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| May 12, 2017 |
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Impact 
As you know, interest rates on Bank FDs are falling.
And you can’t really do anything about it.
Many of you, especially those who rely on the regular income earned on FDs, might have started to feel financially unsteady now.
Brokers and self-proclaimed investment advisors are likely to take advantage of this.
In the fervour of creating awareness and offering you free advice (without taking any responsibility for that), some bloggers and a few publishers can (mis)guide you, knowingly or unknowingly.
At this juncture, the hot trend in the fixed income securities is—buying high-interest bearing Non-Convertible Debentures (NCDs) from the secondary market. The “pitch” your broker might offer you would be similar to this—“you can buy NCDs from the secondary markets, just like you buy stocks. Some attractive interest bearing NCDs will offer you interest rates as high as 10%-11%.”
And this pitch is designed to evoke a sense of urgency as well. “Don’t miss this opportunity.”
You are likely to want to jump into action again; this time for possibly missing worthy investment opportunities if you didn’t follow your broker.
But before you take another wrong decision, do read this article further.
First and foremost, please understand that high-interest bearing NCDs may still generate low returns, if you buy them at elevated prices.
Didn’t quite understand this?
Well, here’s an explanation...
Interest rates and bond prices move in the opposite direction. But interest rates and bond yields move in the same direction. For example, generally if interest rates are falling, high interest bearing NCDs already being circulated will start quoting a premium, as many investors will rush to buy them. So their yields will drop accordingly at the prevailing market price.
Buying NCDs from the secondary market and sealing a winning deal is easier said than done.
Consider this…
Mr. Optimistic decided to buy NCDs with Rs 100 face value at a premium of Rs 3 per NCD. The coupon rate was 10% and the residual maturity was 8 years.
Is it really an attractive deal? | Face Value | 100 | | Market Price | 107 | | Coupon | 10% | | Yearly interest income (For the original buyer) | 10 | | Yield for the original buyer at the time of subscription | 10% | | Yield Mr optimistic might get at the current market price | 9.35% |
(For illustration purpose only based on accepted principles of investing)
Now, Mr Optimistic argues that, 9.35% is still a better yield as compared to what bank FDs offer. But what he’s ignoring (maybe conveniently) is that Mr optimistic can incur capital losses, unless he can hold the instrument until its maturity--- 8 years later.
Suppose, interest rates start climbing in the future, the current market price of 107 won’t sustain itself. Any drop in the market price will eventually result in a capital loss. Now, if you specifically ask Mr Optimistic if he had a holding period of 8 years, he would turn into Mr Pessimist at the idea of buying NCD from the secondary market.
Buying stocks and buying NCDs in the secondary market are two different things as both of them represent asset classes that are poles apart from each other and share a little correlation.
The sincere suggestion is please don’t get carried away with lofty promises and/or the most compelling sales pitches. Apply common sense instead. Usually, institutional investors are more active in the secondary bond markets. They tend to know the markets better than individual investors. If they are selling the NCDs, you should be ultra-cautious to pick their dumped stuff.
And on top of everything, why invite all this trouble? Just to earn about 2 percentage points higher on interest? Is it really worth? Please give a thought.
You should be worried more about real rate of return adjusted for inflation and taxes. As long as that’s not negative, you should avoid the fancy of buying NCDs from the secondary market. What we discussed in this article is just one part of risk that an NCD carries—interest rate risk. What if the issuer of the NCD defaults?
And don’t forget you ask yourself this...
If you can hold your investments for 8 years, is NCDs really a place for you? Why not look at well performing mutual funds that hold a good promise? Think about this too. Of course, you must consider your financial goals, risk profile, liquidity requirements, and the current financial situation among others, before toying with this idea.
So, PersonalFN offers you a great opportunity, if you’re looking for “high investment gains at relatively moderate risk”. Based on the ‘core and satellite’ approach to investing, here’s PersonalFN’s latest exclusive report: The Strategic Funds Portfolio For 2025. In this report PersonalFN will provide you with a readymade portfolio of its top recommended equity mutual funds schemes for 2025 that have the ability to generate lucrative returns in the long run. So, we highly recommend you to opt for The Strategic Funds Portfolio For 2025.
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Impact
Did Government consult RBI before discontinuing 86% of currency notes
from circulation across the country? Well, you may keep guessing, though, "yes” is the answer on record.
Six months on, RBI is struggling to answer some "tough” questions raised by the opposition on this subjects.
Lately, the RBI responded in writing to the questions on demonetisation raised by the opposition parties.
To be fair, RBI answered at least some questions with certainty. What’s the exact amount of currency that was in circulation on the eve of November 08, 2016? Fortunately, the RBI quoted a precise number this time. According to it, Rs 15.44 lakh crore worth Rs 500 and Rs 1000 currency notes were in circulation.
But still, it stuttered while responding to a question on how much of it has actually returned to the system by way of deposits or the exchange of discontinued currency notes.
It rather dilly-dallied stating that until the physical cash balances are cross-checked and reconciled against the accounting balances, no comment can be made on how much of discontinued currency exactly returned to the system. Similarly, information available with it seemed inadequate to answer questions such as how much counterfeit currency was in circulation. It referred to a study conducted by the Indian Statistical Institute, Kolkata, which estimated this amount to be Rs 400 crore.
