4 impacts of the RBI policy

The monetary policy of RBI released on Tuesday, has been received badly by the stock market, with the indices tanking 2.5 per cent. On the personal finance front though, there is not much of a change coming from the monetary policy.

The Key Decision
The key decision in the monetary policy is that of exiting the supportive stance for the expansionary economy. To use the exact words from the monetary policy, "The precise challenge for the Reserve Bank is to support the recovery process without compromising on price stability. This calls for a careful management of trade-offs. Growth drivers warrant a delayed exit, while inflation concerns calls for an early exit. Premature exit will derail the fragile growth, but a delayed exit can potentially engender inflation expectations."
Going with the decision to exit, the RBI has started taking measures to reduce the money supply in the system.
The Measures TakenThough the decision seems to create some risk, RBI has treated the implementation softly. The measures taken to reduce the money flow are: 1 per cent increase in the SLR (Statutory Liquidity Ratio) back to 25 per cent. Reduction in Export credit refinance from 50 per cent back to the earlier 15 per cent of outstanding export credit. Discontinuing the bank funding support to Mutual Funds, Non Banking Finance Companies and Housing Finance Companies.No changes have been made to the Repo and Reverse Repo rates.
The impact on the Aam Aadmi on India is going to be minimal from the above decisions.

Impact A
The SLR change really has no real impact on the economy as the scheduled commercial banks are already in maintaining a SLR of 27.6 per cent. So there is no real money that is going out of the system. That means that if A needs to take a loan, the money to lend to B is still there with the banks.
The reduction in support to exports is marginal. This is because using the outstanding export credit is only one of the means for financing exports for the exporters.

Impact B
Discontinuing the support to Mutual funds can have an impact on the Net Asset Values of the funds. The support was given in the first place to prevent selling off of equity and asset holdings of MFs, when there are a lot of individual investors asking the MFs to return back their money. If the MF has to sell their assets to give money back to their investors, the value of the assets (in this case shares), there will be a further fall in the price of the shares. This will erode the value of the assets of the investors further. To prevent this RBI has allowed MFs to borrow from banks to meet the needs for redemption (investors asking their money back). This helped the MFs to give money back to the investors and at the same time hold on to the shares and other assets. This helped both the investors who remained invested and those who wanted their money back.
Since the past 3 months or so, we have seen the retail investors starting to invest again in the equity oriented MFs. So there is no real pressure on the mutual funds now for redemption. However, there could be some short term redemption pressure with the stock market oscillating a lot in the past few weeks.
The removal of lending support from banks to MFs, will affect the retail investor in the short term.

Impact C
Removing banks support to NBFCs and HFCs may not have a major impart on the common citizen. The lending from these companies has decreased by almost 50 per cent in the last one year. The lending for housing in the last one year has come down from Rs 29,872 crores (Rs 298.72 billion) to Rs 14,668 crores (Rs 146.68 billion).
So we can say it is not true that the HFCs were making use of the bank lending to support borrowers. So removing the support will not affect them.

Impact D
The RBI has not changed the Repo and Reverse Repo rates. This means that the bank interest rates and deposit rates also will not be affected directly. Since the deposit rates of banks have come down in the past one year from a peak of 11 per cent per annum to 7.5 per cent per annum, many investors are shying away from the bank deposits.
At the same time many borrowers who delayed their purchases of houses and cars are back at their bank door steps. This is seen in the results declared by automobile companies (both 2 wheelers and 4 wheeler manufacturers have shown extraordinary results).
If new deposits do not come in during this quarter of the year too, banks may be short on the funds to lend. This may increase the interest rates.

Conclusion
Though the stock market has not liked the RBI Monetary Policy, there is virtually no impact on the common citizen's finances. As a principle though, it is of some concern that RBI has decided to exit the supportive stance that it had for increasing the country's money supply. The additional money supply that RBI has pumped in during the global financial crisis has helped the economy to stabilize and recover to some extent.

