Category Archives: Mutual Funds

Equity Market Dynamics

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Friends,

            Apologies for the long silence (excluding the folks for whom it might have been a bliss) – Some investors even asked me if I had stopped writing Blogs. Income Tax Filing and GST Registration took a toll on my time – Need some excuse, right?

I have realized that starting a new habit like walking, running, swimming, meditation is easy. But, sustaining it for a long period of time is extremely difficult. I am telling this in the context of publishing blogs on a periodic basis rather than adhoc.       

  • ‘Invest cautiously through dynamic asset allocation funds’
  • ‘Move from mid-caps to large cap’
  • ‘Lower your return expectations’
  • ‘Earnings continue to be muted’
  • ‘Cash holding and arbitrage positions have increased’
  • ‘Risk-Reward is unfavourable for Equities’
  • ‘GDP growth takes a hit’
  • ‘Foreign Money is chasing India’s Reform Story’

 

The above statements were made by key fund managers and analysts, both Indian and International, in the recent weeks. Has our reform story taken off or yet to take-off? Statements like price to earnings P/E is more than 10-year average; 1 to 15 is considered cheap, 16-20 is considered fair and greater than 20 is considered as expensive may not be relevant in the current context. Currently Nifty and Sensex are trading at close to 24 P/E. I would tend to argue that there are major changes to the investment pattern which will change the contour of equity investments and following are some of the points why I think so.

  • Retail Investor participation in markets through MFs and ULIPs is at all time high with inflows increasing month over month. Equity MFs had an all-time high net-inflow of Rs. 21,875 Crores in Aug 2017. How was it before? Equity MFs had an all-time high net-inflow of Rs. 14,480 Crores in July 2017. This highlights the appetite of Indian Retail Investors which was not the case earlier.
  • Other than MF Equity route, inflows are high from sources like National Pension Scheme, Provident Fund, ULIPs.
  • The reason attributed to this heavy inflow is not that Investors have started embracing equity but also due to stagnant Real Estate Sector, Gold still struggling to cross 2012 levels and lowering of Bank/Post Office/Company Fixed deposit rates.
  • Instead of yearly dividend payments which was the norm until a few years ago, Quarterly and Monthly dividends in Equity Funds are being paid to attract gullible investors.
  • Some Wealth Management firms and independent practitioners, enticed by the volume and immediate benefits, invest huge lump-sums of their clients, running into crores, even in the current market.
  • The argument of average 10-year Price Earning is something that I don’t subscribe as there will be demand-supply mismatches which inflates the PE of a good stocks with earnings visibility

So, as sensible investors, what is that we can do in this frenzied Bull Run:

  1. Investors who embark on direct equity in this period need to know that, during bull runs, even the worst of stocks do well. Warren Buffet, the Oracle of Omaha and considered as the god of equity investing quoted ‘Only when the tide goes out do you discover who’s been swimming naked’.
  2. Do not go for Lump-Sum investments and invest through systematic plans – SIP and STP – Almost all Chief Investment Officers and Fund Managers of Fund houses are unanimous with this message.
  3. Medium and Small Company stocks have become overvalued and the hit will be heavier during correction. Advice is to stick with Large Company Stocks or move allocation from Small and Mid to Large. This is also a unanimous message
  4. The Equity markets would have changed the asset allocation pattern – skewed towards Equity than Debt and this needs to be rebalanced.
  5. Cashing out of Equity, especially MFs, is not a good idea as it is extremely difficult to predict when the correction will happen and when the market will go back to the original high. I remember atleast 3 popular fund houses, that took cash calls during the 2008-9 global crisis and for a short period those funds were doing better as they contained losses. But the celebration for those funds was short lived as the markets turned around sharply, not allowing the funds to re-deploy the cash. Some of these funds are still languishing.
  6. Even if there is a 10 to 20% correction, the macro factors for India is good which will life the markets – Inflation down, GST Implementation, Current Account and Fiscal deficit, Government gaining due to low Crude Prices – The only reason to be cautious is if we get another shock like Demon. or Beef ban or unrest with neighbours

 

<Blog # PenguWIN 1055 – Equity Market Dynamics>

Welcoming New Year 2017-18

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Dear Friends,

                  A very Happy New Year to you!

For the Finance world in India the New Year starts on 1st April XXXX and ends on 31st March XXX(X+1). However, this is not a standard practice across the globe and some companies use Calendar Year as the financial accounting period i.e. 1 Jan XXXX to 31 Dec XXXX. While these 2 are the predominant periods, companies do follow other timelines for financial accounting. Ex. Oracle follows 1 June XXXX to 31 May XXX(X+1) as the accounting period.

