Investors see an opportunity in Equity; Positive inflows in Equity MFs

The crashed equity market has seemed to give a lesson to investors who have started putting money in trickles in the form of SIP along with lump sum investments, predominantly in Equity Funds, Balanced Funds and ELSS. In totality, there was a total inflow of Rs. 1,942 crore in Equity Funds followed by Rs. 210 crore in Balanced Funds and Rs. 44 crore in ELSS in the month of Aug 2011. The current inflows are a major boost to the ailing industry as the market nosedived more than 8 per cent in Aug 2011. It shows the maturity level of retail investors as they are now looking to equities. In the same period last year (Aug-10) and last month, the Equity Fund saw a net outflow of Rs. 2,890 crore and Rs. 729 crore respectively.

In contrast, the industry AUM declined to Rs. 6,96,738 crore, a drop of Rs. 31,449 crore or 4.32 per cent over the month. The Liquid/Money Market instruments and Income Funds which together control a major chunk of total AUM are responsible for the erosion in AUM; moreover, the other reason is also due to poor performance of the equity market which led to fall in Equity AUM by 6.94 per cent. Similarly, the other equity categories like ELSS and Balanced also witnessed a drop in AUM by 7.91 per cent and 6.09 per cent. The allocation to Mutual Funds by banks dropped marginally from Rs. 70,532 crore in July 2011 to Rs. 69,619 crore in Aug 2011. The advance tax flows requirement may see many banks redeeming their investments in Sep 2011. This figure is likely to fall by Mar 2012 as per the restrictions put by RBI where investments in Mutual Funds are allowed up to 10 per cent of their net worth.

Other categories which saw a decline in AUM are Gilt (1.63 per cent), FoF investing Overseas (2.01 per cent), and Other ETFs (13.83 per cent). However, the Gold category continues to see the inflow and an increase in AUM.

Net Outflows in Aug 2011

Though there was a net inflow in Equity Funds, there was a net outflow overall. In totality, the total outflows were to the tune of Rs. 14,597 crore, mainly caused by outflows in categories like Income Funds (Rs. 6,925 crore), Liquid (Rs. 10,066 crore), Gilt (Rs. 86 crore), other ETFs (Rs. 147 crore) and FoF investing overseas (Rs. 63 crore). The categories which saw inflows are Equity (Rs. 1,942 crore), ELSS (Rs. 44 crore), Balanced (Rs. 210 crore) and Gold ETFs (Rs. 494 crore).

Gold ETF continues to see inflow and increase in AUM too. In last 28 months, it did not see any outflow except at one occasion when it saw a marginal outflow of Rs. 6 crore. In totality, it saw a total inflow of Rs. 4,728 crore in last 28 months. In Aug 2011, it saw a total inflow of Rs. 494 crore; also its net assets increased to Rs. 7,578 crore in Aug 2011 from Rs. 6,119 crore in July 2011.  The subdued equity performance and weak dollar globally has prompted investors to invest in Gold which provides hedge against inflation.

FMPs still rule the inflows; Equity NFOs dried

We continue seeing new FMPs in the street. In Aug 2011, a total of 44 FMPs has been launched collecting a total AUM of Rs. 5,490 crore, a marginal increase over the last month collection of Rs. 5,090 crore. Around 14 fund houses launched FMPs in tenures ranging from 3 months to 2 years. Edelweiss Mutual Fund launched Edelweiss Select Mid Cap Fund which collected a total corpus of Rs. 6 crore.  

Happy Investing!

- Amar Ranu                                                                                                   

CDS launch to boost investor confidence

Authored article in The Bengal Post, a leading daily from Kolkata

Is pledging of shares by promoters a good sign?

Welcome to Business and Economy Supplement BFM (Banking Finance Markets) - Is pledging of shares by promoters a good sign?

Source: Business and Economy Supplement BFM (Banking Finance Markets)

Hobby can be entertaining, it can fetch you great returns too

My article in the Economic Times on Hobby as an Alternate Investment Option



Public Debt Management - A journey toward Debt Management Office

Enhancing the transparency of debt management operations, the Budget Division of the Department of Economic Affairs, Ministry of Finance, GoI has been publishing a quarterly report called “Public Debt Management – Quarterly Report” from the first quarter of FY-2010-11. This is a step towards the establishment of Debt Management Office (DMO) in the Government which has been advocated for quite some time.

