally good stocks correct heavily due to a panic wave in the markets. Investors should make use of these opportunities to build their equity portfolio.

Thursday, May 14, 2009

Franklin Templeton Mutual Fund

Franklin Templeton Mutual Fund has fallen well short of most investors' expectations, but it would be premature to write it off now.All through the bull run they cast their lot with companies boasting of sound balance sheets and free cash flows. By and large, being a conservative fund house, they steered clear of capital goods manufacturers and real estate companies and stuck to strong fundamentals. Naturally, they were penalised for it in terms of returns as the market's attention was elsewhere.

When one looks at the current market decline, their relative performance certainly does impress when compared to its peers. Its star performers, Franklin India Bluechip and Franklin India Prima Plus, also amongst India's oldest private sector funds, have managed to stay strong in the recent market debacle. Though, by their very own admission, they do have some work to do on the mid-cap fund - Franklin India Prima.

The early years of Templeton were not impressive. The acquisition of Pioneer ITI in 2002 was the best thing that happened to it. Pioneer ITI was the first AMC to launch open-ended funds in India. It started off as Kothari-Pioneer, a joint venture between the Chennai-based Shyam Kothari family (through ITI, Investment Trust of India) and the U.S.-based Pioneer Group in 1993.

In 2000, ITI was acquired by TCK Finance and in 2001 the AMC was called Pioneer ITI. Soon after, Pioneer was acquired by UniCredito Italiano, an Italian bank. In March 2002, Templeton acquired Pioneer ITI. Thanks to the acquisition, Templeton acquired some star performers and a great fund management team (the entire team was retained). Ravi Mehrotra, who came over as Pioneer ITI's CIO, was appointed as CEO of Templeton and when he quit in 2005, he was President, Franklin Templeton India.

The acquisition instantly made Franklin Templeton the largest AMC in 2002. But over the last few years, the fund house has lost significant market share. But they do not seem too perturbed by it simply because they are convinced they did the "right thing". There was no NFO mania here, neither did they go overboard with exotic products and refused to pursue short term opportunities, be it in stock selection or fund launches. Where they are rightly concerned is on the performance front where they have undoubtedly faltered.

The fund house has now put together a well structured research team of seven dedicated analysts. They have enhanced their market coverage and fine tuned their investment management processes. They are confident that in the next few years, their convictions will translate into a significant and sustained performance improvement.

Wednesday, May 13, 2009

FCCB buyback

WITH dismal share valuations causing bondholders to redeem, and not convert their foreign currency convertible bonds (FCCBs), which until early this year were regarded as one of the most preferred options for raising corporate debt, suddenly seem to have become millstones around the necks of issuers. It is the redemption pressure on cash-starved issuers, coupled with the need to preserve liquidity by mitigating further forex outflow, which seems to have prompted the Reserve Bank of India (RBI) to issue the circular permitting buyback of FCCBs.

As per the circular, issuers can now buyback FCCBs under the automatic route up to any limit out of existing foreign resources or by raising fresh external commercial borrowings (ECBs,) if effected at a minimum discount of 15% on the book value. Further, FCCBs up to $50 million can be bought back with prior RBI approval out of rupee resources representing “internal accruals”, if effected at a minimum discount of 25% on the book value.

In fact, RBI allowed FCCB buyback earlier for a limited period from March 2003 to September 2003, under the automatic route up to a limit of $100 million, if the buyback was made out of local resources and without any limit, or if the buyback was out of Exchange Earner’s Foreign Currency (EEFC) funds or inward remittances toward equity subject to inter alia one condition — buyback should be effected at face value, and not book value. Book value is the face value of FCCB plus the interest accrued on the bond till the date of buyback. While permitting buybacks at discount against face value will surely encourage bond holder interest, the extant buyback regime may disappoint the issuers on at least the following four counts:

(a) Not many issuers will have existing foreign resources to fund the buyback and raising fresh ECBs in such conditions will be very difficult;
(b) The cap of $50 million will clearly be inadequate for funding buybacks;
(c) Buyback up to $50 million requires prior RBI approval, which could be time consuming, and most importantly;
(d) Even buyback up to $50 million cannot be funded out of the crucial channel of share proceeds.

While the rationale behind other restrictions can probably be understood, RBI’s intent behind excluding share proceeds in times when FDI is most imperative is intriguing, and probably, stems from its disinclination to permit capital stock being used for discharge of loan stock. However, this view lacks substance in light of the fact that the capital stock is not being reduced (but being replenished) to discharge the debt, and more importantly RBI does permit conversion of ECBs into shares, which is akin to buyback of FCCBs from share proceeds.

