How the crisis came home

Capitulation is actually a military term. However, last fortnight it was resonating across world markets as equities tumbled scarily. In tandem, commodities led by crude, and virtually all global currencies barring the dollar, dipped to new lows. Fears of a deep, long global recession gained ground even as the UK economy shrunk in July-September— for the first time in 16 years. 

Chaos reigned back home, too. As the Sensex plunged to a threeyear low, and blue-chip stocks crashed by 40-50 per cent, talk of sovereign stabilisation funds and “unconventional” measures to infuse liquidity gained currency. “With other sources of funds drying up, the banking sector is saddled with twice the normal requirement for funds,” says Jitender Balakrishnan, Deputy Managing Director, IDBI Bank. Despite the central bank having pumped Rs 185,000 crore (till the time of BT going to press) into the banking system via a series of measures (see Interview with Reserve Bank of India Governor alongside), banks are still fearful of lending, and are parking surplus funds with the central bank. “Banks have not resumed lending to consumers or companies. It takes time for policy actions to trickle down,” says A.K.R. Nedungadi, President and Chief Financial Officer, UB Group. He hopes that when his company approaches the market for funds in another two months, things will have stabilised.

If the fall of Wall Street giants was a shock, then the rapidity of the reverberations on Dalal Street is unnerving. What happened? And why? Isn’t the Indian economy largely insulated from the global capital pool? How did the crisis come home?

A recent paper co-authored by Jahangir Aziz, Ila Patnaik and Ajay Shah under the aegis of NIPFP-DEA tries to explain the complex linkages between the seemingly unrelated events. Their hypothesis in brief: in trying to manage the exchange rate, growth and inflation, the central bank had kept the system chronically tight on liquidity. Several Indian companies that had been using the London money market fell short of dollar liquidity in mid-September. So they borrowed on the money market and took US dollars out. At the same time, corporations were liquidating their holdings in mutual funds. Mutual funds, too, then started making claims on the money market, leading to a colossal shortage of liquidity. This was accentuated by factors such as advance tax payments and sale of dollars by RBI to prop up the rupee.

Plausible? Perhaps, but that may not be the only explanation for the domestic turmoil, say finance heads of companies. “Yes, we did sell over Rs 200 crore of our holdings in mutual funds; yet, that was to meet our domestic requirements. The redemptions would not have happened if the consumer market was growing,” says the Chief Financial Officer of a consumer durables company. The rupee’s fall also hastened the outflow.

Whatever the reason, the heightened risk perception is cascading through the economy. Sample: fear of deteriorating credit quality of the papers subscribed by mutual funds under the Fixed Maturity Plans (FMPs), especially those by realtors and non-banking finance companies. On the liquid funds, credit rating major CRISIL gave eight debt mutual funds schemes a 30-day period forrealigning their portfolios in line with credit quality requirements so as to avoid a rating action. Though this represents a fraction of the overall investments, it indicates rising stress in the face of deteriorating macro-economic fundamentals.

Is there a way to manage this extraordinary crisis? In their paper cited above, the three economists point to a four-pronged strategy—increase rupee liquidity, increase dollar liquidity, refrain from artificial exchange rate stability, and remove currency mismatches. Author Ajay Shah believes the RBI has moved quite a bit on providing rupee liquidity but the weakest links in the coming days will be dollar liquidity and currency mismatches.

However, as M.M. Miyajiwala, CFO, Voltas, says: “In this scenario, normal measures by the RBI alone will not help.” The government, too, can help with measures like increased government spending. So would measures like a direct release of dollars to large companies.

Source:http://businesstoday.digitaltoday.in/index.php?option=com_content&task=view&id=8374&sectionid=5&issueid=42&Itemid=1

Investment myths: Lets break some!

There are many myths in investment management …let us break some of them:

Buy low and sell high: Such a simple statement to make, and impossible to do in real life. Buy cheap and sell dear. People would like to think this is easy to do, but remember whether a share is high or low is something you know only in retrospect. For e.g. if you buy Hdfc ltd. today at say Rs. 2400. Six months later if the price is, say Rs. 3000 and you sell it, you would be right. However if you buy it today at Rs. 2400 and 6 months later it is at 2100, you would be wrong. So it is a nice maxim which is easy to espouse, but difficult to do.

Have greed when others have fear, and have fear when others have greed: A very good, brilliant saying again difficult to implement. When the index was 6000, there was a program on one of the Television channels. The 3 speakers were Comrade Raja, Shankar Sharma, and Rakesh Jhunjhunwala. Rakesh said people should not keep their money in savings bank account but put it in the share market. Raja was of course on a spiel about how Americans are here to corrupt (Oh completely as an aside did we hear any Comrade complain about Russia in Georgia?) us etc. Shankar Sharma told Rakesh “Aha, now that the market has reached 6000, you want the common man to lose money?” and put RJ on the defensive. However what happened to the market after that is well known! So to be fearful when others are greedy and greedy when others are fearful is nice to say, difficult to implement.

as life goes on…we will break some more myths.

What is debt market?

There is no single or fixed location or exchange where debt market participants transact. Also very sadly small investors have no role to play. Which means as a lay investor you can invest in equities (far more difficult to understand) but cannot invest in debt markets (easier to understand).

Dealings are done over phone, and confirmed by fax, email, etc. It is a virtual market (on the net). All the Indian stock exchanges (Bse, nse, otcei) have a separate debt market segment. Debt markets deal with Government securities market and Bond markets.

Sadly in this market the only issuer is the government of India. The government has a vested interest in keeping the interest rates low, and we cannot do anything about it!

What are financial markets?

Financial markets do what all markets do - price discovery. Fish markets find the price of fish, gold markets the price of gold, job markets determine your salary. The price of money means the financial markets mobilize savings into investments - and channel them for various uses. It determines the prices of bonds, equities, warrants, etc. Broadly there are four broad classifications -

a. Debt market b. Money Market c. Capital Market and d. Forex market

Each of them are of course interlinked - and the whole world markets are linked in some form or the other.

What is the Money Market?

Money market is described as the market where short term debt is dealt with. Thus financial instruments which can be quickly turned to cash is dealt with in the Money Market. Short term normally means holding period of < 1 year. The asset should be very liquid - ease of convertibility to cash, and the transactions should not be expensive to execute.

It is a specialised market geared to cater to a specialised set of buyers (lenders) and sellers (buyers).

What are SLR securities? (Statutory liquidity ratio)

RBI fixes SLR (statutory liquidity ratio) from time to time - currently it is at 25%. RBI requires banks to maintain 25% of Net Demand and Time Liabilities (NDTL) which is to be maintained on daily basis by investment in cash (other than CRR) and unencumbered prescribed Central and State Government securities, Treasury bills, and Government Guaranteed Bonds. These securities are approved securities for SLR purposes under section 24 of the Banking Regulation Act, 1949, and Indian Trust Act, 1882 and are issued under Public Debt Act, 1944.

The entire investment has to be made only in G Secs and other approved securities.

Currently the RBI is trying to reduce the SLR below 25% - but that has to happen only with the Parliament’s concurrence.

What is CRR?

Cash Reserve Ratio (CRR) is a regulatory reserve requirement under section 42(1) of the Reserve Bank of India Act, 1934 which is to be maintained as CASH or CURRENT ACCOUNT balances with Reserve Bank of India, along with gold by all Scheduled Commercial Banks as a percentage of its Net Demand and Time Liabilities (NDTL).

The CRR has to be maintained on reporting Friday.

Offer document: What is it?

For many investors “mutual fund form” means one single page that your Relationship Manager / IFA thrusts in front of you while you invest, correct? That is not so. A mutual fund form means a 30 page document - called “Key Information Memorandum” - this itself is an abridged version of the “Offer Document”. Of course the word “offer” comes from the Indian Contract Act, and is an offer from a fund house to the potential investor. The potential investor is supposed to read the “offer document” and sign the form. This is because when he signs the form, he is saying “I have read and understood the terms….”. So let us see what is an offer document and what does it contain….

Offer document (OD) describes a product, and is the most important source of information for prospective investors.

· AMC (Asset Management Company) or the sponsor issues it.

· This (OD) is the primary vehicle for the investment decision.

· It is a legal document that protects and governs the right of an investor.

· Key information memorandum (KIM) is the abridged version of offer document. Application forms are issued along with the KIM.

· SEBI has designed standard format for issue of OD and KIM.

· Offer document and the KIM is valid for two years.

· ODs are to be updated, revised and printed once in every two years.

· Changes made in between these two years are circulated among investors in form of addendum or some other source of communication to investors.

· Changes made in the OD has to be filed with SEBI and should be made available at service centers and in the offices of distributors/brokers. Much easier to find it on the net - all mutual funds have decent websites.

· Offer documents should contain

- Summary information at the cover page containing name, type of the scheme, name of AMC and the mutual fund, opening and closing date of the offer, price of units, highlights of the scheme and most importantly disclaimer clause by SEBI.

