RBI’s Policymaking – Is the transmission happening?

Post Lehman Crisis, the world scenario changed drastically forcing many nations to follow the accommodative measures so as to ease the liquidity deficit in the financial system. India, too, remained coupled to global events and remained unscathed from a global slowdown because of its increased integration with the global economy.

In India, the Central Bank, Reserve Bank of India took a series of accommodative measures to support the economy. Soon, the world scenario changed with confidence winning and improved numbers. However, the ease of liquidity put pressure on pricing which led to burgeoning of inflation. In real practice, India’s economy gets driven by two factors – first, domestic consumption story which, in recent years, improved on account of increased purchasing power due to various government sponsored initiatives and other factors and second, direct government aids to different sectors/industries in the form of duty cuts or other aids. The multiple factors also put pressure on inflation which also got imported, thanks to high commodity prices including crude oil, to a certain extent due to our large dependency on them.

Also, read – FIIs’ rave party in India; Economic indicators are at loggerheads

In series of steps, the RBI hiked policy rates ten times successively, effectively by a total of 425 points since Mar 2010 in order to tame inflation which had been due to structural reasons too. Every time, RBI raises policy rates, it remains firm in taming the inflation which has become a toy of political storm too.

To support the fast transmission of policymaking, the central bank also made some changes in policy decisions – (1) introduction of base rate (2) the new Marginal Standing Facility (MSF) to support additional lending (3) restrictions on cross-lending between banks and mutual funds which have been rampant till some time ago. However, the RBI expressed its annoyance over the quality of data on which they have been operating the monetary policy. No doubt, the transmission of monetary policy has improved and to a large extent, the hiking of rates have slowed down the demand and also affected the economy growth, thanks to increased interest rates which have raised the average cost of capital. It has affected the capex investment too. In recent times, the RBI questioned the quality of data on Index of Industrial Production (IIP) which measures the industrial growth and Wholesale Price Index (WPI) which is also called as Headline Inflation; these data do not reflect the real economic activity. Volatility still persists in IIP and WPI. Even the recent improvements in IIP and WPI as per 2004-05 series have not helped the central bank; the data get revised by a wider spread on subsequent months. As evident, even the 10 rate hikes, one after another in the past 15 months have not dampened the demand effectively. In the last 2 years, economic forecasts from all government institutions, from Central Statistical Organisation (CSO) to RBI to Planning Commission have been questioned as they turned inaccurate. The high fiscal deficit and continuous gilt supply also kept RBI at bay in effective transmission of monetary policy.

Also, read – Price Hikes – Are we really ready?

Does it say RBI has failed?

Not really! In the past, RBI had been instrumental in taking the country out of the century worst financial crisis; so, it won’t be good to comment on their effectiveness. Their hands are also tied in terms of data availability, political interference (though it is said that RBI is not under the government interference but not in real sense) and dynamic nature of the situation. The various structural issues including supply-related factors also waned the effectiveness of policy transmission. The persistently high food inflation in the last two years has migrated to manufacturing inflation too.

The RBI says that they are handicapped by the reliability of some of the basic data that they need to use in policy calculations which remains true to a large extent. In a nut-shell, India’s inflation must drop before it eats the economy; hope the government must be listening to improve the effectiveness of policy making which are indirectly linked to them.

Happy Reading!

-          Amar Ranu

FIIs’ rave party in India; Economic indicators are at loggerheads

From bleak to bright – the markets suddenly turned positive ending its successive falls, thanks to strong FIIs inflows and short covering. In a swift movement, the bellwether Sensex added over 1300 points in a span of nine working days ending all the bearish sentiments which had been prevalent across the punters. The favorable factors emanating were from Greece whose parliament approved stark austerity measures; thus, paved the way for international financial aid and it would bail out the country. In India, FIIs joined in the rave party after a brief lull with a total inflow of Rs. 5,084 crore in the last week of June. Markets across the world moved up.

What the other indicators say?

While the equity moved up on favorable news emanating from European sub-region, the manufacturing has slackened across the world. In the latest Purchasing Managers’ Index (PMI) by HSBC and Markit Economics, the figures dropped across the countries. As per the latest figures, the manufacturing growth is slowing from China to Europe, thus, sending the dilemma to all central bankers whether to increase the interest rates to combat inflation despite high prices. While China’s factory index fell to its lowest level since Feb 2009, Europe’s index dropped to 18-month low. Across Europe i.e. Italy, Ireland, Spain, Greece, Germany and others reported contraction. The UK also reported a fall in PMI in June. In India too, manufacturing growth loses steam in June 2011. The PMI drops two per cent to 55.3 per cent in June, its lowest level since Sept 2010. The PMI is considered a good indicator of manufacturing activity across the world, but in India, the large contribution from the unorganized sector yields a low correlation with industrial growth.

Why PMIs are falling?

In the state of higher interest rates, central banks are tightening the interest rates, thus, hurting the economic growth. The average cost of borrowing has increased which are hurting the investment. In India, the investment growth in the latest GDP growth has grown flat. Gross fixed capital formation for Q4FY11 stood at 0.4 per cent compared to 7.8 per cent and 8.6 per cent in Q3FY11 and FY 2011 respectively.