The exclusion, coupled with the restrictions mentioned above, actually frustrates the purpose of FCCB buybacks since most issuers may not have adequate internal accruals to fund the buyback or may like to preserve liquidity for tougher times ahead, and efforts to raise fresh funds will be futile.

While the move is indeed commendable, if RBI does want more buybacks to be effected, it should ideally permit buybacks out of share proceeds at a stipulated discount or even face value leaving the commercials to the parties. Subjecting buybacks to such fetters will defeat the purpose of buyback, handicap the issuers from making an offer for buyback thereby causing greater financial pressure on the issuer and the economy when the bonds come up for redemption.

Tuesday, May 12, 2009

Fortis Mutual Fund

Fortis Mutual Fund, a relatively new player, it is still to prove its case and define its position in the industry.
In September 2004, it came onto the scene with a bang - three debt schemes, one MIP and one diversified equity scheme. And investors flocked to it. Going by the standards at that time, it had a great start in terms of garnering money. Mopping up over Rs 2,000 crore in five schemes was not bad at all.

The fund house has not been too successful in the equity arena, in terms of assets. Though it has seven equity schemes, it is debt and cash funds that corner the major portion of the assets. Most of the schemes are pretty new, and the two that have been around for a while have a 3-star rating each. The last two were Fortis Sustainable Development (April 2007), which received a rather poor response, and Fortis China India (October 2007).

Fortis Flexi Debt has been one of the better performing funds, after a dismal performance in 2005. It currently has a 5-star rating. None of the other funds really stand out.

One of the problems the fund house is facing is over the issue of good talent, or rather, the lack of it.

Monday, May 11, 2009

Edelweiss Mutual Fund

Edelweiss Mutual Fund hit the scene in September with two funds, Edelweiss Liquid Fund and Edelweiss Liquid Plus Fund. At the launch of the funds, the CEO had remarked that they would be launching 10-12 products over the next one year across the spectrum of equity, derivatives and debt.

Edelweiss Asset Management Limited is a subsidiary of Edelweiss Capital Limited, an Indian financial services company founded in 1996.

Sunday, May 10, 2009

Bank FDs v/s Debt Funds

For a time horizon of around five years, you can consider investing in a medium term debt fund. A well-rated income fund with a good track record can be chosen.

Debt funds (long-term) offer higher tax efficiency and liquidity as compared to fixed deposits. The interest earned from a bank FD is added to one’s income for tax purposes, which is taxed as per the applicable slab of the investor. On the other hand, returns earned from a debt fund held for the long term i.e. greater than one year are treated as long term capital gains (LTCG). One can avail the indexation benefit in case of LTCG of debt funds which reduces the tax liability. LTCG is then taxed at 11.33 per cent without indexation or 22.66 per cent with indexation.

However, debt funds are not risk-free like bank fixed deposits. They invest in bonds and hence, carry credit risk and liquidity risk related to the specific instruments held by them. They are also affected by interest rate risk. Hence, the choice of whether to invest in a bank fixed deposit or a debt fund would depend on one’s risk appetite.

SIP is a suitable method of investing in equity funds because equity, as an asset class, is more volatile. For debt, one-time investment is recommended. As for saving entry load, direct investments without an intermediary are not charged entry load. But at the same time, normally, debt funds do not charge an entry load.

Saturday, May 9, 2009

Banks yet to work out uniform ATM charges

Even after accessing their accounts through automated teller machines (ATMs) of other banks became free for customers, banks had not worked out a uniform rate that they would charge each other for facilitating such a service.

From April 1, customers will no longer be charged for using ATMs of other banks to access their accounts. Until now, banks had been passing on the cost of such a facility to their clients. Lenders entered into bilateral/multilateral agreements or were using National Electronic Fund Transfer (Neft), a means of enabling quick interbank fund transfers, so that their clients could avail of such a facility at a cheap cost.

A number of bankers, private and state owned, yet not finalised a single rate that they would charge each other if customers were to use ATMs of other banks.

So far, banks have not arrived at a uniform rate. Right now different rates are being charged for ATM transactions but eventually they will converge. While lenders such as Kotak Mahindra Bank and Union Bank of India had made access of accounts by other bank ATMs free for their customers, others charged Rs 10-20 for each cash withdrawal transaction and between Rs 4 and Rs 7 for every balance enquiry.

The shift of the onus of payments from client to bank will change the entire ATM strategy of banks, with some viewing their ATM operations as profit centres and others preferring to simply pay a charge to another bank whose ATMs its customers use.