- A glossary of defined terms used in the offer document.

- Risk factors – standard and scheme specific

- Due diligence certificate to be signed by Compliance Officer/CEO/Managing Director/Whole Time Director

· The above points should be in the same sequence.

· Offer document contains fundamental attributes of the scheme –

- Type of the scheme

- Investment objective

a) Investment pattern

b) Investment policies

- Load and expenses

· Offer related information – all practical information needed by investor and agents to invest in the proposed scheme.

· Condensed financial information for scheme launched during three fiscal years.

· Constitution of the mutual fund.

· About objective of the fund.

· Activities of the sponsor.

· Name and addresses of the Board of Trustees/Directors

· Management of the fund

· Associate Transactions and borrowing policies

- In case, scheme has invested more than 25% of its net assets in group companies.

a) Business given to associate brokers should be in the limit of 5% of sale and purchase made.

· NAV determination, valuation and accounting policies.

· Procedure for repurchases.

· Tax treatment of investments made in the scheme.

· Investors’ rights and services under the scheme.

- Access to information on NAV computation and unit price.

- Investors friendly services provided by the scheme and documents available for inspection by the investors.

· Brief description of investor complaint history for the last three years of existing schemes and their redressal mechanism.

· Any penalties pending litigation or proceedings should be mentioned in the OD to alert the investors.

Call touches 14-day high as banks rush for funds

Lenders borrow Rs 56,000 cr through RBI’s repo facility to meet reporting needs.

Call money rates were back in the double-digit zone after a gap of two weeks as banks borrowed funds ahead of Bhai Dooj tomorrow, when markets will remain closed.

In addition, banks borrowed over Rs 56,000 crore through the two-day repo auctions as against Rs 42,770 crore on Monday. During the first liquidity adjustment facility (LAF) session this morning, 35 banks submitted bids to borrow Rs 27,125 crore, while in the second auction in the afternoon, there were 33 bids for Rs 28,970 crore. In the afternoon session, two banks also parked Rs 10 crore with the central bank through the reverse repo route.

The high demand for funds was evident in the call money market, with their rates hitting 9.75 per cent in early trade. During the day, call rates touched a high of 13.55 per cent and the weighted average was 11.25 per cent, according to the data on the Clearing Corporation of India website. On Monday, the weighted average call rate was 9.34 per cent and rates had ranged between 6 and 10 per cent.

The volumes in the call money market were estimated at Rs 21,890 crore compared with Rs 17,360 crore on Monday.

Amid some liquidity tightness, dealers said, banks borrowed in the market to meet their reserve requirement ahead of the Reporting Friday. Banks have to report their cash balances to the Reserve Bank of India (RBI) every fortnight and usually they try and complete most of their borrowing in the first week itself. Two holidays during the week, including for Diwali yesterday, are adding to the pressure.

“Last fortnight was not the correct indicator of liquidity since banks may have had a surplus because of RBI’s decision to cut the Cash Reserve Ratio (CRR) with retrospective effect. Banks are playing it safe as they always like to have additional money instead of falling short of the requirement,” said a bank chairman.

RBI’s dollar sales in the foreign exchange market are also putting pressure on the rupee as the central bank is trying to check depreciation of the Indian currency against the greenback.

Wednesday’s closing call rate of 13.50 per cent was the highest since October 10, when it had touched 13.75 per cent. The repo borrowings were also the highest since October 15, when banks had raised Rs 55,340 crore from RBI amid tight liquidity conditions in the market.

The weighted average collateralised borrowing and lending obligation (CBLO) rates were also marginally higher at 8.36 per cent compared with Monday’s 8.08 per cent. The volumes, however, stayed around the Rs 24,000-crore level.

Through CBLO, entities such as non-banking finance companies (NBFCs), mutual funds and primary dealers raise short-term money against securities.

Source: http://www.business-standard.com/india/storypage.php?autono=338665

4 reasons why you should buy while FIIs sell

LET’S assume that you have invested in both, the US and the Indian stock markets. Now, it turns out, while your Indian investments are doing exceedingly well, the US portfolio suffers acute losses.

What is the most obvious thing you would do?

You would book profits in India, in order to make up for the US loss. Right?

This, in a nutshell, is the current scene today. The only difference is that the investors are foreign institutional investors (FIIs). These are institutions that operate mutual funds, hedge fund and portfolio management services abroad and invest the fund money in other countries. FIIs by definition, have world wide investments. So, not only India but other Asian markets are also facing a sell off.

What happens when FIIs sell?
FIIs have a huge exposure to the Indian market. Due to this, their buy and sell actions have a considerable impact on the market. 


Recently, FIIs have been on a selling spree. This is one of the reasons for the markets to register steep falls. 

If FIIs are selling, should you buy?

The US is in turmoil but there is nothing wrong with us. The following factors just reaffirm this:


1. Toxic securities (such as MBS and CDOs) are conspicuously absent in our market, thereby preventing us from catching the infection.

Mortgage Backed Security (MBS) and Collateralized Debt Obligations (CDOs) are securities which are backed by a pool of mortgages that are paid by home loan takers in the US. So, if a home owner defaults on his repayment, the MBS holder suffers. Read all about these instruments and how they caused the big collapse . 


2. As far as domestic operations of banks are concerned, RBI has been extremely strict by continually increasing the risk weights to real estate and housing loans, thereby discouraging banks to get ahead of themselves, in a bid to increase business.

See: Why Indian banks are safe 

3. Unlike the West which has a negative savings rate, our domestic savings rate is more than 35 per cent, that means, on an average, Indians save 35 per cent of their income. So, even if there is a protracted slowdown, we would still have considerable demand for products and services, which in turn will help the economy to achieve good growth.

4. Amongst all emerging economies, our export to GDP ratio is the lowest. This means that even if our exports went down, our growth won't be significantly impacted. Therefore, even a full blown US recession will shave only around 40 to 60 basis points off our GDP growth rate. So, we will still have the capacity to chug along at an 8 per cent plus rate.


India - a safe haven
The fundamentals of our economy make our market nothing short of a safe haven during such turmoil. So, I don’t care if the market falls to 9,000 or even lower. Once this storm blows over, things will be back to normal.

In the meanwhile, your fortune as an investor would depend on how you react or, rather, don’t react to the situation.


The great fall of the market isn’t going to suddenly reverse the quality of the companies listed. If anything, I am looking forward to picking up some cheap but quality stuff.

Source: 

May the festival of lights brighten up you and your near and dear ones lives !

Happy Diwali!

The word "Diwali"is derived from the Sanskrit word "Deepavali", which is composed of two words - Deepa meaning Light and Avali meaning a Row. It means a row of lights and indeed illumination forms its main attraction. Diwali leads us into Truth and Light and is celebrated on Amavasya.

Happy Diwali!


Diwali is one of the most popular festivals of India and of Hindus. Diwali celebrations one of the most eagerly awaited festivals in the Indian subcontinent. It is colloquially known as the "festival of lights", for the common practice is to light small diyas (oil lamps) and place them around the home, in courtyards, verandahs, and gardens, as well as on roof-tops and outer walls. In urban areas, especially, candles are substituted for diyas; and among the nouveau riche, neon lights are made to substitute for candles.


The celebration of the festival is invariably accompanied by the exchange of sweets and the explosion of fireworks. As with other Indian festivals, Diwali signifies many different things to people across the country. In north India, Diwali celebrates Rama's homecoming, that is his return to Ayodhya after the defeat of Ravana and his coronation as king; in Gujarat, the festival honors Lakshmi, the goddess of wealth; and in Bengal, it is associated with the goddess Kali. Everywhere, it signifies the renewal of life, and accordingly it is common to wear new clothes on the day of the festival; similarly, it heralds the approach of winter and the beginning of the sowing season.

Diwali offer: ‘Best time to invest’

As the markets crashed with Sensex losing more than 1000 points on Friday, mutual funds have not faced much redemption pressure, though the NAVs of their equity schemes would have seen erosion in their value.

A couple of mutual funds have even noticed inflows at these levels, said a fund manager.

While there is not much unanimity of fund managers view as far as the bottoming out levels are concerned, most feel that investing in mutual funds is a safer bet in these times.

“Invest money that you don’t require for 3 to 5 years. Sustainable investments assures better returns,” said Mr Waqar Naqvi, Chief Executive Officer, Taurus Mutual Fund.

“One should keep investing at all levels. You don’t know whether this is the bottom or there is a further down.”

It seems to be a Diwali sale and investors should invest at these levels, which are at a huge discount, said Mr Paras Adenwala, Chief Investment Officer, ING Investment Management. 

The bottom levels of the market cannot be predicted but there is tremendous value in the market, subject to the global market behaviour, said Mr Adenwala.

The recent falls have presented the investors an opportunity for investors who under-own equity to increase their exposure to equity as an asset class, said Mr Sanjay Sinha, Chief Executive Officer, DBS Cholamandalam Asset Management.