The current one is the fifth quarterly report and pertains to the first quarter of the fiscal year 2011-12, viz., Apr-Jun, 2011. The report gives an account of the debt management and cash management operation during the quarter, and attempts a rationale for major activities. The previous other reports are as given below:

Q1FY2010-11, Q1FY2010-11, Q1FY2010-11 and Q1FY2010-11

The main highlights of latest quarterly report of ‘Public Debt Management’:

Section 1: Macroeconomic Developments

1)      The headline inflation (as measured by WPI) remained high, above 9 per cent consistently in last 8 months with the major contributors from non-food articles, fuel & power group, edible oil and cotton textile.

2)      GDP slowed down from 9.4 per cent in Q4FY10 to 7.8 per cent in Q4FY11. There has been a constant downfall in GDP in each quarters of FY 11.

3)      IIP remained subdued in comparison to last year performance; however, the IIP growth showed improvement in June 2011 to 8.8 per cent from 5.9 per cent in May 2011.

4)      Exports and Foreign investments remained robust. While India’s exports during Q1FY12 registered a growth of 45.7 per cent, inflows due to foreign investment increased more than four times. The portfolio investment, considered as the dicey asset to minimize the Current Account Deficit (CAD) remained moderate in the said quarter.

Section 2: Debt Management – Primary Market Operations

1)      The GoI expects to maintain the fiscal deficit for 2011-12 at 4.6 per cent of GDP or at Rs. 4,12,817 crore. However, the figures look unlikely achievable because of lower revenue collection both from tax and non-tax revenues.

2)      During Q1FY12, the total long dated securities issued were Rs. 1,20,000 crore or 28.8 per cent of BE. Considering account repayments of Rs. 13,473 crore, the net amount raised through dated securities stands at Rs. 1,06,527 crore. There was a total devolvement of Rs. 1,506.5 crore.

3)      Two new securities of 7-years and 10-years maturities were issued. Majority of the raising had been done on re-issues which reflects the continued focus on building up adequate volumes under existing securities imparting greater liquidity in the secondary market. G-Secs woth Rs. 54,000 crore and Rs. 36,000 crore were borrowed under the maturity bracket 5-9 years and 10-14 years respectively; while remaining were raised under longer dated tenures.

4)      The weighted average maturity of dated securities issued during Q1FY12 increased to 12.1 years than 10.45 years in Q1FY11. However, the average maturity of outstanding securities as at end-June 2011 declined to 9.58 years from 9.64 years. Also, the weighted average yield increased to 8.36 per cent in Q1FY12 from 7.62 per cent in Q1FY11. The continuous policy rate hikes by RBI put upward pressure on G-Secs which effectively increased the average cost of borrowing. It crossed the average borrowing yield above 8 per cent after FY08 when it borrowed at an average rate of 8.12 per cent. In FY 2003-04, the average yield was as low as 5.71per cent which started increasing since then.

Section 3 – Cash Management

1)      The Reserve Bank manages the government’s cash account; any mis-matches in cash flows are largely managed through issuances of Cash Management Bills, Treasury Bills and access to Ways and Mean Advances (used in deficit) or through buybacks of G-Secs held by RBI (used in surplus mode). The WMA borrowing happens at repo plus 2 per cent and the current limit stands at Rs. 30,000 crore for Q2FY12 and Rs. 10,000 crore between Q3FY12 to Q4FY12.

2)      The cash position remained in deficit mode in Q1FY12 except the first week of April. Henceforth, it remained in deficit mode to the tune of Rs. 50,000 on an average.

3)      The government also issued Cash Management Bills (CMBs) worth Rs. 38,000 crore as an alternative to WMA where borrowing happens at higher relative cost. Against a total maturity of Rs. 20,000, the net CMBs issued remained at Rs. 18,000 crore. The cut-off yield increased gradually as the borrowing limit increased.

Section 4 – Trends in Outstanding Public Debt

1)      The total public debt of the government increased to Rs. 31,49,996 crore at end-June 2011 from Rs. 29,75,628 crore at end-March 2011. The internal debt constituted 90.3 per cent of public debt; among the internal debt, the share of marketable securities accounted for 78 per cent. Overall 30.9 per cent of outstanding stock has a residual maturity of upto 5 years, which implies that over the next five years, one an average, 6.2 per cent of outstanding stock needs to be rolled over every year. Thus, the rollover risk in the debt portfolio remained low.

2)      Banks remained the major holders of G-Secs; the trend continued at 50.4 per cent. Insurance companies on an average hold 22.22 per cent.

