Five things to check before you invest in NCDs

The weakness in the stock markets and the high returns offered by debt instruments are making investors rush to the safety of fixed income options. After fixed deposits and FMPs, non-convertible debentures (NCD) have caught the fancy of investors. Right now, the NCD issue of India Infoline Investment Services is open for investment, with the company offering 11.9% on the 5-year bonds. Three more issues are in the pipeline. However, before investing in these bonds, here are a few things you should check.

How safe is your capital?

You are investing in debt because you want safety, right? However, private issuers can default on the repayment of the principal. This is where the credit rating of bonds comes into focus. Credit rating is an independent assessment of the ability of the issuer to meet its financial commitments. It's important because it also determines the price that a bond will command in the secondary debt market. A high rated bond will fetch a higher price than a bond with a lower rating.

The rating assigned to a bond is not for perpetuity as it may change with the fundamentals of the issuing company. Any downgrading of rating will bring down the price of the bonds in the secondary market. So, you need to keep your eyes open for any change in the rating of the bonds that you hold. Any variation in rating is usually announced by the agency and reported in the media.

Is the issuer on a sound footing?

Unlike in the case of bank deposits, which are insured up to `1 lakh, investments in non-convertible debentures are not backed by any guarantee. However, as a lender to the company, an investor in NCDs has the first right over the company's assets if it faces liquidation. However, this information is useful only if the company has sufficient assets. So, before investing, take a look at the company's financials. Check whether it is sufficiently capitalised and if it has a healthy book value. "Stay away from companies that have a highly leveraged balance sheet," says Ritesh Jain, head of investments, Canara Robeco Mutual Fund. A little bit of spadework here can save you a lot of heartburn later.

How liquid is the investment?

The investor is not obligated to hold the debenture till maturity because it can be traded in the secondary debt market. That's the theory. The reality is that these instruments are not very liquid and have very few buyers. So, check the liquidity of similar instruments issued by the company before you are taken in by the sales pitch. You may find that some NCDs are not traded for days, which is not the state of liquidity you expect from a product sold on a national exchange.

Is there a put and call option?

Some NCDs come with riders called put and call options. The put option means that the investor has the right to sell the NCD back to the company after a specified period, while the call option gives the company the option to repay prematurely. While the put option favours the investor in a rising rate scenario, the call option acts as a cushion for the company if the rates fall and it wants to retire the high-yielding NCDs prematurely. Find out whether the put and call options suit your needs before you invest in the NCD. For instance, the five-year NCDs by Shriram Transport Finance have a put and a call option after 48 months, whereas the Indian Infoline Investment Services NCD does not have any put or call option.

What is your post-tax yield?

Lastly, consider the tax implications of the investment. The yields being advertised by the issuers obviously do not take into account the tax liability of the investor. Any income from the NCD is to be added to the total income for the year and taxed at the normal rate. In the 10% tax bracket (income of up to `5 lakh a year), the 11.5% yield drops to 10.35%. In the 20% tax bracket (income of up to `8 lakh a year), it falls to 9.2%. And in the highest 30% tax bracket, it is barely above 8%, which is no more than that offered by the PPF.

Source: http://economictimes.indiatimes.com/markets/bonds/five-things-to-check-before-you-invest-in-ncds/articleshow/9506377.cms

Prospects of rate hike to slow down India's growth: Moody's

Research firm Moody's has said that prospects of further rate hikes by the Reserve Bank is likely to slow down the growth of Indian economy in 2011-12.

It, however, added that headline inflation in the country is expected to remain at around 9 per cent in the coming months.

"With Indian policymakers signalling additional interest rate hikes are needed to cool inflation, growth will slow through the end of the year," Moody's Analytics said in an article 'Higher Rates Slow Indian Growth'.

The research firm had earlier forecast the Indian economy to grow by 8.2 per cent in 2011-12, compared to previous fiscal's 8.5 per cent.