While the view of fund managers is that it is the right time to start investing considering that the fundamentals of the economy are still intact, some raise doubt over whether there will be interest of retail investors considering the gloom in the market. 

While FIIs are pulling out money, the question is that what is going to replace those investments, said Mr Rajiv Vijay Shastri, Lotus India Asset Management Ltd.

The advice to the retail investors is to start investing at these levels, but the concerns is that whether they have the money or the ability to invest, he said.

Those who have invested in systematic investment plans should not exit now and those who want to do one-time investment should wait till the market bottoms out, said a fund manger.

According to fund managers, mutual fund investors have mostly been staying invested despite the huge market fall as they would expect the market only to rise from now on.

In India, an investor exposure to equity is relatively low compared to other financial assets. So even though the markets have fallen substantially in the past few months, the value erosion of total investments is not much, said Mr Sanjay Sinha, DBS Cholamandalam Asset Management.

Market has been continuously falling for weeks and to a large extent mutual funds have been holding cash, in some cases even 35 per cent, said Mr S. Krishnakumar, Fund Manager & Head Research, Sundaram BNP Paribas Asset Management Company Ltd.

Though comparatively smaller portions are being invested, mutual funds are waiting for a bottoming out of the market for further investments, he said.

Sensex crashes on eve of Diwali

Joining a global equity rout on worries about a sharp global recession, domestic indices fell to their lowest levels in nearly three years on “Black Friday” as the benchmark BSE 30-Share Sensex tumbled by 1070.63 points to close at 8701.07.

The index had last tumbled below 9000 in November 2005. 

The sell-off began in the morning session itself — led by realty, oil and gas, bank and metal stocks — as the half yearly review of the Reserve Bank of India disappointed the markets, which were expecting some more measures from the central bank to expand liquidity in the system. 

Signalling what could be a dark Diwali on Dalal Street, as many as 350 securities hit their all-time lows.

These included big names like Reliance Power, Cipla, Ranbaxy, Ambuja Cement, Hindalco, Jet Airways, Suzlon Energy, Idea Cellular and realty majors DLF Ltd. and Unitech.

The RBI had announced a slew of measures to assuage markets in the last one month, including the repo rate cut by 100 basis points four days back and a cut in the Cash Reserve Ratio — a portion of the deposits that banks have to keep as a reserve — to 6.5 per cent from October 11. 

However, the sell-off intensified with the domestic as well as the foreign funds hammering Indian stocks in line with its Asian peers whose stocks tumbled on fears of a severe global downturn. 

In the bloodbath, 20 stocks from the 30-Share Sensex fell more than 10 per cent. This was the steepest fall in any single trading session after a 1,408-point plunge on January 21 this year. A broader index, the NSE 50-Share Nifty, lost 359.15 points to close at 2584. The Sensex fell 1204.88 points at the day’s low of 8566.82 in late trade, its lowest level since November 23, 2005. Nifty hit a low of 2525.05 in late trade, its lowest level since November 11, 2005.

Meanwhile, announcing its stance of monetary policy for the remaining period of 2008-09, the RBI kept all the key rates unchanged even as it lowered its 2008-09 growth forecast to 7.5 per cent to 8 per cent from a previous forecast of around 8 per cent. 

“The global downturn may be deeper, and the recovery longer than expected earlier,” said RBI Governor D. Subbarao, here. The central task for the conduct of monetary policy has become more complex than before, with increasing priority being given to financial stability. The current challenge, according to Dr. Subbarao, is to strike an optimal balance between preserving financial stability, maintaining price stability, anchoring inflation expectations and sustaining the growth momentum. 

European shares — the U.K., French and German — lost between 8.1 and 9.79 per cent on data suggesting Britain would enter a prolonged recession. 
Rupee breaches 50-mark 

The rupee breached the historic 50-mark intra-day against the U.S. dollar on sustained demand for the greenback amid its sharp rise against major currencies. It, however, recovered after the announcement of the monetary policy review and closed the day a little lower at 49.95/96.

http://www.hindu.com/2008/10/25/stories/2008102558300100.htm

Lending, deposit rates may not change for now

Banks non-committal about impact, adopt a wait-and-watch policy.

After injecting Rs 1,00,000 crore of liquidity through a cut in the Cash Reserve Ratio (CRR) in the last ten days, the Reserve Bank of India (RBI), in its mid-term review of the annual policy, kept things simple — no more cuts in any rates. CRR is a percentage of the deposits that banks have to keep with RBI.

For investors in bank fixed deposits, it could mean good news, at least for some more time. Banks, which have been trying to attract funds, may not immediately cut deposit rates. At present, most banks are offering 10-10.75 per cent for deposits between one and two years. “Banks are still competing to raise the resources, so deposit rates have seen an upward movement,” said K R Kamath, chairman and managing director, Andhra Bank.

According to M S Sundara Rajan, chairman, Indian Bank, though long-term interest rates (over five years) and short-term (3-6 months) interest rates have come down, medium-term rates (1 year) are still holding firm. “We will have to wait for some more time before any significant changes occur,” added Sundara Rajan.

No immediate change in deposit rates also implies that the lending rates are likely to stay high. “As long as the cost of funds remains high, it is tough to reduce lending rates,” added Kamath. Most bankers felt that while the repo rate cut is a signal for them to pass on the advantage to consumers, it can happen only gradually.

“Banks will have to wait for large-size deposit rates to settle. It will take 1-2 months to pass the benefit of lower cost to consumers,” said B A Prabhakar, executive director, Bank of Baroda.

Risk-reward ratio is looking very attractive: Hedge funds

As the Indian market went into a tailspin yet again on Friday, the finger of blame once again pointed to leveraged hedge funds, which 
are trying to cut their 
losses and run. But some global fund managers and hedge fund officials maintain the crash was accentuated by too many leveraged players rushing for the exit door at the same time, and not just hedge funds alone. 

“Money is flowing out of every emerging market, not only in India. How does one differentiate between a hedge fund and local mutual fund selling,” asks Amit Bhartia, partner, GMO (Grantham, Mayo, Van Otterloo), a global institutional money management firm managing $120 billion of assets. 

“For any country today, you need serious policy action to stop the carnage. What is worrying is that in a country like India, actions are more reactive than proactive. What is the need of the hour is a serious statement and policy action by government to jump-start infrastructure and maintain growth,” he adds. 

So far in 2008, foreign institutional investors (FIIs) have pulled out over $10 billion from Indian equities at the net level. “In the very short term, there are redemption pressures on domestic mutual funds and hedge funds which have to raise cash. 

Offshore hedge funds are increasing cash ahead of redemptions which they have to pay at the beginning of the next quarter ie January 2009,” said Sam Mahtani, director of emerging markets at F&C Investments which helps manage $2.8 billion in global emerging markets. 

As per a recent analysis by Credit Suisse, hedge funds are sitting on close to $800 billion in cash. On India, Mr Mahtani is of the view that the stock market is likely to remain volatile over the next few weeks and the market is close to a bottom, thereby presenting attractive buying opportunities. 

“We believe the risk-reward ratio is looking very attractive, as we are close to crisis level types of valuations. We see a 5-10% potential downside from here, while the potential upside could be between 30-40% for anyone with a twelve month view. If any one is willing to take a long-term view, this is an extremely attractive time to buy India,” he added. 

Mr Mahtani is betting on frontline. “Once sentiment changes, local and foreign investors will go back into big stocks. Mid-caps, however, could continue to be under pressure.”

Source:http://economictimes.indiatimes.com/Market_News/Risk-reward_ratio_looking_attractive/articleshow/3638730.cms

The dummy's guide to making money when the markets are down

Two Business Standard analysts tell you there’s no time like now to fatten your wallet.

WHO SAYS THE GOOD TIMES ARE OVER?
Shobhana Subramanian

With the stock markets having come off by close to 50 per cent from their peaks in January this year, this should be a good time to buy into some blue chip counters. After all, the India growth story is far from over, so what if the economy grows at 7 per cent and not 9 per cent for a couple of years?

The case for Indian equities remains as strong as ever — India will continue to be the second-fastest growing economy in the world, after China. The fundamental story with a strong domestic market, large pool of skilled manpower and entrepreneurial talent, remains compelling.

Moreover, there are plenty of bargains — it’s almost a fire sale out there. Valuations, usually measured by what is called a price-earnings multiple, are now near their lowest levels in the last four or five years.

Remember, it’s impossible to time the market — one rarely catches either the peak or the bottom. Also, as some wise soul pointed out, “It’s not timing the market but time spent in the market that matters.”

Equities have historically given very good returns over a three to four year period or even a longer horizon; all it takes is some patience. It’s important not to get too greedy and to be able to let go after one has made money; the trouble with most investors is that they are reluctant to sell when prices are rising.

Don’t wait for returns of 60 and 70 per cent; cash out if you’ve made even 40 per cent because no other asset class gives you that kind of return, and that too tax free — that’s if you’ve held the shares for more than a year.