Source: http://business.rediff.com/report/2009/oct/27/perfin-4-impacts-of-the-rbi-policy.htm

Birla Sun Life Mutual Fund declares dividends in multiple equity funds

Birla Sun Life Mutual Fund has announced dividend in four schemes – three equity and one balanced fund.
It has announced a dividend of 50% (Rs 5.0 per unit on Face Value of Rs 10), under the dividend option of Birla Sun Life Equity Fund, An Open ended Growth Scheme with the objective of long-term growth of capital, through a portfolio with a target allocation of 90% equity and 10% debt and money market securities
It has announced a dividend of 15% (Rs 1.5 per unit on Face Value of Rs 10), under the dividend option of Birla Sun Life Top 100 Fund, An Open ended Growth Scheme which seeks to provide medium to long-term capital appreciation, by investing predominantly in a diversified portfolio of equity and equity related securities of top 100 companies as measured by market capitalization.
A dividend of 5.80% (Rs .58 per unit on Face Value of Rs 10), has been announced under the dividend option of Birla Sun Life Dividend Yield Plus, An Open ended Growth Scheme with the objective to provide capital growth and income by investing primarily in a well diversified portfolio of dividend paying companies that have a relatively high dividend yield.
Birla Sun Life Mutual Fund has also announced a dividend of 70% (Rs 7.0 per unit on Face Value of Rs 10), under the dividend option of Birla Sun Life ‘95 Fund, An Open ended Balanced Scheme with the objective of long-term growth of capital and current income, through a portfolio of equity and fixed income securities. The record date for the above dividends is October 15, 2009. All investors registered in the dividend plan of these schemes as on record date will receive these dividends.
The NAV as on October 8, 2009 under the dividend plan of Birla Sun Equity Fund, Birla Sun Life Top 100 Fund, Birla Sun Life Dividend Yield Plus and Birla Sun Life’95 Fund were 74.19, 15.80, 13.40 & 113.07 respectively,
Birla Sun Life Asset Management Company : Established in 1994, Birla Sun Life Asset Management Company (BSLAMC) is a joint venture between Aditya Birla Group, a well known and trusted name globally amongst Indian conglomerates and Sun Life Financial Inc, leading international financial services organization from Canada.

Source: http://pr.trak.in/2009/birla-sun-life-mutual-fund-declares-dividends-in-multiple-equity-funds-344/

