  | | January 11, 2013 | | | | | | | Weekly Facts | | | Close | Change | %Change | | BSE Sensex* | 19,663.64 | (120.4)
| -0.61% | | Re/US$ | 54.58 | (0.1) | -0.17% | | Gold Rs/10g | 30,345.00 | (450.0) | -1.46% | | Crude ($/barrel) | 111.66 | (0.7) | -0.59% | | FD Rates (1-Yr) | 7.50% - 9.00% | Weekly change as on January 10, 2013
*BSE Sensex as on January 11, 2013 | |
Impact 
Direct equity investing as many of you may be aware is prone high risk, due to its volatile nature. But despite this, many investors - especially the retail ones in their objective of faster wealth creation (through listing gains) evince interest in Initial Public Offerings (IPOs) from companies without evaluating much whether the price at which the shares are offered justify the underlying fundamentals of the company.
However now noticing the anomalies over pricing of IPOs, a safety net mechanism from the Securities and Exchange Board of India (SEBI) may soon lead companies to think twice before aggressively pricing their issues. The regulator feels that issuers have driven out investors from the market because of a lack of discipline in pricing IPOs
It is probable that the capital market regulator could ask companies to compensate retail investors if stock prices crash within months of their initial public offerings.
"The pricing of IPO in this country has been an issue. In the last three years, of the issues that have come about two-thirds are trading at a price below their issue price even after adjusting for the general decline in the market. Again and again, we are finding that there is lack of transparency in pricing," said Mr U.K. Sinha, Chairman of SEBI while addressing an Assocham event said,
Mr Sinha also expressed his personal view (while SEBI has come out with a discussion paper on safety net mechanism for investors), that there is need for introducing a safety net mechanism which could be in a milder form, primarily to give a signal not about returning money but that the pricing has to be right.
We are of the view that, indeed a safety net mechanism has to be in place to protect investors in times where some IPOs have fallen violently in the past, eroding investors wealth. A safety net could provide an exit opportunity to investors, if the price has fallen below a certain level. In September last year, the capital market regulator had proposed that the safety net provision will be triggered if the prices of the shares fall by more than 20% from the issue price within three months of listing; but now we think guidelines thereto should be issued, thereby protecting investors in primary markets.
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Impact
Most investors look forward to equity investing in their objective of wealth creation, with the intention to beat even the inflation index. But while investing some prefer the large caps as they construe them to be more stable, while some enabled by their appetite for high risk, look at mid and small caps as an ocean of opportunity for wealth creation at an accelerated pace.
The year 2012 clearly belonged to mid and small caps. As depicted in the chart below, BSE Mid Cap and BSE Small Cap dominated the show right from the beginning of the year. Although there was a consolidation phase in the Indian equity markets for about two quarter (i.e. from April to early September), due to uncertainty over General Anti-Avoidance Rules (GAAR), political uncertainty (due to anti-graft campaigns), debt crisis in the Euro zone, policy paralysis and unfavourable investment climate amongst host of other issues; the mid and small caps lingered much higher than the large caps. Midcaps have gone from strength to strength especially since September.
Relative Performance: Large caps vs. Mid caps vs. Small caps
Base: Rs 10,000
Data from January 02, 2012 to December 31, 2012
(Source: ACE MF, PersonalFN Research)
So at the beginning of the year gone by if one were to invest a sum of Rs 10,000 each in BSE Midcap, BSE Smallcap and BSE-100 he would have yielded a sum of Rs 13,861 Rs 13,282 and Rs 12,972 respectively.
And it is noteworthy that the rally in mid and small caps has depicted strength especially after reforms being pushed and important bills being passed in the Parliament.
So henceforth would it be wise to incline the portfolio towards mid and small caps?
We are of the view that, market valuations have fluctuated since January 2011. It brings out two important findings. First, the year 2012 started on low midcap valuation. This when combined with other factors such as record Foreign Institutional Investors (FIIs) inflows and sentiment booster in the form of reforms announced by the Government, triggered a magnificent rally in midcaps. Large caps too have rallied albeit at slower pace. The second finding has been alarming. Since January 2011, valuation of large caps has steadily gone down while those of mid caps have been see-sawing. Moreover, valuation differential between mid caps and large caps in past 2 months has been highest over last 2 years. In other words, midcaps have become dearer than large caps. This usually happens when markets are ripped for some corrective phase. However, technically there is another possibility that earnings growth would catch up soon and to the extent that should justify the higher valuation. Over last few months midcaps have rallied a lot and hence unless they report sharp rise in earnings; they would be more vulnerable than large caps to a market fall.
