Fixed Maturity Plans, commonly known as FMPs have started losing their allure amongst the mutual fund investors as interest rates in the country have peaked out and are consolidating at present. It is noteworthy that in order to provide an impetus to economic growth (which has depicted a descending trend in the last financial year), the Reserve Bank of India (RBI) may want to reduce policy rates, although the WPI inflation is not providing enough room to do so.
In the past few months about a dozen large-to-mid-sized fund houses have recalled their FMPs during the subscription phase. Inability on the part of fund houses to mobilise the SEBI-mandated ‘minimum target amount’ of Rs 20 crore is one of the reasons for fund houses withdrawing their fixed maturity plans. Also, since many of them (fund houses) have not been able to meet the mandatory ‘20 investors’ norm, the mutual fund houses have recalled the rolled out FMPs.
Apart from about 20 FMP cancellations, fund houses like ICICI Mutual, L&T Mutual, Tata Mutual, UTI MF, DWS MF and Reliance MF, among others, had to extend their subscription phase to pool in necessary investments and the required number of investor. According to some of the fixed income managers, savvy investors have started cold shouldering FMPs as short-term rates have declined from 11.5% a few months ago to about 9.15% at present.
Moreover, corporate treasuries - which were the biggest category of investors in FMPs, have also been forced to cut back on their FMP investments due to their declining surpluses over the past few months.
Taking into account the fact that stiff WPI inflation could impede rate cuts from RBI, policy rates may remain almost at their present level at least until October 2012. Addressing to liquidity concerns, RBI could however reduce Cash Reserve Ratio (CRR) and / or resort to Open Market Operations (OMOs).
Thus taking into consideration the present interest rate scenario in the country- wherein interest rates have nearly peaked and likely to consolidate further, some exposure to FMPs upto 1 year could be considered as they could yield appealing returns as against the option of fixed deposit from a bank, provided if you are willing to hold it until maturity. It is noteworthy that FMPs are rewarding when the interest rates peak out and consolidate before falling, as this certainly helps investors to benefit from high interest rates.
This Week's Poll !!!
Where would you prefer to invest for a fixed tenure?
- FMPs (offered by mutual funds)
- Fixed Deposits
After undergoing a corrective phase in the last three months, the Indian equity markets in the month of June 2012 gained +5.9% (until June 26, 2012). This ascending move was depicted, despite downbeat domestic as well as global economic headwinds such as:
Falling Brent crude oil prices, bounce in services sector PMI (Purchasing Managers’ Index) to 54.7 in May 2012 (from 52.8 in previous month) and central bank’s intervention to arrest the deprecation of the Indian rupee against the dollar (by raising the limit of foreign investment in Government bonds by U.S. $5 billion to U.S. $20 billion), helped the market to pave their upwards path.
But having said that, the Indian equity markets lacked the buying momentum since investors were wary about reform measures not being put in the forefront by the Government and unpredictable stance thus far adopted on tax policies.
BSE Sensex vs. FII inflows
(Source: ACE MF, PersonalFN Research)
Thus the Foreign Institutional Investors too were on a cautious footing as they net sold to the tune of Rs 160 crore (until June 26, 2012). They preferred to wait and watch, what the new Finance Minister, would do in order to propel investment activity in the country, after Mr Pranab Mukherjee steps down from the post to contest the presidential election (to be held on July 19, 2012).
We believe, that while buying momentum in the Indian equity markets remains lacklustre and FIIs too are on a cautious footing, the present valuations are appealing to invest in a staggered manner. Recognising that we may experience volatile times until more clarity is disseminated on "Grexit" and Banking crisis in Spain, we recommend one to opt for the SIP (Systematic Investment Plan) mode of investing in mutual funds, as it will enable you to mitigate the volatility through rupee-cost averaging and power your portfolio with the benefit of compounding. However, while selecting mutual funds for your portfolio prefer the diversified equity funds (preferably which adopt value style of investing or the opportunities style of investing) which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years.
