S&P BSE Sensex*	Re/US $	Gold Rs/10g	Crude ($/barrel)	FD Rates (1-Yr)
21,063.62 | 305.13 1.47%	61.54 | 0.54 0.87%	29,750.00 | 100 0.34%	106.46 | -0.47 -0.44%	8.00% - 9.00%

Would foreign capital flows make equities attractive in 2014?

Impact

You buy stocks or invest in mutual funds to generate wealth in the long run. Buyer in the market is bullish about the prospects of the company while seller is bearish. Going by data it seems Indian mutual funds and retail investors are bearish on Indian companies while Foreign Institutional Investors (FIIs) are bullish. As per the shareholding pattern disclosed by 25 companies (out of 30-Sensex companies) FIIs have raised their exposure in about 18 of them. FIIs bought stocks worth USD 6.5 billion in the December quarter whereas domestic investors sold equities worth USD 4.7 billion. FIIs were seen raising stake in some engineering companies while trimming exposure in consumer non-durable companies.

Should you follow FIIs?
Although Indian equity markets have been relying heavily on FIIs historically, following them would be inappropriate. Goals of FIIs and those of retail investors may be different. Their risk taking capacity too might significantly differ than that of yours. FII flows are affected with developments in the global economy. Events such as tapering of monetary stimulus affect FII sentiment as they always compare competitiveness of investments. If they believe risk-adjusted returns generated by Indian equities might be lower they might exit even if there is nothing wrong with the company. As far as market highs are concerned they are durable only when there is a broad base buying. Irregular flows may flood the markets making them vulnerable to sudden outflows. Going forward, flows of FIIs would depend on the pace of winding down of monetary stimulus programme in the U.S. Political stability post elections would also set the tone for the markets.

PersonalFN is of the view that you should invest keeping your financial goals in mind. Investing as per your personalised asset allocation may help you optimise risk-adjusted returns. You may not have to follow any other investor if you have planned your finances systematically.

Are debt funds worth investing now?

Long term debt funds generated marginal returns in the year 2013. Investors' sentiment was low. As inflation climbed and rupee depreciated RBI started hiking policy rates. Short term borrowing rates too were raised in an attempt of reining in currency speculation. Yields hardened and income funds gave up gains made in the first few months of 2013.

But over last few months, Indian rupee seems to have stabilised against dollar. Moreover, India's foreign exchange reserves grew by nearly USD 15 billion between September and November; suggesting pressure on Balance of Payment (BoP) may ease. To improve inflows of foreign currency, RBI had launched a swap facility for banks to attract foreign capital through FCNR-B deposits. Banks attracted 34 billion US dollars providing some comfort on foreign exchange front. Inflation for the month of December 2013 has been the lowest in previous 6 months. Retail inflation has also fallen in December. Investors, especially the FIIs are hoping that outlook for Indian debt may turn positive as RBI may maintain status quo and even go for rate cuts later during the year.

However, RBI has clarified no single datum point would decide the course of policy action and it would prefer to await some more clarity on various macro-economic indicators. Fiscal deficit has touched 94% of its limit for the current fiscal and likely to overshoot its target. Higher fiscal deficit would be a negative for debt markets. Ahead of Lok Sabha elections, political stability in India would be also a crucial factor to watch out for. On the positive side, inflation is expected to soften further.

FIIs turned net buyers in Indian debt in December for the first time in last 6 months. Liquidity pressures are also easing in the system making the yield curve more neutral i.e. instruments with longer maturities command higher rates than those with shorter maturities. PersonalFN is of the view that you would be better off considering your time horizon before investing in debt funds as no debt fund is safe. Speculating about interest rate movement may prove to be hazardous. You should not hold more than 20% of your debt portfolio in long term debt funds. You shouldn't change your asset allocation with every market movement but should review only occasionally, especially when there is any change in your financial circumstances or preferences of financial goals.

 

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Would I.T. funds continue to outperform in 2014?

