Category Archives: Mutual Funds

Debate on Debt MFs

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Greetings from PenguWIN

In this blog, I would like to compare and contrast Debt Mutual Funds and other traditional Fixed Income products. In my earlier note on decoding the jargons, I had briefly explained about Debt MFs which you might want to refresh before reading further.

Like a commercial break, I would like to deviate a minute and mention about 2 of our new partners (more than 3 months old now) that we have tied up with - ICICI Prudential for Life Insurance and Bajaj Allianz for Health, 2 large and established players. You can reach out to us if you have any requirements 

The objective of this blog, is to discuss risk-return profile associated with the fixed income products including Debt MFs. With some of the recent setbacks including IL&FS (Infrastructure Leasing and Financial Services), a “AAA” rated company and more so like a PSU, started by LIC, SBI, HDFC, it is extremely important for investors to understand the risk return profile of the instruments in the debt space. The IL&FS could be a black swan event, but whether there are more skeletons in the closet is anybody’s guess. The moot point is, as a fixed income investor, do you want to take some risk for incremental and tax efficient returns or stick to secured products like postal deposits and government bonds. As far as bank deposits are concerned, since Independence no scheduled commercial bank has defaulted (SBI, public sector banks, private banks, foreign banks part of second schedule of RBI) and can be added to the list of secured products

Traditional fixed income products include bank deposits, postal deposits, company deposits, PSU bonds, government securities et al. When I refer to bank deposits, it covers the umbrella of products including savings A/c, Term deposits with various maturity periods, tax savings deposits, recurring deposits, senior citizen deposits, Government schemes administered by banks like public provident fund, senior citizen savings scheme (SCSS, different from senior citizen deposits), girl child benefit program (SSY). Fixed income schemes from Nidhis, Chits (Saradha), gold jewellers’ schemes (Balu, Devi), benefit funds (Royapettah and Alwarpet) and even some company deposits have defaulted in the past. At the same time some of them are operating well with prompt interest and principal payments to investors. A large number of NCDs (non-convertible debentures) have been issued in the past and even as recently (L&T Finance NCD which got oversubscribed) as 2 weeks. This would continue as long as investors have faith and appetite. An instrument that is rated “AA+” by a rating agency (CRISIL, CARE, ICRA, India Ratings) and pays an interest rate of say 10% per annum definitely sounds attractive as a bank will not pay more than 8% in the current scenario (ignore exceptions). Assuming that such a company defaults in repayment of interest or principal, rating agency is not going to take care of the investor interest. The IL&FS is a classic case where AAA rating moved swiftly to default and flummoxed everyone.

Now, let’s look at the case of Debt MFs. Several fund managers from some best of the fund houses had taken exposure in IL&FS and their values were marked down, resulting in their 1, 3, 6-months and 1-year fund returns turning negative. So, as an investor will you be able to withstand a situation like that is something that you need to make up your mind. This does not mean that your returns will be negative overall as typically these are funds where the investors are expected to stay put for 3 years (to get the tax advantage through indexation). The fund manager will definitely make it up and the chances of getting a negative 3-year return is almost nil. But, if you pull out in panic or you have a contingency and need the fund, then you might have to compromise on the returns. However, IL&FS has dented even a liquid fund and an ultra short-term fund, that are supposed to be safe, to a 1-year negative return.

IL&FS is not the only (but popular) case where things went wrong and in the past 2 years, there have been several cases including Amtek Auto, Jindal Steel and Power and Ballarpur Industries (may not have a recall among retail investors)

So, how do we decide on good funds with the limited information that we have? If we take the scenario of short-term debt funds like liquid, overnight, ultra-short, money market, low duration where the investment duration varies between a day and a year (defined clearly by SEBI), the chances that the returns will turn negative is relatively less (and not “nil”). Within this set of fund categories, if we focus on parameters like the size of the fund (larger the better), level of diversification, portfolio composition in terms of rating (% of AAA, AA, A1+ rated instruments), long term track record, the chances of picking a loser is less.

The advantages of the short-term debt funds are:

  • Returns in the range of 6%+ even for short periods of 1 week+, which is approx. 2% plus compared to what we get in bank/postal deposits.
  • Steady returns without penalty, irrespective of the duration unlike banks/postal deposit where the return will be less along with penalty, if pre-closed before the contracted period (like 91 days term deposit and closure in month 2 itself)
  • Tax efficient, when withdrawals are made for cash flow requirements as the withdrawn amount has a component of principal and capital gains, unlike interest component in Banks/Postal deposits.

We are not talking about capital erosion in all cases and only negative returns for a certain period time which might be made up in a short time frame (happened with several cases in the past). If I can take an example to explain: Assume that an amount of 1 lakh is invested for 3 months and the expected return from the fund is 6%.  The fund value goes up to 1,00,500 by end of month 1 and in month 2, it returns a negative 0.25% (-3% on an annualized basis), and again makes up positive 0.75% in month 3. You will end up with a positive return of approx. 1,01,004/- on your investment over 3 months.

