RBI MPC Member Doubts GDP Data. Should You?   Sep 07, 2018

S&P BSE Sensex* Re/US $ Gold Rs/10g Crude ($/barrel) FD Rates (1-Yr)
38,645.07 |-255.25

-0.66%
71.95 |-0.53

-0.74%
30,535.00 | 436.00

1.45%
76.57 |-0.46

-0.60%
5.00% - 7.00%
Weekly changes as on September 06, 2018
BSE Sensex value as on September 07, 2018
Impact
 
Objective Of Demonetisation

Indian economy expanded at 8.2% in Q1, FY 2018-19

Right after this news came in, Mr Subhash Chandra Garg, Secretary of Department of Economic Affairs (DEA) was enthusiastic to announce India’s progress to the world. He expressed,

Economic performance is back to very normal. We had over 8% of quarterly growth last time in first quarter of 2016-17. Now after 8 quarters, we are at 8.2%. From 8.1% we have come to 8.2% which signals economic growth now on steady high growth path.

Impressive economic growth…
Percentage change over previous year Q1
Industry Q1, FY 2017-18 Q1, FY 2018-19
Agriculture, forestry & fishing 3 5.3
Mining & quarrying 1.7 0.1
Manufacturing -1.8 13.5
Electricity, gas, water supply & other utility services 7.1 7.3
Construction 1.8 8.7
Trade, hotels, transport, communication & services related to broadcasting 8.4 6.7
Financial, real estate & professional services 8.4 6.5
Public administration, defence & other services 13.5 9.9
Quarterly GVA estimates for Q1 at 2011-12 prices
(Source: MOSPI)

Meanwhile, China has reported 6.7% growth for the April-June quarter. This helped India retain its crown of the world’s fastest growing economy.

And these days with the BSE Sensex and CNX Nifty making new highs frequently, the Indian equity markets are in celebration mode.

But not all experts are ready to take these numbers at face value.

Dr. Ravindra Dholakia, an external member of the Reserve Bank of India's (RBI's) Monetary Policy Committee (MPC) has questioned the correctness of the methodology used to calculate GDP.

According Dr. Dholakia, the new GDP series considers corporate financial data instead of Annual Survey of Industries (ASIs) to gauge the value addition from the manufacturing sector. In his view, this data gives the impression that the manufacturing sector is growing at a faster pace.

To express his views on the subject, he recently co-authored a column with R Nagaraj and Manish Pandya in the Economic and Political Weekly. He opined, “Does the new series represent a fuller description of the manufacturing value added, or is it an overestimation?

The Central Statistics Office (CSO) claimed that the ASIs failed to estimate the output produced outside factories which causes an underestimation. Dr. Dholakia has countered this argument too.

Meanwhile, India’s Finance Minister ascribed the impressive GDP growth India reported in Q1, FY 2018-19 to the government’s fiscal prudence and a spate of reforms it introduced.

Interestingly, Dr. Dholakia doesn't seem to be in favour of 'fiscal prudence'. In the past, he has voted for dovish policy actions. In August 2017, 4 out of 6 MPC members had advocated a rate of 25 Basis Points (bps). But, Dr. Dholakia debated this for a rate cut of 50 bps. One basis point is 1/100th of a per cent.

In December 2017, five out of six members had voted for status quo, while Dr. Dholakia had recommended a 25 bps rate cut. This recommendation had surprised many, since retail inflation in October 2017 was at a 7-month high.

Minutes of the Monetary Policy Committee (MPC) conducted between July 30, 2018 and August 01, 2018, revealed that Dr. Dholakia was the only member of MPC who voted to maintain the status quo in RBI’s third bi-monthly monetary policy review for FY 2018-19.

[Read: How To Approach Debt Mutual Funds After RBI’s Rate Hike]

Having said this, his dissent with other MPC member is a healthy sign for the institution of RBI. It suggests that there’s a democracy, in the true sense, within the MPC of RBI.

It also highlights that, perhaps, Dr. Dholakia always thought the growth wasn't as 'intact' as it was perceived to be by the government and other MPC members. Notably, RBI can't forget about growth while containing inflation.

Instead of evaluating Dr. Dholakia's claims, CSO and the other government agencies will come clean about the methodology that he has challenged.

Nonetheless, the external member questing the authenticity and accuracy of the GDP data is likely to open a new battleground for the government. The 2019 Lok Sabha elections are almost around the corner.

Should investors worry about GDP growth in India?

Indian markets have generated double-digit returns over the last three decades, despite the sea-level changes taking place in the economy.

As for the question of existing controversy about GDP data, you should leave it to the experts and not speculate on the authenticity of the chart numbers.

In the last 38 years, India has clocked about 6.3% average growth rate every year. PersonalFN believes, as long as the Indian economy is growing at least at the average rate, you can rest easy.

real-gdp-growth0709
Data as of December 2017
Note: 10 Governments of which 7 were coalition governments,
(Source: RBI and www.parliamentofindia.nic.in),

Robust GDP growth numbers can generate substantial stock market returns, but you would benefit only if you invest correctly.