For those who do not have the time to keep track of stocks, the best way to go about it is to invest in mutual funds through what is called a “Systematic Investment Plan” or SIP.

Essentially, the idea is to invest a small amount every month so that it doesn’t strain one’s finances and one gets a good price for what one’s buying. There are all kinds of mutual funds — index funds that mimic the indices, large-cap funds which invest in bigger companies, mid-cap funds that take bets on smaller firms, sector funds that look at options in different spaces such as infrastructure or pharmaceuticals.

There are also what they call balanced funds — schemes that invest some of your money in fixed-income paper and the rest in equities. You can take your pick but for starters stay with large cap diversified funds. It’s important to choose a good fund house — a glance at how they have performed over the years should give you an idea of which have been the better performing fund houses.

The other way to get an exposure to equities is to buy what are called Unit Linked Insurance Plans (ULIPs) which bring with them an insurance cover. ULIPs are pretty much the same as mutual funds though many of them are expensive in that the upfront fees are rather high.

Again, there are several combinations of debt and equity that one can choose from. Remember, equity is risky, you must be prepared to lose money, but I’d say if you’re young — below 35,or even below 40 — this is a good time to invest in the market. You could put in as much as 30 per cent of your savings into equities.

The rest can be put away in what are call fixed-income instruments such as fixed deposits (FD) with banks or Government of India bonds. They are safe and also liquid, because you can break an FD by paying a penalty, but they hardly cover you for inflation.

But interest rates appear to be topping out, so here’s a chance to lock into long-term (three year) money at 10.5-11 per cent, which will fetch you about 7 per cent, post tax. If you think you can do without the money for a longer time, say four years, you could opt for longer term deposits.

FMP today is a four letter word but fixed maturity plans have given good returns in the past. I would like to think there are responsible fund managers who would not invest the money in sub-standard paper or in paper issued by real estate firms.

Perhaps one could wait a while for the liquidity situation to improve and then buy into an FMP. The returns are better than those on fixed deposits, especially if the paper has a maturity of more than a year because there are tax benefits to be had. Again, stay with reputed fund houses.

Finally, since Dhanteras is round the corner, do buy some gold. It’s always a good investment. And if you still have money left over, go party!

TAKE ADVANTAGE OF THE MARKET
Joydeep Ghosh

Where do you invest? In these troubled times, it’s a tough question to answer. With the stock markets down almost 50 per cent in the last 10 months, investors no longer have much confidence in equities. The good news is that banks have been consistently hiking fixed deposit rates — 10-10.5 per cent for deposits of between one and two years.

And gold, whether the metal per se or exchange traded funds (ETFs), has been quite a hit. With returns of around 25 per cent from gold ETFs in the last one year, it well ought to be.

But while fixed deposits and gold ETFs look attractive, parking my entire funds in them would mean that I will have no exposure to equities. While I might be tempted to do this in the present market, when the situation changes, my returns in debt would start coming down.

Also, it would imply that I would be scrambling to move my money from debt to equity, and vice versa, every few years. Since I would be inevitably entering the stock markets when they are on the rise, my returns would come down, and substantially at times.

The only way to resolve this is by keeping things simple. Once I have exhausted my Section 80C commitments (Rs 1 lakh), which would include investments in equity-linked saving schemes, public provident fund, employee provident fund, national savings certificates, principal payout on home loans et cetera, and also taken care of my insurance needs under Section 80D, I will create a portfolio.

For starters, there should be an asset allocation that will change according to risk appetite and income. I would prefer 30 per cent in debt, 10 per cent in gold ETFs and the remaining 60 per cent in equities.

Here’s the scenario. For instance, if I have a monthly take-home of Rs 50,000 per month and cash of Rs 3 lakh in my savings account, I will immediately invest a lump sum of Rs 1.8 lakh in debt, gold ETFs and index funds. I will build the equity portfolio through four monthly systematic investment plans (SIPs) of Rs 2,500 each. The advantage: I will have cash of Rs 1.1 lakh in my savings account for emergencies.

There is further classification. In debt, there are options of short-and long-term mutual funds, fixed deposits, fixed maturity plans (FMPs) and others. In equities, there are stocks, equity diversified funds, sector funds and so on.

I would start by investing 30 per cent in debt — 20 per cent (Rs 60,000) in bank fixed deposits, 10 per cent (Rs 30,000) in FMPs of mutual funds and another 10 per cent (Rs 30,000) in gold ETFs.

By getting into fixed deposits of over one year, I would create a stable part of my debt portfolio that will give me 10-10.5 per cent returns. But since the interest earnings would come under the head of “income under other sources”, my tax payout will increase.

On the other hand, 10 per cent in FMPs (for 13-14 months) of mutual funds would give me double indexation benefits. That is, if I had invested in an FMP on 20 March, 2008 and it’s maturing in 10 May 2009, my returns will be taxed at 10 per cent (without indexation) or 20 per cent (after inflation indexation benefit of 2007-08 and 2009-10). Yes, the risk is higher in FMPs, but with returns hovering around 11-11.5 per cent, it’s worth it.

An investment of Rs 30,000, or 10 per cent, in gold ETFs will ensure that I am able to take advantage of the gold rush.

As far as equities go, Rs 60,000 or 20 per cent will go into index funds because of the nominal entry load and expenses. With the Sensex down at sub-9,000 levels, any rise will ensure that I am able to take advantage of it, even if it happens after a while.

The other two equity investments will take care of safety and aggression. I will start four SIPs (Rs 2,500 each), three in large-cap equity diversified funds and one sector fund. I would look at research data on the performance of the top 10 funds and invest for a minimum of three years.

Among sector funds, I will opt for an infrastructure fund simply because I believe that this is an important need of the Indian economy that will be addressed sooner or later. And I will invest in it for a five-year period. The sector fund will compensate for the slightly-lower returns from my index and equity-diversified funds.

Source:http://www.business-standard.com/india/storypage.php?autono=338301&chkFlg=

How to make tax gains on stock market losses

Stock markets have tanked big time, spreading widespread, contagious panic, pain and gloom the world over. 

For equity investors, the pain is, of course, real though not unusual given that share prices routinely go through bullish and bearish cycles. 

An array of preferential tax treatment on equity investment offers some balm to investors bloodied by capital losses. 

Tax gains on capital losses 

Your investments may not always result in capital gains. A loss from the sale of a long-term capital asset (such as investment in equity or equity mutual funds held for more than 12 months) can only be set-off against long-term capital gains. 

On the other hand, a loss from short term capital asset is allowed to be set-off against both short term and long-term capital gains. 

How to set-off capital losses 

Accordingly, to obtain the maximum benefit one may use the following order of priority to set-off capital losses: 

First, try setting off against short term capital gains not subjected to securities transaction tax (STT); this will save 30 per cent tax (since slab rates are attracted); 

Second, try setting off against long term capital gains not subjected to STT and thus save 20% tax. 

Last, try setting off against short-term capital gain subjected to securities transaction tax. 

Where capital loss cannot be set-off and tax mitigated during the ongoing financial year, it can be carried forward to the next year provided you file a loss return along with your return of income. 

In fact, you can carry forward such losses for up to eight years 

Zero tax on dividends 

Dividends are the distribution of a portion of a company's earnings to its shareholders in proportion to his / her holding in the company. 

The dividend distribution may be in cash or kind entailing the release of a company's assets. 

For this purpose, dividends mean and include: 

Distribution of debentures or deposit certificates to shareholders, and bonus shares to preference shareholders; Distribution in cash or kind on liquidation of a company to the extent attributable to accumulated profits of the company; Distribution by a company to its shareholders on reduction of its share capital to the extent of accumulated profits of the company. 
All such 'dividends' received from a domestic company, whether interim or final, are exempt from tax in the hands of the investor. 

On the other hand, dividend received from an investment in a foreign company is taxable. 

However, an investor can reduce his or her tax burden to some extent by claiming deduction for related expenses, such as collection charges, interest paid on money borrowed to purchase the stock, if any. 

Zero tax on long term capital gains from equity 

Capital gain is the increased value of any capital asset (in this case, shares) in relation to its purchase value. 

However, this gain is said to be realised only when the investment is sold, and not otherwise. 

On the sale of equity or preference shares, securities listed in stock exchange, units of Unit Trust of India or units of mutual funds, or zero coupon bonds, the nature of capital gain (difference between the sale consideration received and the purchase price plus costs incurred to realise the proceeds) depends on how long you held the security concerned. 

If you held it for 12 months or less, the sale results in short term capital gains. 

On the other hand, if the security was held for more than 12 months, its sale results in long term capital gain. 

Any short term capital gain arising from the sale of equity shares or units in a recognised stock exchange, and on which securities transaction tax is charged, attracts a flat short term capital gain tax @15%. 

However, if the sale is effected through an unrecognised stock exchange, the short-term capital gain is added to the investor's total income and attracts tax at the appropriate income tax slab rate applicable to the investor. 