I am attaching the profile of one of our favourite short-term funds which we have recommended for a lot of investors and I personally have significant investment in this fund, for my cash flow requirements. The fund scores high on size, returns over 10 years are fabulous, no history of even a 1-month negative return, comes from a top fund house and managed by one of the best debt fund managers in the Industry. However, the credit quality of the holding is mediocre. But given that all other parameters are great, I feel that it’s worth the risk.

All weather short term fund

However, if you still do not want to take any amount of risk, then stick to Bank and Postal Deposits, atleast till things settle down. Is there a period when things will settle down? Its anybody’s guess and its like asking the Finance Ministry, RBI, SEBI etc. to give a guarantee that another IL&FS or Saradha or Sathyam or Nirav Modi will not happen again 😊

“In investing, what is comfortable is rarely profitable.” – Robert Arnott

<Blog # PenguWIN 1065 – Debate on Debt Mutual Funds>

Gross Domestic Product or GDP

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Gross Domestic Product or GDP is the monetary value of all goods and services produced within a country in a specific period of time, typically a quarter/year. GDP is one of the primary indicators used to gauge the health of a country’s economy.
A significant change in GDP, usually has a significant effect on the stock market. Real GDP refers to economic output adjusted for Inflation while Nominal GDP is not inflation adjusted. India’s GDP in 3rd quarter of 2018 was 7.1%, well below the earlier quarter of 8.2% due to slowdown in consumer spending.
The highest ever recorded quarterly GDP figure is 11.4% during Q1 of 2010 under Dr. Manmohan Sigh. India is the 6th largest economy in the world by nominal GDP. Since 2014 with the exception of 2017, India’s economy has been the world’s fastest growing major economy, surpassing China

PenguWIN attempts to decode Financial Jargons <GDP>

Deepavali 2018 and SIP for My Retirement

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Deepavali is a special day for most of us. During my childhood days, Deepavali used be my favourite day in the entire year, more precious than my birthday, last day of school closing for annual leave or other festival days. Its not the new clothes, savouries, sweets, meet and greet family and friends that made the difference but the Crackers! Things have changed a lot in the past 2 decades, when the interest level for crackers has waned significantly, even among small children. Ironically, the courts decide when the crackers are to be burst, day, date and time and mostly, the entire family gets glued to the idiot box!

Retirement

Dhanteras is celebrated all over India on the 5th Nov, today and marks the beginning of Deepavali Celebrations! People pay respect to Lord Kubera and Goddess Lakshmi during this time. There is a long-standing custom of buying gold during Dhanteras. It is believed that a symbolic buying of gold, silver, jewellery, vehicles, property will act as a protection against ill will and bring good luck to every family member

“Goal based” investment has been gaining traction over a period of time. Among goals including buying a new house, medical corpus, world tour, kids’ higher education, retirement planning and creating a corpus for a trouble free (atleast w.r.t. to money) Golden age period is extremely critical. Various research studies show that Indians, relatively, attribute less importance to this when compared to people in other nations

We, typically give importance to our current needs like house, overseas vacations, kids education, marriage and tend to start thinking about retirement only in late forties or early fifties. In the current competitive world where disruption is the order of the day, unless we start thinking about retirement (I am referring to the cash flow part and not sitting in an easy chair and reading a newspaper free of work pressure!), early in our life, its not going to be a smooth ride. Unlike the government and public sector jobs, people working in private sector, professionals, business face the threat of stable jobs till 58 or 60 years. Retired people struggling with penury is becoming common now and more so since we have very little support from the government.

During this week from today to Friday, we are having a awareness drive to invest for retirement by initiating a SIP in Mutual Funds to emphasise the importance of Retirement goal and also use the auspicious period of Deepavali to protect us during the Retirement phase. I am anticipating every investor to contribute a new SIP this week (we have 8 already created even before publishing this note as and when I interacted with a few investors today) with the theme of “SIP for My Retirement”  

SIPs can be as low as 1000/- per month and I want to use the opportunity for everyone to participate. Whether its 1000/- or a 1 lakh SIP does not matter but inculcating the practice to start building the retirement corpus is. While a SIP of 1000/- rupees or 1 Lakh may not be sufficient for retirement depending on our lifestyle, needs among others and requires a separate retirement planning session to figure out the corpus, we can be sure that everyone of us have started thinking about retirement.

I am not initiating a business drive with this and the intent is to have maximum number of people to participate rather than the business volume. I will be publishing the number of Individuals who participated in this initiative, not names or volume, next week. The statistics will be interesting to see how many can be nudged to start thinking and investing using this opportunity. Please don’t worry about the size of instalment and the key is to participate for the cause of “My Retirement” Read it as your retirement (and not mine by creating new business 😊). Its probably a little late in the day but I was reading an article today morning which dwelled into challenges faced by retirees and took the cue from that.

Request you to send in a mail or message indicating the amount per month and we will work on setting up the plan with goal marked as “My Retirement”

<Blog # PenguWIN 1063 – Deepavali and SIP for My Retirement>