Unless you have the time, knowledge, and skills required to pick stocks yourself, you shouldn't think about taking direct exposure to equity markets. For you, mutual fund schemes would be the right option.

Remember that you can't pick up mutual funds randomly. Before investing in mutual funds, you should take stock of your existing financial situation, financial goals, and risk appetite. Once you do this assessment and arrive at the personalised asset allocation plan, you should think about investing in equity-oriented funds.

[Read: Why You Should Not Ignore Personalized Asset Allocation While Investing]

Systematic Investment Plan (SIP) remains the best option to invest in equity mutual funds which have a proven track record across time-frames and market phases. The ideal choices for you would be to look out for the ones offered by those mutual fund houses that follow sound investment systems and processes.

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Happy Investing!

Does A Service Sector Fund Make A Worthy Proposition?

Impact

Our regular readers know that PersonalFN has been writing incessantly about pitfalls of investing in New Fund Offers (NFOs).

Moreover, it's been equally vocal about reasons to avoid sector and thematic funds.

But some mutual fund houses are equally resolute about striking when the iron is hot. At present, the popularity of mutual fund investing is on the rise with retail investors. And to cash-in on this boom, fund houses launch NFOs.

While Chinese factories are shutting down due to environmental concerns; NFO factories of mutual fund houses are running at full capacity. This is astonishing, especially, considering the strong stand the Securities and Exchange Board of India (SEBI) has taken to protect investors' interest.

What's on offer nowadays?

Sundaram Mutual Fund recently launched a thematic NFO—the Sundaram Services Fund. At present, there is only one comparable fund—ICICI Prudential Exports and Services Fund in this category.

Ironically, three fund houses, UTI Mutual Fund, Tata Mutual Fund, and Principal Mutual Fund have already merged their services sector funds long ago.

Why Services Fund now?

The Services sector not only has a dominant share in India's Gross Domestic Product (GDP), but it has also been a source of mass-level employment. According, India Brand Equity Foundation, services industries collectively put up 54% India's Gross Domestic Value-Added (GVA) and provides employment to over 28% of India's population.  

Services Fund0709
( (source: India Brand-Equity Foundation)
 

According to the Economic Survey 2017-18, services sector in India has been growing at a faster pace than India's overall GDP. Export-oriented services industries have been witnessing even rapid growth. Various government initiatives such as according infrastructure stats to logistics, digitalisation of services, and implementation of Goods and Services Tax (GST) have contributed to the impressive performance of services sector in India.

The seasonally adjusted Nikkei India Services Business Activity Index suggests that India's services sector activity jumped to a 21-month high in July.

Services can be broadly classified into:

  • Trade, repair, hotels and restaurants

  • Transport, storage, communication & services related to broadcasting

  • Financial services

  • Real estate, ownership of dwelling & professional services

What might drive services sector growth going forward?
  • Growing trend of digitalisation

  • Changing lifestyles and growing aspirations

  • India's cost-effectiveness and global trends in outsourcing

  • Under-penetration of financial services

Here's what Sundaram Mutual Fund has to offer…
Type An Open Ended thematic scheme investing in companies belonging to services industries across market capitalisations. Category Thematic
Investment Objective To seek capital appreciation by investing in equity / equity related instruments of companies who drive a majority of their income from business predominantly in the Services sector of the economy. However, there can be no assurance that the investment objective of the Scheme will be realized.  Services sector includes healthcare, Fitness, tourism & hospitality, transportation & Logistics, education, Staffing, Wealth management, media, Retail, aviation, Legal, architecture, Design services etc.
Min. Investment Rs 5,000 and in multiples of Re 1 thereafter.

Additional purchase Rs. 500/- and in multiples of Re. 1/- thereafter.

Face Value Rs 10 per unit
Plans  • Regular
• Direct
Options
  • Growth

  • Dividend Payout

  • Dividend Reinvestment

  • Dividend Sweep

Entry Load NA Exit Load 1% of the applicable NAV, if redeemed on or before expiry of 12 months from the date of allotment.
Fund Manager S Krishnakumar, Rahul Baijal, Rohit Seksaria and Dwijendra Srivastava (Fixed Income) Benchmark Index S&P BSE 200 Index TRI
Issue Opens 29th  August, 2018 Issue Closes: 12th  September, 2018

Indicative Asset Allocation and Investment strategy of Sundaram Services Fund

Under normal circumstances the asset allocation of the Sundaram Services Fund is as follows:

Instruments
Indicative Allocation (% of Total Assets) Risk Profile
Minimum Maximum
Equity & equity related instruments of services sector 80% 100% High
Fixed income and  Money Market Instruments (MMI) 0% 20% Low to Medium
  • Equity and equity-related securities includes Convertible bonds, debentures and warrants carrying the right to obtain equity shares

  • The scheme shall engage in securities lending subject a maximum of 20% and 5% for a single counter party

  • The Scheme shall not invest in ADR/GDR/ Overseas securities.