Market punters are blaming the global economic scenario for the current headwinds. But the tailwinds still exist. We expect that the domestic companies’ performances in the first quarter of FY 12 would also decide the movement of markets as the internal consumption growth story remains intact. The natural historical corrections are also certain and the future looks promising. So, let us be hopeful.

Happy Investing!

-          Amar Ranu

Price Hikes - Are we really ready?

The shock and anger ran through the nerves of billions of Indians when Indian government hiked the diesel prices, kerosene and LPG by Rs. 3, Rs. 2 and Rs. 50 respectively. With these rate hikes, the government targeted all sections of the economy – poor people would have to bear the kerosene prices’ hike, middle men would be poorer Rs. 50 every time they buy a cylinder of Liquified Petroleum Gas (LPG) and transporters would have to shell out more for filling their oil tanks. Most likely, they would pass the buck to end consumers; thus, biting them even harder. And, affluent riders especially of Sports Utility Vehicles (SUVs) would also face the wrath; but this would hardly be any game changer for them.

We call it as a life cycle – Consumer to Consumer riding across the circle of life and reaching the same destination.

Is the price hike justified?

No doubt the international crude oil prices have gone off the roofs, thanks to unrest in MENA regions and growing demands across the world. In India, the oil prices are administered and decided by the government. The freeing of Petrol prices has already sent the petrol price beyond the affordability. The hike of other dependent fuels was long awaited and now it is being passed.

In a situation where the country has been going through various governance issues including series of scandals which have hurt India’s image internationally, the recent price hike would hurt the domestic consumers. The ‘aam aadmi’ is being targeted. While the various social security programmes have increased the purchasing power of end users, the recent hikes would empty their pockets. So, the question arises – is it justified for the Government of India to dole out various employment related sops during various elections’ times and increasing the price of basic needs of Indians. The government must answer – why the policy is towards benefitting private companies? Are we moving towards a capitalist economy? We have already killed the maharajas of India – Air India by doling out the lucrative destinations to private airlines and ditto with oil companies where lot many sops have been provided.

Cost-benefit analysis

It is estimated that roughly Rs. 21,000 crore would be added to state coffers in one swift. Most likely, the public transport, truckers, retail manufacturers using road transport in a large, railways et al would pass the buck to retail consumers, thus, bending the consumers’ backbone further.

We are going through a very rough phase of our life – a series of scandals have already dented India’s image plus common persons are already overburdened with the wrath of various government policies which have benefitted more to private capitalists instead of social consumers. Hope India would rise! We would eagerly wait for the FTD (Fast till Death) on Aug 16; no need to mention why this date is very important to all Indians!

Good Luck Indians!

Happy Reading!

End of an era – 25 paisa or 4-Anna or Chawanni

All the living/non-living things have got a life cycle; some has longer survival period and some has shorter existence. Imagine the time when we were bound by “Barter System”. People used to exchange their belongings to get things of their choice – so some of the transactions used to be rice-animal, vegetables-wheat and many more. Then came the era of coin system which streamlined the trading activity and people understood the power of money circulation. The initial coins in India used to be 1-paisa, 1-anna, 2-anna, 4-anna, 8-anna and many other denominations. While 1-anna and 2-anna became inexistent with the passage of time, 4-anna is still in circulation.

Now go back to your early school life or ask your grandparents how important coins used to be in our life; the kind of achievement, fulfillment and purpose it used to serve. In fact it evoked nostalgia among old timers. The power of 4-anna – hire a bicycle for an hour, a breakfast of idlis, postal envelopes, postcards, stamps and many more for not much old timers; however, ask an old timer in late 60s or early 70s who will tell how a 4-anna coin used to bring a long day planning with their friends – watching movie in nearby theatre in the front rows and making delightful comments in the theatre, a full party with delicious meals and many more.

But this 4-anna is going to be a history; may be it would find place among hobbyists. From June 30 onwards, the RBI has banned the circulation of 4-anna and it would no longer be legal tender. It is being phased out as it is unviable to produce coin because of rising metal costs. The metal scrapper nerds had been hoarding the coins to melt and sell it in scrap to earn arbitrage on the metals used in coins.

The era has come to an end; the chavanni era which many must have cherished would find solace in collectors’ item. All thanks to rising metal costs, global inflation and big demand out of industrialization which increased the demand for metals making them unviable for making small denomination coins.

Miss you naal-anna!

Net inflows dwindled by Rs. 48,850 Cr in May 11; Equity shows a net inflow after a lull

The lull in Equity in the month of May 11 didn’t deter Mutual Fund investors from investing in Equity Mutual Funds which showed an inflow after a brief lull. The broader indices Sensex and Nifty 50 which nosedived by 3.30 per cent approximately affected the diversified Equity AUM too which lost 1.72 per cent to Rs. 1,67,470 crore in May 2011 vis-à-vis Rs. 1,70,406 crore in April 2011. However, there has been a net inflow of Rs. 1,546 crore in Equity category in May 2011, much to the reprieve of Mutual Fund Industry which has been witnessing outflows continuously except for few occasions since the ban of entry loads in Aug 2009. In debt and other categories, net outflows were reported. The recent regulation of RBI to cap the banks’ investment in Mutual Fund up to 10 per cent of total banks’ net worth as on Mar 31 has started affecting the Liquid/Money Market category which saw an outflow of Rs. 39,603 crore in May 2011. Moreover, the Income category also reported an outflow of Rs. 11,141 crore. As on May 20, 2011, the banks’ net investment in Mutual Funds stood at Rs. 106,233 crore. It is estimated that the total net worth of the banking system stands at Rs. 3.13 which essentially means that the current investment of Rs. 1.06 lakh crore will drop to Rs. 30,000 – 35,000 crore in next six months which may impact the net flows in Income/Liquid categories.