"The Prime Minister's Economic Advisory Council revised its Indian growth forecast down to 8.2 per cent... and is now in line with our 8.2 per cent estimate," it said.

In its Economic Outlook for 2011-12 released last week, the PMEAC projected growth to slow down to 8.2 per cent, far below the government's pre-Budget survey expectation of 9 per cent.

In its annual monetary policy review, the RBI had also painted a gloomy picture and said that Indian economy would expand by only 8 per cent this fiscal.

The RBI has already hiked interest rates 11 times since March, 2010 to curb inflation. Headline inflation stood at 9.44 per cent in June.

"Tighter monetary policy is working to cool domestic demand. Manufacturing grew at the slowest pace in 20 months in July...," Moody's Analytics said.

It added, "Even though policymakers are engineering slower growth, the country's robust expansion remains firmly on track, and no hard-landing is expected".

Moody's, however, cautioned against spiralling inflation and said rising prices remain the prime risk India's robust medium-term growth projections.

"Inflation remains stubbornly strong, despite the central bank's aggressive monetary tightening over the past year... Inflation will sustain its current 9 per cent pace in coming months, before tighter monetary policy and rising agricultural production reduce food and demand-side inflation by year's end," Moody's Analytics said.

The PMEAC's outlook had also projected inflation to remain stubborn till at least October, mainly on account of high global commodity prices.

Source: http://economictimes.indiatimes.com/news/economy/policy/prospects-of-rate-hike-to-slow-down-indias-growth-moodys/articleshow/9514638.cms

‘We are underweight on companies with high leverage'

Earnings downgrades in select sectors may not be very worrying for the equity market as valuations are attractive for markets as a whole.

Ms Swati Kulkarni, Vice-President and Fund Manager for UTI Mutual Fund, says that rising interest rates and policy issues have slowed the investment cycle, even as the big picture doesn't look too gloomy.

Excerpts from an interview:

Downgrades to Sensex earnings estimates have been a concern for the markets for some time now. Do you see further downgrades happening now, with the rate increases? What does that spell for markets?

The downgrade concerns are mainly coming from the margin pressure due to high raw material prices, wage inflation and top-line concerns arising from limited pricing power in a phase of slowing economic growth. Commodity prices have softened a bit from the peak levels.

If the commodity correction persists due to slowing global growth, Indian companies will experience margin and earnings expansion.

Earnings downgrades in select sectors may not be very worrying for the equity market as valuations are attractive for markets as a whole. They are also below historical average multiples.

The market appears to be much more concerned about growth than value today. So many stocks and sectors available at low price-earnings multiples (PEs) are declining even further. Do you agree?

From a relative perspective, among the global equities, India has always remained a growth market.

The valuation premium over the developed market is justified with relatively higher expected growth.

Having said that, there could be certain stocks and sectors at any given point of time that may remain at lower valuations on account of certain concerns on earnings visibility or uncertain competitive scenario or simply because of excessive pessimism.

If we find that the concerns are priced in to a large extent, there could be an opportunity to gain from these value picks.

Is the premium the market is paying for consumption stocks justified? Much of the recent move in the markets has been driven by the consumption theme, with infra stocks completely out of favour. Do you see this trend reversing?

The preference for consumer stocks is clearly coming out of the strong demand visibility for the coming few years, backed by the rising income levels in urban and rural areas and demographic advantage — 50 per cent of the population in the working class for the next 20 years.

The premium valuation may sustain till we see initial signs of a pick-up in the investment cycle.

For that we may have to look for evidence that the rate hikes are done with and also increased activity in infrastructure ordering.

Will an erratic monsoon cloud the prospects on earnings?

Cumulative monsoon till date is only 3-4 per cent below normal. The risk is reducing as the monsoon advances.

Hypothetically, if we see a poor monsoon from here on, it may adversely affect consumer demand and worsen the inflation fears.

Recent macro indicators all signal a slowdown in the manufacturing side of the economy. What is triggering this slowdown? Is corporate India running up against capacity constraints?