Hence while you may like to play in the market capitalisations prudently in your objective of wealth creation, we recommend that you invest in flexi cap funds which as per their mandate tilt their portfolio sighting opportunities in each market capitalisation segment. However while selecting mutual funds for your portfolio, prefer the one which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years.
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Impact
Many investors often perceive investing in Public Sector Undertakings (PSUs) as a safe investment bet, in their objective of wealth creation. Since the Government is the largest shareholder, they get hooked and believe that can really maximise shareholders wealth.
Roaring participation in Initial Public Offerings (IPOs) of PSUs is a confirmation to interest evinced by investors. IPOs of Coal India, NTPC and Power Finance Corporation (PFC)in the past have received an overwhelming response. Coal India for example, received 15.9 lacs of applications (which is the highest number since 2003-04). Likewise, PFC got oversubscribed 76.7 times. And thus getting lured by this splendorous participation, mutual fund houses too started playing the PSU theme song and they too launched dedicated PSU sector funds to capitalise on investor perception.
The Government has recently moved ahead with its proposal to set-up Exchange Traded Funds (ETFs) for PSUs, and invited proposal from mutual fund houses having equity assets of over Rs 2,500 crore.The Department of Disinvestment (DoD) has said, mutual fund houses registered with the Securities and Exchange Board of India (SEBI) and who have at least five years of experience would be eligible for setting up PSU ETFs. To know more about this news and our view over it, please click here.
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Impact
Many of us may have encountered horrendous experiences while transacting with our most trusted bank. A feeling of being betrayed often skulks into us, as such a service was least expected. And while many of us seek recourse by launching complaints either with senior officials of the bank or banking Ombudsman, the issue takes either long to be resolved or conveniently the onus is put onto us as bank's customers.
But now, soon an end would be put to this rigmarole. The Reserve Bank of India (RBI) is seeking to turn banking services in favour of customers from being loaded in favour of banks. The central bank intends to weed out one-sided agreements and ensure that customer complaints are resolved within 45 days. To know more about this news and our view over it, please click here.
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- With an aim of channelizing investors' savings into infrastructure projects, the Finance Ministry could allow commercial banks to issue tax-free infrastructure bonds in line with other state-run firms such as Power Finance Corporation (PFC), Housing and Urban Development Corp Ltd. (HUDCO), National Highways Authority of India (NHAI) and others. An announcement to this effect is expected to come as part of the forthcoming Budget proposals for 2013-14.
It noteworthy that in a pre-budget talk with the Finance Minister - Mr P. Chidambaram, some banks have made a request that they should be allowed to issue tax-free bonds (since they have good distribution network and can finance infrastructure projects), and this proposal has been forwarded to the Finance Ministry for its consideration.
Some bankers have also expressed in the pre-budget talk that the lock-in period on tax saving deposits be reduced to 3 year (from 5 years at present), which could help to channelize more funds into the banking sector.
We are of the view that, although suggestion to allow banks to issue tax-free bond has been made to the Finance Ministry, the RBI would look into the modalities. However a noteworthy point is that tax-free bonds haven't been able to attract many investors leading to their total issue size being underutilized.
As far as the proposal of reducing the lock-in period on tax saving deposits is concerned, yes, indeed it would be a good move enabling more funds into the banking sector, and also make it in line with lock-in period for Equity Linked Saving Schemes).
- Amid the tax saving season, mutual fund houses have begun to line-up mutual fund schemes focused on the Government's newly introduced Rajiv Gandhi Equity Savings scheme (RGESS), which aims to attract first-time small investors into the capital market by offering them tax benefits.
Thus far three mutual fund houses namely SBI, IDBI and DSP BlackRock have filed offer documents with SEBI and it is expected that other may follow suit.
We are of the view that, since the capital market regulator could take about 3 weeks to a month's time to clear these offer documents, it may be that one may find these schemes available for tax saving investments only in February. Thus it can be said the scheme launched by mutual fund houses is most likely to miss the bus as far as garnering assets from salaried individuals (who may be first time investors in Indian equities, with a gross annual income below Rs 10 lakh), because by end of January most of them have completed their tax saving formalities. Thus only self-employed individual may evince interest this year in such a scheme from respective mutual fund houses.
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Exchange Traded Funds: A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.
Source: Investopedia
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Quote : "There is a complicating factor that makes the handling of investment mistakes more difficult. This is the ego in each of us." - Philip Fisher
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