Net Outflows in May 2011

In totality, the MF Industry AUM dropped by Rs. 53,926 crore or 6.87 per cent to Rs. 7.31 lakh crore in May 2011 from Rs. 7.85 lakh crore in Apr 2011. The categories which saw major fall are Other ETFs (-25.09 per cent), Liquid/Money Market Instruments (-17.43 per cent), Income Funds (-3.39 per cent), ELSS (-2.86 per cent), Gilt (-2.37 per cent) and Equity (-1.72 per cent). However, Gold ETF and FOF Investing Overseas lapped the AUM with a gain of 13.81 per cent and 10.83 per cent respectively. The trends of gold price continue to head for a bull run which prompts investors to invest in Gold ETFs. The table below shows the comparative flows and AUM of all major categories of Mutual Fund industry.

FMPs still rule the inflows

Perhaps FMP (Close ended Income Fund) is the only category which has been showing continuous inflows. In May 2011, there were 37 NFOs which collected a total of Rs. 7,416 crore. The burgeoning interest rates and tight liquidity in the financial system seem to remain in place; moreover, it is more likely that RBI may go for additional policy rate hike in upcoming mid-quarter review as on June 16, 2011.

New Funds enter into industry

Apart from FMPs, there were four open ended Funds in Income, Equity and Gold ETF category. While ICICI Prudential MIP 5 collected a total AUM of Rs. 27 crore, Sundaram Equity Plus garnered Rs. 134 crore in their NFOs. First of its kind, HSBC Brazil Fund collected a total amount of Rs. 313 crore in May 2011.

Unique Investors

For the first time, AMFI declared the unique investors data which clearly shows that Equity investors rule the industry. There are a total of 3.77 crore unique investors out of which 2.43 crore (65 per cent) investors belong to Equity, 72.65 lakh (19 per cent) to ELSS, 30 lakh (8 per cent) to Income, 22.29 lakh (6 per cent) to Balanced and remaining to other categories. In Gold ETFs, there are 3.87 lakh unique investors.

Small is not bad; try these Mutual Fund houses

The Mutual Fund Industry in India is in glut of mutual fund schemes; in totality the industry boasts of around 2000 schemes, one of the largest numbers of schemes in world. For a large number of times, the industry veterans have been crying over the excessive number of schemes; even SEBI Ex-Chief C B Bhave has also called for reduction in number of mutual fund schemes. The whole concept of Mutual Fund – ideal product for retail investors is lost in its way of growth. However, there are some fund houses in India which have been offering products at reasonable costs.

Expense Ratio – Cost to manage Mutual Funds

Ask any investor how he decides a Mutual Fund scheme before investing into it; probably the answer will come in terms of ‘returns’ rather than ‘expense ratio’ which should be the prime factor in selecting the fund. Expense Ratio is a cost to measure what investment companies require run a fund. In simple word, it is defined as the ratio of mutual fund’s expense to total net assets.

Bigger the better – not always

The SEBI regulation stipulates that the mutual fund scheme can charge up to 2.5 per cent of total net assets (up to Rs. 100 crore) in equity category which reduces further as the corpus rises. For any amount above Rs. 700 crore, a total expense of 1.75 per cent can be charged. After the ban of entry loads, it became very difficult for fund houses to float new schemes and pay to the distributors from the fund. This is more applicable to new fund houses which have floated in recent past and have been charging 2.5 per cent as the corpuses remain low.

ETFs still rule the industry – an analysis

We analyzed all the fund houses in India in terms of average expenses charged by them for their equity schemes. For equity, we considered Equity Funds (all categories), Balanced, ELSS and ETFs (other than Gold ETFs). We took the latest available expense ratios and month end corpuses for all the sorted schemes. Since some of the fund houses don’t declare month-end AUM, we considered Quarterly Average AUM for them. Based on calculation, it emerged that the fund houses having ETFs predominantly emerged as the clear winners in terms of charging the least expenses. Benchmark and recently launched Motilal Oswal Mutual Fund top the chart with least average expense ratios of 0.65 per cent and 1 per cent respectively which clearly boast that ETFs are the ideal products for long term investors with least costs.

Surprisingly, Quantum Mutual Fund having a total equity corpus of Rs. 79 crore in Equity runs the least average expense ratio (1.48%) despite having active funds only in their portfolio; as per their policy, this Mutual Fund does not pay any brokerage to distributors and promotes their schemes directly. The others in the top category are IDBI Mutual Fund (1.5%), UTI Mutual Fund (1.76%), HDFC Mutual Fund (1.84%) etc.