The Index of Industrial Production has been very volatile in the past. There is a high base effect of last year coupled with the effect of monetary tightening.

Projects are being put on hold in certain sectors for clarity on policies, environmental clearances and fuel linkages.

Rising interest rates are another important factor in postponing of investment decisions. I hope that the slowdown does not result in worsening the supply-side issues, with their adverse structural impact on inflation in the system.

The Reserve Bank of India has been more aggressive than expected in hiking interest rates. How do you see companies coping with debt and interest costs?

Companies that are highly leveraged get affected on account of rising borrowing costs and also due to the limited ability to restructure capital in a not so benign capital market.

Added to these, the order intake is slowing, clients are postponing deliveries — choking off the cash flows for these companies.

We avoid or stay underweight on such companies in a rising interest scenario.

Many managers have been betting on mid-cap outperformance for quite some time now, but it somehow doesn't play out at all. Why and when do you see a catch up in mid-cap valuations?

Investors need to pick good companies which have the ability to withstand a challenging business environment especially during times of macro headwinds. One has to be stock specific here.

The mid-cap companies with competitive positioning, pricing power, product strength and financial strengths continue to outperform relatively, despite the tough environment.

For example, our own mid-cap dominant funds such as UTI Master Value Fund and UTI Mid-Cap Fund have posted 6 per cent and 10 per cent returns respectively in the last six months, when large-cap indices such as the BSE Sensex and S&P CNX Nifty have struggled to post positive returns.

Source: http://www.thehindubusinessline.com/features/investment-world/article2331162.ece

'US debt crisis to benefit Indian market'

The US debt crisis triggering deep cuts in the stock markets across the globe is likely to benefit India in due course, said a senior official associated with the market regulator Securities and Exchange Board of India (Sebi).

“The downward movement in the Indian market is a very short-term knee-jerk reaction,” the official said, adding once the situation stabilised, Indian markets would be very lucrative for FIIs.

“With the US credit rating getting downgraded by the Standard & Poor’s and most of the markets falling more than India, FIIs are set to move here as, at worst, the growth rate in the current financial year would be 7.5 per cent.”

Under pressure from the fears of a double-dip recession in the US and financial problems in Europe, stock markets worldwide including that of India, witnessed a substantial fall last week.

There is an apprehension of the situation worsening further on Monday with credit rating agency Standard & Poor on Saturday lowering the US credit rating from AAA to AA.

The official said in the immediate run, FIIs might sell in the Indian markets but while taking fresh positions, they will find the markets very attractively placed “Markets like India, which are well-regulated with good economic growth prospects and large number of companies, will certainly be preferred by the FIIs.”

The official said as far as retail investors were concerned, they would take time to come back to the markets. Sebi had recently announced a number of steps to bring back small investors to the stock markets.

As the markets are being driven by global cues, it is expected that the measures announced by the regulator to simplify processes would be beneficial in broadening the market base in the medium- and long-term, said the official.

The proposal to bring in Uniform KYC (know your customer) norms will have a major bearing in this regard, along with the steps announced to support mutual fund distribution and simplification of the IPO process, he said.

The simplification of Forms associated with investment in the financial market is also likely to help investors.

Source: http://www.business-standard.com/india/news/us-debt-crisis-to-benefit-indian-market/445047/

Invest in equities when markets dip

The recent fall in equity markets over the last few weeks has forced a lot of investors to worry about its impact on their equity portfolio.

It has also left them clueless about their future course of action — whether they should pull out money at this stage from equity markets before a much sharper fall erodes this value further.

We, however, believe that this weakness in the Indian equity market provides good opportunity for long-term equity investors to generate superior returns on their portfolios over the next 5-10 years.

In the shorter term, equity markets always tend to be very unpredictable and are prone to sharp movements — both upward and downward.

However, over a longer time frame of five years and above, the predictability of stock market returns increase.

This is contrary to what a large number of investors believe, that the short-term in equity markets is predictable but the long-term is not.

