RBI unlikely to cut CRR by 75 bps: Lakshmi Iyer, Kotak Mutual Fund

In an interview with ET Now, Lakshmi Iyer , Head of Products & Fixed Income , Kotak Mutual Fund , talks about fiscal deficit and what can be expected from RBI's monetary policy on 15th of March. Excerpts:

ET Now: The deficit in the financial system has climbed to Rs 180,000 crore. How much worse do you believe it is going to get? Do you believe that when refunds from the MCX IPO start coming back, the situation could look a little better?

Lakshmi Iyer: The MCX IPO is one of the problems which have added to the further liquidity issue. However, that is a thing of the last couple of days. We have seen this liquidity go into the negative zone significantly beyond the RBI's comfort zone for quite sometime now.

Our take is that if there is no CRR cut on March 15th, which is the next monetary policy date, this liquidity situation could further aggravate. This is due to the advance tax which is likely to be in the band of about Rs 50,000 to Rs 60,000 crore and that could take the number to anywhere between the Rs 2,20,000 to Rs 2,30,000. So, the combination of CRR cut and open market operations is what would lead to better liquidity numbers from here on.

ET Now: Montek Singh Ahluwalia said that the interest rate is going to be determined predominantly by what is likely to happen to the fiscal deficit. Where do you see interest rates stabilising in light of that and what is your reading of the yield on the 10 year bond?

Lakshmi Iyer: Fiscal deficit is definitely a challenging situation for the government for FY12 and it would continue to remain a predominant factor determining the direction of rates for 2013. This is because the fiscal deficit is funded through government borrowing programme. Moreover, it is subscribed to buy Indian investors predominantly and to a certain extent FIIs.

So, our take is that if the borrowing programme is likely to shoot up for FY13, which is a resultant of the higher fiscal deficit, we could see some more upward pressure on the 10-year benchmark rates from these levels. It is currently trading at about 8.2%. It could back up by about 10 to 15 bps, taking it on to 8.35%. So, we need to wait and watch out. We are likely to see near term volatility at the shorter end because of liquidity and the longer end because of the uncertain fiscal outlook.

ET Now: Do you believe that the RBI could surprise on the upside by coming out with a higher than a 50 bps CRR cut on the 15th? Do you think that RBI will cut CRR by 75 bps or even a 1% cut to address the challenges that the market is facing?

Lakshmi Iyer: I am not sure that is something which the RBI would want to do right now given that it continues to do open market operations. Today the open market operations figures have topped Rs 1 lakh crore and we still have liquidity continuing to be in the deficit mode.

My sense is that 50 bps is what we are likely to see as a CRR cut. RBI may introduce it in graded phases - may be 25 now and 25-25 in three tranches. This will probably total to 75 bps. But at a stretch going into 75 looks a very low probability given the fact that RBI continues to be committed to do OMOs. Today's market situation clearly warrants open market operations.

ET Now: Do you believe that a combination of that plus CRR cut would likely to sooth liquidity and also bring yields to stable levels?

Lakshmi Iyer: The CRR cut will give some respite on liquidity. It will not lead to a significant soothing on the yield curve front because March is a typical period of historical tightness and liquidity and this March will not be an exception. The liquidity situation is likely to ease only towards the last week of March or probably in the first week of April. So, that is when we could see a transition of the current high state of yield curve to a softer yield curve in the first quarter of FY13.

We are not expecting significant respite even if there were to be a CRR cut of 50 bps or 75 bps on March 15th. If the market gets a sense that the current open market operation trend is likely to continue, then we could see some small respite at the longer end of the GSEC yield curve.

Source: http://economictimes.indiatimes.com/opinion/interviews/rbi-unlikely-to-cut-crr-by-75-bps-lakshmi-iyer-kotak-mutual-fund/articleshow/12056116.cms?curpg=2

Equity linked savings scheme trumps PPF on returns

A penny saved is a penny earned. In the long run, those who follow this simple yet very powerful principle would probably be more financially sound than those who don’t. And those who go one step further by not just “saving” but “investing” in appropriate asset classes and products would likely benefit all the more.

Equity Linked Savings Schemes (commonly known as ELSS schemes) offered by mutual funds combine these two principles to create a product that not only help investors to save tax but also has the potential to help build wealth in the long run. However, ELSS funds differ from most of the other tax saving investment instruments in terms of their risk-return characteristics and for that reason, many investors tend to prefer traditional tax saving investments over ELSS funds.

Fidelity Worldwide Investment conducted a study based on the historical long-term performance of ELSS funds in the Indian mutual fund industry. As a first step it identified all the open-ended ELSS funds which have been in existence for more than 10 years (in existence since October 2001) and then calculated the CAGR of each of those funds for a five-year period at every month end starting from October 2006 to October 2011. 