A tax free investment 

Long-term capital gains arising from the sale of equity shares are exempt in the hands of an investor if: 

the sale is effected through a recognised stock exchange, and also when units of equity-oriented funds are sold back to a mutual fund, and has been charged with securities transaction tax in respect of such sale. If the sale is not effected through a recognised stock exchange then tax @ 10% is levied if the indexation benefit is not availed, and at the rate of 20% if the benefit of indexation is availed. 

Clearly, equity investment held for more than 12 months is more tax efficient; in fact, it's tax-free! Such exemption is applicable to bonus shares and right shares also. 

Also, since any long term capital gain arising from sale in a recognised stock exchange is tax exempt, while no such concession exists in the case of sale in unrecognised stock exchange, it is obviously wiser to sell your investment through a recognised stock exchange by paying the very small transaction tax. 

Tax implications of rights issue 

Right shares are shares issued to its existing shareholders by a company which opts not to approach the public for raising its required capital and instead chooses to do so from its existing shareholders. 

The tax implications of right shares are the same as in the case of any other shares which an investor may acquire. 

Thus the dividends received on rights shares are tax free in the hands of an investor. 

Hence, in addition to the benefit that an investor typically gets rights shares at a price lower than the market price, regular dividends received from them are also currently not taxable. 

However, when these shares are sold in the market they attract tax either as short-term or long-term capital gains depending on the holding period from the date of allotment of the rights shares to the date of their sale. 

Tax implications of bonus issue 

Bonus shares are shares issued by a company to its existing shareholders without any consideration. Such shares are issued to increase the liquidity of a stock, or to adjust its market price resulting by a reduction in the accumulated profits and an increased share capital. 

There is no liability on purchase, no tax liability on dividends received; however, on sale they attract short term or long term capital gains depending on the period of holding (date of allotment of bonus shares to date of sale). 

The tax implications are the same as in the case of rights shares except that the cost of acquisition in the case of bonus shares will be taken to be nil. 

Tax implications of stock split 

While a stock split results in an increase in the number of shares in an investor's hand, the total intrinsic value of the investment, however, remains unchanged. 

The tax implications of dividends received on stock split and the capital gains are the same as tax implications of original shares, while the holding period for the purpose is reckoned from the stock's original date of purchase. 

Tax on investments in MFs 

In the case of equity oriented mutual funds with growth option, no dividends are declared, and the tax obligation arises only on sale of the units. 

The capital gains tax arising from the sale may either be: 

short-term capital gains taxable at 15% (chargeable to STT), or long-term capital gains chargeable either at 10% (without benefit of indexation), or 20% with indexation if the sale is through unrecognised stock exchange. 
In the case of sale through a recognised stock exchange, no tax is payable on long-term capital gains. 

Tax on equity-oriented MFs 

In the case of equity-oriented mutual funds with dividend payout option, any dividends received in the hands of investors are tax exempt. 

The tax implication on capital gains arising on sale of units is the same as in the case of equity oriented mutual funds with growth option. 

In the case of debt-oriented mutual funds, dividends declared are tax free in the hands of an investor while long term capital gains are taxed at 10% without indexation, or 20% with indexation. 

In the case of short term capital gains the rate corresponding to the tax bracket in which the investor falls becomes payable.

Are Investments in Foreign AMCs Safe?

The mutual funds in India were buffeted from the meltdown in the Wall Street and its impact on the Indian stock market. The foreign Asset Management Companies, or AMCs, had to deal with another factor. Many mutual fund investors in India were anxious whether their investments in the foreign AMCs were safe, particularly when Lehman went for bankruptcy and AIG's fate was also not decided. There are worries on more Wall Street firms going under.

India has a sizable presence of global AMCs including Fidelity, HSBC, and Morgan Stanley. There are also foreign partners in AMCs, including Merrill in DSP Merrill Lynch, and Sun Life in Birla Sun Life.

But the investors can be assured of their investments in foreign AMCs. Of course, their investment in mutual funds in India has the market risk per se from the fortunes of the stock market or debt markets.

The structure of the mutual funds safeguards the investors in case an AMC falls. The AMCs just manage the money. The creditors of the AMC do not have any right over the investors' money. The AMC just acts as an investment manager of the mutual fund and gets fee-based income on it. The AMC takes investment decisions according to the scheme objectives.

Another entity, the Custodian, has the role of safekeeping of securities and it has no role in asset management. The Custodian is appointed by the Trustees, who are group of persons that have supervisory authority over fund managers. The Trustees of mutual funds in India also ensure that the fund managers stick to the trust deed and the assets of the funds are held safely. The Trustees also perform other supervisory role.

The mutual fund is set up by a sponsor who works closely associated with the AMC. The regulations of the mutual fund regulator, SEBI, require that the Sponsor has to contribute a minimum percentage to the net worth of the AMC.

The Board of Directors of an AMC are normally elected each year at the annual meeting and act on behalf of the shareholders.

So the different levels of supervision in a mutual fund delink your investment from that of the bankruptcy of the AMC. Still, we wish all the foreign AMCs a good luck as they battle the Wall Street storm.

Of course, the creditors have the AMC have rights over the assets of the AMC like its offices. But not over the investors' money.

Are all your worries over from investment in mutual funds? Not exactly, says French bank BNP Paribas. The global markets, including those in India, have not bottomed out yet, it says. But on the positives it says that it expects the Reserve Bank of India to hold rates for the next six months on concern over growth rates. Hopefully, some respite for realty, banking and other interest-rate sensitive counters. BNP Paribas sees Asian banks untouched from the global credit crisis.

As of now, the bank remains underweight on commodities. But still the French bank is worried over how he rescue plans of US Treasury Secretary Henry Paulson and Fed chief Ben Bernanke's will hold off another crisis.

SEBI set to ban early redemption in new FMPs

Capital market regulator, SEBI, is set to stop early or premature withdrawals by investors in Fixed Maturity Plans (FMPs) to be launched from now on. 

The recent rush by large corporate investors in FMPs to redeem their investments, which resulted in considerable pressure on fund houses, has forced SEBI to review its norms relating to this product. 

The regulator has decided not to allow early withdrawals in new FMP offerings and to make it mandatory for new FMPs to be listed on exchanges, according to a person familiar with the issue. The aim is to prevent large scale premature redemption in a product, which is marketed as a fixed maturity plan. 

Over the course of the past 12 months, FMPs had emerged as one of the most popular products offered by fund houses. Where it scored over fixed deposits was in terms of higher yields and post-tax returns, which helped draw in a lot of corporate money. 

On an average, this scheme offers a return of well over 12% with the corpus being invested in corporate and securitised papers, certificates of deposit and commercial paper. The most common FMPs vary in maturities from 3-6 and 13 months. 

An early or premature exit for an investor in these schemes would be through the secondary market, unlike the scenario now where an investor can redeem investments before maturity by paying the exit load. Mutual fund industry managers say the regulator has stopped approving new filings for FMPs until the changes are incorporated. They are now waiting for the regulator to amend the regulations soon. 

Effectively, changes underway could signal that new FMPs will be truly be close-ended schemes, which could be traded like an exchange-traded fund. "The product is called a fixed maturity plan and the investor buys into it knowing the features of the product. People have to come into it with a clear idea that they have to stay in for the maturity. If they want to exit, they should be able to find a buyer in the secondary market after an FMP gets listed," said a person familiar with the proposed changes. 

At the end of September '08, the corpus of FMPs aggregated Rs 132,000 crore out of the assets under management of the Indian mutual fund industry of Rs 5,32,000 crore, a share of 25%. The effective tax for a long-term investor in such schemes work out to 22% while the short-term tax is 16.5%. 

The corpus would have shrunk considering that many corporates have pulled out money, given their concerns relating to the credit quality of some of the investments made by fund houses in some of the FMPs.

Source:http://economictimes.indiatimes.comSEBI_to_ban_early_redemption_in_new_FMPs/articleshow/3635064.cms

Redemptions force MFs to cut costs

Mutual fund houses are on a cost-cutting drive as their profit margins are under pressure following a dip in the assets under their management (AUM). As redemption pressures, following the global credit crisis, is taking a toll on AUMs, fund houses are planning to reduce staff and put off expansion plans. Some fund houses have already terminated their tie-ups with direct sales agents, said sources. AP Kurian, chairman, Association of Mutual Funds in India (Amfi), said the dip in AUMs owes to the global financial crisis. 

Asset management companies, which manage mutual funds, are allowed by the regulator to charge management fees between 2% to 2.5%. And they can amortise up to 6% of the new fund offerings (NFOs) over a period of time. 

Any decline in AUM will thereby force fund houses to rationalise costs. They will hire fewer professionals and open less number of new branches as profits are likely to suffer this year, said market sources. 

The redemption pressure has increased in October due to the liquidity strain in the financial system. However, redemptions are expected to ease. “The Reserve Bank of India's decision to reduce the cash reserve ration and the repo rate will bring liquidity in the financial system and help ease the redemption pressure,” Kurian said. 