Fund Houses which have been fully utilizing the expense ratio cap (2.5%) are Pramerica Mutual Fund, Daiwa Mutual Fund etc. Nonetheless, some old names which have been in the industry for quite a good time still feature in the list and are not able to reduce their expenses are Escorts Mutual Fund, L&T Mutual Fund, ING Mutual Fund, DWS Mutual Fund and BNP Paribas Mutual Fund (BNP Paribas demerged from Sundaram and merged with Fortis Mutual Fund). Other fund houses charge average expense ratios in the range of 2 to 2.5 per cent.

What is the loss for investors?

Let us take an example to understand the effect of expenses on funds’ performance. For two funds A and B, if an investment of Rs. 5 lakh is done for a period of 10 years and 20 years and having expense ratio of 2.5% and 1.5% which grow at 10 per cent,  the difference in maturity amount is astonishing. In 10-years and 20-years categories, the differences in returns are Rs. 4.82 lakh and Rs. 31.81 lakh respectively.

Where should an investor incline to?

The newly appointed chairman of SEBI U K Sinha rules out reintroduction of entry loads and emphasizes on increasing the retail participation in Mutual Funds. No doubt Mutual Funds can play a bigger role in doling out handsome returns and charging less in the name of expenses. Moreover, ETFs have been emerging as the best players in terms of lesser expenses. But it is still higher when compared to developed countries’ ETFs where expenses vary in the range of 0.15-0.5% only. Also, the expense ratio is one among many factors which need to be considered while choosing a mutual fund scheme. It should not be considered in isolation.

Happy Investing!

- Amar Ranu

Business Line : Dazzling returns whet investors' appetite for gold

My comment on The Hindu Business Line
Business Line : Today's Paper News : Dazzling returns whet investors' appetite for gold

Outflows in Equity continued; Total MF AUM up by 32.61% to Rs. 7.85 lakh crore

The equity outflows continued in April 2011, following the market negative sentiments and the ongoing geopolitical tensions in MENA region which have skyrocketed the crude oil prices affecting the domestic inflation. In April 11, there has been an outflow of Rs. 1,076 crore for second month successively. In last one year, the equity category lost Rs. 13,348 crore. However, the total AUM in Equity grew to Rs. 1,70,406 crore, up marginally by 0.38 per cent. In other equity related categories – ELSS, Balanced and other ETFs, there were mixed signals. While ELSS showed an outflow of Rs. 289 crore, the other ETFs category showed an inflow of Rs. 510 crore. The Balance category also showed a marginal inflow of Rs. 17 crore.

Slowly and steadily, ETFs have been becoming the mass product as shown by large accumulation of assets in it. While Gold ETFs continue to grow by leap and bounds, other ETFs also grew drawing interests from retail investors. In last one year, the Gold ETFs saw an inflow of Rs. 2,319 crore while the AUM grew more than double. Its current AUM grew to Rs. 4,800 crore in Apr 2011 from Rs. 1,711 corre, up by 180.54 per cent. To some extent, the uptick in gold prices is also responsible for the growth in AUM. The gold prices rose 29 per cent in last one year.

Net Inflows in April 2011

On the comfort side, the Mutual Fund Industry AUM rose to Rs. 7.85 lakh crore, up by 32.61 per cent or Rs. 1.93 lakh crore mainly contributed by Liquid/Money Market and Income Fund Categories. In Mar 2011, the industry lost Rs. 1.15 lakh crore.  The Liquid/Money Market AUM grew to Rs. 2.22 lakh crore in April 2011 from Rs. 73,666 crore in Mar 2011, up by 201.9 per cent. There has been a net inflow of Rs. 1.47 lakh crore in this category. Similarly, the Income category also showed upward movement in net AUM including net inflow in April. The category AUM grew to Rs. 3.35 lakh crore, up by 14.63 per cent and the net inflows were Rs. 37,891 crore.

In a significant ruling to Mutual Funds in the recent monetary review, the RBI has mandated that banks should restrict their exposure to 10 per cent of their net worth as on last year in Liquid Mutual Funds. So, eventually, the investments around Rs. 50,000 crore will outflow in next 6 months.

FMPs still rule the inflows

The burgeoning interest rates on account of high inflation have made the FMP category conducive for the market. Moreover, the uncertainly in equity market which is expected to remain in near future have also led to demand from investors. In April 2011, there has been 22 FMPs collecting a total of Rs. 3,065 crore.

New Funds enter into industry; some exited

Apart from FMPs, there were three open ended Income Funds named as Axis Dynamic Bond Fund, Canara Robeco Yield Advantage Fund and Peerless Child Plan Fund which collected a total sum of Rs. 41 crore. In gilt category, Daiwa Govt. Securities Fund – Short Term Plan collected Rs. 57 crore. There were no other NFOs.

However, the number of total equity funds reduced with some AMCs merging the schemes with the other existing schemes. As against earlier of 328, the total equity funds stand at 318. JM Mutual Fund and ICICI Prudential Mutual Funds merged their schemes with other existing schemes.

Post Office or MF? Let Risk Appetite Decide Your Monthly Income Option

Planning QE-III? Think of Zimbabwe’s One Hundred Trillion Zimbabwe Dollar bill

For a long time and the history says that inflation, predominantly hyperinflation works against the country. The classic example is Zimbabwe which used to have a note of One Hundred Trillion Zimbabwe Dollar bill, which are 100 followed 12 zeroes. John B Taylor in his blog abstracted a great article from Patrick McGroarty and Farai Mutsaka and states that printing money beyond a limit can create conditions like this. He has been asking Fed to rethink on the idea of going beyond QE-III.

