Skip to main content

Quantitative easing and fund flows

   The Federal Reserve's second round of quantitative easing of USD 600 billion to support the struggling US economy was announced. This announcement by the Fed is almost in line with market expectations. The Fed announced it will buy treasury bonds of around USD 75 billion per month for the next eight months to increase money supply in the system as part of this quantitative easing.


   This increase in money supply by increasing the excess reserves of the banking system is expected to keep the interest rates very low, and stimulate the borrowing and spending activities in the economy.

Need for quantitative easing    

The US economy has come out of the 2008-09 recession but the economic growth rate has been very slow over the last few quarters. This is evident from various economic data points released month over month. On the other hand, new job creations are also very slow which is evident from the high jobless rate (hovering around 10 percent).


   Economists believe there are chances that a continued high unemployment rate may lead to changes in consumer behaviour and therefore trigger another round of recession which could probably last much longer than the current recession. Therefore, the Fed is under pressure to take the required steps and provide another round of triggers to stimulate business activity.
   

Impact of quantitative easing:

Momentum for economic activity    

The logic behind the quantitative easing is the Fed buys treasury bonds from banks leaving them with cash surplus to lend to customers. The interest rates would fall further and lower interest rates will encourage people to borrow money and increase spending. On the other hand, lower interest yield will discourage investors from investing in safer instruments such as bonds and debt instruments. Instead, they will invest in high returns investments like stocks. More spending results in more business and more hiring ensues.

High inflation    

Inflation will certainly be a threat after this quantitative easing. Some economists believe the quantitative easing will increase liquidity in the system which may push inflation rate to higher levels. The high liquidity may result in a situation of excess money chasing limited resources and hence prices start going up, leading to a high inflation rate.


   However, inflation is under control at the moment and the Federal Reserve is not very worried if it goes upwards slightly.

Weak dollar    

The quantitative easing will result in a drop in interest rates, and as a result the dollar will have some depreciation in its value against major world currencies in the international market. However, analysts believe the quantitative easing package of 600 billion dollars will not have any drastic impact on the dollar valuation. The US dollar will eventually regain its strength in a couple of quarters, the feel.

Increased inflows for emerging markets    

The quantitative easing will result in further funds inflows into emerging markets such as India. Analysts believe a part of this excess cash will be channelled to the emerging markets as these countries are better positioned than their developed counterparts in terms of economic growth.


   In the markets here, foreign institutional investor (FII) inflows are expected to remain strong in the short to medium terms. This will keep the markets in a bullish momentum.


   On the flip side, this will mean challenges related to high liquidity, and the high inflation rate will continue further up. Sharp currency movement is another factor which investors should track going forward. Individual investors should not turn over-optimistic on the stock markets, but exercise caution.

 


Popular posts from this blog

Mutual Fund Exit Load Changes

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300 Mutual Fund Exit Load Changes AMCs don't communicate about any change in exit load directly with investors, but do update on their website   The exit load applicable to your investments is the load which existed at the time when you invested in the particular fund. Any subsequent changes in the exit load will not be applicable to your investments.   However, Asset Management Companies ( AMCs ) periodically publish addendums in the newspapers, which state any change in exit loads of specific schemes managed by them. Such changes are also posted on their websites. However, a direct communication to an investor is not made, considering the costs involved in doing so. In their own interests, investors should not only track the performance of the funds they i...

Birla Sun Life Mutual Fund Launches Birla Sun Life NIFTY ETF

Birla Sun Life has launched a new fund namely, Birla Sun Life Nifty ETF, an open ended exchange traded fund. The new fund will be open for subscription from 4th July to 18th July 2011, at an offer price of Rs 10 per unit. The investment objective of the scheme is to generate returns that closely correspond to the total returns of securities as represented by S&P CNX Nifty, subject to tracking errors. No exit load will be charged under the scheme. The performance of the scheme will be benchmarked against S&P CNX Nifty and will be managed by Satyabrata Mohanty.   -----------------------------------------------------------------   Also, know how to buy mutual funds online:   1) DSP BlackRock Mutual Funds: http://prajnacapital.blogspot.com/2011/05/buying-dsp-blackrock-mutual-funds.html   2) Reliance Mutual Funds: http://prajnacapital.blogspot.com/2011/06/buying-reliance-mutual-funds-online.html   3) Birla Sunlife Mutual Funds: http://prajnacapital.blogspot.com/2011/...

Atal Pension Yojana contribution Tax Benefit for spouse

Contributions to Atal Pension Yojana (APY) are eligible for the same tax benefits as the NPS. This means that the contributions can be claimed under Section 80CCD (1B). The current limit for Section 80CCD (1B) is   Rs   50,000, over and above the   Rs   1.5 lakh limit under Section 80C. Section 80 CCD (1) is a different one, meant to cover employers' contribution towards NPS . You cannot get tax benefit by investing in the name of your spouse under Section 80 CCD . ------------------------------ ----------------- Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds Top 10 Tax Saver Mutual Funds to invest in India for 2016 Best 10 ELSS Mutual Funds in India for 2016 1. BNP Paribas Long Term Equity Fund 2. Axis Tax Saver Fund 3. Religare Tax Plan 4. DSP BlackRock Tax Saver Fund 5. Franklin India TaxShield 6. ICICI Prudential Long Term Equity Fund 7. IDFC Tax Advantage (ELSS) Fund 8. Birla Sun Life Tax Relief 96 9. ...

Mutual Fund Reivew: Birla Sun Life Asset Allocation Conservative

Birla Sun Life Asset Allocation Conservative has numbers on its side to prove its credibility… Don't be surprised to find this Fund of Funds ( FoF ) in our recommendations. It has earned its place. And despite the difference in the structure of the product, there is no arguing with the numbers.   Of the total 6 years of its existence, the fund has been among the top 10 funds in its category in four of them. Last year it put up an average show and the only year it underperformed its peers was in 2008.   One aspect to look at when investing in an FoF is the expense ratio. The expense ratio of an FoF is capped at a lower limit of 0.75 per cent (2.50% for an actively managed fund). However, the FoF not only has its own expense (though lower) but even the expense ratio of the fund it is investing into. Fortunately, the fund manager takes that into account. "Expense is one of the important criteria used for fund selection and is the main reason for our investment in BSL Ind...

Short-Term Investment Options in Mutual Funds

Mutual funds offer liquid funds and ultra short term funds in the debt category, which are suitable for short investment periods. Ultra short-term funds were earlier known as liquid plus funds. Liquid funds invest in money market instruments with a maturity of 91 days or less. However, there are no such restrictions for ultra short-term funds. Who should invest in these? These are open-ended schemes. Investors with a short investment horizon or with surplus cash and low risk appetite should look at these. These could include corporate as well as retail investors. Those interested in staying invested for less than 15 days can opt for liquid funds. Retail investors who want to remain invested for two-four months, can look at ultra short-term funds. The short duration for both liquid and ultra short-term funds shields them from any interest rate volatility.   What kind of returns do they offer? In terms of an investment period less than 15 days, these funds are comparable to a ba...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now