Time To Tank Up

"Investors are switching to equity and debt funds to cash in on the stock market rally".

Adarsh Shamdasani, 35, general manager at a Mumbai-based export company, invested only in gold and fi xed deposits to build her wealth. She did dabble in equities and debt mutual funds a few years ago, but was quick to retract. "Gold and fi xed deposits have been the safest investment options for me and I have stuck to them," she says. However, of late, Shamdasani has been toying with the idea of making her debut as a 'serious' investor, given the improving macroeconomic conditions and the subsequent rally in the stock market. "With reducing interest rates, equity and debt mutual funds seem to be a more attractive option," she quips.

Shamdasani is not alone. An increasing number of Indian investors are trying to make the best of the stock market rally. This is evident from the fl ow of Rs 62,500 crore in equity mutual funds between March 2014 and February 2015. The value of assets held by individual investors in mutual funds increased to Rs 5.52 lakh crore in February 2015 from Rs 3.93 lakh crore in the past one year. Says S. Naren, CIO, ICICI Prudential AMC: "The spur in economic activity and poor performance of other asset classes, such as real estate and gold, in the recent past have contributed to it."

After years of stupor, the Indian stock market rally saw the Bombay Stock Exchange (BSE Index) rise by 27 per cent after the NDA government came to power at the Centre with full majority. While equity funds have done even better with the category average returns ranging from 35 per cent to 75 per cent, debt mutual funds also gave 25 per cent returns, compared to gold funds losing nine per cent during the period.

MARKET RALLY TO CONTINUE

Naren feels equities will continue to do well. "The government's reforms initiatives have set the stage for a virtuous economic cycle which will boost corporate earnings," he says.

Market valuations are a factor of earnings growth, hence current valuations may seem high due to poor earnings growth in the corporate sector. Profi t growth for 2014/15, for instance, collapsed to 4-5 per cent, which is lower than the average of the last four to fi ve years. Even though the stock market is trading at about 17 times one year forward earnings, which may appear expensive prima-facie, given the historical average of 14 to 15 times, in the current scenario, the valuations are not expensive," says Pankaj Pandey, Head of Research, ICICI Direct. During the peak of 2008, markets were trading at 18-20 times one-year forward multiples, leaving enough room for expansion.

Going forward, a pickup in earnings growth will depend on the speed with which government reforms are implemented and capital expenditure is undertaken. Naren says the Indian economy is in a much better shape, since current account has been improving, infl ation is on a downtrend, forex reserves are much higher and growth impulses are picking up. The actions taken by the government is likely to start refl ecting in corporate earnings over the next three to four quarters, with a consensus among market experts at 16-20 per cent profi t growth for 2016/17.

According to I.V. Subramaniam, Managing Director and Chief Investment Offi cer, Quantum Advisors, investors entering the market now must be wary and invest with a longterm orientation as there is risk of near-term underperformance. "If one does not have the skill set to analyse stocks, avoid direct investments. Instead, use the mutual fund route and do not get carried away by near-term favourites," he adds.

Mid-cap funds, for instance, have given over 70 per cent returns in the last one year, which can be attributed to the fact that these funds take incremental risk by investing in high-beta stocks, which allow multi-fold returns. It is diffi cult for large-caps to mimic mid-cap funds. The other factor driving mid- and small-cap stocks is the enhanced liquidity. Typically, liquidity drives mid-cap stocks more easily than large-caps. However, during a bear phase, these stocks fall steeper than large-caps.

According to Subramaniam, investors should maintain their core portfolio into large-cap funds, while mid- and small-caps should form a smaller portion of their portfolio. Further, with mid-caps running up twice as much, easy stock picking is behind us. Hence, choosing a fund wisely is more imperative now than before. Investors should look at fund performance through various cycles and its performance vis-a-vis its benchmark. Unlike large-cap funds, which make alpha from sector selection (for example, being overweight on the banking or pharmaceutical sectors, etc.), mid-cap funds make alpha on the basis of stock selection. Therefore, while choosing a fund it is critical to see who is the fund manager and how his performance has been over the years.

Says Vinit Sambre, Fund Manager, DSP BlackRock: "Retail investors should incrementally look at allocating higher share to equities as it is likely to outperform all other asset classes in the next 3-5 years." The other advice will be to follow strict discipline in terms of equity investments and avoid low- quality traps. Investor participation in stock market usually increases as valuations rise, which should not be the case. "It may be prudent to add funds in the balanced, dynamic or asset allocation category as they seek to increase allocation to equity when the markets are cheap, and book profi ts in equities when markets are rising, thereby, reducing volatility and boosting returns," says Naren.