This resulted in a total of 61 data points, the first five year period was from 31-Oct-2001 to 31-Oct-2006 and the last five year period was from 31-Oct-2006 to 31-Oct-2011. Further, using the above performance numbers we calculated the simple average performance of these funds for each of the time periods. Lastly, the results were compared against the rate of return that investors in PPF or NSC would have earned for each of those five year periods.

The results clearly show that ELSS funds’ average returns have been better than PPF/ NSC in 58 out of 61 periods and average five year annualised performance of ELSS funds was 26.43 per cent as compared to average PPF rate of 8.32 per cent and average NSC rate of 8.59 per cent — an out performance of 18.11 per cent and 17.94 per cent respectively.

In other words R1 lakh invested in ELSS funds on an average would have grown to R 3,23,036 in a five-year time-frame whereas the same amount invested in PPF or NSC would have grown to just Rs 1,49,120 and Rs 1,50,317 respectively. It was also interesting to learn that more than three times out of five, ELSS funds outperformed PPF by over 10 per cent on an annualised basis.

Like evaluating any other investment option, it is equally important to understand the associated risks. As the study revealed the range of returns from ELSS funds over different time periods and the divergence of returns (and hence the risk) reduces with increase in investment horizon.

For example, over a three-year period, the average CAGR of ELSS funds have been in the range of 9.15-76.75 per cent but if the investment horizon is increased to 5-years, the return range narrows down to 7.03-53 per cent.

Like most equity funds, ELSS funds also tend to be volatile in the short term but have the potential to help investor generate wealth in the long run. Their wealth generation potential along with the compulsory minimum investment period of at least three years makes it a great investment option for investors looking to benefit from tax deductions under Section 80C.

Source: http://www.indianexpress.com/news/equity-linked-savings-scheme-trumps-ppf-on-returns/916999/0

Domestic managers may get to run offshore funds

Indian fund managers will soon be able to manage domestic and offshore funds. Market regulator SEBI is planning to relax rules that require funds to appoint separate managers for each activity - mutual funds, portfolio management services and offshore advisory services, according to people with knowledge of the matter.

The regulator will put in place rules mandating disclosures of possible conflict of interest arising from the same person managing different funds, they said. Industry officials say the move will result in lower cost for fund houses while investors will be able to enjoy the benefits of the cumulative experience of the investment team.

Also, international investors have more faith in local fund managers as they have a better understanding of the market. "There is a distinct segregation of activity in terms of personnel, research and dealing. Anything that can facilitate pooling in of resources which would not result in conflict of interest would be a welcome move," said N Sethuram Iyer, chief investment officer, Daiwa Mutual Fund.

Last year, the regulator had allowed investment management firms to share back-end resources like IT systems but said they had to have a separate manager for each fund by it unless the investment objective and asset allocation are identical.

Chinese walls that require separate investment teams add to the cost of the asset management company which translates into higher costs to the ultimate investor, industry officials said. Such segregation is not found in developed markets with fund managers managing different funds, provided disclosure about potential conflicts of interest is made to the investor.

The conflicts of interest that the current SEBI regulations seek to avoid are insider trading, front running or the practise of the fund manager buying stocks ahead of the fund and preferential treatment to investors in the larger fund at the expense of funds that have a lower quantum of assets under management.

Abroad, asset management firms have to ensure that they have put in place effective policy to mitigate such concerns.

For instance in the UK, there are provisions for disclosure of conflict of interest to clients and potential clients.

"Achieving the economies of scale is the key value delivery by investment management industry. Being conscious of an ensuring effective resolution of any conflict of interest of varied set of investors is crucial," said Dhirendra Kumar, CEO of Delhi-based mutual fund tracker Value Research. 

Source: http://economictimes.indiatimes.com/markets/regulation/domestic-managers-may-get-to-run-offshore-funds/articleshow/12027727.cms

Gold imports may decline to $38 billion in FY'13: PMEAC

Estimated to shoot up by 76 per cent in the current fiscal to $58 billion, India's gold import may decline sharply to $38 billion in 2012-13 on back of improved economic situation, PMEAC said.

The decline in gold imports next fiscal, the Prime Minister's Economic Advisory Council (PMEAC)'s economic report said, would be on account of improvement in economic situation which would encourage people to invest in financial assets like mutual funds and insurance.

"The stabilisation of basic macroeconomic conditions at home is expected to curtail the demand for imported gold to be held as an asset by Indian households," PMEAC Chairman C Rangarajan said.

The report projects the gold import bill for the next fiscal at $38 billion.

The increase in import of the yellow metal is attributed to investors buying the precious metal to hedge against high inflation.

"Going ahead I believe inflation rate will come down and if rate of return on financial assets becomes attractive then we might able to reduce import of gold," he said adding that the import to revert to the previous year's level of $32-33 billion.

The best means of limiting the appetite for gold is to work towards making other kinds of assets more attractive, he said.