India Central Bank Begins Exit From Monetary Stimulus

India’s central bank took the first step toward withdrawing its record monetary stimulus as inflation pressures build, ordering lenders to keep more cash in government bonds.
“It may be appropriate to sequence the ‘exit’ in a calibrated way,” Governor Duvvuri Subbarao said today after increasing the statutory liquidity ratio to 25 percent from 24 percent and raising the inflation forecast. The central bank kept benchmark policy rates unchanged, while maintaining its economic growth forecast of 6 percent “with an upward bias.”
Stocks fell the most in two months after the statement spurred speculation the Reserve Bank of India will boost borrowing costs by year-end, eroding corporate profits. Today’s shift also signals intensifying global concern about consumer and asset-price increases, with Norway tomorrow forecast to follow Australia in raising rates this month.
“We will start to see G-20 economies exiting now, starting with the emerging ones and then the advanced countries,” said Mridul Saggar, the Mumbai-based chief economist at Kotak Securities Ltd. “In India’s case, growth is coming back on track and inflation is becoming quite a concern.”
The Bombay Stock Exchange’s Sensitive index fell 2.3 percent to 16,351.58 at 2:50 p.m. local time. The rupee extended losses to 0.7 percent, trading at 46.98 against the dollar.
Bonds Rise
Bonds rose because some banks will need to boost their holdings as a result of today’s move, said Murthy Nagarajan, a fund manager at Mirae Asset Global Investment in Mumbai. The yield on the 6.90 percent note due July 2019 fell 9 basis points to 7.32 percent, the biggest drop since Sept. 15, according to the central bank’s trading system.
Subbarao, who has injected 5.85 trillion rupees ($130 billion) of cash since September 2008 to protect the Indian economy from the worst financial crisis since the 1930s, said draining that money has become a “central issue in our policy matrix.” The liquidity injection was the equivalent to almost 9 percent of India’s gross domestic product, Asia’s third-largest.
The central bank said “unconventional” steps taken during the global meltdown in the past year can now be reversed to damp price gains, adding that reversing the “conventional measures is not considered appropriate for now.”
Subbarao maintained the reverse repurchase rate at 3.25 percent, the repurchase rate at 4.75 percent and the cash reserve ratio at 5 percent, in line with the median forecast of 24 economists surveyed by Bloomberg News. He increased the inflation forecast for the year to March 31 to 6.5 percent from 5 percent.
Exporter Credit
The central bank cut the refinance limit to exporters to 15 percent of their eligible outstanding credit from 50 percent, and asked lenders to set aside more funds as provision for loans to property companies.
India becomes the second country, after Australia, among Group of 20 nations to take steps to boost borrowing costs, underscoring a rising threat of accelerating consumer and asset prices. At the same time, today’s decision risks damping a recovery from India’s weakest growth pace in six years.
Subbarao said today’s action wouldn’t affect the “liquidity position” of the banking system, since most commercial banks have government bond holdings amounting to 27.6 percent of their deposits.
Central banks globally have stepped up their vigil against inflation and asset-price increases.
Global Context
The Reserve Bank of Australia increased rates three weeks ago, citing costlier real estate. Norway’s Norges Bank is set to raise borrowing costs tomorrow, according to a Bloomberg survey. Bank of Korea Governor Lee Seong Tae said Oct. 23 that keeping rates at a record low may not be healthy for the economy.
At the U.S. Federal Reserve, officials under Chairman Ben S. Bernanke are reviewing whether recent gains in asset prices and narrowing credit spreads are justified as they try to ensure near- zero borrowing costs don’t create bubbles.
Subbarao said there are “definitive” indications that India’s economy is recovering. Accordingly, attention around the world has shifted from “managing the crisis to managing the recovery.” He said the prospects for Indian industry have become “more promising” and with the revival in the stock market and international financial markets, there will be a pick-up in investments.
Political Factor
The decision to signal tighter monetary conditions comes after Finance Minister Pranab Mukherjee told Bloomberg-UTV television channel on Oct. 8 that promoting economic growth and containing inflation are both important and the central bank shouldn’t “compromise” one for the other.
Subbarao is concerned about consumer-price inflation in India that’s running above 10 percent and may accelerate further after the weakest monsoon rains since 1972 create food shortages. India’s $1.2 trillion economy depends on the June to September rains to water crops.
India uses wholesale price data as its key inflation gauge; consumer price indexes are calculated on the basis of rural and urban workers and don’t capture the aggregate price picture.
Wholesale prices rose for a sixth week on Oct. 10, gaining 1.21 percent. Robert Prior-Wandesforde, an economist at HSBC Group Plc in Singapore, expects the rate to hit 8 percent by March 31. Asset prices are also rising, evidenced by the 75 percent climb in the Bombay Stock Exchange’s Sensitive index since January.
“The central bank faces a very delicate situation to manage growth and inflation,” said Ravi Sud, chief financial officer at Hero Honda Motors Ltd., India’s biggest motorcycle maker. “On balance, inflation is the risk as it will hurt consumption and eventually hurt growth as well.”
It will be a “big challenge” to sustain Hero Honda’s profit margins because of rising commodity prices, Sud said last week. Hero Honda, based in New Delhi, is the Indian affiliate of Japan’s Honda Motor Co.

Source: http://www.bloomberg.com/apps/news?pid=20601087&sid=a.Cc4PTq_Tgg

Reliance MF Declares Dividend for Growth Fund

Reliance Mutual Fund has declared dividend on the face value of Rs. 10 per unit under dividend option in retail and institutional plan of Reliance Growth Fund. The record date for the dividend is 30 October 2009.

The fund house has decided to distribute 50% (Rs. 5 per unit) as dividend for retail and institutional plan on the record date. The NAV of the scheme under retail plan was Rs. 56.1611 per unit and Rs. 392.5758 per unit for institutional plan as on 22 October 2009.

Reliance Growth Fund is an open-ended equity scheme, which has the investment objective to achieve long term growth of capital by investing in equity and equity related securities through a research based investment approach.

Source: http://profit.ndtv.com/2009/10/26100118/Reliance-MF-Declares-Dividend.html

Longer trading hours likely to add to Mutual woes

The prospect of extended stock market hours soon is giving mutual funds some nervous moments. The anxiety is over the additional pressure that the extra trading hours will put on the mutual funds and custodians to meet the daily deadline to submit the net asset values (NAV) of equity schemes. As per existing norms, the NAVs have to be uploaded on the Association of Mutual Funds of India (AMFI) website before 9 pm everyday. While custodians, who manage the back-office operations of mutual funds, just about manage to meet the deadline at the moment, mutual fund and custodian officials said the extension of trading hours will make it difficult for them to meet the deadline. “Even when the markets closed at 3.30 pm, we just about managed to submit the NAVs before deadline. Now, at 5 pm, we do not know how will we meet it, especially with the quality checks that need to be followed,” said a top official with a leading private mutual fund.