Impact

This Information and Technology (I.T.) sector is considered to be less risky than some interest rate sensitive sectors such as banking, auto and real estate. After the dot com boom and the subsequent bust in the year 2000, I.T. remained less favourite in the bull phase of 2002-07. But since markets entered one of the worst bear phases in 2008, Indian I.T. sector started outperforming many others. Over last 3 years, I.T. has outperformed broader markets by a huge margin. The year 2013 was exceptionally well for the sector.
  S&P BSE I.T. vs. S&P BSE 200

Data as on January 14, 2014
(Source: ACE MF, PersonalFN Research)
But a closer look at the graph suggests that the I.T. was performing more or less in sync with the broader markets for most part of the 3-Year period. Only from the mid of 2013 S&P BSE I.T. started outdoing S&P BSE 200.

Why I.T. sector outperformed?
One of the key contributors to this success of I.T. stocks has been the depreciation in rupee which helped I.T. exporters. Some of India's leading I.T. companies earn majority of their revenue in USD as they have a large clientele outside India. Chart above suggests that, depreciation of rupee is a boon to I.T. companies. Rally that started in May 2013 helped I.T. stocks register massive gains. Till then someone who had invested money on January 14, 2011, would have incurred a loss about 10% till May 2013.

To read more about this news and the view of PersonalFN over it, please click here.

Government plans to launch PSU ETF; is it worth investing?

Impact

The Government has set ambitious revenue collection targets which have barely been met till now with just 3 months left for the current fiscal to end. The government had planned to raise Rs 40,000 crore by selling stake in Public Sector Undertakings in the Financial Year (FY) 2013-14; but it has managed to collect a little over Rs 1,300 crore as yet. Indifferences within ministries, opposition by trade unions and poor stock market performance of Public Sector Undertakings (PSUs) are said to be the main reasons for poor performance of the Government on disinvestment front. However, this time, instead of diluting stake by launching Follow-on Public Offers (FPOs), the Government is coming up with an Exchange Traded Fund (ETF) comprising 11 bluechip PSU Stocks.

PSU ETF...
The Empowered Group of Ministers (EGoM) cleared the proposal of finance ministry last week for selling the stake of Government by launching a PSU ETF. The Government is expected to garner about Rs 3,000 crore by this route. Earlier this fiscal, Goldman Sachs has been chosen by the Government as the fund manager for managing PSU-ETF.

To read more about this news and the view of PersonalFN over it, please click here.
 

Insurance penetration in India is very low as compared against global standards. With an aim of using bank network to achieve this goal and give buyers more options, it was suggested that banks should be allowed to sell products of multiple insurers. Backing the proposal of the finance ministry, Insurance Regulatory and Development Authority (IRDA) recently allowed banks to conduct insurance broking. It is also believed that with availability of multiple options banks will stop mis-selling insurance products which they are always accused of doing.

Till now banks were tied up with a single insurer. Under the new format, not more than 50% of the premium shall be emanated from any single client. Furthermore, there is an upper limit of 25% on selling insurance of the insurance company having a same promoter group such as that of the bank. Instead of directly placing any capital requirement, the guidelines require banks to maintain a fixed deposit of Rs 50 lakh with any schedule bank. Moreover, separate books of accounts are to be maintained by the bank now. This might have addressed concerns of RBI.

PersonalFN is of the view that, the primary reason for low penetration of insurance in India has not been lack of distribution network but lack of interest to promote products that suit customer requirements. Assumption that products with standardised features would curb mis-selling appears slightly unconvincing. The bank may still end up selling one of the best products in a particular category but unless that satisfies the insurance requirements of the customer; it wouldn't serve its purpose. PersonalFN believes buying term insurance optimises the benefits.

Inverted Yield Curve: "An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession. "

Quote:"In the long run, it's not just how much money you make that will determine your future prosperity. It's how much of that money you put to work by saving it and investing it." - Peter Lynch