"...make investment in life insurance and mutual fund schemes at least as attractive, as was the case till March 2010," the report said.

Source: http://economictimes.indiatimes.com/markets/commodities/gold-imports-may-decline-to-38-billion-in-fy13-pmeac/articleshow/11993596.cms

Small investors logging out from SIPs

Young Chinmay Pise never forgot to check the net asset value of his investments in equity mutual funds before going to bed. His tracking of investments only intensified this year, amid a swift rally in equity markets as the Pune-based software engineer had been investing through systematic investment plan (SIP) since September, 2010. And, last week when the fund value overtook his costs he chose to exit.

“Barring the first two months, my fund value remained below the incurred costs,” says Pise, 25. “At one point of time, it dipped more than 13 per cent. Had I put this amount even in a recurring deposit, I would have made close to nine per cent gains.”

He started when the equity markets was to its last high only to see a value erosion of 25 per cent in 2011. Pise is not alone. Over one lakh retail investors, who took the SIP route, considering it a safer way to invest in equities, decided to stop investments in January. And the current month, appears to be the same or worse, say fund managers.

“Reduction in SIP is not new. It’s happening over the last six months,” says Sanjay Sachdev, chief executive officer at Tata Mutual Fund. In February too, the scenario has not changed, he adds. “Even those SIP investors who had started investing three years back have not made gains.”

Last month, nearly one lakh equity folios (including non-SIPs) were closed. On top of it, 1.2 lakh equity SIPs failed to see transactions. “Either the cheques bounced back or transactions through ECS (electronic clearing service) were not honoured,” says the chief marketing officer of a large fund house.

...but fund managers are optimistic 

Domestic fund managers are more confident about investing in stock market now than three months ago, says a survey conducted by ICICIdirect, the online broking arm of ICICI Securities.

According to the survey, conducted among 17 domestic mutual fund managers this month, the outlook for the Indian equity markets has improved significantly. The previous survey was conducted in November 2011. After losing nearly a quarter of its value, the Bombay Stock Exchange benchmark, Sensex, has gained over 19 per cent so far this year. Most fund managers do not see any major downside in the equity market, the survey says. Seventy-six per cent of the respondents expect the Sensex to rise 5-10 per cent or more from the current levels by 2012-end.

Most fund managers have increased their earnings growth expectations for FY13. Eighty-two per cent, as against 50 per cent in the previous survey, believe the earnings growth for FY13 will be around 10-15 per cent. Though most believe the markets to be fairly valued, the majority advises investors to increase allocation to equity markets.

Compared to November, a higher number of fund managers expects equities to outperform, even as almost everybody expects gold to underperform for the rest of 2012. Most respondents see higher crude oil prices and the European debt crisis as the major concerns for the Indian market.

The previous year had started on a big bang note for SIPs. That time, H N Sinor, CEO of Association of Mutual Funds in India (Amfi), had told Business Standard that there was a remarkable increase in number of SIPs. One of the top officials at Securities and Exchange Board of India had said that transactions through the SIP had improved from Rs 800 crore per month to Rs 1,300 crore per month.

Sinor, though, was quick to add that it had to be seen whether this trend continues. Possibly, he could foresee the trend reversal in the second half of 2011.

“Clearly, there is a trend of outflow from equity funds,” explains Akshay Gupta, CEO of Peerless Mutual Fund. “There is no upbeat attitude among investors to propel their equity investments. As the markets have rallied too steep and too fast, retail investors are cautious.”

Tata Mutual Fund’s Sachdev says investors are cautious. “They should stay invested,” he notes. “This is more of a liquidity-driven rally and not a fundamental-driven one.”

Investors are only recovering their costs and moving out, they say. According to Waqar Naqvi, CEO at Taurus Mutual Fund, the situation continues to remain same as what the industry witnessed in January. “Old investors continue to exit and new investors taking time to enter,” he adds.

Most fund managers, Business Standard spoke to, were of the opinion that it is the current state of markets that is making investors quit equities. Moreover, availability of alternate investment avenues, including the recent tax-free bonds issued by several companies offering assured returns, have dented inflows in the equities, they say. For the last couple of months, net inflows in the equity segment has been touching three year lows of close to Rs 2,500 crore against as high as Rs 5,000 to Rs 6,000 crore witnessed in early part of last year.

Industry officials also admit that there was an over-marketing of SIPs. This led to mis-selling as well. “Distributors are getting a high up-front fees of 0.5 per cent,” says a chief marketing officer. “They tend to churn the portfolio in as little as one month of starting the SIP. For this, both industry and distributors are to be blamed.”

According to Hemant Rustagi, CEO of Wiseinvest Advisors, the bigger question now is how investors perceive equities. “I do not think that Indian mindset is yet prepared for equity investments,” he adds.

Source: http://www.business-standard.com/india/news/small-investors-logging-outsips/465382/