The number of new applications to offer new schemes also have come down significantly in the last two months as both equity and debt markets are not conducive for investment. Fund managers are waiting for the cloud of uncertainty in the US financial market to clear. 

The AUM in the mutual fund industry declined 4%, or Rs 21,802 crore, in the period from January to September this calendar year, according to Amfi. 

“Clearly, new recruitments are off. Yes, pay cuts are on the anvil , but not yet implemented as many of the fund houses have kept costs in control by outsourcing a lot of activities,” said a senior HR executive with a leading mutual fund. 

Hence, there has been a churn in service providers and that consequently many fund houses parted with their direct sale agents (DSAs). “In fact, channel rationalisation is the obvious step for existing mutual funds,” he added. 

But the clouds of uncertainty are certainly hovering over fund houses. Retrenching employees, however, is seen as the last option, after rationalising advertising spends and distribution channels.

Downturn helps MFs cherry-pick talent at realistic pay

Mutual fund houses are making the most of the current financial market turmoil. Sensing an opportunity and keeping long-term expansion plans in mind, some mutual funds are recruiting across functions. The hiring comes as salaries are slowly retracting to more realistic levels, thus allowing funds to pick and choose quality candidates. 

Sahara Mutual Fund, Taurus and Bharti AXA Mutual Fund are some of the fund houses looking to add more personnel in the next six months, keeping their expansion plans in mind. Bharti AXA plans to beef up its current branch network of 45 by 10. 

“Very soon, we will be recruiting for our fund management team starting with a senior position. With the pace of our geographical expansion and introduction of newer product features, we will be recruiting people in our sales team as well,” said Bharti AXA Investment Managers chief executive Sandeep Dasgupta. 

Sahara Mutual Fund, which has 70 employees on its rolls, is planning to double its manpower in the next few months as it is looking to increase its network from 16 to 32 around the same time. The fund house will be recruiting across functions — research, sales, marketing and fund management teams. 

”Our recruitment process is not driven by the market meltdown. We will continue to recruit talent to strengthen our human resources to meet geographical expansion plans,” said Sahara Mutual Fund CEO NK Garg.
Taurus Mutual Fund is also in the process of adding to its existing headcount. The fund house plans to increase the number from 120 to 150 people by end of March 2009, said its CEO Waqar Naqvi. 

“In the coming fortnight, we will be recruiting some analysts on an immediate basis. Enhancing our pan-India presence, we are getting investments through SIPs (systematic investment plans). We will also recruit people in different functions with a special focus on our fund management team,” Mr Naqvi said. 

The recruitment drive comes at a time when several other segments are facing job cuts and allows fund houses to cherry-pick candidates at lower salaries. 

Mr Naqvi said Taurus is now getting job applications from overseas as well. “We are not averse to even picking up talent from global entities and are definitely on the look out,” he said. While salary is not a constraint for the right candidate, fund houses say the downturn has definitely made things easier for them. “Salary demand has substantially come down from candidates due to dull market conditions,” said Mr Garg. 

Even finance companies like Antique Finance are recruiting people across levels to expand their teams. Recently, Antique recruited five senior professionals, including Premal Doshi, who held senior positions with Motilal Oswal, Anand Rathi, Lazard India and Jardine Fleming. 

It also roped in Krish Shanbhag, who has worked with Clareville Capital India Investment Advisors, HSBC Asset Management and ING Investment Management in senior positions.

Source:http://economictimes.indiatimes.com/Personal_Finance/Downturn_helps_MFs_cherry-pick_talent/articleshow/3625263.cms

Liquidity crunch’s for real, MFs put cap on redemption

THE liquidity crunch in money markets is exacting a heavy toll on some small fund houses that have been hit by massive redemption pressures. ABN Amro MF has now put a cap on redemption on its long-term FMP schemes. All investors in these schemes can redeem only Rs 1 lakh per folio per day. 
“As a short-term measure, the trustees of the mutual fund, in order to safeguard the interest of the investors who want to remain invested till the maturity of the long-term FMPs, today have decided to limit the redemption to 5% of the size of these schemes per day, with a further limit of Rs 1 lakh per investor, per day,” said ABN Amro India-AMC managing director Nikhil Johri. 
What is making matters worse for ABN Amro is that its schemes are in the no-load period for a month, due to the recent change in management control. This makes it all the more easy for investors to pull out their funds. 
In the offer document (OD), mutual fund houses mention that the trustees can under unforeseen market circumstances limit redemptions temporarily. According to industry players, trustees of many mutual funds have instructed distributors that redemptions for all fixed income schemes should be paid only within 10 days from the date of redemptions. 
Another fund that appears to be under stress, according to market sources, is Edelweiss Mutual. The fund has seen the asset size of its maiden liquid scheme launched last month, shrink from Rs 730 crore to nearly Rs 230 crore. 
Mirae Asset Management Company, a fund into its second year of operations in India, failed to report the net asset values (NAV) of its two liquid schemes — Mirae Asset Liquid Fund & Mirae Asset Liquid Plus Fund — on October 14. The company refused to comment on the development 
Due to tightness in the money market, the AMC may have found it difficult to sell securities to raise the required amount. Unable to settle accounts at the end of the day, the AMC would not have reported the NAVs of the two schemes. 
Experts say in extreme situations, certain securities like government bonds or corporate debt papers may become illiquid. A fund house may not be able to sell securities immediately, and so, cannot raise money to return to investors in the case of higher than usual redemption requests. 
As on 30 September, Mirae’s assets stood at about Rs 2,309.8 crore. Of which close to Rs 1,864 crore is in liquid and liquid plus funds. Sources say the size of these assets have plunged in the past 10 days, and the fund is now unable to meet redemption requests. The AMC, however, has reported NAVs of both the schemes for October 15.

MFs hold on till realty debt do ’em part

LICMF, Can Robeco, Reliance Mutual & DSPML Reveal Big Holdings In Realty Debt Paper

AT A time when investing in realty and real estate-related instruments is considered a taboo, a few fund houses — having debt portfolios — are seen holding on to their investments in debt securities issued by real estate companies. Fund houses like LIC Mutual Fund, Canara Robeco Mutual, Reliance Mutual and DSP ML reveal substantial holdings in the real estate sector at the end of September. As per mutual fund tracker MFI Explorer, the liquid and liquid-plus funds of LIC Mutual Fund hold 19% and 65%, respectively, on each portfolios in real estate debt papers. LIC’s floater fund holds nearly 71% investments in papers issued by real estate companies. The Canara Robeco floater has nearly 46% in real estate debt securities. 
  Likewise, the liquid plan of ICICI Prudential owns nearly 3% in unrated papers issued by real estate companies. Around 17% of net investments made by DSP ML Liquid-Plus Fund is in real estate debt — a portion (4.4%), of which is in unrated papers issued by real estate companies. The liquid and liquid-plus funds of Reliance Mutual Fund holds over 6% each in papers issued by real estate companies. “We are not holding a lot many unrated papers; if you consider our entire debt portfolio, only 2 to 3% of the pool will be in unrated securities of sound companies,” said LIC Mutual Fund chief executive Sushobhan Sarker. 
  “It was a conscious decision on our part to invest in papers issued by real estate companies. These papers yield very high returns; moreover, we’re very comfortable with issuers of these papers. We’re very sure, these companies are strong enough to pay back the principal amount on time,” Mr Sarker added. He also said the sector would look up once the liquidity crunch in the system eases out. 
  Most fund houses had invested into real estate debt securities (including unrated ones) with a view to get higher returns from their investment. Papers with lower investment grade (or unrated ones) usually yield 200-300 bps more than the rated ones. With concerns over the credit quality of Indian companies looming large, investors, fearing a probable loss of capital in the event of default by companies, have been redeeming their investments from funds over the past one month. As per AMFI, there has been an outflow of Rs 26,665 crore (fresh investment not considered) from income funds in September. Redemption in debt funds have shot up 25% from the regular trendline, expert opine. 
  “At the end of September, we only have 1% of our fixed income portfolio in debt papers issued by real estate companies. The remaining 1.8% is in my real estate securities fund, where I have the mandate to invest in real estate. Over 90% of our investments are in highly-rated papers of good companies,” said ICICI Prudential Mutual Fund CIO Nilesh Shah. 
  According to Crisil Fund Services head Krishnan Sitaraman, investors need not really have apprehensions about their investments in various debt schemes. “Majority of the schemes have invested into good quality instruments and rated papers,” he added. 

Six ways to chill in a bear market

Greed (bull) and fear (bear). These are two words investors often hear and think of, but are unable to control their emotions when it comes to investing. In fact, when stock markets are north-bound, their confidence in buying increases considerably.They buy stocks irrespective of their high price-to-earning ratio and are sure to make good money. If, however, the markets enter a bearish phase, their confidence goes down, leaving them wondering where did they go wrong?The chaotic bear market environment then sets the stage for fear to creep into their minds, thus impacting investment decisions. To make sure that you successfully weather the raging market storms, here are six ways to drive out your fears of losing money in a bear market.