  • The Scheme may use derivatives for trading, hedging and portfolio balancing. Exposure to derivatives will be limited to 50% of the net asset value of the Scheme at the time of transaction. Exposure is calculated as a percentage of the notional value to the net assets of the Scheme. The Scheme will maintain cash or securities to cover exposure to derivatives.

(Source: Scheme Information Document)

The question is should you invest in the NFO?

In one word the answer is, No!

PersonalFN reiterates that you must not invest in a sector or thematic fund. Let's assume, India's services sector is going to thrive even in the future, but, is NFO the best option to benefit from the growth?

Logically, any diversified multi-cap mutual fund scheme can invest in companies belonging to the services industries. Nothing stops them from this.

NFOs don't have a past record. As remains the question of Sundaram Mutual Fund's existing track record of managing thematic schemes, you should check yourself.

Bad track record?

Scheme Name 1 Year 2 Years 3 Years 5 Years SINCE INCEPTION
Sundaram Financial Services Opp Fund(G) 7.2 12.2 14.6 23.4 14.8
Nifty Financial Services - TRI 16.8 20.9 19.8 25.8 17.5
Sundaram Infra Advantage Fund(G) 2.3 10.9 10.2 22.9 9.8
S&P BSE 100 - TRI 18.0 16.9 15.5 18.8 10.5
Sundaram Rural and Consumption Fund(G) 8.0 14.8 20.3 25.8 12.9
NIFTY 500 - TRI 16.3 17.0 15.8 20.4 11.2
Data as on September 03, 2018
Returns upto 1-year are absolute, for all other time periods, compounded annualised
Source: Ace MF


What should you do?

Instead of investing in Sundaram Services Sector Fund, invest in diversified mutual fund schemes that have a proven track record and come from mutual fund houses which follow sound investment systems and processes.

Before you invest in any mutual fund scheme, it's imperative to take into account your financial goals, time horizon and your risk appetite. Based on these factors, you should chalk out a personalised asset allocation plan.

Why Good Advice Matters In The Journey Of Wealth Creation

Impact

Amar and Ashwini are working professionals.

They plan each of their weekends differently.

Sometimes they go on a long drive. Occasionally, they go shopping or dine out

Some weekends they simply chill out at home watching their favourite movies.

Rajesh and Rashmi, on the other hand, spare a weekend to discuss financial matters—receivables, payables, household budget, savings, etc.

At times, they discuss their on-the-job experiences—work pressure, officious interventions of the boss, the uniqueness of recently acquired clients, etc.

How do you usually spend your weekend?

Like Amar and Ashwini or Rajesh and Rashmi?

Weekends are meant for relaxation, true, but they can also be utilised to discuss important household matters too. If you are below 35 years old, you probably spend your weekend like Amar and Ashwini. And if you are a little older, your idea of the weekend might be somewhat similar to that of Rajesh and Rashmi.

To read more, please click here.

Has The Rupee Really Depreciated The Way It Looks? Know Here…

Impact

At 71.37 against the US Dollar (US$), Indian Rupee (INR) fell to its all-time low recently. Over the last one year, INR has slumped over 11% against US$.

INR: constantly losing ground for last 1 year…
constantly losing ground for last 1 year
(Source: Investing.com)

This extent of depreciation in the value of domestic currency doesn’t bode well for any country; particularly if the country has a huge dependence on imports.

As you might be aware, imports account for 80% of India’s total crude oil demand. And this, falling currency adds to the inflation trend in India.

However, not everything’s lost with falling currency.

INR depreciation is beneficial to Indian exporters.

To read more, please click here.

SEBI Proposes 'On-Tap' Bond Issue? Should You Invest In Bonds Directly?

Businesses need capital to grow and survive.

At a time when, Public Sector Banks (PSBs) are in a total disarray, satisfying the capital requirements of businesses is a daunting task. For years, the corporate sector has relied primarily on PSBs for project finance and working capital loans.

Of late, PSBs are facing several problems. They are finding it difficult to maintain their asset quality. The constraints on government to recapitalise them optimally is chocking the capital flow in the system. Government borrowing program puts an additional burden on the Indian banking system.

To read more, click here.

Fund Of The Week

The Secret Of Mirae Asset India Equity Fund's Increasing Popularity

Mirae Asset India Equity Fund (erstwhile Mirae Asset India Opportunities Fund) is the flagship fund of Mirae Asset Mutual Fund. Though classified under Multi Cap Funds category, it is primarily an opportunities style fund that has flexibility to invest in stocks of companies across market capitalizations and sectors depending on their attractiveness.

The fund aims to help investors gain from sector or stock specific opportunities. The prudent investment strategies followed by the fund has earned it a tag of being a consistent performer that has rewarded long-term investors well across market cycles.

To read the complete note, click here.


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Financial Terms. Simplified.

Tap Issue: A tap issue is a procedure that allows borrowers to sell bonds or other short-term debt instruments from past issues. The bonds are issued at their original face value, maturity and coupon rate, but sold at the current market price.

A tap issue is also referred to as a bond tap or tap sale.

(Source: Investopedia)


Quote:"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”‒Warren Buffett