In the past, many have been afflicted if the mutual fund scheme they invested in, hasn’t been able to clock the returns at least in tandem to the benchmark, if not the category peers. While investors entrusted the job of selecting the right mutual schemes for their portfolio on mutual distributor / relationship manager / agent, all they were left was disdain and distress. The occurrences of wealth erosion also led to them lose faith in the investment avenue, which in turn led get rid of their investment in mutual funds by logging in redemption request.
But now, addressing to this issue and being concerned about the continuous underperformance of some mutual fund schemes, the capital market regulator - Securities and Exchange Board of India (SEBI) at a mutual fund summit organised by the Confederation of Indian Industry (CII) displayed its determination to pull-up fund managers and CEOs of fund houses, and have a dialogue with them about what measures they are undertaking to turnaround the mutual fund scheme and reduce its underperformance.
To read our view on this news please clicks here.
Nothing in life remains constant. May it be your day-to-day life, the weather, environment or for the matter of fact the Government in power. Everything changes at its own time. Change is inevitable and the only way to move ahead successfully in life is to accept change willingly. A sudden change in one’s routine may make him or her uncomfortable for a while but slowly and steadily the new way becomes the routine and things go smoothly once again.
Similarly, when the Insurance Regulatory and Development Authority (IRDA) directed all the life insurance firms to re-file all existing products according to its new product design guidelines, the insurers were left uncomfortable. Moreover, recently the regulator has directed insurers to withdraw by October 1, 2012 all the existing products based on the earlier guidelines. Thus, going by these guidelines it is feared that the life insurance industry may be left with only a handful of products from the month of October 2012.
To know what should existing insurance policyholders do, and to read our view please click here.
In an interview with the DNA Money, Mr Venugopal Manghat, Co-Head, Equity Investments at L&T Mutual Fund shared his views on the Reserve Bank of India’s (RBI’s) monetary policy stance, significance of monsoon in the economy, currency fluctuations and India’s credit rating downgrade.
On the monetary policy stance adopted by the RBI (in its first quarter mid-review of monetary policy 2012-13), Mr Manghat is not surprised with the stance taken by the central bank, as he believes that inflation has been sticky and the recent numbers announced have not given any comfort to the RBI for cutting rates. Also, according to Mr Manghat there haven’t been enough initiatives to ensure adequate supply which can take care of the growing needs of large population. Moreover, he says that the global scenario continues to be extremely uncertain - especially in the Euro zone, and given this backdrop, it is not a surprise that the central bank maintained status quo.
Explaining the significance of monsoon in the light of current inflation scenario, Mr Manghat is of the view that the monsoon continues to be a key determinant in agricultural production and in influencing inflation, especially as food prices are contributing to headline inflation numbers. He thinks that a significant deviation from the trend for the South West monsoon could have a meaningful negative impact on kharif production as was seen in 2010. "This year, the monsoon has started on a weak note with a large deficit in June and current predictions are that the monsoon could be weak in the second half of the season due to the El-Nino effect. A weak monsoon could lead to lower agricultural production and this would add to the macro challenges the economy is facing. Also, agriculture input prices and labour costs have gone up, which is likely to have an impact on farm income. In this scenario, if production is lower than expected it could have a significant adverse impact," he said.
As far as currency fluctuations are concerned, according to Mr Manghat export-driven sectors and companies should gain and companies with high import content in their inputs would stand to lose. However, he says, the underlying demand for products and services from global markets are weak in the current scenario which negates the gain for exporters to some extent and commodity prices are correcting. Also in his view, there could be an impact on foreign currency denominated debt and any near-term repayment would be impacted negatively. For some sectors like capital goods, the competitiveness against overseas companies would improve due to the difference in currency movement. "Our view is that the net impact of currency depreciation, assuming the current rate stays for the year, on the Sensex companies as a group, could be marginally positive in terms of earnings upgrades. However, on the broader market, the impact could be negative especially for smaller companies," he added further.