Though there is no relation with this piece of junk dollar vs QE-III, but the situation may arise. The QE-I and QE-II have created conditions conducive to US growth story but not to a large extent. The 10-year US Bond note has reached to 3 per cent range where it stood before QE-II and also, the GDP growth slowed down to 1.8 per cent, much below the market expectation.

Perhaps US must think again and again before committing to QE-III as the world dynamics are also dependent on it. Funds may again move to Emerging Market Economies (EMEs) creating the nightmare of volatile capital flows for these nations creating a unbalance on their deficits.

Note: Zimbabwe bank notes have already been discontinued with new series of notes. This blog has already reported a story on it – here.

New Pension Scheme – Is it the ideal pension scheme?

India does not boast of any permanent Social Security Scheme unlike in developed countries. In May 2009, the GoI announced a new investment avenue for its citizens to plan for retirement in the form of New Pension Scheme (NPS) on a voluntary basis. On May 01, 2009, the launch of NPS paved the way for common people to secure their retirement and make their pension management easier. Till then, this pension scheme was available only to the central and state government employees. It is the single biggest initiative in pensions’ reforms story as it works on IT enabled infrastructure to extend social security cover to the citizens.

The NPS Trust created by its regulator PFRDA (Pension Fund Regulatory and Development Authority) has been authorised to oversee and review the investment of the pension corpus.

What is unique about NPS over other Pension Schemes?

India didn’t have any forced pension scheme for its citizens unlike EPF (Employees Provident Fund) where employers deduct a certain portion from employees’ salary. The PPF (Public Provident Fund) also provide an additional opportunity to persons not employed; however, the investment tenure is for a maximum period of 15 years extendable by 5 years and the investible amount is also limited to Rs. 70,000 p.a. Also, the returns in these two pension schemes are fixed – EPF (9.5 percent) and PPF (8 per cent). Some insurance companies have Pension Schemes but they are costly and eat major of investors’ money.

NPS fills both the gaps. It is open for all citizens (aged between 18 years to 55 years) in India and it is categorized as one of the cheapest pension scheme in India – the lowest Fund Management Charges and Administrative charges in the market, with FMC capped at 0.0009 per cent and custodian charges in the range of 0.0075 per cent to 0.05 per cent. It also provides an opportunity to participate in equity which can let your corpus grow at higher rate. Currently, the NPS trust has appointed seven independent fund managers which manage the NPS corpus. You have the choice to select any of these fund managers based on their expertise, track record et al. In NPS, the individual invests a certain amount (minimum of Rs. 500 per month or Rs. 6,000 a year), no upper limit in a pension scheme till he retires.

What are the Options available?

Currently there are two options available under NPS – Tier I and Tier II. Under Tier I, the investible amount can be withdrawn only at the retirement period i.e. 60 years. On retirement, 60 per cent of the corpus can be withdrawn as lump sum and remaining 40 per cent has to be invested in an annuity from an insurance company to generate a regular income. Currently, the lump sum withdrawn amount is taxable in the hand of investors (EET – Exempt, Exempt, Tax) but with the force of DTC (Direct Tax Code), the corpus would be tax-free for investors (EEE – Exempt, Exempt, Exempt).

However, in Tier II option, one can withdraw his investible amount at any point of time. However, your contributions and savings will not enjoy any tax advantages.

In addition, NPS Lite caters to small investors i.e. low income earners and it works on a ‘group’ model. In budget 2010-11, the government also announced the “Swavalamban Scheme” for NPS Lite investors under which the government will contribute Rs. 1,000 to each NPS account. Currently, this benefit would be available for another three years.

NPS comparison with existing retirement saving plans

Currently there are seven Fund Managers who have been managing NPS corpuses. The Pension Fund Managers (PFM) manage 3 separate schemes, each investing in different asset classes. The table 1 describes the different available schemes of NPS Funds.

The investors can choose either of investment options – Active Choice (decided by individuals to invest in any class) and Auto Choice (predetermined asset allocation based on age of investors)

The table 2 shows the comparative performance of some existing NPS Funds and other retirement fund options. For period between May 01, 09 to April 06, 11, NPS Pension Funds have returned in the range of 9.29 per cent to 18.72 per cent in Class E category (it comprises exposures in Equity up to 50%), while Pension Funds by Mutual Fund – UTI Retirement Benefit Plan and Templeton India Pension Plan returned 14.43 per cent and 86.11 per cent respectively. These funds have 30 to 40 per cent exposures in equity.

On the other hand, pension schemes sponsored by the government – PPF and EPF have fixed returns i.e. 8 per cent and 9.5 per cent respectively; however, they differ from time to time. Both these schemes provide only lump sum withdrawal and chances remain high that after withdrawal, majority of the corpus might be squandered away due to lack of human behaviour.

NPS still not picking up

Despite being a low cost product, NPS has not found many takers. In India, people are not used to invest for a longer period if it is defined contribution as in EPF where the employer deducts a portion of your salary. The number of subscribers in NPS still counts in thousands.

