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| August 04, 2017 |
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Impact 
These are tough times for conservative investors investing in banks deposits. Interest rates are regularly falling and unlike before, other options such as corporate fixed deposits have become risky propositions.
Under such a scenario, it might be frustrating for many of you since your investments generate lower returns.
What should you do under such circumstance?
The simple answer is: invest sensibly and smartly.
Here’s what we mean...
There’s no need to overreact to all macroeconomic events and developments. Instead, plan your invests in a manner that can help you achieve your intended financial goals, and stay focused on the path while being mindful.
Your portfolio isn’t expected to generate higher returns at all times. What it means is long-term return potential of your portfolio should be consistent with your financial goals, risk appetite, market conditions, and inflation level among others.
Therefore, you need not get anxious about the falling interest rates.
In the first place, lower interest rates don’t always mean lower returns. All you got to do is device an astute investment strategy, so that you clock a decent real rate of return (also known as the inflation-adjusted return) which is even tax efficient. Thankfully, with lower retail inflation (measured by the Consumer Price Index), your bank FDs are yielding a positive real rate of return. But you also ought to make smart choices which are tax efficient. Lower inflation facilitates savings that can be invested efficiently.
Here are some promising investment avenues…
Debt and money market mutual funds
Presently, while allocating your investible surplus to debt mutual funds, taking dominant exposure towards the longer end of the yield curve would be imprudent. It can be perilous, since most of the rally has already been captured at the longer end of the yield curve and there isn't much steam left. A 25 basis points (bps) reduction by RBI was already factored in (after CPI inflation for June 2017 registered a historic low of 1.54%).
Preferably, invest vide dynamically managed bond funds (with an investment time horizon of 2-3 year) – it would be a prudent approach. You'll also be better-off if your hard-earned money is deployed in short-term debt funds; but ensure to give due importance to your investment time horizon along with diversification in your portfolio. Consider investing in short-term debt funds for an investment horizon of upto 2 years. If you have an investment horizon of 3 to 6 months, ultra-short term funds (also known as liquid plus funds) would be the most suitable. And for an extreme short-term time horizon (of less than 3 months), you would be better-off investing in liquid funds.
Don't forget that investing in debt funds is not risk-free. Hence, it is critical to select debt funds carefully.
Tax-free bonds
Likewise, tax-free bonds are a good long-term fixed income option, especially if you are in the highest tax bracket and able to subscribe to the bonds in the primary market (as and when they are offered). Currently, there are no tax-free bond available for subscription in the primary market, but as the financial year draws to a close, you may find quite a few. You can even buy and sell these bonds in the secondary market; however, liquidity can be an issue. If you choose to sell the bond before its maturity and if there are no buyers on the exchange, liquidity will be found wanting.
Corporate deposits
A few highly rated corporate deposits and bonds may also yield better returns than bank FDs. But make sure you study the company’s financials before investing, as the risk of default can’t be ignored. This will save you from the financial shocks.
Equity mutual funds
If you hold a high risk appetite and wish to address some of your long-term financial goals viz. children’s future – their education and marriage needs – your retirement, among a many others and have an investment time horizon of at least 5 years, SIP in equity mutual funds can prove worthy owing to the benefit of rupee-cost averaging and power of compounding .
But don’t get carried away by the exuberance; instead invest sensibly by carefully selecting mutual funds that have displayed consistent performance track record and are from mutual fund houses that follow strong investment processes and systems.
Want to own a time-tested ready-made mutual fund portfolio that is potentially rewarding and can beat inflation? PersonalFN is offering its model mutual fund portfolio service, ‘FundSelect Plus’ at an attractive 75% discount, as it celebrating a decade of unmatched excellence. This portfolio is constantly tracked by a highly experienced research team. All you need to do is invest in the mutual fund schemes and the research team will monitor the portfolio, and suggest any change when required. Don’t miss out this Special Anniversary Offer. Click here to Subscribe now!
While investing rebalancing the portfolio plays a pivotal role, so that you can successfully accomplish the financial goals you have envisioned.