Thus, there is a tendency to give more importance to short-term trends like an unexpected interest rate increase or a bad results from a company for a quarter than the long-term trend like young population with significant saving potential or the strength of the Indian economy, which has a very small component of its GDP coming from exports.

Empirically it has been found that over long period, the returns from equity markets tend to closely track earning growth rates of companies, though in the short-term the correlations are not so strong.
Let’s see how you should go about building your equity portfolio.

Keep it simple: Trying to do too many things on an equity portfolio tends to add complexity to the portfolio without necessarily adding higher returns.

For example, we come across portfolios with a stock portfolio running into a number of pages and small investments in a few dozen mutual funds.

Most investors would do well to have only a handful of fundamentally strong stocks and a combination of three-to-five index and actively managed mutual funds with different styles and good track records.

Buy only what would make you comfortable: This comfort differs from individual to individual. Some investors are very comfortable holding stocks of large companies that they deal with in their day-to-day life such as the bank that they have close to their residence or the company that owns the coffee brand that they have every morning.

It is critical that investors are comfortable with the products that they own, whether it is a stock or a mutual fund, so that they do not overreact when it corrects sharply.

Be disciplined with your investments: Over the last few years, Systematic Investment Plans (SIPs) in mutual funds have become very popular with investors.

While these are excellent tools to build long-term wealth, there is no guarantee that returns over short periods of time will be positive.

There is a tendency to stop SIPs when equity markets turn negative, which beats the very purpose of an SIP.

In fact, investors should be looking at enhancing exposure to topups through SIPs during negative equity markets, so that they can enhance the overall portfolio rate of return, if they have the liquidity. And last but not the least, be patient and give your investments time to grow. Remember Rome was not built in a day.

Source: http://www.asianage.com/business/invest-equities-when-markets-dip-864

Franklin India Index Tax Fund to be merged into Franklin India Index Fund - NSE Nifty Plan

Franklin Templeton Mutual Fund has announced that Franklin India Index Tax Fund (FITF) would be merged into Franklin India Index Fund - NSE Nifty Plan (FIIF - Nifty) as on 9 September 2011. Consequently, from the date of merger i.e., effective 9 September 2011, the investors of FITF would become investors of the growth option in FIIF - Nifty.

In terms of prevailing regulatory requirements, investors in FITF are given an option to exit at the prevailing Net Asset Value without any exit load, in case they do not wish to approve the merger. The period of this no load exit offer is valid from 8 August 2011 to 9 September 2011.

Source: http://www.adityabirlamoney.com/news/496626/10/22,24/Mutual-Funds-Reports/Franklin-India-Index-Tax-Fund-to-be-merged-into-Franklin-India-Index-Fund-NSE-Nifty-Plan

Franklin FMCG Fund & Franklin Pharma Fund to be merged into Franklin India Prima Plus

Franklin Templeton Mutual Fund has announced that Franklin FMCG Fund (FFF) and Franklin Pharma Fund (FPF) would be merged into Franklin India Prima Plus (FIPP) as on 9 September 2011. Consequently, from the date of merger i.e., effective 9 September 2011, the investors of FFF and FPF would become investors of FIPP in the respective plans / options.

In terms of prevailing regulatory requirements, investors in FFF and FPF are given an option to exit at the prevailing Net Asset Value without any exit load, in case they do not wish to approve the merger. The period of this no load exit offer is valid from 8 August 2011 to 9 September 2011.

Source: http://www.adityabirlamoney.com/news/496635/10/22,24/Mutual-Funds-Reports/Franklin-FMCG-Fund-Franklin-Pharma-Fund-to-be-merged-into-Franklin-India-Prima-Plus

U.S., Europe Crisis to Boost Flows to India, Reliance Asset Says

Sunil Singhania, head of equities at Reliance Capital Asset Management Ltd., India’s biggest money manager, comments on the outlook for the nation’s stocks. He spoke in an interview with Bloomberg UTV. Reliance Capital’s mutual fund unit manages $23 billion in assets.