STAY CALM AND ACT SMART

Easy to say than follow. It is true that bear markets spread panic among investors, often causing them to sell all the stocks they hold. But a smart investor, according to capital market experts, is one who gets on with the job of picking up value stocks, notwithstanding where the tide of the market is moving.“Such an investor is rightly rewarded with great profits once the market turns. Since we fail to control our emotions, we forget that investment in equity is not for short term. So for long-term benefit , it is important to stay calm and act prudently in such times,” advises Ashok Kumar Jain, chairman and managing director, Arihant Capital Markets.

SET REALISTIC GOALS

You may have earlier doubled your money in a short span, say six months, by investing in a particular stock during a bull run, but you must remember — what goes up, comes down. Stock investing is not about speculating or making easy money. It is an art and science of buying good businesses at cheaper valuations.“It is important to set realistic goals for your portfolio’s long-term return , and buy only good companies with strong fundamentals and good management,” says Jain. To nip your fears in a bearish market, you should avoid selling just because stock prices have dropped.“You must review your stock portfolio rationally. Then only you should arrive at a decision to sell losers whose future prospects look weak, and hold on to winners with prospects that remain solid,” advises Jain.

DON’T TRACK THE MARKET

Another way you can soothe your nerves in a bear market is by not following the stock markets on a daily basis. Every investor knows that you should buy low and sell high.Bull markets provide you a chance to sell high. Bear markets, however, offer you a chance to buy low. Unfortunately, too many investors are lulled into complacency during bull markets and scared out of their wits in bear markets.So they do just the opposite, buying high and selling low. “Thus, you should avoid tracking the stock markets daily during a bearish phase. This way you will save yourself from unnecessary anxiety and fear,” says Amar Ambani, V-P , research, India Infoline.

SET ASIDE EMERGENCY FUNDS

Investors have the tendency to overinvest during a bull run, which becomes a reason for fear when the markets turn choppy. Ambani holds the view that to counter such a situation, you should have sufficient liquidity in hand for emergencies.“This will make sure that you aren’t forced to sell equity holdings or other assets before the time and price are right,” he says. To emerge as a winner, all you need to do is recognise the fact that your portfolio will decline from time to time, but take solace in knowing that short-term pain is required for long-term gain.

SEE THE POSITIVE SIDE
To make money in equities, it is important to be rational, not emotional. “You should always try to look at the positive side in a bad market,” says Ambani. Citing an example, he says that a bear market provides an excellent opportunity to buy strong businesses at rock bottom prices. Jain adds that no one can tell you when the next bull market will begin, how long will it last, or how high the market will ultimately go.“That should be the key point to drive out your fears in a bear market. So even if the markets are down, you should be convinced that your business is making money. The stock price may not generate great returns due to the bearish phase, but in the long term, your portfolio’s returns will be unmatchable,” he says.Warren Buffett was recently quoted as saying: “I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month.” You don’t get maximum pessimism during bull markets. You get them when the world looks like it’s falling apart. Times like now, for instance.

STUDY BEHAVIOURAL FINANCE

Last but not the least, you can study behavioural finance to calm your fears in a bear market. For the uninitiated, behavioural finance pairs emotions with investments and shows how emotions and cognitive errors can cause disasters in investment decisions. “Individual behaviour, temperament and psychology play an important role in determining investment success. Equity price movements are nothing but a summation of individual behaviours, reflecting their greed and fear,” says Ambani.As always happens, even experienced investors are susceptible to making judgment errors identified by behavioural finance research. “It can help you to be watchful of your behaviour and, in turn, avoid mistakes that will decrease your personal wealth. It provides a platform to learn from people’s mistakes, to modify and improve your overall investment strategies and actually profit from identifying these mistakes,” feels Jain.As for the bottomline, just as it is important to know when to exercise caution, the same way it is important to comprehend when to abstain from fear. Happy investing!

Run on FMP's causing panic

This could be India's subprime and credit crisis which will affect the realty industry the most.

Sucheta Dalal & Debashis Basu say that withdrawals from Fixed Maturity Plans can turn into a huge problem

A full blown panic in the real estate and financial services sectors has led to the withdrawal of nearly Rs 30,000 crore from Fixed Maturity Plans of Mutual Funds in the past week alone. These funds are meeting all redemption demands by borrowing money at high rates of 20% to 24%. This may end up destroying parts of their corpus and may lead to losses for retail investors. Retail investors have (as usual) foolishly remained invested in FMPs lured by their pitch which touted them ‘safer than fixed deposits and offering higher returns and lower taxes’, on the assurance of ‘indicative’ returns, although MoneyLIFE magazine (FMPs Lose Shine) had repeatedly pointed out that the risks of FDs and FMPs are so vastly different that comparing them are like comparing oranges and apples. FMPs may end up being like the unregulated Overseas Corporate Bodies of the previous market decline. Someone needs to urgently look at what is going on inside them. Unfortunately, SEBI does not even gather data about the FMPs issued by mutual funds or the quality of securities in them.

The other problem today is super-liquid schemes that invest in the call money market. There was no regulatory oversight on these schemes and they have been allowed not to mark their investment to market and could claim to hold them to maturity even when it was a one-year paper. This has created a very dangerous situation today.

Finance and realty companies are the weakest link in the chain. Many FMPs have subscribed to short term AAA rated paper of finance and realty companies. The credit rating of these papers now looks doubtful. One finance company (belonging to the bluest of the blue chip business house whose previous finance arm was deeply involved in the 2001 scam), has also renewed its paper at an exorbitant rate of 32%.

The smarter, corporate investors are taking no chances and pulling out funds and exacerbating the salutation leading to panic. No regulator has bothered to collect data on the investment pattern of FMPs and liquid schemes and keep tabs on it. As result, the systemic risk posed by the redemption runs on these schemes and the shaky underlying debt securities in their portfolio is suddenly upon us and nobody knows whether the RBI should look into it or SEBI or both. Mutual funds that are borrowing to meet redemption are refusing to utilise their bank credit for this emergency, because they feel that it will only put information in the public domain and cause a run on the fund.

Govt, RBI should act fast to restore normalcy in markets: UK Sinha Chairman UTI AMC

UK Sinha, chairman, UTI AMC 

The freeze on liquidity in the local market and the severe downturn in the stock market have hit Indian fund houses which are now seeing a drop in assets under management. It’s been a difficult few weeks for the mutual fund (MF) industry, given the pressure on redemptions in some of the fixed-maturity plans (FMPs) by large corporate investors. Some of the problems faced by the industry are now expected to be addressed by a special group constituted by the finance ministry to assess the current situation and to suggest measures. UK Sinha, chairman, UTI Asset Management Company (AMC) has been co-opted as a member of this group. He spoke to ET on the state of the industry and the changes he foresees. Excerpts: 

How severe is the redemption pressure being faced by mutual funds in their debt schemes, mainly FMPs and liquid money market schemes? 

If you look at the redemption figures in FMPs and liquid schemes last month and compared it with the numbers for the same period last year, you will see that there is not much difference. Earlier, after the September 15 deadline for advance tax, the liquidity in the system used to improve. 

This time, the liquidity situation has worsened. The equity market is seeing one of its worst downtrends, there are rumours about the health of some financial institutions, and there are doubts if some mutual funds will be able to meet redemption demands. Banks have been drawing Rs 80-90,000 crore through RBI’s repo window. Even if they (banks) have surplus fund, risk aversion is very high, and they are very wary of lending. At the moment, the situation, as regards mutual funds, is manageable. The industry has seen a rapid growth in assets under management over the past 2-3 years, primarily on the back of liquid schemes and FMPs. Contrary to what most industry experts may claim, growth in equity assets has not been very high. The 35% CAGR (compounded annual growth) in AUM has largely been on the strength of debt schemes. 

How valid are the concerns relating to quality of assets in liquid schemes and FMPs of MFs? 

In the case of a vast majority of fund houses, 90% of the debt assets are in the highest-rated paper (debt instruments). Some fund houses have been trying to grow their AUM at any cost. These players have compromised on the quality of their assets in a bid to offer higher returns to their investors. Yet, these are minuscule, when seen in the context of the overall industry. The problem can be solved, if these funds are offered liquidity against their top quality assets. This is something that has to be tackled by authorities. Right now, it is not business as usual. The inter-bank money market has not been functional for close to two weeks. 

Confidence among market participants is so low that there are no buyers for quality assets, and no institution is willing to offer credit against these assets. This is a peculiar situation. Faster the government and RBI act to address the situation, better the chances of restoration of normalcy not just in the money market, but in the financial system as a whole. This is not just an issue for MFs, but also for banks, NBFCs, and non-banks. 

What more should RBI and the government do besides the recent steps taken to ease liquidity? 