The low cost determines the uniqueness of NPS. However, the low distribution cost (Rs. 20 per transaction along with one-time registration fee of Rs. 40) is the main deterrent which discourages brokers/distributors/agents in advising NPS. They contend that the amount hardly covers their sales costs. At some Point of Presence (PoPs) like Banks, the employees prefer to push their own pension products when asked for the NPS form. So, there is mis-selling even at the PoP level.

Moreover, the NPS is still costly product for entry level depositors.  An investor depositing Rs. 500 per month, or Rs. 6,000 a year, will have to shell out Rs. 800 (considering transaction happens at RBI locations else additional Rs. 180 p.a. would be charged), or 13 per cent, as charges in the first year and Rs. 400 p.a. thereafter. The government claims that the charges would be reduced once the number of subscribers crosses 1 million.  Refer the chart 1 for different expense ratio for different subscription amount in NPS.

Moreover, the current tax status i.e. EET (Exempt – Exempt – Tax) also acts as a dampener in comparison to other pension products i.e. the maturity proceeds would be taxed in the hand of investors. However, the new Direct Tax Code (DTC) to be implemented from FY 2012-13 has put it in EEE mode i.e. the maturity amount won’t be taxed at the hand of investors. The table 3 gives the current status of tax liability on on different pension products.

 

What should be done to make NPS acceptable among investors?

Though the government is not leaving any stone unturned in order to improve the spread of NPS, a lot still needs to be done. To start with, the PFRDA must tie with Online Brokers where there is minimum involvement of manual interference; also, the government must work into giving targets to PoPs and they should also incentivise the PoPs with bigger margins if they bring a certain number of subscribers. Also, the financial advertising and education would be important factors where the government can look into. Private employers should also encourage their employees to subscribe to the low-cost NPS.

At micro-levels, the government must also tie-up with NGOs, SHGs and other community centres in order to promote NPS Lite. In order to encourage the low-earning investors to subscribe to NPS, the government also introduced the “Swavalamban Scheme” for NPS Lite investors under which the government will contribute Rs. 1,000 to each NPS account for the next 3 years. The ongoing Aadhar-linked programme can also be a booster for NPS.

Is the NPS justified?

The future is undecided especially the retirement period. People must invest to protect its future at the minimal cost of investment expenses. Also, in the absence of any permanent social benefit plan in India and where a majority of the population depends on daily wages, the current NPS fits the wall. Moreover, the low cost of NPS describes its uniqueness, the lowest till date for an investor investing a particular limit. In a nutshell, the NPS gives the subscriber a portable account, simple choices (unlike complex investment products), nationwide access, and much needed pension coverage. So, the NPS experiment is worth the trouble taken.

Net MF outflows of Rs. 1,27,451 cr in Mar 11; Rs. 13,405 Cr outflow in Equity in FY 10-11

Despite the equity market closing in net positive in FY 2010-11, it failed to excite the Indian Mutual Fund Industry in FY 2010-11. In Jan-Mar 2011, Mutual Funds had been actively buying in Equity but it did not boost up the overall AUM in Equity. The total AUM in Equity sans ELSS, Balanced and Other ETFs in Mar 2011 stands at Rs. 1,69,754 crore compared to Rs. 1,74,054 in the same month last year. Overall, there has been a net outflow of Rs. 13,405 crore from Equity category, thus, making it as the highest absolute redemption in a particular year. Since the ban of entry loads in Mutual Funds in Aug 2009, the Mutual Fund Industry has been bleeding with constant outflows. However, it stabilized in Feb 2011 with the highest net inflow of Rs. 2,495 crore in last 20 months.

Net inflows in Mar 2011

In Mar 11, there has been a total outflow of Rs. 1,27,451 crore from Mutual Fund industry, a common phenomenon in every financial year end month. In Mar 10 and Mar 09, it witnessed a net outflow of Rs. 1,62,165 crore and Rs. 98,697 crore respectively. Generally, banks redeem their investments in March again to invest in the following month. In FY 2010-11, there has been a total outflow of Rs. 48,931 crore. Categorically, the Income and Liquid/Money Market saw an outflow of Rs. 30,612 crore and Rs. 98,255 crore respectively.

FMPs flooded in Mar 11

The liquidity deficit and the burgeoning inflation which have forced the policy makers to raise the interest rates have actively changed the dynamics of the market. The Certificate of Deposits, popularly known as CDs – a short term money market instrument used by banks to borrow from the market has been very active in Jan-Mar 2011, predominantly in Mar 2011. Banks have issued CDs even at higher rates (10 per cent plus) in order to inflate the balance sheet as the year end closes in. In Mar 11 alone, there has been a total of 132 FMPs launched garnering a total corpus of Rs. 27,912 crore. In Feb 11 and Jan 11, there have been a total of 65 FMPs and 48 FMPs collecting Rs. 17,232 crore and Rs. 12,713 crore respectively. With money market rates falling specially CDs’ rates, the FMP saga may not continue in coming months.

