  | | October 25, 2013 | | | | | | | Weekly Facts | | | Close | Change | %Change | | BSE Sensex* | 20,683.52 | (199.4) | -0.95% | | Re/US$ | 61.47 | (0.3) | -0.41% | | Gold Rs/10g | 31,785.00 | 815.0 | 2.63% | | Crude ($/barrel) | 108.01 | (2.3) | -2.11% | | FD Rates (1-Yr) | 8.00% - 9.00% | Weekly change as on October 24, 2013
*BSE Sensex as on October 25, 2013 | |
Impact 
In turbulent time such as those prevailing at present, many prefer to be risk averse and look for safer investment avenues such as bank fixed deposits (FDs). And knowing this fact, banks these days are following a less transparent practice of disclosing the effective yield on FDs.
Most banks today to depict the interest rates offered by them are carrying two columns – one for interest rate and the other for ‘annualised yields’– where the interest offered by them is compounded on a quarterly basis for the entire tenure.
So where is the problem?
You see, the problem is in the calculation of yields which the banks are displaying to investors. For instance, a bank offering an interest of 8.50% per annum for its 10-year deposits usually projects that the annualised yield for the same as 13.19%. Now while this is very luring, the premise of this calculation is flawed. This is because, what the bank does is it simply calculates the absolute return (by imbibing the quarterly compounding benefit offered on the FD) and then it divides the same by tenure of the FD. To understand this, let’s take an example here.
Say you invested Rs 1 lakh in a FD offering the aforesaid rate of interest (i.e. 8.50%) and tenure (10 years). Your invested amount would grow to Rs 1.02 lakh at the end of 1st quarter, then Rs 1.04 lakh at the end of 2nd quarter and this process continuing until the tenure (of 10 years) fetches a sum of Rs 2.32 lakh as against the amount invested. This is an absolute return of 131.9%, which the bank divides by the tenure of 10 years and exhibits an annualised yield of 13.19% to lure you.
So the problem lies in the fact that they are projecting an incorrect calculation and are not being prudent in exhibiting a Compounded Average Growth Rate (CAGR); which is more rational method when your investments are held for a period of more than a year. It is noteworthy that CAGR is the best way to compare return rates between two financial products and this is why even the capital market regulator – the Securities and Exchange Board of India (SEBI) has made it mandatory for mutual funds when they give historical returns.
PersonalFN is of the view that the Reserve Bank of India (RBI) should make note of this less transparent practice followed by banks for depicting yields offered on FDs and should direct banks to follow a CAGR when they are displaying yields of products which offer an investment tenure of more than a year.
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Impact 
Onion prices are bringing tears to eyes of a common man these days. Money which you would spend on buying a kilogram of onions would be enough to get one full meal in an ordinary eatery. Last year, onions were selling at Rs 6.0 a Kg at wholesale markets in India but recently they hit an all-time high of Rs 55.0 at Lasalgaon wholesale market, which is the biggest wholesale market for Onions in India.
There are various reasons for such high prices of onions; one of the primary reasons is lesser sowing this season. Besides this, poor weather conditions due to extended and excessive rainfall also affected the crop. Hike in minimum export price and imports from other countries have not helped bring down prices. Whenever onion prices shot up to this extend in the past, income tax officials have raided onion traders. It showed results then but this time, despite of such income tax raids on traders, onion prices are persistently high. Agricultural ministry is of the view that prices may remain firm for a few weeks till new crop arrives.
Along with onion, there are other veggies too whose prices are escalating. Although vegetables have only about 5.5% representation in Consumer Prices Index (CPI), the rate of inflation in this category has been massive. Retail inflation measured by the movement of CPI shows that vegetable prices have gone up 34.93% this September as compared those in September 2012. CPI inflation came in at 9.84% for September 2013.
PersonalFN believes such sharp fluctuations in prices of food articles negatively impact your expenditure budget. Thus, while you plan your finances, you should not under estimate the impact of inflation. No monetary policy measure will have any positive impact on food price inflation unless; supply side constraints are addressed appropriately.
