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| September 25, 2015 |
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| Weekly Facts |
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Close |
Change |
%Change |
| S&P BSE Sensex* |
25863.5 |
-355.41 |
-1.36% |
| Re/US $ |
66.16 |
0.3 |
0.45% |
| Gold Rs/10g |
26,415.00 |
145.00 |
0.55% |
| Crude ($/barrel) |
45.92 |
-0.20 |
-0.43% |
| F.D. Rates (1-Yr) |
6.25% - 8.20% |
Weekly changes as on September 24, 2015
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Impact 
In the game of Rummy, it's not only important to collect right cards and make sequences, sometimes it becomes very crucial in deciding which cards you deny your opponent. To defend their currencies and maintain price stability in their respective nations, monetary policy makers are fighting one another. The Federal Reserve in the U.S. remains the joker of the pack. If Fed decides to end accommodative monetary policy and hike the interest rates in the U.S., the rest of the world can take only a reactive step to it, considering the dominance of the U.S. in the world-economy and U.S. dollar being the reserve currency.
In case of India, the story isn't different. India will be affected by monetary policy stance of the Fed. Whatever affects the value of the U.S. dollar is bound to show its consequences on the Indian markets. It affects flow of foreign investments, it bears upon the import bill, and it eventually can disturb the price stability in India. So beyond a limit, even favourable domestic factors don't permit the Reserve Bank of India (RBI) to lower policy rates in India if such rate cuts are not in sync with the global trends. You have to think twice before you move to north when the world is sailing south. At this juncture, the RBI will have to make this decision. The pressure on RBI is mounting every day. Corporates want to enjoy the lower-interest-rate regime in the tough business environment that prevails today. So let's understand the factor that may permit the RBI to lower policy rates along with factors that may rein it in.
A case for the rate cut - Lower inflation and stabilising growth
Speaking about the growth of the Indian economy, it has grown at 7.0% in the first quarter of the Financial Year (FY) 2015-16. The Consumer Price Index (CPI) inflation declined to 3.66% in August as against 3.69% recorded in July.
Inflation Cools Off
Data as on September 14, 2015
(Source: MOSPI, PersonalFN Research)
Growth in India's industrial output measured by the movement of Index of Industrial Production (IIP) has come in at 4.2% in July 2015, as against the growth of 0.9% recorded in July 2014. With this, IIP has managed to stay in the positive for the ninth consecutive month, after recording a fall of 2.7% in October 2014.
But what may discourage RBI from lowering rates?
Problem of the bad loans: A bankers' survey conducted by Ernst & Young (E&Y), the multinational professional services firm, revealed sensational facts. Nearly 72% of bankers surveyed by E&Y believe the pickle of Non-Performing Assets (NPAs) is going to worsen in next 2 years. A lower interest rate regime is not the solution-to an extent the problem is self-inflicted. Around 64% correspondents believed that lapses in due diligence of the initial borrower has resulted in bank loans turning non-productive.
Economic activity may remain soft going forward:
A survey conducted by the Federation of Indian Chambers of Commerce and Industry (FICCI) reveals that just about 25% of manufacturers have planned to expand their capacities in next 6 months. This suggests that, most manufacturers expect demand to remain soft, and thus are concerned about investing in capacity additions at this point of time. The deposit growth and credit growth aggregated at 11.4% and 9.3%, respectively, for the quarter ended on June 30, 2015. This suggests the demand for credit is still at a low. During the first quarter of last fiscal year, credit growth had aggregated at 13.3%.
So, what to expect?
Macro-economic indicators suggest there will be pressure on the RBI to cut rates. However, given its track record of taking prudent steps on the policy front, rates may remain untouched until it sees better transmission of previous rate cuts and moderation in inflation expectation. Global factors are not supportive at the moment for lowering interest rates. "Interest-rate policies alone can't help establish healthy economic growth in the world." This is an effective statement made by Dr Raghuram Rajan, the Governor of RBI. It perhaps indicates that the onus is not only on the RBI to revitalise flagging economic growth but also on the Government by implementing reforms.
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Impact 
Wisdom says, decisions must not be taken blindly. When you invest in a mutual fund, you expect a team of professionals to take wise decisions on your behalf. Many people invest in a mutual fund scheme and later stop bothering about where and how their money is being invested, as long as they receive decent returns. In case of debt investors, it becomes more complacent, sometimes for two reasons. These are:
All said and done, some debt funds are exposed to high risk as they invest in debt papers of inferior quality in an attempt to maximize returns. Usually, lower the quality of debt security, higher the yield it will offer. The trouble becomes even more imminent when the independent rating agencies too fail to gauge the risk involved as the company seeks borrowed funds. Mutual funds often depend on the rating agencies to determine the risk involved while they invest in debt securities of companies. This is not to say that they don't have other internal processes to perform risk assessment.