Section 5 – Secondary Market

1)      The inflationary concerns, policy rate hikes and fuel price increases including imported inflation in the form of higher commodity prices  were certain factors which raised the 10-year G-Sec yield from 8.01 per cent on end-Mar 2011to 8.33 per cent on end-June 2011. The bond yield curve remained largely flat with the inversion happing at 5 years maturity bracket compared to 10 year yield.

2)      The maturity distribution pattern of dated securities remained largely in 7-10 years bracket (46 per cent) in Q1FY12 compared to 6.9 per cent in Q4FY11. The shift in share of trading volumes shorted to 7-10 years bracket due to launch of new 10-year benchmark paper. However, the above 10 years category declined from 72.5 per cent in Q4FY11 to 41 per cent in Q1 FY12. It was mainly due to increased volume in two papers 8.08% G-Sec 2022 and 8.13% G-Sec 2022 which were traded actively in absence of an active 10-year paper.

Happy Investing! Happy Reading!

- Amar Ranu

Inflows in Equity plummet in July 11; Industry AUM levitates

Indian Mutual Fund industry continues to be tumultuous with no good signs on net inflows in equity. Although the industry assets have grown by 8.17 per cent to Rs. 7.28 lakh crore, a net addition of Rs. 55,011 crore mainly contributed by the new inflows in Liquid/Money Market and Income Funds, the inflows in equity continue to show the muted performance after two quarters of positive inflows. Investors redeemed investment worth Rs. 729 crore in July 2011 in comparison to net buying of Rs. 20 crore and Rs. 1,546 crore in the months of June and May 2011. Net outflow for the year to date in Equity is Rs. 239 crore.

The bleak investment scenario in India and global headwinds especially US Political circle at loggerheads over the increase in debt ceiling and Euro’s issue of default scathed through the globe. Meanwhile the absence of spark and direction in Equity also forced the investors to shift to alternate products including fixed income funds. Investors preferred investing in accrual products as shown by Income Fund category which saw an inflow of Rs. 15,429 crore with a good chunk of money (about Rs. 5,080 crore) moving into FMPs. Also, the Liquid/Money Market category saw a net inflow of Rs. 35,699 crore as banks put back investments into it. In an earlier circular, the RBI had asked to trim the investments in Mutual Funds up to 10 per cent of their net worth as on Mar 31, 2011 by Oct 2011 which it further extended it to Mar 31, 2012. The banks’ total net worth is estimated as Rs. 3.5 lakh crore; it is expected that funds would flow out of Mutual Funds by Rs. 40,000 – Rs. 50,000 crore from the current level of Rs. 74,749 crore in July 2011.

Net Outflows in June 2011

In totality, the net inflows to the Mutual Fund industry are estimated at Rs. 51,010 crore. Interestingly, all categories saw net inflows except Gilt which lost Rs. 85 crore followed by Equity and ELSS which lost by Rs. 729 crore and Rs. 140 crore respectively.  For the year till date in 2011, the net inflow is Rs. 1,24,049 crore; in same period in the previous year, the net inflow had been at Rs. 35,201 crore.

On the positive side, the categories which saw net inflows are Balanced (Rs. 77 crore), Gold ETFs (Rs. 234 crore), Other ETFs (Rs. 384 crore) and FoF Investing Abroad (Rs. 141 crore).

Gold ETF continues to see inflow and increase in AUM too. In last 27 months, it did not see any outflow except at one occasion when it saw a marginal outflow of Rs. 6 crore. In totality, it saw a total inflow of Rs. 4,234 crore in last 27 months. In June 2011, it saw a total inflow of Rs. 234 crore; also its net assets increased to Rs. 6,119 crore in July 2011 from Rs. 5,568 crore in June 2011.  The subdued equity performance and weak dollar globally has prompted investors to invest in Gold which provides hedge against inflation.

FMPs still rule the inflows; Equity NFOs dried

We continue seeing new FMPs in the street. A total of 43 FMPs has been launched collecting a total AUM of Rs. 5,080 crore. Birla Sunlife Mutual Fund launched Birla Sunlife Nifty ETF which collected a total amount of Rs. 12 crore. Around ten fund houses launched FMPs in tenures ranging from 3 months to 2 years.

- Happy Investing!