Reliance Growth Fund, managed by Singhania, has risen 37 percent annually in the past 10 years, the most among active funds focused on Indian equities with a record going back a decade, according to data compiled by Bloomberg.

On U.S., Europe Debt Problems:

“If you spend more than what you earn for a prolonged period of time, there’s going to be a time when you have to bear the pain of it. That is what most of the countries in Europe, as well as the U.S., are undergoing. We feel the problem is not insurmountable. Though challenges would be there, it’s not something which is going to cause too much of a concern in the near term. The good thing is that the countries are realizing that they need to cut expenses.

‘‘If there’s going to be some catastrophe in Europe or the U.S. then in the near term all the global markets are going to get hit. Even now more than 85 percent of global equity money is invested in developed markets and only 15 percent is in emerging markets. The problems in Europe and the U.S. will probably hasten the move and make allocation from global guys a little more balanced. This would favor emerging countries, of which India would be an important part.”

On the outlook for interest rates:

“A few global gurus have been of the opinion that it makes sense to tighten up to sacrifice growth to some extent. At the same time, if too many shocks like this come then sentiment can take a beating. That is something which India cannot afford. Already we are seeing new project announcements being deferred. The predominant reason would be interest rates. India can’t afford its entrepreneurs becoming more careful in their expansion plans.”

The Reserve Bank of India has raised rates 11 times since the start of 2010, the most aggressive tightening among major economies in Asia.

On outlook for economic growth:

“There is no doubt in our mind that India is going to continuously keep growing on an annual basis. There will be periods where you might see growth slow. Too many shocks have come at the same time, which are leading to a perception and a view that probably if things don’t improve then the next two quarters can be really tough.

‘‘Hopefully by October-November we should again start to see some revival in activities, led by interest rates coming off to a certain extent, or at least peaking, and some policy decisions from the government that can kick-start the economy.

‘‘The market is discounting a lot of things, unless there are more shocks. The entrepreneurship spirit is alive. It is upon the government to ensure that it is kept alive and kicking.’’

Earnings reported by eight out of 19, or 42 percent, of Sensex companies have lagged behind analyst estimates for the quarter ended June. That compares with 33 percent that missed forecasts in the previous quarter, according to Bloomberg data.

On Holding Cash:

‘‘The reason why we have not taken a cash call is that we don’t feel there’s a strong reason for the market to correct significantly. There will be short-term movements. If things start to move a bit more positively, and as not too many people expect too much positiveness, the impact on the upside could be much larger than what it has been on the downside.

‘‘It took 60 years to become a $1 trillion-$1.5 trillion economy. Probably in the next 10 years we will be a $5 trillion to $6 trillion economy. Three times the wealth created in the last six decades is going to be created in the next 10 to 12 years. The direction is very clear.’’

Reliance has cut cash holdings in its biggest stock fund to 3.6 percent, the lowest level since at least the collapse of Lehman Brothers Holdings Inc. in September 2008.

On financial-services stocks:

‘‘Financials is one of the largest sectors in the economy. The combined size of the balance sheet will double in four to five years. Profit should also double in four to five years. Banks are now much stronger than what they were 10 to 15 years ago. The systems are very strong and we are an under-banked country. It is both a consumption and a growth theme.’’

Lenders and finance companies accounted for 20 percent of Reliance Growth Fund’s 70-billion rupee assets on June 30, data compiled by Bloomberg show.

On infrastructure stocks:

‘‘We’re positive on infrastructure, but too many headwinds have hit the sector at the same time. Land acquisitions and environmental clearances are issues, interest rates have shot up and equity raising has been difficult. If we intend to be a $6 trillion economy, we cannot just eat pizzas, see movies and hope to reach there. We need infrastructure and that is where the opportunity lies.’’

Source: http://www.bloomberg.com/news/2011-08-05/u-s-europe-crisis-to-boost-flows-to-india-reliance-asset-says.html