Companies seeking borrowed funds from investors such as mutual funds, secure ratings from independent agencies. These rating agencies analyse the prospects of the business and the company along with its current financial situation. Based on the outcome of the analysis, a rating is assigned. Here, tenure of borrowed funds or the debt securities they issue, matter as well. It is possible that a company might be well-placed to service loans in the short run, but servicing the debt during the entire tenure is also critical.
Now it appears that, rating agencies have failed to keep up with the developments and hence there is a possibility that corporate debt rated in 'A' and 'BBB' may be waiting to blow off. The Case of Amtek Auto was just a tip of the iceberg.
Why so much stress?
- Credit rating agencies are supposed to update their ratings on a quarterly basis. But who provides them the information? The company itself. Companies have started concealing information and instances of poor disclosures are not unheard of.
- At times the rating agencies ignore a few economic developments affecting the company to avoid frequent changes in the ratings assigned.
- There are instances when rating agencies are blindfolded with false guidance and ‘window dressed' accounts.
- Sometimes the assumptions are based on an incorrect premise.
So don't live in a bubble that debt funds are safe. If the debt mutual fund scheme you're investing in holds low rated papers, that's enough grounds for high risk as well. The fund manager ought to be actively cognisant about why the company is paying a high coupon/yield. Checking the quality of debt papers a debt mutual fund scheme holds matter gravely and so does the average maturity profile. It is best to stay away from debt mutual fund schemes which invest in lower rated papers in their endeavour of wealth creation. Always invest in funds that follow strong investment processes and systems. This will help you ensure that you do not compromise on the long term well-being of your investment portfolio.
In case you don't know which debt funds you should invest in, you may like to know more about Debt Select, an unbiased service of PersonalFN that helps you pick promising debt mutual funds.
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Impact
The lure of the primary markets has attracted the attention of mutual funds once again. After a two-year dry spell, there's been a revival with a slew of mutual funds investing into the Initial Public Offerings (IPOs) of companies. As an investor, you may be curious to know where your hard earned money is being deployed by Asset Management Companies in the objective of wealth creation.
According to Prime Database, mutual funds accounted for Rs 1,100 crore of the Rs 1,800 crores of anchor investments in 15 IPOs in the 2015, which is around 61% of the anchor investments this year. Many big names in the mutual fund business have taken exposure to IPOs, while the top three fund houses - HDFC Mutual Fund, ICICI Mutual Fund, and Reliance Mutual Fund have invested approximately Rs 300 crore into IPOs this year according to Business Standard.
To know more about this and PersonalFN's views over it, please click here.
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Impact
The buzz about the Federal Reserve (Fed) of the United States deciding to hike interest rates went on for a while. However, against the expectations of many, the Fed has kept rates unchanged being concerned about the economic outlook and progress within the U.S. along with other external factors. However, members of the Fed are putting the cards on the table for a rate hike at the end of the year citing continued improvement in the domestic economy and low unemployment. Foreign investors were wary of the effects a Fed rate hike would have on Indian markets, although the Feds decision to postpone raising rates allayed their fears. FII's have pulled out Rs 19,263 crores from Indian markets over the last one month.
The Fed's decision on 17 September, 2015 to postpone raising rates provides temporary relief to Indian markets. The Fed has not provided any guidance on when would it raise rates, nevertheless it has hinted that whenever rates are hiked, they will be hiked keeping in view long term objectives of maximum employment and inflation target of 2%. There is an air of uncertainty as to when exactly the fed will go about raising rates as many are of the opinion that the fed will hike rates sometime early next year based on the Fed's deliberations. However, a few members of the Fed have contended the case for a rate hike as soon as the end of 2015.
To read more about this news and our views, please click here
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- If you receive an SMS from any unknown number advising you to buy some stock with a promise of high returns, you should simply ignore it. There's no such thing as a free lunch, right? With the advent of social media websites and proliferation of a plethora of personalized communication modes, instances of misleading ads and recommendations are on the rise.
However, the Securities and Exchange Board of India (SEBI) warned people against following unsolicited advice given by advisors and research analyst that are not registered with SEBI. In a cautionary note published recently, SEBI appealed to investors to check the registration status of advisors before following recommendations.
PersonalFN believes this is a right move made by SEBI to create awareness against fake, unregistered, and fraudulent advisors. Those who comply with conditions set by SEBI may offer advice, but you ought to ascertain and perhaps even question the soundness of the advice. It is important to select your investment advisor wisely and be a responsible investor in your journey of wealth creation.
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Financial Distress: "A condition where a company cannot meet or has difficulty paying off its financial obligations to its creditors. The chance of financial distress increases when a firm has high fixed costs, illiquid assets, or revenues that are sensitive to economic downturns."
(Source: Investopedia)
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Quote : "This company looks cheap, that company looks cheap, but the overall economy could completely screw it up. The key is to wait. Sometimes the hardest thing to do is to do nothing." - David Tepper
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