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| January 02, 2015 |
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| Weekly Facts |
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Close |
Change |
%Change |
| BSE Sensex* |
27,887.90 |
646.12 |
2.37% |
| Re/US$ |
63.36 |
0.17 |
0.27% |
| Gold Rs/10g |
26,880.00 |
70 |
0.26% |
| Crude ($/barrel) |
55.76 |
-2.72 |
-4.65% |
| FD Rates (1-Yr) |
7.75% - 8.75% |
Weekly change as on January 01, 2015
*BSE Sensex as on January 02, 2015
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Impact 
New Year comes with new hopes and we all wish to fulfil our aspiration in the New Year. A few people have a habit of preparing a “to do list” for the year. Investors are always in search of great investment opportunities and often try to follow celebrity investors. For Indians, Foreign Institutional Investors (FIIs) have always remained celebrity investors. There is a tendency among domestic, especially, retail investors, to follow FIIs in investment patterns. It’s an open secret that FII flows have a significant impact on Indian capital markets.
In the year gone by, investments by FIIs in debt have exceeded those in equity for the first time. FIIs pumped in Rs 97,000 crore in Indian equities while Indian debt markets received inflows approximately worth Rs 159,200 crore. Reading this, if you are giving a thought to putting money aggressively in debt mutual funds or buying bonds in the secondary market, you should rethink. At this juncture, first you may be interested in knowing why FIIs went more bullish on debt than that on equity.
- Given below are some prominent reasons why FIIs invested aggressively in Indian debt:
- Stable Government at the centre set the tone for the debt market
- Steadfast approach of RBI to monetary management and inflation control boosted the confidence
- Falling crude oil prices (Crude oil has fallen about 50% in 2014) and softening of other commodity prices helped India lower its Current Account Deficit (CAD)
- Retail inflation reached its lowest level towards the end of 2014 recorded since the new data series was launched in 2011
- Rupee managed to do better than other emerging market currencies
- Yield on India’s sovereign bond witnessed a sharp decline of 100bps (1 percentage point) in 2014. As it is widely anticipated that, RBI may start slashing policy rates early next year as inflation has fallen sharply.
- Indian debt market may witness a sell off if;:
- RBI takes a tough stance on deteriorating asset quality of banks and holds rates unchanged for longer, investors’ sentiment can be negatively affected and debt markets may witness a sell off
- India’s fiscal deficit in the current Financial Year (FY) has reached 99% of its full year limit. This would put a lot of pressure on the Government to shore up its revenues. High fiscal deficit may discourage RBI from lowering policy rates
- Although the retail inflation has fallen, it mainly attributes to two factors. One, higher base effect and the second factor is falling crude oil prices in the international market. Going forward, if crude oil prices rise, there could be reversal in the downward trend of inflation, a negative for the interest rate movement. There is a upside risk to retail inflation as there is a threat that rabi crop could be lower than expected this year which may push the food price inflation high.
What should you do?
PersonalFN believes following FIIs is a bad idea as investment objectives of institutional investors can be vastly different than those of yours. Moreover, their risk taking capacity could also differ significantly than that of yours. PersonalFN believes, investors need to consider their time horizon before selecting a category of debt funds. If you have a time horizon of 1 year and if you invest in long term debt funds, you might lose your money. You need to note that debt funds are not risk free. After analysing your personal circumstances and time horizon if you plan to invest in long term debt funds at this juncture, please remember potential risks as well.
PersonalFN believes investors investing in long term debt funds now would be better off if they stagger their investments. PersonalFN is of the view that, investors shouldn’t hold more than 20% of their debt portfolio in long term debt funds.
Do you think, FII inflows in Indian debt would continue to outpace those in equity? Share your views
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Impact
As you may be aware, Government cleared Insurance Laws (Amendment) Ordinance 2014 recently. With this, insurance companies will now be able to garner fresh funds through new and innovative instruments. The limit of Foreign Direct Investment (FDI) has been raised to 49% from 26% earlier. This may potentially attract up Rs 50,000 crore in the Insurance sector. There are about 24 life insurance companies doing business in India. Although these companies are expected to benefit a lot from the amendments, they are now subject to even more stringent compliance requirements.
More capital comes with more responsibilities...