Cash withdrawals will not face tax

CASH withdrawals from bank will not attract tax from Wednesday. This is following abolition of the Banking Cash Transaction Tax (BCTT) in the Union Budget 2008-09. The BCTT was introduced in the Budget 2005-06 with the aim for setting an audit trail and to prevent money-laundering using the banking channels and was applicable in all parts of India except Jammu & Kashmir.

Friday, May 8, 2009

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Stock Dividend Yield

Investors investing in equity shares look for two types of returns.

1) Capital appreciation - increase in the market value of the shares.

2) Dividend income - Companies declare dividends on equity shares from their profits. Funds left after paying off all expenses are used to create reserves and declare dividends.

The dividend is declared on the par value of the shares. For example, a 10 percent dividend on a Rs 10 par value equity share means a dividend of Re 1 per share. Even if you have paid Rs 20 to acquire the share, the dividend is payable at Rs 10. So the dividend yield would be five percent and not 10 percent.

Calculating the dividend yield is important to calculate the real returns from an investment. Also, dividend yield helps analysts in calculating the value of an investment, and whether it is worthwhile to make an investment in a particular stock.

A high dividend yield may not always indicate a good investment as it may be wiped out by losses incurred on the falling market prices of the shares. From an investment perspective, both dividend yield as well as capital appreciation are necessary to make a scrip attractive. By comparing the current yield of a scrip over a period of time, you can determine whether the growth in the dividend payout has been proportionate to the increase in the market value of the share.

The dividend yield is not equal to the amount of dividend paid by the company. It is the dividend payout with reference to the market price of the stock. It is the return on the stock by way of dividend. Dividends are always paid as a percentage of the face value of the share. When the dividend is received, it is computed as a percentage of the current market value of the share and is termed as the dividend yield.

Dividend yield also specifies how much an investor is willing to pay for the expected dividend stream generated by a single share. Investors may use the expected dividend values over a time period or the past dividend values to make the analysis.

The dividend yield indicates what percentage of the investors' purchase price of a stock is repaid to him by way of dividends. Absolute amount of dividends do not count for this comparison. Many investors who want to have a regular income by way of dividends, look for stocks which either maintain a steady or an upward trend of dividend declaration. They invest in scrips having a high dividend yield. Ideally, a low market price, combined with high dividend payout, would give a high dividend yield. Dividend yield is a simple tool for any investor to evaluate his investments in scrips and to build the right portfolio depending on his priorities.

Dividend yield varies for different investors for the same scrip. This is because the common denominator for calculating the dividend yield is the market price. As the cost price of each investor would be different depending on the time of his investment, the dividend yield would also be different. For example, assume investor X purchases a scrip of company A for Rs 10. Investor Y purchases it for Rs 100 and investor Z for Rs 200. Assuming the company declares a dividend of 25 percent on the par value of Rs 10, the dividend paid is Rs 2.5 per share. As such, the dividend yield for investor X is 25 percent, for investor Y it is 2.50 percent and for investor Z it is 1.25 percent. So, for the same amount of dividend, the dividend yield varies for different investors, depending on their cost of investment.

Thursday, May 7, 2009

Book Building

Book Building Process

Book building is a process of price discovery in case of IPOs. When Companies come through the book building route, the price of the issue is not fixed before hand. Rather the issue document only gives a floor price or the price band within which investors can bid for the shares. The IPO applicants bid for the shares being issued by the company quoting the price of their bid and the quantity that they would like to bid at. Only the retail investors have the option of bidding at ‘cut-off’. Cut off means that the investors are not active bidders but they are willing to accept whatever price is getting arrived at based on bidding done by other persons. After the bidding process is complete, the ‘cut-off’ price is arrived and shares are issued to successful applicants.

What is a price band?

Price band in the book building process refers to the band within which the investors can bid. The spread between the floor and the cap of the price band is not be more than 20%. In other words, it means that the cap should not be more than 120% of the floor price. It is up to the company and its merchant bankers to decide on the price or the price band of the public issue. There is no cap or regulatory approval needed for determining the price of an IPO. The only requirement is that the issuing company is required to disclose in detail about the qualitative and quantitative factors justifying the issue price.

How is the Retail Investor defined as?

‘Retail individual investor’ means an investor who applies or bids for securities of or for a value of not more than Rs.1,00,000.

Can a retail investor also bid in a book-built issue?

A retail investor can bid in a book-built issue for a value not more than Rs.1,00,000. Any bid made in excess of this will be considered in the HNI category.