We should feel extremely happy at this juncture, when the returns from the Equity Markets (and Debt too) have been wonderful for the period ending 31 Mar 2017. Rewind it by 1 year, 31 Mar 2016, the portfolio of most of our investors were in Red. Though none of our customers exited in fear, I was definitely worried as most of them are first time equity investors and typical investor reaction is to salvage whatever they have and exit the market. Here, I must say that the level of Composure and Maturity demonstrated by our investors was really great.

Equity Returns are never linear and the risk of equity is the volatility and not that we will lose everything like the fund scams (Sharda, EMU birds, Ponzi schemes and Gold houses in Chennai). The volatility decreases over time and that is the reason why Equities are referred as long term growth products.

A simple approach that I follow for equity investing is

  • Do not look at Equity for short term goals. It might happen that investors who started investing a year back would have made handsome returns in just 1 year, but I would say that luck was in their favour as predicting the market is impossible.
  • Never lose your conviction on Equity to deliver. Whenever there is a blood bath in the markets, eroding significant value, people tend to question their conviction and negative thoughts arise as whether they made a mistake.
  • Don’t invest in Lump-sum mode when the markets are highly valued and stagger the investments over a period of time. Valuation can be figured out through Price to Earnings Ratio (P/E) and Price to Book Value (P/BV) which is easily available.
  • Leave the investment management part to experts through MFs (I would be publishing a separate note on this)
  • The advantage of Equity investment is not just the returns that it can generate but also the taxation aspect of the instrument – currently not taxed if the investment duration crosses a year. Let’s make hay while the sun shines and before Finance Minister brings a twist.

I am enclosing some interesting data on the returns delivered by Equity in the last decade i.e. 31 Mar 2008 to 31 Mar 2017

I cannot predict if the year 2017-18 will continue to be a fantastic year for equity but the drivers are in position today, unlike the past. Investments from Domestic Institutions (DIIs), EPF, NPS and Mutual Funds have significantly improved countering the FII flows. Real Estate and Gold are not expected to improve which helps money flow into Equity

I propose to conduct year end portfolio reviews starting the week of 10th April 2017 and will reach out to you.

<Blog # PenguWIN 1052 – Welcoming New Year 2017-18>

 

HDFC Charity Mutual Fund for Cancer Cure

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Dear Friends,

                      HDFC Mutual Fund has come up with a unique scheme to support needy and underprivileged Cancer Patients by donating the money to Indian Cancer Society (ICS) or other eligible institutions. A total of 3168 patients from 28 states have been benefited through this scheme. A Governing Advisory Council (GAC) meets every fortnight to identify the genuine cases for financial aid

This scheme which is open for investment until 24 Mar 2017 is the 3rd in the series of funds collected by HDFC MF for Cancer Treatment, the earlier 2 being 2011 and 2014. This is closed ended fund for a period of 1136 days and premature exits will not be possible. Typically, when 1 fund house launches a product, its copied by all other fund houses. However, HDFC MF is the only fund house that runs a fund for charity purpose, since 2011. The Scheme offers 2 types of funds for the investors,

HDFC Charity Fund for Cancer Cure

Debt – Income generated through debt/money market instruments and Government Securities

Arbitrage – Income generated through arbitrage opportunities between cash and derivative markets

The minimum investment is 50,000/- and multiples of 1,000/- thereafter.

Now comes the interesting feature of the fund.

The funds collected by HDFC in both the Debt and Arbitrage schemes will be deployed to generate income. The Scheme has only dividend pay-out option and dividends are paid every 6 months, subject to availability of distributable surplus. 

The Investors have 2 options:

50% Dividend Donation Option – Under this Option, Investors can donate 50% of the dividend amount, they earn and the rest shall be paid to them.

100% Dividend Donation OptionUnder this Option, Investors can donate 100% of the dividend amount.

In addition to this, the dividends donated by the investors is eligible for Income Tax deduction as per Sec 80G.  To claim this as a part of IT filing, a certificate with PAN of the investor will be provided.

HDFC MF will not charge any fund management expenses for this scheme and also match the contribution of Investors donation through dividends

At the end of 1136 days the scheme will be closed and the principal will be returned back to the investor.

Dividends paid by debt funds are taxed at 28.4% (Dividend Distribution Tax, DDT) while Arbitrage fund enjoys equity status and hence Tax Free. So, even if is we get a lesser return through Arbitrage, the taxation will make a difference making Arbitrage fund attractive over debt

Most of our clients know that we do not recommend a product that we will not buy and preach only what we practice. So, our contribution is definitely there for this fund.  

<Blog # PenguWIN 1051 – HDFC Charity Mutual Fund for Cancer Cure>