The ordinance has made special provisions for protecting rights of policyholders. It has also given more powers to the regulator, Insurance Regulatory and Development Authority (IRDA). Insurance companies will now have to explicitly state policy benefits and disclose characteristics of life insurance policies in the public domain. The life insurance companies have to distinctly mention whether the product on offer comes with or without profit participation benefit. On the other hand, amendments expect IRDA to oversee the insurance sector even more rigorously. If the insurance company fails to comply with any regulatory requirement it will now be subject to heavy penalty.
How policy holders would benefit?
PersonalFN is of the view that, tighter regulation, better disclosures and provisions for heavy penalties would help keep unethical marketing practices under check. It has so far been experienced that, marketing gimmicks and lack of awareness about product suitability on the part of policy buyers gave rise to mis-selling on massive scale. With Insurance Laws (Amendment) Ordinance 2014, coming in force, now the policy buyers would have better protection against malpractices and mis-selling.
Having said this, PersonalFN also believes, policy buyers should also gather adequate information before buying policies. Being fully aware about your rights and assessing the product for its suitability in your life would help you safeguard your interest.
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Impact
"As you may be aware, rising prices slowly erodes your wealth. So, if your investments fail to keep pace with inflation; you don’t earn any real returns. Thus, when inflationary pressures are mounting, it exposes your investment portfolio to a threat of not earning enough to meet rising cost of living. And in such times it is imperative to be on a pursuit of having investment avenues which can beat the inflation bug.
Last year in June 2013, the Reserve Bank of India (RBI) introduced Inflation Indexed Bonds (IIBs) to help investor clock an effective real rate of return and reduce the dependence on gold as a hedge against inflation. The time was opportune as there were concerns on inflation (both on WPI and CPI level) and burgeoning gold imports. You see, initially the rate of return on IIBs was linked to the movement of WPI inflation. But later, on prudent recognition that WPI linked IIBs served little purpose, in the second phase, CPI-linked IIBs were launched at the time when retail inflation was hovering at around 11%.
Mellowed down inflation
(Source: MOSPI, PersonalFN Research)
However now with the measures taken by the Government and underlying macroeconomic variables, inflation has mellowed down, and so have the gold imports recently fallen sharply (In the first fortnight of December 2014 gold imports have fallen to about 25 tonnes from 150 tonnes in the month before).
To read more about this news and PersonalFN’s views on it, please click here..
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Impact 
Employees' Provident Fund (EPF) and Public Provident Fund (PPF) are truly long term investment instruments considered ideal for channelising your retirement savings. Those who are nearing their retirement now would tell you the importance of EPF and PPF in their retirement planning. Two decades ago, rate of interest on EPF savings was 12.0% which gradually came down to 8.5%. Yet, EPF and PPF continued to remain popular retirement savings avenues. The biggest advantage of investing in EPF or PPF has been their favourable tax status. Investors get tax benefits on the amount they deposit and the amount they withdraw along with tax free interest that accrues on their investments.
Over last 10-15 years, EPF has yielded better returns than those on PPF. But when adjusted for retail inflation measured by the movement of Consumer Price Inflation for Industrial Workers (CPI-IW), year- on-year real rate of returns or inflation-adjusted returns of EPF kept falling over last 15 years.
To know more about this story and to read our views, please click here
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- Until a few years ago, people used to search Net Asset Values (NAVs) of their mutual funds in the newspaper supplements, but these days they get everything on-line right from NAVs to portfolio valuation reports. Customer preferences are undergoing changes as the internet literacy is growing and people are getting comfortable with making extensive use of mobile phones.
Securities and Exchange Board of India (SEBI) is thinking about appointing a committee to develop a distribution channel using digital modes. This would be a sub-committee to the Advisory Committee on Mutual Funds appointed by SEBI. The committee is expected to assess the potential role of using digital distribution channel for encouraging the growth of mutual fund industry. The said committee would also accept suggestions from the industry before forwarding its findings to the regulator.
PersonalFN is of the view that, higher penetration of mutual fund products would help increase the market participation thereby making Indian capital markets even broader. Having said this, PersonalFN is of the view that, efforts also need to be taken to curb mis-selling and create awareness about mutual funds. Lack of awareness gives distributors a chance to mis-sell. PersonalFN has taken a number of initiatives to educate investors and guide them on their finances. Moneysimplified.in is one of them.
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Real Rate of Return: The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other external effects. This method expresses the nominal rate of return in real terms, which keeps the purchasing power of a given level of capital constant over time.
(Source: Investopedia)
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Quote : "You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ" - Warren Buffett
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