What is "online bidding"?

A company bringing out an IPO can use the infrastructure of a stock exchange for on-line system offer of securities. An investor desirous of making the application may place his bids through the online terminals offered by some of the brokers. This is the easiest way of investing in IPO, where broking houses such as ICICIdirect.com, Kotak Securities, Geojit securities etc, offer their clients to invest in IPOs through click of the button

Wednesday, May 6, 2009

Deflation - Economics of lower inflation

There are chances of the economy moving into deflation. Here we outlines some implications

The stock markets had a few surprises last week. Here, the inflation rate fell to historic lows. The market participants were now foreseeing a possibility of inflation hitting zero. It just showed how times had changed in a short span of a few months.

Just a while ago, investors were praying for lower inflation numbers every Thursday. But the consistent decline in the inflation numbers has left them pondering whether they got more than what they had bargained for, as India may experience negative inflation WoW soon.

What is deflation?

A temporary dip into the negative side will not be immediately considered as deflation. Deflation should not be confused with a temporary fall in prices. It is a sustained fall in prices that occurs when the inflation rate passes down below zero percent. In a deflationary environment, the price of goods and services keep falling. Hence, consumers have an incentive to delay purchases and consumption until prices fall further. This in turn reduces the overall economic activity.

There is a fall in the quantum of goods and services the whole economy is willing to buy, and the price they are willing to pay for goods and services. Since this idles capacity, investments also fall, leading to further reductions in aggregate demand. Deflation also has the side effect of increased unemployment since there is a lower level of demand in the economy. A lower employment level further slows down the demand, thereby contributing to the deflationary spiral.

The appearance of deflation as a widespread global phenomenon is indeed disturbing, not only because of its immediate economic implications, but because until recently most economists regarded sustained deflation as a fundamentally implausible prospect.

Deflation increases purchasing power

Deflation increases the real value of money. It benefits savers and of holders of liquid assets and currency as the real value of liquid assets and currencies keeps increasing as time lapses. On the other hand, it erodes the wealth of investors who have invested in illiquid assets, and borrowers as the value of money invested in an illiquid asset today will be worth less as time goes by.

It also amplifies the quantum of borrowings and is a significant disincentive to borrowers. The payments one is making in the service of a debt represent a larger amount of purchasing power than they did when the debt was first incurred. Deflation is generally regarded negatively, as it causes a transfer of wealth from borrowers and holders of illiquid assets, to the benefit of savers and of holders of liquid assets and currency. It increases the purchasing power of money as time goes by. However, it can cause hardship when the majority of one's net worth is held in illiquid assets.

Way out of deflation

Deflation, at least in theory, is easy to prevent. The government has to just print more money. Printing money is normally a pleasant experience for all governments. Printing more money increases the quantum of money in circulation making it easy for people to spend.

Another measure to counter deflation is monetary policy operations by the central bank. By buying government bonds they increase the money supply and deliberately induce rising prices, causing inflation. Rising prices provide an essential lubricant for any sustained recovery because it increases profits and takes some of the depressive pressures off wages and debtors of every kind.

Impact on investor

Hence, there could be more rate cuts and monetary easing from the Reserve Bank of India. The markets are factoring in a rate cut of 100 basis percentage points. Monetary easing could also take the form of buying government bonds in open market operations.

For individual investors, it also implies that the days of high deposit rates of 10-12 percent are a thing of the past and they will get lower returns on their deposits and fixed instruments. Individual investors who have invested in fixed deposits and bonds will find the intrinsic value of the instruments will increase during deflationary periods.

Tuesday, May 5, 2009

Arbitrage Trade

1) Traditionally, we have understood arbitrage to mean, the simultaneous buying and selling of the same security between different markets, when that was possible. Now with volumes being overwhelmingly concentrated on the NSE, that window is closed.
2) Then started the 'arbitrage' between the major indices and the values of their underlying shares. In volatile markets, this kind of opportunity presents itself often.

3) Another such 'arbitrage' is the difference in prices of a Future between the far month and the near month, between Spot and Futures and between Futures (calculated as synthetic put + call options) and Option prices. There is a surrogate for the 'lending rate' on the security markets, and can be 'stripped out' and traded separately, like an interest rate. This interest rate should logically follow the patterns of the debt markets, but they don't; usually because this 'lending rate' is decided by the balance between short-sellers and long-buyers in the market, and can sometimes have no relation to the debt market. In some specific stocks, the variances can be very large.

A watchful 'arbitrageur' can locate these patterns and trade these strips like an interest rate, borrowing in the debt market and 'lending' into the securities market.