Last week, capital market regulator Sebi, in a circular, permitted stock exchanges to begin the day as early as 9 am and keep the market open for trading till 5 pm. Mutual fund officials said the deadline to submit NAVs will need to be extended by at least an hour-and-a-half, if the stock market’s close is stretched to 5 pm. A top Sebi official told ET that the matter will be considered once the new timings are implemented by exchanges, though he added that the industry is yet to approach the market regulator to extend this deadline. One of the hindrances to uploading the NAVs on time is the delay by stock exchanges in releasing the final data on futures and options, which are a part of the portfolio of several equity schemes today. Currently, the final derivatives data arrives at around 6 pm. Mutual funds are worried that setting up new systems, including more manpower, will result in escalation of costs, especially when business has been hit following the new fee structure for distributors in August. Custodians said insurance companies also may be burdened with higher costs, as they need to adhere to similar deadlines to submit NAVs for the unit-linked Investment Plan (Ulips), which constitute a sizeable chunk of their assets.

Source: http://economictimes.indiatimes.com/Longer-trading-hours-may-add-to-MF-woes/articleshow/5166513.cms

Mahindra Finance awaits nod for AMC to float MF business

Mahindra Finance, part of the $6.3 bn Mahindra Group, plans to enter into mutual fund business through an asset management company, a top company official said here.

"We have lodged an application to launch an asset management company (AMC) to float a mutual fund and it is under process of review with the regulatory authority," Mahindra Finance's Managing Director, Ramesh G Iyer, told PTI on the sidelines of a press meet here today.

Once licence is issued, we would be able to float mutual fund business in the next 4-6 months period, Iyer said.

The company hopes to provide mutual fund products to vast untapped rural market customers, he said.

Mahindra Finance, one of India's leading non-banking finance company registered on a consolidated basis a growth of 10 per cent in its total income at Rs 368 crore for the second quarter ended September, 2009 as compared to Rs 334 crore during the same period last year.

During the 2nd quarter, the profit after tax (PAT) doubled to Rs 72 crore from Rs 36 crore in the corresponding quarter of the previous year. During the first half of financial year 2010, the total income on consolidated basis increased by 10 per cent at Rs 704 crore as against Rs 638 crore in the same period of the previous year.

Source: http://economictimes.indiatimes.com/Personal-Finance/Mutual-Funds/MF-News/Mahindra-Finance-awaits-nod-for-AMC-to-float-MF-business/articleshow/5165399.cms

Large cap fund yet to prove prowess in market downturn

A large cap fund is considered an ideal investment option for risk-averse investors. While these funds do not promise overwhelming returns like their midcap or multicap peers in rallies, they are known to offer better protection in downturns. However, this does not make a thumb-rule for the entire range of large-cap funds including Principal Large Cap Fund.

PERFORMANCE:

Launched in October 2005 in the middle of the bull run, Principal Large Cap managed to do well delivering decent returns in the first two years. For a new fund, it was a rather comfortable journey – beating the market and its benchmark BSE 100 by healthy margins both in 2006 as well as in 2007. Its returns of about 48% in 2006 and 73% in 2007 compared well against BSE 100’s 41% and 60%, respectively, given its large-cap investment mandate. Year 2007, which was an year of midcap stocks, saw the Sensex and Nifty deliver just about 47% and 55%, respectively.

The feat of the first two years of the launch could not, however, be repeated in 2008 and the fund slumped by about 59% against BSE 100’s fall of 55%. The sensex and the Nifty had lost about 52% each in that year. While this came as a surprise given the fund’s large cap mandate, the downfall could be given the benefit of doubt in light of the fund’s high beta of 1.05. Beta compares the risk imbedded in the fund’s portfolio vis-à-vis that of the market as a whole. Thus, a beta greater than 1 indicates the fund is expected to generate returns higher than that of the market and vice-versa.

However, what has indeed been fascinating about this fund is the kind of turnaround that the fund has made in calendar year 2009. Since January, the fund has delivered a whooping 102% returns against BSE 100’s 82%, smartly compensating the downfall it witnessed last year.