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Impact
It Markets in India are trading near their peak but apparently retail investors are not enthused about it. Retail participation in the market has fallen to 10-Year low in 2013. Despite staying invested for more than 5 years now, many of them are yet to see any meaningful returns; thus they are exiting equities on every rally. Investors are pulling out money even from equity oriented mutual funds. This shows that they have lost confidence in equities and expect markets to stay dull for sustained time. It is interesting to know what view equity oriented mutual funds hold about the market since they are considered ideal for long term investors.
The simplest way to know the view of mutual funds on the market is to analyse their investment pattern and see the weightage of cash and equivalent assets in the portfolio. From the beginning of the Financial Year (FY) 2013-14; markets have rallied around 9% so far but with lot of interim volatility. It is evident from the below given graph that after 4 consecutive months of bad performance, CNX Nifty rebounded in September and returns got accelerated in October thanks to upbeat global sentiment. Now that markets hover near their all-time high, taking directional call has become difficult.
Market performance...
Returns are absolute
NAV Data: October 21, 2013
# Month to date
(Source: ACE MF, PersonalFN Research)
How mutual funds have reacted?
At present, mutual funds are divided. Few of them have raised cash component while others have reduced it. There are also a few players who have largely kept weightage of cash unchanged in the portfolio over last few months when markets rallied. It is noteworthy that smaller as well as newer fund houses have relied on taking active cash calls.
To read more about this news and the view of PersonalFN over it, please click here.
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Impact
Stock market fluctuations are wild. But they are not always sentiment driven. Few informed investors who have vested interest in stock price movement, manipulate prices. Based on positives or the negatives about the company mentioned in the research report; cartels operating in the market either jack up or beat down stock prices. Market participants such as brokerage houses, investment banks and mutual fund houses are already being overseen by the market regulator, Securities and Exchange Board of India, (SEBI) extensively. But given the increased number of cases of stock price manipulations, SEBI now feels the need of bringing all research analysts under its regulation.
Why greater regulation?
Gullible investors invest in stocks based on recommendations of self-proclaimed experts; but often lose money due to price manipulations. SEBI has a mechanism to discourage such malpractices but few in the market find loopholes in regulations and restrictions to control stock prices.
To read more about this news and the view of PersonalFN over it, please click here.
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- • While expenditure of government is expected to rise at 16% as per Budgeted Estimates in the current fiscal; it has become difficult for it to garner higher revenue. Take example of difficulties the Government is facing in achieving its disinvestment target. Disinvestment target for the fiscal 2013-14 stands at Rs 54,000 crore. Although the Government was confident of achieving the target quite comfortably, it is apparently struggling now. In the first five month of the current fiscal it could only fetch about Rs 1,300 crore through disinvestments. The Government was hoping to raise Rs 13,000 crore from the stake sell in Coal India Limited (CIL) and Indian Oil Corporation (IOC).
But faced with opposition of labours to even 5% (lower than 10% target set earlier) stake-sell in CIL; the Government has been forced to postpone the divestment programme. Similarly, in case of IOC, the petroleum ministry is of the view that current stock prices are lower and there is still a lack of clarity on new subsidy sharing formula. This is posing threat to business valuations making the divestment unattractive.
PersonalFN believes failure of Government to grow its non-tax revenue would put pressure on finances and may result in expansion of fiscal deficit. Higher fiscal deficit is bad for investors, as it results in stricter monetary policies. PersonalFN is of the view that, investors should adopt a cautious approach and should refrain from any speculation as it may result in severe losses.
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Effective Yield: The yield of a bond, assuming that you reinvest the coupon (interest payments) once you have received payment. Effective yield is the total yield an investor receives in relation to the nominal yield or coupon of a bond. Effective yield takes into account the power of compounding on investment returns, while nominal yield does not.
(Source: Investopedia)
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Quote : "Setting a goal is not the main thing. It is deciding how you will go about achieving it and staying with that plan." - Tom Landry
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