- Amar Ranu                                                                                                                                      Source: MOSL

Why and How of 'AAA' rating cut of the United States - An Interesting Read from NY Times

Floyd Norris, the Chief Financial Correspondent of The New York Times writes on Why and How of ‘AAA’ rating cut of the United States by S&P. He also answers various questions related to future repercussions on the US ability to pay its debt.

Q. Why did Standard & Poor’s lower the credit rating of the United States to AA+?

A. The rating agency thinks the United States has too much debt, or at least will: “Under our revised base case fiscal scenario — which we consider to be consistent with a AA+ long-term rating and a negative outlook — we now project that net general government debt would rise from an estimated 74 percent of G.D.P. by the end of 2011 to 79 percent in 2015 and 85 percent by 2021.”

There has been a series of articles and notes in different newspapers and online domains which explain the likely impact of the Emerging Nations including Developed World including the future of Dollar.

Our Central Bank, The Reserve Bank of India (RBI) also came out with a note on Recent Global Development; it stated that it has been closely monitoring the global developments and its likely impact on India in terms of liquidity, exchange rates and forex reserve portfolio which may see a flight of capital.

As Friday’s market behaviour demonstrated, India is not insulated from such developments. It may, however, be noted that in the worst phase of the recent global financial crisis, the economy grew by 6.8 per cent, suggesting high resilience emerging from domestic factors. While downside risks to growth may have increased in the wake of global developments, they are likely to have limited impact. However, the policy and regulatory framework must anticipate and be prepared to respond to turbulent financial market conditions arising out of external developments.

Fingers are crossed; the Emerging Market Economies (EMEs) are preparing themselves to avoid any likely large impact on them out of this headwind which exacerbates the global outlook.

Happy Reading!

-          Amar Ranu

Ranking the PMs/Presidents on the basis of GDP

Floyd Norris, the Chief Financial Correspondent and a blogger on The New York Times has a very interesting analysis on G.D.P numbers in the United States (US). He states that the government has limited influence on the economy and the president can have limited influence on government policy.

He says that

Normal economic cycles mean that growth is likely to be less impressive for a president who enters office at the end of a boom, as George W. Bush did, and better for one who enters when growth is weak, as Bill Clinton and Ronald Reagan did. If normal cyclical factors return, and President Obama has a second term, his record should end up much better than it currently appears. If he loses, he could be like Gerald Ford, who also took office during a deep recession.

He also said that all the presidents except George W. Bush (Jr. Bush) and Barack Obama joining the office after World War II have done fairly well having a growth ranging from 2.2 per cent to 5.4 per cent. It is with George H. W. Bush (also called as Sr. Bush), the number started faltering. If Obama by any means gets nominated for a second term, the GDP growth may turn rosy and better than it currently appears as said by the theory of normal economic cycles. The table given below also reflects that Democratic Presidents performed better than Republican except under Reagan.

What does India’s GDP say under different Prime Ministers?

The table 2 depicts the picture which is entirely different. India boasts of multi-party system unlike in US where they are two major parties.  Post independence era, India was ruled mostly by Congress before given a break in 1977 to Janata Party, a party coming into existence after the famous Jay Prakash Aandolan. Immediately after independence under Pandit Nehru regime, the GDP grew at an average rate of 3.8 per cent which decreased marginally to 3.6 per cent under Mrs. Gandhi’s regime. Janata Party, a non-congress government came into ruling under Morarji Desai and didn’t disappoint the country. They delivered 6.5 per cent on an average before faltering to -5.2 per cent under Charan Singh regime. This is the first and only PM’s tenure in which India showed a negative GDP growth. Congress and Janata Dal swiftly changed powers and scored an average GDP score ranging from a low of 5.2 per cent to a high of 6.1 per cent.



Narasimha Rao government could not get much benefit after opening of Indian economy and could not score well in terms of numbers. The number nosedived further to 5.2 per cent. Janata Dal came to power for a short tenure and gave a comfortable growth of 8 per cent but faltered again to 4.3 per cent under H D Deve Gowda. Bhartiya Janta Party, a reformed version of Janata Party delivered an average GDP figure of 5.9 per cent. At the end of his tenure, the country GDP went as high as 10 per cent as he rationalized many reforms in the country. Dr. Manmohan Singh, the current Prime Minister and the then Finance Minister when India opened its economy scored an impressive figure of 8.6 per cent. However, India also witnessed many scandals and high level corruptions under his tenure, causing the country’s exchequer a loss of billions of dollars.

Overall, on an average, Congress gave an average GDP figure of 4.91 per cent during their tenures while non-Congress governments gave an average GDP figure of 4.42 per cent.