On the latest sovereign rating downgrade for India by Fitch and S&P, Mr Manghat is of the view that, the latest downgrade by international agencies does not alter anything significantly for the equity markets. Also, global investors who have an exposure to India would already know most of the factors that may have prompted the rating agencies to take a different view. "Even after the moderation in growth, India continues to be one of the fastest growing economies and there are enough good quality companies growing at fairly high rates, above nominal GDP (Gross Domestic Product-a measure of economic output) growth and managed well. We believe that investors would not be able to ignore India given the positives and money will ultimately chase better returns," he explained.
We too are of the view that stiff inflation above the comfort zone (of 6.0% to 7.0%) of RBI, was a deterrent for the central bank to cut policy rates, to provide impetus to economic growth. Also, since southwest monsoon occupies an important place in the path to progress for the economy and it being delayed, could have also prompted the central bank to keep rates unchanged. While, there is a threat "El-Nino" effect in the second half of the monsoon season, it would be interesting to see how the rains take their course going forward. At present, while the fall in Brent crude oil prices has been a positive for inflation, the depreciation of the Indian rupee against the dollar has been negating the gains. Moreover, there is also a threat of imported inflation due to the weakening of the rupee.
Yes, the Indian economy has been reeling under slow growth, high inflation and adverse global economic factors. Also, lack of clear tax rules and political uncertainty has kept investors at bay. But despite all these negative factors, Indian economy has been able to grow at a better pace than the developed economies and hence, continues to attract foreign capital. Also, there is an advantage of young working population in India which keeps the consumption story intact.
- The RBI is likely to clamp down on gold coin sales by banks, amid rising bullion imports adding pressure to the Current Account Deficit (CAD) and weakening the rupee.
It is noteworthy that, the Banking Regulation Act, 1949 does not allow banks to trade in commodities and they play the role of a financial intermediary. In pre-2008 era, when the country saw a dollar influx resulting in sharp appreciation of the Indian rupee, this norm was merely relaxed and banks were allowed to sell gold, as the precious metal was imported. The measure was temporary.
But now since the Indian rupee has depreciated amid the Euro zone debt crisis, the need is felt by the central bank to reverse the measure earlier taken, as it could help to lower CAD.
- Now one may soon see a whole new category of life insurance products — index-linked insurance plans. At present discussion are on between life insurers and IRDA, where more clarity is expected on this front along with the final guidelines on product design.
The index-linked insurance plan would be linked with the indices approved by the insurance regulator, and the fact of the same would be disclosed to the policyholders upfront.
- In order to educate people in India while buying an insurance cover, the insurance regulator – IRDA launched a consumer education website: www.policyholder.gov.in. The portal provides useful guidance while buying an insurance cover, how to make claims besides do’s and don’ts for policyholders.
- The country’s premier stock exchanges are gearing up for the latest investment route opened for foreign investors. After the recent revision of framework and clarification by the Government and market regulator, the bourses are moving in to put in place the systems required for implementation of the Qualified Foreign Investor (QFI) framework. The exchanges are planning to put up a separate order routing mechanism for QFIs as the flow of orders are different from the normal route.
- According to the Centre for Monitoring Indian Economy (CMIE), the continuing depreciation of the Indian rupee is expected to fuel inflation and push the headline WPI inflation number to 7.3% for FY13, thus making a reduction in interest rates for borrowers unlikely in the near term.
- Moody's Investors Service has maintained a stable outlook on India's Baa3 rating as problems such as slower growth and higher inflation were long- standing and already factored into the outlook.
The rating agency has said that the global and domestic factors, including potential shocks in agriculture, could keep India's growth below trend for the next few quarters. But it felt recent negative trends were unlikely to become permanent or even medium-term features of the Indian economy.
- The RBI vide a circular dated June 26, 2012 has asked Urban Co-operative Banks (UCBs) to stop levying penalty on prepayment of home loans on floating interest rates with immediate effect.
Current Account Deficit: It occurs when a country's total imports of goods, services and transfers are greater than the country's total export of goods, services and transfers. This situation makes a country a net debtor to the rest of the world.
QUOTE OF THE WEEK
"Individuals who cannot master their emotions are ill-suited to profit from the investment process." - Benjamin Graham