Monday, May 4, 2009

Listing of Close-ended Mutual Funds

It is not necessary that all close-ended funds have to be listed on stock exchanges. According to SEBI guidelines, every close-ended fund shall be listed in a recognized stock exchange within six months from the closure of its subscription.

But in certain cases, listing of close-ended funds is not necessary if the scheme is of such type that it provides for capital protection or if the fund periodically provides the redemption option to the unit holders with some kind of restriction (exit load). The period of redemption is clearly mentioned in the offer document of the said funds.

Sunday, May 3, 2009

Best mutual funds of 2007 turn duds

If 2008 was a bad year for stocks, it was brutal for funds that rode high on the bull run posting big gains last year. Diversified equity mutual funds (MFs) that logged in returns between 70% and 110% in 2007 and emerged on top have put up a dismal show during the current market meltdown. Top MFs in 2007 have significantly underperformed the benchmark indices posting some of the biggest losses this year. In all, 14 funds that were in the top 40 list last year have ended up at the bottom of the ladder, the analysis shows. JM Basic, Canara Robeco Infrastructure, SBI Magnum COMMA and Midcap are some of the funds that have registered huge declines after growing more than 70% last year.Most of these funds invested mainly in engineering, construction, commodities, small and mid-cap stocks - all of which did well during last year’s bull run. But with commodities prices falling sharply and real estate impacted by the demand slowdown, stocks in these sectors have taken a heavy beating. In fact, engineering (32.76%), construction (18.22%), steel (27.01%) and refineries (9.8%) are among the sectors that have shown the steepest fall in value terms for MFs in November.

While large-cap stocks have offered some stability mid and small-cap heavy portfolios have been badly hit in a falling market. Several fund houses have started paring their exposure to mid-cap stocks and have gone in for large cap ones. Interestingly, funds that did badly during the last year have come up with a good performance in 2008.

Saturday, May 2, 2009

What is Bottom fishing?

The term bottom fishing is generally applied to the practice of buying what you think is an undervalued stock, especially in a period when the markets are bearish. The logic behind bottom fishing is that the prices of stocks sometimes fall much below their actual value in a dismal market situation which makes them attractive. Investors purchase these stocks at cheap rates with the expectation that when the markets improve, the stocks will bounce back and become a profit-making investment. Bottom fishing is, however, fraught with risk as the markets could always move contrary to expectations.
There are two crucial aspects determining the profitability of bottom fishing —

  • Price
  • Time

Price - With regard to price, it is largely felt that the market has bottomed out and you may currently get stocks at the cheapest rates.

Time - However, there is no guarantee as to when the markets will move up or dip further. So if you’re looking at making quick profits in the near future, bottom fishing may not necessarily come to your aid.

Which sectors appear attractive in the current downturn?

Bottom fishing by retail investors has been mostly concentrated around certain stocks in sectors such as banking, capital goods, realty, media and logistics.

Analysts advise investors to take exposure in sectors that are more focused on the domestic markets and are right now trading around their 52-week low on the bourses.

In fact, it is not just retail investors who are resorting to bottom fishing in the current market conditions. Even promoters of medium and small-sized companies are looking at bottom fishing as a means to increase their holdings in the company.

Friday, May 1, 2009

SBI Mutual Fund

SBI Fund Management is a wholly owned subsidiary of State Bank of India. It got into the business way back in 1987. In 2004, SBI divested 37 per cent of its stake in SBI Fund Management Pvt. Ltd., its mutual fund business, to French entity Société Générale Asset Management for over $35 million.
Looking at its public sector heritage, it has been a very bold player. Its aggressive fund management during the bull phase served it well. Fund manager Sabharwal made his mark by displaying a knack for identifying hidden gems. After his exit, Sanjay Sinha put to rest apprehensions that he could not fill his shoes.

The AMC was initially known for its closed-end funds. Later, its open ended equity funds made their mark. It was the performance of three funds-Magnum Taxgain, Magnum Global and Magnum Contra-that resulted in investors' changing their perceptions. As these funds had a sensational run, their assets grew multi-fold. These three schemes handle Rs 6.008 crore, out of total equity assets of Rs 13,983 crore.SBI Mutual Fund has seven funds which have a rating of 4- or 5-stars, including a hybrid equity oriented one, Magnum Balanced.

On the debt side, this fund family has nothing much to show compared to its excellent performance in equity. Magnum Gilt Short-term is the only debt fund with a 5-star rating (none are 4-stars). This particular scheme had a phenomenal run last year after a poor performance in 2006.

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