In India, the strong consumption story and Next’s Trillion Dollar opportunity has worked really well in recent years which helped Congress a lot. However, the figures also worsened in terms of increased deficits and borrowings as the government went for high spending on social measures schemes. Though interest rates are less now in comparison to 90s, the high interest rates (real  saving interest rate) are decelerating the growth and affecting the overall buildup of India a lot.

Hope we will get the best out of it and India will bounce back!

Happy Investing!

-          Amar Ranu



First Quarter Review of Monetary Policy 2011-12 - RBI stumps with 50-bps hike; Inflation target hiked to 7%

The RBI revealed its super hawkish monetary policy for the first quarter 2011-12 by raising the policy repo rate under the liquidity adjustment facility (LAF) by 50 bps.  The repo rate will now move to 8 per cent. This is 11^th successive hike since Mar 2010 and the fastest monetary accommodative uncovering in the world. Consequently, the reverse repo rate under the LAF, at a spread of repo rate minus 100 bps gets adjusted to 7 per cent. Similarly, the Marginal Standing Facility (MSF), determined at a spread of 100 bps above the repo rate will move up to 9 per cent.

Repo rate is the rate at which RBI lends to banks and Reverse repo rate is the rate at which RBI borrows from banks. The new term Marginal Standing Facility (MSF) is the additional borrowing window for banks set up at 100 bps above repo rate and they can borrow overnight up to one per cent of their respective Net Demand and Time Liabilities (NDTL).

Click  here to read more....

SEBI Regulations - A cup of half-emply, half-filled

The SEBI board in its today meeting announced major decisions which are as mentioned below:

a)      Fees on Mutual Fund transactions: Healing the wounds of Mutual Fund Industry which had been almost killed since the ban of entry load in Aug 2009, SEBI imposed a fee of Rs. 100 per transaction on Mutual Fund investments for existing investors while new investors would have to cough up Rs. 150 on investment above Rs. 10,000. This is a break through decision for bleeding distributors’ community to compensate them to penetrate into retail segment.

The per transaction fee would be Rs. 100 for investments above Rs. 10,000 including Rs. 50 per new folio creation i.e. first time Mutual Fund investor. This may be deterrent to investors as distributors may promote new folio each time investors put money into Mutual Funds. For SIPs, the transaction charges can be recovered in 3 or 4 months. However, it is still not clear whether the new SIP transactions of less than Rs. 10,000 would have one-time fee of Rs. 150 only recoverable on 3 or 4 months. Investors investing directly through AMCs shall not require paying any transaction fee or folio creation fee.

This move is seen as back door imposition of entry load in Mutual Fund which has been banned in Aug 2009. The ruling had hit Mutual Fund inflows severely and had de-incentivized IFAs and distributors to promote Mutual Funds.  

The regulator also put onus on AMCs to do due diligence and regulate distributors alternatively. The diligence process would be applicable for those distributors satisfying one or more of the following criteria:

1)      Multiple point presence in more than 20 locations

2)      AUM raised over Rs. 100  crore across industry in the non-institutional category but high networth individuals (HNIs)

3)      Commission received of over Rs. 1 crore p.a. across industry

4)      Commission received of over Rs. 50 lakh from a single mutual fund

b)      New Takeover regulation: The regulator raised the initial trigger threshold to 25 per cent from the existing 15 per cent and also abolished the non-compete fees. All shareholders would be given exit at the same price. It also increased the minimum offer size from the existing 20 per cent of the total issued capital to 26 per cent of the total issued capital. This is a welcome move for institutional investors who were not able to put money in listed companies for more than 15 per cent of their issued capital in fear of mandatory requirement of additional 20 per cent open offer. Now, investors can buy up to 25 per cent stake without making an open offer.

c)       Guidelines for Infrastructure Debt Funds (IDF): The SEBI also allowed existing Mutual Funds to set up IDF. Existing companies in infrastructure financing for a period not less than five years can also set up Mutual Funds exclusively for the purpose of launching IDF scheme. As said in earlier document by the Finance Ministry, it would invest 90 per cent of its assets in the debt securities of infrastructure companies or SPVs across all infrastructure sectors. This new proposal may open a new financing window for the government who has been looking for a fund equivalent to $ 1 trillion to build the infrastructure in India.

d)      Reduction in no. of pages of IPO form: The SEBI allowed an approximate 50 per cent reduction in number of pages and asked for standardization of form and a single form for ASBA/Non-ASBA. It has also asked to put track record of lead managers in Bid-cum-Application Form and Abridged Prospectus. This would a boon for all investors who have to go through the pain of filling so many information in a larger sized form. 