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Impact
At the 3rd bi-monthly monetary policy review for the Financial Year (FY) 2017-18, the RBI cut policy rates from 6.25% by 25 bps to 6.0%. This has been the lowest level witnessed in last 6 years. Similarly, it reduced the reverse repo rate to 5.75%. Repo is the rate at which banks borrow from the RBI, while the reverse repo is the rate at which they park their surplus liquidity with it. Reduction in policy rates is a precursor of fall in the interest rates in the economy.
Monetary Policy Committee (MPC) overwhelmingly voted in favour of a rate cut this time. Four out of its six members voted for a cut to the tune of 25 bps, while one member felt 50 bps rate cut would be appropriate. One basis point is a hundredth of a percent. Taking a slightly hawkish stance, another member voted in favour of maintaining the status quo.
To read more about this story and Personal FN's views over it, please click here.
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Impact
Non-Performing Assets (NPAs) in the Indian banking system continue to remain at precariously high levels. As per the RBI estimates, Gross NPA (GNPA) ratio of Indian banks rose to 9.6% in March 2017 as against the 9.2% recorded in September 2016. The stressed advances ratio (denoting NPAs + restructured assets + write offs—cooled off a bit from 12.3% to 12.0% between September 2016 and March 2017. However, even at this stage, it appears too high.
Loan growth has languished to a multi-decade low and banks seem to have lost prominence, albeit temporarily. As per the RBI figures, the share of banks in the total outstanding credit in the economy has shrunk from 50% in the Financial Year (FY) 2015-16 to about 38% in FY 2016-17. The contribution of the major corporate borrowers is 87% (terribly high).
If your conclusion is, “Banks are in bad shape, and they don’t have a bright future.”, and you have ruled out any possibility of committing money to financial stocks, be ready to be a lone voyager in the dark sea.
To read more about this story and Personal FN’s views over it, please click here.
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Impact
As children, haven't we enjoyed playing a game of musical chairs?
Even as grownups, the game is just as fun to play or watch.
The players are many, the chairs are few. As the music plays on, the players walk around the empty chairs eyeing the nearest seat.
When the music stops, no matter how courteous we may be in real life, our competitive nature drives us to vie for a chair to sit in. For the ones left standing -- tough luck -- they are out of the game. As the game proceeds, the players and chairs decrease. The participants keep switching chairs, until a winner is declared.
As uncanny as it may be, this game is played in real life as well. We have often seen it played out in politics. Politicians jump political parties or change allies (as seen recently in the Bihar Legislative Assembly), in a hope to come to power. In the corporate world too, employees will move from one company to another seeking better prospects. Wouldn't you join another company that offers you a career growth, higher salary, or better perks?
To read more about this story and Personal FN's views over it, please click here.
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Impact
India's widely tracked diversified index, CNX Nifty surpassed the 10,000 mark last week. This psychological barrier concurred at a time when many experts and analysts were predicting the market would crumble under the pressure of high valuations.
The bulls took the bears for all they were worth, and the stock market indices caught many lackadaisical investors by surprise.
Clearly, these are increasingly difficult times for investors. When stocks were falling like a house of cards during the demonetisation phase, it was unforeseen that these would race to an all-time high. Some market experts still doubt the durability of the rally; as they have been questioning it for the past couple of years.
However, the markets have proven them wrong so far. You may have also come across experts and analysts who aren't tired of discussing the brownie points of Indian markets, but they start sounding monotonous (hence less dependable) sooner rather than later.
To read more about this story and Personal FN's views over it, please click here.
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With the aim of offering more choices to the banking customers, the Reserve Bank of India (RBI) has been insisting that banks allow account portability.
On the occasion of the annual conference of banking ombudsmen, Deputy Governor of RBI said, "A scenario was thus emerging wherein customers would be able to silently walk out from one institution to another, in the case of any dissatisfaction with the services.”
However, it remains to be seen how seriously the suggestions of the RBI will be taken by the industry.
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Liquidity Risk: Liquidity risk is the risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss.
(Source: Investopedia)
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Quote:"Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble." - Warren Buffett
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