SECTOR PREFERENCE

Pandey of ICICI Securities is bullish on domestic sectors such as automobiles, cement, capital goods and banks. According to him, defensive sectors such as FMCG, pharma and IT could perform in line with the broader market. He maintains his December 2015 Sensex and Nifty target of 32,500 and 9,750, respectively. Ridham Desai, Managing Director and Head of Research at Morgan Stanley, estimates a 24 per cent CAGR in Sensex earnings in the coming two years compared with 17 per cent estimated by the bottom-up consensus. He is overweight on private sector banks, industrials, discretionary consumption and technology. Naren believes highly leveraged segments are likely to do well considering a 50 basis point cut. It will reduce the interest burden of leveraged companies. Many highly leveraged companies did badly relative to the rest of the market, and some of them are wellpoised to make the most of the lower interest rate cycle.

Debt-ridden companies may not necessarily have the best fi nancials or the best balance sheets now and, therefore, it would require intensive research to narrow down to specifi c companies. "Financials is another area that looks quite promising.

Public sector banks require capital and, over time, lower interest rates should benefi t banks as it will improve growth and reduce nonperforming assets. A combination of lower interest rates, lower NPAs and capital infusion are extremely positive for the fi nancial sector," adds Naren. Visibility on capex revival through increased government spending and addressing issues of fi nancing infrastructure projects could also benefi t certain sectors in the infrastructure space.

TRENDS IN INCOME MUTUAL FUNDS

Fixed income, too, offers good investment opportunity. According to Pandey, outlook for the bond market turned positive in 2014 on the back of attractive levels of government security (g-sec) yields after continuous sell-off and improving macroeconomic data. The sharp fall in consumer prive index (CPI) infl ation coupled with favourable global and domestic macroenvironment, such as softening global commodity prices, a stable rupee, and comfortable fi scal and current account defi cit, have led to increased expectations from market participants about rate cuts by the Reserve Bank of India. Increased and sustained foreign infl ows in the Indian debt market also improved market sentiments, leading to increased domestic participation in income funds and g-sec funds.

What is likely to decide the income trajectory from here on is the CPI or retail infl ation, which is the key driver for interest rates to ease. According to Rahul Goswami, Chief Investment Offi cer, Debt, ICICI Prudential AMC, interest rates are likely to decline by another 50 bps over the course of this year. The 10-year g-sec yield is currently hovering at 7.75 per cent and could fall to seven per cent mark in about a year, making debt attractive. Falling interest rates and yields are good news for bond investors as interest rates and bond prices share an inverse relationship: any fall in rates and yields lead to an appreciation in bond prices, and vice versa.

Says Santosh Kamath, Managing Director, Local Asset Management, Fixed Income, Franklin Templeton Investments, India: "Debt mutual funds offer an attractive alternative to traditional savings instruments due to their return potential and tax advantages. Some of the other key benefi ts of mutual funds are professional management, diversifi cation and easy access to liquidity at a fraction of the cost of buying debt instruments individually to build such a portfolio.

Source: http://businesstoday.intoday.in/story/investors-eye-equity-debt-funds-benefit-from-stocks-rally/1/219657.html

Volatility counts while picking equity mutual fund schemes

One of the best investment options is to invest in mutual funds. Mutual funds investments through SIP provide good returns in the long run. However, when you are investing in equity funds, you should look at volatility (risk) factor. What is this volatility factor in Equity fund? In this article, I would provide some insights about volatility in equity fund and how an investor can understand it in simple terms.

Why it is important for an investor to look at volatility in equity fund?

Stock market reached peak in the last 1.5 years. You may not see such peaks every year. Foreign investors are pumping money into the Indian stock markets. Small cap stocks and mid cap stocks are zooming like anything. We see some market corrections now and then. In such case, it may be a risk in investing in stock markets at this point of time. If you are investing in equity funds now, you do not know whether you would get good returns in future. Investors generally look at the high returns track record and invest in such funds. Many investors look for higher returns rather than ranking and the volatility of the fund. Exceptional gains in short term period would hide the poor performance of the fund.

Hence, you should understand volatility risk in equity funds to have a better picture of your equity fund investments.

How to measure it?

Mutual fund volatility risk can be measured by various ways like Alpha, Beta, R-Squared, Standard Deviation and Sharpe Ratio. However, it is difficult to understand for normal investors to go through the formula and check for each and every scheme. I would tell you how to measure volatility of equity fund in simple terms.

Large cap equity fund – volatility is somewhat moderate

Mid-cap equity fund – volatility is generally high

Small-cap equity fund – volatility would be very high

As an example, if you are investing in a good small cap fund, when markets are rising, returns from such a small cap fund would be higher than a large cap benchmark such as SENSEX or NIFTY. Similarly, when markets are falling, small cap funds would tend to fall at faster speed than the benchmark indices.

Then, how should we invest in equity funds?

There are few factors you should consider while investing in equity funds.

Invest more in large cap funds than in mid-cap or small cap funds especially during peaks.

During rising markets, mid-cap and small cap funds tend to do better.

Choose funds that have done well in bear markets too.

Look for consistent performers rather than short period upswing.

Avoid funds which came in last 3 years. Performance in various market cycles is not yet known.

Do profit booking for mid-cap/small cap funds during market peaks as they tend more volatility during market corrections.

