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| April 17, 2015 |
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| Weekly Facts | | | Close | Change | %Change | | S&P BSE Sensex* | 28,442.10 | -437.28 | -1.51% | | Re/US $ | 62.3 | -0.05 | -0.08% | | Gold Rs/10g | 26,900.00 | 150.00 | 0.56% | | Crude ($/barrel) | 60.20 | 4.93 | 8.92% | | F.D. Rates (1-Yr) | 7.25% - 8.75% | Weekly changes as on April 16, 2015
*BSE Sensex as on April 17, 2015 |
Impact 
Most of us benefit when prices of life essentials fall as our savings get a big boost. The central bank has adopted accommodative monetary policy stance in a phase of price moderation, pushing borrowing cost lower. As per the new monetary policy framework, RBI has been following the method of inflation targeting and has set an upper limit of 6.0% on CPI inflation by January 2016. And the actual data for CPI inflation number has stayed below 6.0% by far since October 2014, while the prices at the wholesale level have slipped into negative (-2.3% in March 2015).
So, in such times, those who have invested in Inflation Indexed Bonds (IIBs) have not derived the benefit. On the other hand, those who invest in debt mutual funds have reaped good returns over the last one.
Also it is vital to note that IIBs come with a few shortcomings, which include:
- Lack of tax incentives vis-à-vis that offered by PPF which enjoy an E-E-E (Exempt-Exempt-Exempt) status;
- Complex structure and restrictions such as: cannot be actively traded, 3-year lock-in period for senior citizens, a minimum investment limit; and so on.
Also the time of the launch of IIBs was rather inappropriate.
So what’s the future of IIBs?
Well, to judge this let make an assessment of inflationary trends. Let us see where retail inflation is heading.
Contrary to expectations, retail inflation measured by the movement of Consumer Price Index (CPI) came in at 5.17% for the month of March 2015. Food Inflation which has a weight of a little over 54% in CPI dipped unexpectedly in March to 6.14% vs. 6.88% in the month before. The fall was mainly because of subdued prices of egg, meat & fish, sugar products and oils & fats. Prices of fruits moderated too; but inflation in vegetables continued to go up at a double digit rate.
Is fall in inflation misleading?
Data as on April 10, 2015
(Source: MOSPI, PersonalFN Research)
At a broad level, retail inflation has stayed flat for almost last 6 months. Food inflation after bottoming out in November 2014, seems to be exerting some pressure yet again. This is possibly on account of the after effect of erratic climatic conditions and perpetual supply side constraints. And taking cognisance of this, RBI kept policy rates unchanged in its 1st bi-monthly monetary policy statement, 2015-16 (held on April 7, 2015). Also the central bank insisted that banks should first pass on the benefits of previous rate cuts to borrowers.
Is there a threat of food inflation going up?
Fruits and vegetable prices have started going up as unseasonal rainfall in some parts of the country has left crops damaged. It is also expected that, output of rabi crop would be lower this season as crops such as wheat, soybean and jeera among others have been damaged by unseasonal rains. Going forward, trends in food prices would largely affect the retail inflation. The southwest monsoon will also play key role in determining the direction of food prices. Apart from that, crude oil prices would also be a factor. Unprecedented fall in crude oil prices has contributed substantially.
What should you do now, if you had invested in IIBs?
IIBs have failed to impress so far. This is why PersonalFN always believes that you shouldn’t blindly invest even in a product which is apparently safe and dependable. Unless the investment serves your purpose, it would not be a right fit in your investment portfolio. To beat the inflation bug it is vital that you invest in high yielding investment instruments, but in accordance to the asset allocation charted for you, keeping in mind your risk appetite and financial goals.
Do you think mutual funds focused on the theme of industrial and economic revival would do well, going forward? Share your views here.
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Impact
Anaemic growth in manufacturing adversely affected the industrial activity in the country so far. Breaking that series, Index of Industrial Production (IIP) has managed to stay in positive for the consecutive fourth month in February 2015. At 5.0%, growth in the industrial output as measured by the movement of IIP jumped to 3-month high. It is noteworthy that, manufacturing growth, at 5.2% reached 28-month high in February 2015. Output of mining industries grew at 2.5% while electricity and related sectors posted 5.9% growth.
Within manufacturing industries, capital goods sector grew at a brisk pace of 8.8% while consumer non-durable segment grew at 10.7%. Strong performance of companies falling in these two sectors usually hint at a strong economic revival. As per the new method of calculation, Gross Domestic Product (GDP) is expected to grow at 7.4% in the Financial Year (FY) 2015-16. The Government remains optimistic about achieving above 8.0% growth in the current fiscal.
For GDP growth to pick up further, the industry needs to perform even better. Although there are some early signs of resurgence in investment activity in the economy, it remains to be seen how far this revival goes.