It sounded too theoretic in response to a question on the introduction of new Rs 2,000 note. When the inflation creeps in, value of currency dips, resulting in a need of reviewing the denominations of the currency in circulation. According to it, "In that background, introduction of higher denomination notes is a standard practice in managing currency production and logistics. Further, higher denomination has helped remonetisation being much faster by quickly ramping up value.”
A common man may wonder if the RBI’s common-sense suffered a paralysis. Or has it no option but to respond in a diplomatic manner? Hard cash is supposed to solve the liquidity concerns. But in absence of smaller denomination notes, what did a Rs 2000 note achieve?
And one more question, if the overhaul was consulted well in advance, then it should have stocked up adequately on Rs 2,000 notes before the demonetisation was announced. So that, it could have devoted more time to printing smaller denomination notes later.
Wasn’t that a blunder or the common man should discount it as a lacuna in execution?
Here’s where it stands at this moment: "Let bygones be bygones”.
However now the question is, what steps are the Government and RBI taking to curb black money circulation, counterfeiting of currency, and to maintain adequate supply of money in the system.
This is something to watch out for!
So far, there has been a flurry of announcements on each front. How much of that will actually materialise? Let their efforts do the talking. Fingers crossed.
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Impact
You have probably read tons of articles on robo-advisors— highlighting the good, the bad and probably even the ugly parts of robo-advisors. And the flood of information has perhaps left you unsettled. And now, you’ve decided to take the plunge into the sea of financial automation, but don’t know where to start?
PersonalFN’s here to help…
A visit to the website of any robo-advisor (by the way, ‘robo-advisor’ is the nickname for automated money management services) will leave you awed with the interactive user interface. Each provider will claim the ease of use, advanced technology, low costs, and so on.
So, how do you separate the wheat from the chaff?
PersonalFN has outlined five steps to zero-in on the right robo-advisor.
To read more about this story and Personal FN’s views over it, please click here.
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Impact
The success or failure of any national level programme can be gauged by 3 parameters:
- Its reach and effectiveness
- Positive difference it may bring in one’s life
- Acceptability among masses
If these parameters were applied to test the Aadhaar programme, one of the most important campaigns in India, we must say it’s been successfully run over last 7-8 years. And now it’s at a crucial juncture, Aadhaar may soon become an indispensable part of our life.
Do you know, how may Aadhaar cards have been issued in India? Don’t be surprised by its reach.
Until February 28, 2017, Unique Identification Authority of India (UIDAI) issued 112.26 crore Aadhaar. Barring the North-Eastern states, the reach of the Aadhaar campaign has been robust.
To read more about this story and Personal FN’s views over it, please click here.
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Impact
Have you received monetary reward for your hard work in the last financial year?
Well, if you are going to receive an increment, ensure you don’t blow it up.
So if you are thinking about taking on a loan to buy a new car, by utilising your increment to pay for the EMIs, curb your temptation.
Because every rupee you save and invest wisely, will earn you more money; and take you closer to your financial goals.
So what matters to you more?—immediate benefits that last momentarily or long-term benefits that will stay with you forever?
Many of you may not have enough time to meticulously plan your investments and, more importantly, have the discipline to stick to the plan and monitor investments.
If that’s been your reason for being unable to invest your incremental earnings, your worries are likely to be over now.
New robo-advisors are gearing up to serve you better.
To read more about this story and Personal FN’s views over it, please click here.
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Impact
It is common sense to revisit basics when a/the circumstance/s has changed and you think you’ve taken a wrong turn.
Imagine this…
Your friend referred a doctor, who enjoyed a reputation for being one of the sharpest minds in the industry, to you. Lately, however, you noticed he’s devoting less time to his regular patients, including you, and busier with more critical cases. Many a times when you visit him for health concerns, you don’t even get a chance to speak with him; and, his support staff is obliged to "entertains” you.
At some point, wouldn’t you reconsider continuing to subscribe to this doctor? Wouldn’t you ask yourself why, in the first place, you started to consult this renowned medical professional?
This is defined as’ revisiting the basics’, and you may not agree, but this is an important exercise to ensure you are on the best path for your wellbeing.
If this instance makes sense to you, then revisit basics when it comes to your mutual funds too! After all, fund managers are no less than your financial surgeons. They make sure your mutual fund investments are in good health.
Of late, it’s been experienced that, many mutual fund schemes have changed their fundamental attributes.
To read more about this story and Personal FN’s views over it, please click here.
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Life Planning v/s Financial Panning: Which Is Better?
4 Benefits Of Using A STP Option Smartly
Top 5 Reasons To Sell Your Mutual Fund Schemes
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The Security and Exchange Board of India (SEBI) recently allowed mutual fund investors to invest in mutual fund schemes through digital wallets. Given below are the conditions attached to making such investments:
- Mutual fund investors using their wallet can purchase mutual fund units upto Rs 50,000. It’s noteworthy that, it’s an umbrella limit per mutual fund.
- They can utilise the balance transferred to the wallet through their own earnings. This means, debit cards and net banking facility would be allowed, but the purchase of mutual fund units through cash back balance and credit cards won’t be accepted.
- Digital wallet companies are prohibited from offering any promotional discount or cashback on such purchases.
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Yield To Maturity (YTM): Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until the end of its lifetime. Yield to maturity is considered a long-term bond yield, but is expressed as an annual rate. In other words, it is the internal rate of return of an investment in a bond if the investor holds the bond until maturity and if all payments are made as scheduled.
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Quote :"All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don't work out." - Peter Lynch
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