Prajna Capital - An Investment Guide

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 th...

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 ...

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 class...

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...

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 characteristi...

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%...

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 co...

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 m...

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. Th...

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 ...

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 ...

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 ...

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 wi...

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:

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 p...

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. Interes...

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 d...

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...

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. I...

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 ...

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.

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 i...

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 Mah...

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 ...

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%. I...

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 in...

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-s...

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.

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,...

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 ...

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 asse...