Factors that may positively affect IIP growth going forward
- Make in India Initiative of the NDA Government may provide incentives to manufacturing industries resulting in higher growth
- Thrust of the Government on speeding up reforms and improving India’s ranking in ease of doing business
- Accommodative policy stance adopted by RBI may continue if macro-economic factors, remain supportive
- Continuation of the trend of softer commodity prices internationally, including those of crude oil
There are some negatives as well which may drag the performance of the industry. They include,
- Unforeseen rise in retail inflation which may prompt RBI to reverse its accommodative monetary policy stance
- Reversal in soft commodity prices globally
- Government falling short to implement its reformist agenda
PersonalFN is of the view that, although there is some optimism about revival in the industrial growth, you should avoid speculating on the prospects. The growth is contingent upon several factors indicated above. PersonalFN believes investors should avoid betting on sector specific or thematic funds focused on industrial and economic revival in the country.
Those of you, who want to benefit from the higher economic growth, may consider investing in opportunities funds. They are a type of diversified equity oriented funds investing across market caps and sectors based on their attractiveness. PersonalFN provides unbiased mutual fund research services.
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Impact
Outgo towards interest payment forms a significant portion of expenses of companies that have higher loans on their books. It is not easy for them to get cheaper loans unless RBI adopts the accommodative monetary policy stance. Monetary policy actions depend on a number of factors such as inflation, fiscal management of the Government and overall economic growth, to name a few. Recently RBI announced its 1st bi-monthly monetary policy for the Financial Year (FY) 2015-16. As expected by many bankers, the central bank held policy rates unchanged. Corporate desperately want to see their borrowing cost going down as their profitability is already hit by the slow revenue growth and broader economic lull.
To overcome this, a number of Indian companies have been aggressively borrowing from overseas markets. As western countries have been following ultra-loose monetary policies for almost past 7 years; borrowing abroad has become very attractive for Indian companies.
High Dependence of India Inc. On Offshore Funds...
(Source: RBI, PersonalFN Research)
Whenever, a company raises a foreign currency denominated debt, it not only exposes itself to currency risk; but also puts pressure on India's forex reserves. On number of occasions RBI has warned companies against their unhedged foreign currency exposure. Despite of that, companies, on a few occasions, have been reluctant to hedge their positions considering relatively stable rupee and the high cost of hedging. If corporate see that they are losing the benefit of borrowing abroad due to higher cost of hedging, they keep their positions unhedged. To address this issue, recently RBI decided to allow companies to issue rupee-denominated debt abroad.
To read more about this news and PersonalFN's views on it, please click here.
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Impact
Many of you must have planned to buy gold on the auspicious day of Akshaya Tritiya this year. There is a belief that, investment in gold made on this day, not only remains imperishable but also brings you success and good fortune. Gold has always been important to Indians.
As far as investing in gold is concerned, globally, gold is considered as a hedge against inflation. It is often called a store of value. Gold as an asset class rarely moves in sync with other asset classes such as equity, real estate and fixed income. Therefore, undoubtedly, gold is a "must have" asset and everybody should possess atleast some gold. PersonalFN believes you should hold about 10% to 15% of your investment portfolio in gold.
However, those who bought gold on the day of Akshaya Tritiya over last few years might be sitting on losses for now, due to sluggish gold price movement. On the other hand, equity as an asset class has generated tremendous returns for investors in last 1 ½ years. For a number of reasons including this, many investors might have avoided investing in gold in the recent past. So now, it remains to be seen whether demand for gold revives this Akashaya Tritiya.
To know more about this story and to read our views, please click here
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- Total redemption requests placed by investors of equity oriented mutual funds amounted to over Rs 77,000 crore in Financial Year (FY) 2014-15. But don’t be surprised with this number. Mutual funds still witnessed huge net inflows worth nearly Rs 40,000 crore in FY 2014-15, which are highest ever.
Profit booking is one of the major reasons for such heavy redemptions. However, this is not the only reason. Incessant launches of New Fund Offers (NFOs) by mutual funds are equally responsible. When equity markets witness a strong rally, mutual funds find it easy to launch new schemes as people readily invest in them. As commission driven mutual fund advisors and distributors induce people to redeem existing funds and invest in NFOs.
PersonalFN is of the view that, you should avoid investing in NFOs. It has been observed that, for securing assets for long term, mutual fund houses launched more close ended funds over last 1-1 ½ years. Close ended funds don’t guarantee you good returns; neither have they exposed you to lower risk. Hence they don’t score above open ended funds. PersonalFN believes, you should invest in open ended equity oriented mutual funds only for long term and revisit your portfolio periodically to assess the performance of funds. You should avoid unnecessary churning of portfolio as it may affect your portfolio negatively.
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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 : "Never depend on single income. Make investment to create a second source." - Warren Buffet
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