Other categories too saw inflows

The other equity categories such as ELSS, Balanced Funds and Other ETFs saw inflows to the tune of Rs. 576 crore, Rs. 231 crore and Rs. 107 crore respectively. March being the tax season month saw the flows in ELSS as investors invest to save taxes up to Rs. 1 lakh. The Gold ETFs continued its positive flows in last 23 months except in May 10 where it saw a marginal outflow of Rs. 6 crore. In Mar 2011 and FY 10-11, it saw an inflow of Rs. 648 crore and Rs. 2,250 crore respectively. The inflow in Mar was the highest inflow till date mainly on surge of commodities due to geo-political tensions in MENA region which made people lured towards gold.

New Funds enter into industry

In Equity category, there were two NFOs – IDFC Infra Fund and Mirae Asset India – China Consumption Fund collecting a total asset of Rs. 93 crore. In Income Fund category, there were 3 NFOs in Open-Ended category and 134 NFOs in Close-Ended Category. The month also saw two capital protection funds by Sundaram Mutual Fund and SBI Mutual Fund. In other ETF category, the in-house promoted NASDAQ-100 ETF collected Rs. 48 crore.

                                                                                                                               Soure: MOSL
Happy Investing!

Cricket let you dance; so with Financial Markets!

Generally I refrain from writing on issues not related to finance, but cricket is no longer unlinked to financial world. The industry bets high amount of money in ethical and unethical manners which helps both ways. After making a historic win over Men in Green, Men in Blue finally conquered the excitement and gifted a beautiful gift to all Indians who stood still on Mar 30, 2011 from their regular work. One Billion plus prayers worked for us. Now the focus shifts to India vs Sri Lanka. The online domains are already filled with slogans favoring India like Ram Sena on its way to conquer Ravan Sena, Lanka. Both the teams are at their best; India has to work on its negatives. It is just few hours away from 1983 historic day, after which we could not witness.

Out of these hopes, the question arises – are there any relationships between cricket and financial world? What are the best chances that India would win? Exactly 28 years back i.e. in 1983, all the days and dates match with those of 2011. So, we have a strong chance we would repeat the history. Also, in 1983, the current finance minister Shri Pranab Mukherjee was the then finance minister under then Prime Minister Indira Gandhi. Though there does not emerge any correlations on these happenings, superstitions and astrological theories have always surrounded the game of cricket. Also, the current networking age or the age of Twitters, Facebook or Orkut, the positive correlations emerge like a rising sun in the east.

Cricket is considered as a religion in Indian sub-continent which boasts of world’s major population. Luckily, the ICC World Cup 2011 would have remained in this continent even if we had lost the match against Pakistan. Examining the relationships between Cricket and Stock Market, the events suggest that large sporting events do affect the sentiments of viewers which ultimately become investors. Depending upon their mood swings, stock prices move through crests and troughs.  Mishra and Smith (2010) have already shown that there is an asymmetric relationship between the performance of the Indian Cricket team and stock returns on the Indian Stock Market. While a win by the Indian cricket team has no statistically significant upward impact on stock market returns, a loss generates a significant downward movement in the stock market. When Sachin Tendulker, India's most popular cricketer plays, the size of the downward movement in returns is larger. However, in last few trading days, when the cricket fever is on, markets have moved upwards. Though there are reasons, the continuous wins support the correlations. This time, it has worked positively.

Even Aiyar and Ramcharan (2010) suggest that it is lucky for international cricketers to play their debut Test (international) match at home.

A good start may have a persistent, positive impact in other fields, too. Nonetheless, selection committees appear to systematically penalize both bowlers and batsmen for the misfortune of debuting abroad—and systematically penalize bowlers more than batsmen. It would therefore seem likely that similar biases are widespread among employers of all kinds, for whom performance metrics are more ambiguous, differences in initial conditions harder to judge, and the decision itself unlikely to be second-guessed by millions of opinionated fans around the globe.

Whatever the reasons be, Indians hype the situation beyond the limits and looks into all permutations and combinations. Why? The betting is on, boss! A large part of Indian financial market is conceptually linked to bettors. Let India play its natural game! Let them give 100% to win 110 crores hearts. Also, we stand united.

Enjoy the game!

Let the Cricket win! Let India win!

Probably by this time, Indians must have reworked their schedules for the deadliest fight between India and Pakistan; mind it – it is not a battle ground war but the craziness has gone beyond it, the craziness for Cricket. Welcome to the Semi-Final Cricket match of ICC world Cup 2011 between India and Pakistan. Until now, fans across the countries have started exchanging verbal feuds especially women of both countries. And everyone knows – when women fight, they forget the conclusions. All the social-networking sites have been fired with online campaigns in favor of India. Probably everyone is eyeing this world cup as the last world cup for cricket’s own god Sachin R. Tendulkar.

But are we just concerned to win this semi-final? Is lifting the World Cup not equally important? And the craziness has gone beyond limits; truly said India sleeps Cricket, speaks Cricket, drink Cricket et al.