PORTFOLIO:

Adhering to its investment mandate, Principal Large Cap has built up its portfolio with some of the best large-cap stocks available in the market. But the same is not without a tint of midcap stocks. The fund has shown a tendency to invest on an average, about 10-12 % of its portfolio in midcap stocks with the average number of stock holdings restricted to about 40 giving the fund a reasonable diversification.

An analysis of the fund’s portfolio shows that the fund has indeed been prompt enough to pick some of the multi-baggers that are reaping yields in the current market. Its picks like Shree Cement in Sep ’08, at one third of the current market price, and Lupin in Aug ’08 – both of these it continue to hold – have seen a good runup . Again Bajaj Auto, which it had picked way back in Oct ’07 has also rewarded it handsomely. The fund has, however, now replaced this stock with Hero Honda. It was also quick to offload Mundra Port within a month of its IPO and before the markets snapped the bull run in early 2008.

However, some of the moves did not work for the fund — such as its investments in ICICI Bank and ABB at their peaks in Jan ’08, the levels they are still to breach. What may have also hit the fund was its early exit from stocks like Axis bank in Dec ’08. Had the fund continued to hold this multibagger stock today, it may have added on extensively to its returns.

VIEW: This four-year old fund has reasonably proved its ability to beat the market in an upturn. However, it is yet to prove the same in the reverse scenario. While its performance in the current calendar year has been highly impressive, it is now rather imperative to watch whether it can continue to maintain this trend in the coming months as well. But given its track record, it can be conveniently deciphered that Principal Large Cap is one of the better performing schemes from the Principal basket.

Source: http://economictimes.indiatimes.com/Features/Investors-Guide/Large-cap-fund-yet-to-prove-prowess-in-market-downturn/articleshow/5162018.cms

Pick a fund, not a portfolio

It goes without saying that choosing a mutual fund is the most critical aspect of fund investing. How well your investments perform is directly dependant on how you pick them. It is safe to say that picking the right fund is almost as good as ensuring good returns on your investments. But, despite the fact that choosing funds is such an important factor, most people often seem to falter at this very step.

There are a lot of different approaches used to choose a mutual fund. When it comes to equity funds, the approach that is most ineffective is the one based on the fund’s portfolio. Under this approach, an investor – and quite often even an analyst or expert – looks at the fund’s recent portfolio statement and decides for or against the fund on the basis of the stocks it holds. I can’t stress enough on why this method is a futile way of choosing a fund to invest in.

Firstly, this approach is wrong because it takes away the basic advantage of investing in a fund. You invest in a fund because you don’t have either the time or the knowledge, or sometimes both, required to dabble in stocks. So you let the fund manager do it for you. But when you start decoding a fund’s portfolio, you are doing nothing but dabbling in stocks and worse, also assuming that you are a better judge of stocks than the fund manager. In general, stock investors who feel the need to venture into funds as well use this approach. Apart from them, this method is used by broking firms who have started selling funds. In such firms, the stock analyst analyses the funds as well. And hence, he looks at the fund’s portfolio. If he doesn’t like the stocks in it, he renders the fund unfit for investment.

This approach has been appearing in the media a lot too. Recently, a financial publication published a misdirected article that picked individual stocks in isolation from funds, followed the fund managers’ actions on those stocks through a couple of years and then declared those actions to be illogical. What amazed, and amused, me was that they didn’t realise that the funds that they had picked out were funds that had mostly outperformed their benchmarks and peers over the last few years.

This is just another example which shows why a fund shouldn’t be analysed on the basis of its portfolio. A fund buys or sells a stock for myriad reasons, many times for reasons that have nothing to do with the stock’s performance. At times, another stock from the industry could be more attractive. At times, there could be an internal limit on an industry, or to the company. And likewise.

Hence, a fund shouldn’t be analysed on the basis of its portfolio. For most funds, a look at its past returns-based performance is more than enough. A comparison of a fund’s returns, vis-à-vis its benchmark’s or peers’ returns, will give you a fair idea of whether the fund is worth investing in or not. The fund’s portfolio should be looked at after it has answered other basic questions. The portfolio should only be seen to know if the fund is concentrated, is it churned a lot, does it have exposure to emerging sectors, etc. The portfolio should be used to decide between two otherwise similar funds, not as a primary deciding factor....

Source: http://www.financialexpress.com/news/pick-a-fund-not-a-portfolio/533114/0