The SEBI also announced various other regulations and guidelines related to simplifying and rationalizing trading account opening process and also harmonized the new KYC applicable for all transactions. The guidelines have been framed keeping the investors at benefit. Under former SEBI C B Bhave’s chairmanship, there had been a number of investors’ friendly steps but too many guidelines had been killing the industry especially Mutual Fund industry. The new chairman U K Sinha, an IAS veteran and the former Chairman of UTI Mutual Fund had promised some incentives to distributors/IFAs to sell Mutual Funds which to a large extent seemed justified in today guidelines. However, at the end, investors would be paying some additional charges on their Mutual Fund investments.

Happy Investing!

-         Amar Ranu

Mutual Funds’ Net Assets dwindled in June; Equity saw a marginal inflow

After seeing few positives in recent months, Equity saw a good dip in net inflow in the month of June. The net inflows in Equity Mutual Funds dwindled to Rs. 20 crore in June 2011 from Rs. 1,546 crore in May 2011. This is the massive fall in inflows in Equity in recent months.

The uncertain domestic equity market coupled with the bleak global factors predominantly emanating from Euro region also caused Indian investors to redeem their investments out of Equity Mutual Funds and allocate to fixed income products. The domestic equity market remained in bear mood in most of trading days in June before given a boost by FIIs in the last week; thus, letting the broader indices Sensex and Nifty 50 to end in positive.

In addition, the overall Mutual Fund assets fell to Rs. 673,176 crore in June 2011 from Rs. 731,448 crore in May 2011, a fall of Rs. 58,272 crore or 7.97 per cent. Also, the industry saw a total outflow of Rs. 62,442 crore which was mainly caused by outflows in short term debt category – Liquid Funds and Ultra Short Term Funds. In total, these two categories had an outflow of Rs. 62,378 crore. Other categories which saw a net outflow are Gilt (Rs. 88 crore), ELSS (Rs. 80 crore), FOF Investing Overseas (Rs. 42 crore) and Other ETFs (Rs. 210 Crore). Only Balanced Fund, Equity Fund and Gold ETF categories saw a net inflow of Rs. 84 crore, Rs. 20 crore and Rs. 252 crore respectively.

Banks continue to reduce their investments in Mutual Funds; as on June 17, 2011, the net investments stand at Rs. 84,034 crore from over Rs. 1 lakh crore on May 20, 2011. Recently, the RBI has instructed all banks to cap their investments in Mutual Funds up to 10 per cent of their net worth as on Mar 31, 2011. Earlier, the deadline had been as on Oct 2011 which has been extended by another six months. It is being expected that investments worth Rs. 50,000-55,000 crore would flow out of the system in next six months.

Net Outflows in June 2011

The outflows continued in June 2011; barring categories like Equity, Balanced and Gold ETFs, all other categories saw a net outflow. The equity category saw a net inflow of Rs. 20 crore on standalone basis; however, if we consolidate Equity with Balances and ELSS, there has been a net outflow in totality.

On net asset basis, the MF industry AUM also came down to Rs. 673,176 crore, a fall of 7.97 per cent. The other categories which saw a major fall in assets are Liquid/Money Market (-22.36 per cent), Other ETFs (-8.25 per cent), FOF Investing Overseas (-6.2 per cent), Income (-5.49 per cent), Balanced (-4.45 per cent) and others.

Gold ETF continues to see inflow and increase in AUM too. In last 26 months, it did not see any outflow except at one occasion when it saw a marginal outflow of Rs. 6 crore. In totality, it saw a total inflow of Rs. 4,000 crore in last 26 months. In June 2011, it saw a total inflow of Rs. 252 crore; also its net assets increased to Rs. 5,568 crore in June 2011 from Rs. 5,463 crore in May 2011. 

FMPs still rule the inflows

We continue seeing new FMPs in the street. A total of 74 FMPs has been launched collecting a total AUM of Rs. 7,747 crore. The new fund house Union KBC Mutual Fund launched its maiden Equity Fund, Union KBC Equity Fund which collected a total AUM of Rs. 167 crore. It also launched a liquid fund, Union KBC Liquid Fund.

Happy Reading!

- Amar Ranu

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.