Source: http://www.moneycontrol.com/news/mf-experts/volatility-counts-while-picking-equity-mutual-fund-schemes_1391051.html

Debt funds may be better than tax-free bonds

Public sector undertakings such as Indian Railway Finance Corporation and National Highways Authority of India will soon come out with their tax-free bonds. The biggest advantage for investors is that the interest earned from these bonds is entirely tax-free. But the disadvantage is that these bonds lack liquidity. While investors can sell them through exchanges since they are listed bonds, it becomes difficult to do so as they are not traded frequently.

One way to get around this is to invest in an active bond, say an income fund, that invests in the taxable bonds of the same PSUs. This way you are assured of the same credit quality and higher yields. Yields on taxable bonds can be about 100 basis points higher than tax-free bonds.

"For us it does not make sense to buy tax-free bonds because then where can we sell the bonds? On the other hand investing in the taxable bonds of the same PSUs makes sense as yields are higher. This is a strategy we have been following for our debt funds for some time now. And if you remain invested for three years, you will get benefit of indexation,'' says Namdev Chougule, Executive Director, Head-Fixed Income, J P Morgan Asset Management.

For instance, J P Morgan has non-convertible debentures of PSUs like Power Finance Corporation, Rural Electrification Corporation, Airports Authority of India, IRFC, Power Grid Corporation of India, etc. All of these are companies also issue tax-free bonds.

The trade-off is between the higher returns generated by the mutual fund and the post-tax benefits of tax -free bonds, says Sudip Bandyopadhyay, MD and CEO, of Destimoney Securities. "Even in a debt fund it is possible to reduce the tax by opting for the growth option and holding your investment for three years. But it will attract long-term capital gains after three years. However, the clincher for mutual funds is the liquidity. Investors can sell at any point of time. In case of tax-free bonds they are stuck with the bonds if they can't find buyers,'' he says.

Besides with interest rates going down and bond prices going up, both mutual funds and tax-free bonds will give the benefit of capital appreciation. So savvy investors can consider the mutual fund route, he adds.

Those investing in mutual fund will have to keep in mind intermediation costs and other expenses, which can eat into the gains, points out Jyoteesh  ‎EVP & Head Marketing, Distribution & Product at HDFC Securities. "If you invest directly in tax-free bonds it is transparent and you know what you are investing in. But in case of mutual funds often investors don't know what kind of papers the fund is investing in,'' he says.

Currently, there is a lot of demand for tax-free bonds in the secondary market, he adds.

Tax-free bonds are usually issued for long term periods of 10-20 years and are preferred by High Networth Investors, who do not want to pay tax. This time around experts feel that a lot of money from equity gains could flow into tax-free bonds as and when they hit the markets.

If you sell tax-free bonds before maturity, the capital gains will be taxed. So, investors will have to hold them till maturity to get the tax benefit.

Source: http://www.business-standard.com/article/pf/debt-funds-may-be-better-than-tax-free-bonds-115051400720_1.html

5 Reasons Why Sensex Fell Over 550 Points

Indian stock markets fell sharply on Tuesday, with the BSE Sensex plunging 506 points to 27,000. The broader Nifty slipped 134 points and the rupee corrected over 0.5 per cent to 64.24. The decline in stock markets comes after two days of gains which saw the Sensex gaining over 900 points.

Here are the latest developments:

1) The Sensex, which rose 908 points in the last two trading sessions, succumbed to profit-booking. Analysts say the gains seen in the last two trading sessions were a mere technical pullback. Technical analyst Anil Manghnani told NDTV that the Nifty has stiff resistance around 8,300-8,310 levels.

2) The crucial bills such as Goods and Service Tax amendment bill and the land acquisition bill, which were supposed to be passed in the ongoing session of Parliament, got stuck in the Rajya Sabha. A K Prabhakar, an independent market analyst, said that it seems the government is compromising on these bills by referring them to the Select Committee of Parliament, and hence delaying the much talked about economic reforms as promised by the NDA government.

3) Correction in other Asian markets is also having its toll on the Indian markets. On Tuesday, most of the stock markets in Asia were trading with a negative bias and overnight, the Wall Street also edged lower as investors fretted about Greece's precarious financial condition and slowing growth in China while energy stocks fell on weaker oil prices.

4) The rupee, which rose to a high of 63.85 against US dollar on Monday, again slipped back to a low of 64.27, taking it closer to its yearly low of 64.28 hence raising worries that foreign portfolio outflows may create a vicious cycle between rupee and domestic shares, fund managers said.

5) FIIs or foreign institutional investors being net sellers: Despite gains in the equity markets in the last two trading sessions, FIIs were net sellers in the equity markets to the tune of Rs 270 crore in the last two trading sessions. And in the last 17 trading sessions, they have sold shares worth over $2 billion or nearly Rs 14,000 crore.

Source: http://profit.ndtv.com/news/market/article-5-reasons-why-sensex-fell-over-550-points-762409