Shaila Baghail, a cricket enthusiast rather an India enthusiast, an ex-navy officer, an entrepreneur and my Aerobics trainer walked down from Navy Nagar to Siddhivinayak Temple, covering a crazy distance of 19 km in scorching heat of Mumbai to offer prayers at the temple for India’s win in this crucial hotheaded fight. Should we call her a crazy fan or did she pour her blessings and mind to India wholeheartedly? The media reports that crazy fans have been lining through the days and night in Mohali outside the stadium to get tickets despite the officials claiming that they have been sold out. People luckier to get few tickets have been black-marketing after adding a single zero or double zeroes on the actual price of ticket. So, a ticket worth Rs. 5,000 has been selling at Rs. 50,000, even costlier than Olympics. India Inc. has gone beyond their rule books; while many companies have relaxed their employees to leave early in 2^nd half, some have arranged big-screen in their auditoriums. 

Today, the match got politically involved too after the Pakistan PM accepted Indian counterpart invitation to watch this fierce fighting live at Mohali, very near to Lahore, once a part of India pre-1947.

Let the craziness remain! All Indians would owe to their team if India manages to win. But the question arises – are we close to ICC World Cup 2011, a feat unachieved since 1983. Let the spirit of game prevail!

Innovation reaches to Indian Investors – Try MOSt Shares NASDAQ-100 ETF

Imagine some of the most innovative companies on the globe; probably you would name Google, Apple, Ebay, Amazon or others etc. They have presence almost all over the globe. Now, if you want to buy these companies, you need to find an Indian broker who offers the facility to buy foreign shares. Probably there are very few brokers in India who offer to buy foreign shares; and that too comes at high cost ranging 1 - 4 per cent. Moreover, your investment will fall under the foreign investment limit of        $ 2,00,000. So, as an individual, you can’t invest more than US $ 2,00,000.

Here come your solutions – Invest in MOSt Shares NASDAQ-100 ETF

Motilal Oswal Mutual Fund, after trying the domestic innovations in the form of M50 (a large cap oriented fund) and M100 (a mid cap oriented fund) – these funds got wide acceptance from investors – launched MOSt Shares NASDAQ-100 ETF, India’s first US Equity ETF providing exposure to US and International firms on NASDAQ Index.

Why MOSt Shares N100?

·         The fund provides unique access to World’s most innovative firms; all non-financials including some market leaders like Google, Apple, Cisco, Baidu and many more.

·         It is Rupee dominated investment and does not fall under the foreign investment cap of US $ 200,000.

·         It is a passive investing with no discretion to Fund Manager; that too comes at a lower cost (relatively at 1 per cent).

·         Very low-correlation of NASDAQ-100 with India’s major indices – around 0.29 with Sensex and Nifty – thus, providing the ideal diversification option for domestic investors.

·         The NASDAQ-100 has a healthy mix of all sectors – Technology, Consumer Services, Health Care, Industrials, Telecommunications, Consumer Goods, Oil & Gas and Basic Materials – with around 60 per cent of holdings falling under Technology.

·         The NFO being treated as Other than Equity Product (since the investment is made outside India) will offer Double Indexation Benefit as the AMC claims that the allotment would happen before March 31, 2011.

Why NASDAQ-100 Index?

·         No doubt NASDAQ-100 Index® (NDX) is one of the widely watched indices in the world. It includes 100 of the largest domestic and international non-financial securities listed on The NASDAQ Stock Market based on market capitalization.

·         NASDAQ-100 comprises the A (Apple) to Y (Yahoo) of innovation. Comparatively, the index has sound fundamentals, low valuation, low correlation with Indian markets and global spread of innovation.

Performance Analysis (NASDAQ-100 vs Nifty)

One can suspect why an investor needs to diversify beyond India if he is getting better returns in India only. It is imperative to state that the decoupling story no longer holds true in India vis-à-vis to developed economies. However, the low correlation of NASDAQ-100 against major Indian indices makes a strong case on the performance of NASDAQ-100. The long term growth story of NASDAQ-100 is still intact as relevant from the historical performance of NASDAQ-100 vs Nifty.

While in 1-year and 3-years category, NASDQ-100 has beaten Nifty by good margin, in other categories, it lagged Nifty. However, in 15-years category, (In India, hardly any investor keeps his money locked for 15 years), the NASDAQ-100 has bitten Nifty by almost 300bps.

Why MOSt Shares N100 at this juncture?

Most emerging markets have dramatically come out of the global financial crisis since the fall of Lehman Brothers at faster pace in comparison to its developed counterparts; however, the inflationary pressure kept on building too, thanks to hike in commodities’ prices around the globe, supply-side issues including demand related factors. Also, there had been geo-political tensions arising from Tunisia spreading to Egypt, then Libya and now Bahrain. The natural catastrophe in Japan colliding with the man-made catastrophe (Nuclear Plants blast and leakage) has further worsened the situation. The global crude prices have gone beyond US $ 111 per barrel and it is estimated if the similar trends continue, it can touch US $ 200 per barrel.

Moreover, the developed countries followed the Tortoise race in ‘Hare and Tortoise’ race and have started recovering from the financial crisis recently. They have been showing signs of increased employment, higher productivity and increasing economic growth. So, in a nutshell, the United States is expected to re-emerge as an engine driving global growth.

Words of Caution

Diversification is the key to investors’ portfolio to minimize the losses and the N100 fits in due to low correlations with Indian indices. However, any uneven and significant movement of rupee-dollar exchange rate against can have a bearing on returns. Also, in the long run, Indian equities may outperform US equities as the strong domestic consumption story still remains intact.

Happy Investing!