The government itself can inject liquidity into the system; it can provide credit to the non-banking industry as well. RBI could think of further reduction in CRR and SLR. At the moment, oil and fertiliser bonds do not qualify as securities for meeting SLR requirements. This norm could be changed. Coming back to mutual funds, at least 90% of the assets in debt schemes are in highest-rated paper. RBI should ensure that these papers remain liquid, by offering credit against them.

India mutual funds turn to central bank for short-term cash

RBI mulls proposal to let them deposit debt with central bank for cash

India's mutual funds have asked the central bank to lend them short-term cash via a repurchase facility after the global financial crisis virtually paralysed the country's money markets, fund executives said. 

The Reserve Bank of India (RBI) is considering the proposal to let mutual funds deposit some of the short-term bank debt they hold with the central bank in exchange for cash, said four senior executives, who were involved in talks with the central bank and declined to be named. 

Central bank repurchase facilities are normally only open to banks and primary dealers. The central bank's spokeswoman said that she could not immediately comment. 

Mutual funds would normally sell bank debt on the money market to raise cash to meet redemptions, which should have risen in September as customers pulled out money for quarterly tax payments. 

But Indian money markets have been hit by the global financial crisis, which has wrecked banks across the United States and Europe and made lenders around the world wary of dealing with each other. 

The cost of overnight borrowing on the interbank market jumped to a 19-month high of 23 per cent last Friday, more than double the central bank's short-term lending rate of 9 per cent. 

The central bank has tried to ease the liquidity squeeze and the executives said that it would only agree to the mutual funds' request if the money markets failed to thaw. 

The central bank lowered the proportion of deposits banks must keep in their vaults by 150 basis points from Saturday, adding 600 billion rupees (S$18.5 billion) to the amount of cash available for lending. 

The stock market regulator, the Securities and Exchange Board of India, has asked mutual funds to give details of their holdings of certificates of deposits (CDs), short-term debt sold by banks. This data would be used by the RBI to assess the request for access to the repo facility, the executives said. 

'That seems to be the final objective in mind,' one of them, a chief executive of an Indian mutual fund house, said. 

CD issuance has ballooned this year as banks scrambled to raise funds to feed demand for credit. Mutual funds have bought them, attracted by returns. 

Central bank data shows that outstanding CDs at the end of August totalled 1.71 trillion rupees, up nearly 40 per cent from the start of the year. 

But appetite for CDs is waning and cost of borrowing for three months by selling certificates of deposit has jumped to as high as 14 per cent compared with 10-11 per cent a month earlier, two money market dealers said on Saturday. 

That spells trouble for mutual funds at a time of rising redemptions. Customers pulled a net 43 billion rupees out of liquid mutual funds in August after investing a net 630 million the previous month, according to the Association of Mutual Funds in India. The association has yet to release figures for September, when withdrawals typically rise due to quarterly tax payments. 

Foreign funds are bailing out of the tumbling stock market, driving the rupee to a record low against the US dollar. The central bank is buying rupees to support the currency, exacerbating the cash shortage. 

The government has also yet to disburse cash for planned spending, something which would normally boost cash supply in the banking system. 

To try to the thaw out the market and prod banks into lending to each other, the central bank injected a record of 920 billion rupees in its repo operation last Friday. 

Liquid funds managed 891.2 billion rupees at the end of August and accounted for 16.37 per cent of the total industry's holdings, Association of Mutual Funds in India data shows.

Meanwhile, India's central bank governor Duvvuri Subbarao said that the South Asian nation may 'escape the worst consequences' of the global financial crisis even as its currency and stock markets experience some impact.

Indian banks have 'very limited' direct or indirect exposure to the collapsed US mortgage market or failed financial institutions, Mr Subbarao said on Saturday at the meeting of the International Monetary Fund in Washington.

Money market funds face intense redemption heat

Liquidity crunch sees banks, companies withdraw Rs30,000 cr from such funds over the past fortnight

The liquidity crunch in the Indian financial system has taken a toll on the mutual fund industry. Liquid and liquid-plus funds, popular debt schemes among corporate investors and bank treasuries for parking surplus money, are seeing heavy redemption. An estimated Rs30,000 crore, or about 30% of the corpus of such funds, has been withdrawn in the past fortnight, according to two fund managers and the head of treasury operations of a diversified group.

According to the Association of Mutual Funds in India, an industry lobby, liquid and liquid-plus funds, also known as money market funds, constituted a quarter of the Rs3.6 trillion of assets under management in debt, or fixed income, funds at the end of August, the last month for which such data is available.

India’s total assets under management in the mutual fund industry were Rs5.4 trillion in August. This came down to Rs5.2 trillion in September.

“There a liquidity problem but we don’t see any credit crunch,” said Ritesh Jain, head of fixed income at Principal PNB Asset Management Co. Pvt. Ltd, which manages about Rs10,000 crore worth of assets.

Liquid-plus funds had a particularly tough time in the previous week with 33 of 291 of such funds declining in value between Wednesday and Friday. Fund managers had to sell some assets below cost price due to heavy redemption by banks and firms, said industry analysts, dubbing this a rare occurrence for such schemes.

Market watchPeople outside the BSE building. Investors fear liquid and liquid-plus funds could be sitting on huge losses. PTI

One such fund house—Mirae Asset Global Investment Management (India) Pvt. Ltd— has eight variants of its liquid-plus schemes quoting at a discount to par value, or the price at which an investor bought units of the scheme.

“The very essence of money market funds is that they don’t dip below par,” said Dhirendra Kumar, chief executive of Value Research India Pvt. Ltd, a mutual funds research firm.
While liquid funds can mark to market up to 10% of their assets, liquid-plus funds can have more assets marked to market, an accounting practice of assigning a value to a position held in a financial instrument based on the current market price for that instrument.

In liquid funds, the drop in net asset value (NAV) is not as stark as in the liquid-plus funds because of the 10% cap on the accounting practice of marking to market its assets under management.

“Though there is no regulatory diktat on it, most liquid-plus funds also keep only a small portion of their portfolio in instruments that are marked to market,” said a fund manager who didn’t wish to be named.

The fear, thus, is that many of these liquid and liquid-plus funds could be sitting on huge losses in the rest of their portfolio, which is held to maturity.
If the liquidity crunch continues for long, the funds may have to recognize the losses and pass them on to the investor. Else, the funds themselves will have to make good the losses by injecting cash in the scheme.

Most fund houses have a small capital base, sometimes as low as Rs10 crore, which would prove insufficient as losses could be more. In the current scenario, when short-term rates have risen by 400 basis points in three months, a six-month maturity portfolio would be out of money by 2%. One basis point is one-hundredth of a percentage point.

“Getting a bank line (of credit) is not easy,” said Ganti Murthy, debt fund manager at SBI Funds Management Pvt. Ltd. “Banks are facing liquidity tightness themselves.”
Markets regulator Securities and Exchange Board of India, or Sebi, does not call for capital protection in the liquid-plus schemes currently available. But, according to analysts, it has been taken for granted that fund managers handling such schemes would invest in a combination of papers to ensure NAVs are maintained above par value in normal times.

But these are unusual times, and redemption by firms and banks have risen sharply, said many fund managers.

“Nobody has money to buy these assets,” said Ashish Nigam, head of fixed income at Religare Aegon Asset Management Co. Pvt. Ltd, which is yet to launch any scheme.
As overnight lending rates rose, banks redeemed their liquid-plus schemes to be able to lend to other banks at higher rates in the inter-bank money market.

Interest rates on the overnight inter-bank call money market crossed 20% on Friday, the highest since April 2007, as banks rushed to borrow from each other to tide over their temporary asset-liability mismatches. Since then it has come down after the cash reserve ratio (CRR, or the balance banks need to maintain with the central bank) cut.

Companies, on the other hand, have been getting higher returns from fixed deposits with interest rates on such deposits for one month rising to 12%, from 8-9% a month ago, said N.S. Paramasivam, head of treasury at Essar Group, a steel-to-oil conglomerate. “This has made many corporates switch over from mutual funds to FDs (fixed deposits).”

In a tight credit situation, yields, or interest rates, on debt instruments rise and their prices fall, hurting NAVs of money market funds.

While liquid funds typically invest a majority of their assets in debt instruments that are of one- seven-day maturity, liquid-plus funds hold a large chunk of their assets in papers with one- three-month maturity. Liquid-plus funds are becoming increasingly popular as they are more tax efficient for investors.

To be sure, funds are now rebalancing their portfolios and switching to papers with a shorter tenure. “This will ensure the funds’ liabilities (the money they manage) which can be redeemed every day will be in line with the tenure of the paper they invest in, said Paramasivam.
According to Jain of Principal PNB Asset Management, the liquidity problem could be solved “as early as in a fortnight or so”.

The Reserve Bank of India’s move in cutting banks’ CRR infused Rs60,000 crore in the financial system last Saturday. “This and more such measures are expected to help the industry tide over the crisis of confidence,” said Paramasivam.

Source: http://www.livemint.com/2008/10/14001655/Money-market-funds-face-intens.html?pg=1