Bond markets awaits borrowing calendar; yields to remain under pressure

Highlights:

•  The 10-year benchmark (6.35 per cent 2020 G-Sec) traded in range bound; closed at 7.85 per cent, up by 2 bps


• The average volume under Reverse Repo remained at Rs. 15,500 crores


• Inflationary pressures to continue; unwinding of accommodative measures by RBI to continue


• Non-food inflation also factoring into the overall inflation figures; will remain high in near term


• Borrowing calendar for the fiscal year 2010-11 to be announced on March 29, 2010; expected to be front-loaded


• Short-term yield curve to remain under pressure; G Sec spread for 5-1 years and 10-5 years at 220 bps and 39 bps respectively

Detailed View:

The policy rate action by RBI post market hours left traders dazzled on Monday and the yield on 10-year benchmark (6.35 per cent 2020 G-Sec) soared to 8.03 per cent, its 18-month peak before easing to 7.85 per cent, up by 2 bps over its last closing. This immediate reaction in the market was inevitable after RBI raised short term policy rates by 25 bps. Post action, the repo rate and reverse repo rate stand at 5 per cent and 3.5 per cent respectively. During the week, the yields on the benchmark G Sec remained in range bound and closed at 7.85 per cent, up by 2 bps. One basis-point is one-hundredth of a percentage point. Traders have been waiting eagerly for the weekly borrowing calendar to be announced on Mar 29 and expect that most of the borrowings are scheduled to be front loaded (60-70 per cent of total gross borrowings) in the first half of the fiscal year. The market will also keep a watch on the tenure of the bond issuances. The government has indicated that it would raise Rs. 4,57,000 crores from market in 2010-11, up by Rs. 6,000 from last year’s gross borrowing. Traders have been demanding short to mid term papers to be the major part of borrowing schedule in first half of the fiscal year following high inflation, unwinding of accommodative monetary policies by the central bank etc.

The RBI has been under high pressure on soaring inflation which is on continuous rise and has already touched near to 10 per cent. The inflation which used to be mainly due to food prices’ factors has moved to non-food prices’ factors too. Fuel inflation soared to 12.5 per cent for the week ended March 13. It might continue to remain high after the recent oil price hike by the government. Manufacturing inflation is also running at 4 per cent level and is expected to remain high as manufacturers pass the rising input costs to consumers.

The yields on 5-year 7.32% 2014 G-Sec rose by 6 bps to 7.24 per cent while 7.02% 2016 yield rose by 8 bps to 7.46 per cent.

On the liquidity front, the liquidity as measured by bids for reverse repo/repo under the Liquidity Adjustment Facility (LAF) remained comfortable with average bids for reverse repo amounting to Rs. 15,000 crores in the concluding week.

View and Recommendations

The yields at the shorter end of the curve will remain under pressure as the market would be witnessing a new round of borrowing next week onwards.
Liquid Fund and Ultra-short term debt funds (erstwhile called as Liquid-Plus Funds) should be the preferred choice for investors looking to invest their surpluses for a short duration (3-6 months) while for an investor having investment horizon of 9-12 months should invest in Income Funds. On return basis, LIC MF Income Plus Fund – Growth, IDFC Money Manager – Invest Plan – Growth and Kotak Floater – LT – Growth have been the front runners in Liquid Plus category in 6-months horizon. In Income Fund category, some of the actively managed funds are Fortis Flexi Debt Fund – Growth, Birla SunLife Dynamic Bond Fund – Retail – Growth and HSBC Flexi Debt Fund – Retail – Growth scoring 10.33 per cent, 8.27 per cent and 7.28 per cent respectively in 1-year category.
New FMPs have been flowing into the market on a continuous basis. Investors looking to lock-in their investments for a longer period (13-20 months) can consider this avenue as they will also get Double Indexation benefit (if invested before March 31, 2010) which will reduce the tax outflow on their FMP earnings.

RBI acts on Repo and Reverse Repo, a surprise for all

Indian Debt Markets are increasingly more on middle-of-the-road as traders awaited the borrowing calendar from RBI anxiously due on Mar 29, 2010. The inflation as measured by Wholesale Price Index (WPI) already reached to 9.89 per cent on month-on-month basis surpassing the RBI projection of 8.5 per cent. This has put policy makers to analyze all the monetary scenarios before announcing a roll back in accommodative measures. The Deputy Governor K C Chakraborty commented that the RBI might take measures anytime before the RBI policy meet on April 20 to tame the inflation which had shifted from Supply Side constraints to Non-food inflation constraints. An increase in non-food i.e. manufacturing inflation coupled with high IIP numbers (already in double digits nearing 16 per cent for two times in a row) prompted the RBI to announce a hike in policy rates, the first step seen in unwinding the stimulus packages and normalizing policy rates to tame the high inflation. The RBI hiked the Repo Rate and Reverse Repo Rate under the Liquidity Adjustment Facility (LAF) to 5 per cent and 3.5 per cent respectively with immediate effect, a hike of 25 bps over its last figures. Repo Rate is the rate at which the banks borrow money from RBI for meeting its short term liabilities and Reverse Repo Rate is the rate at which the banks put their surplus/money with RBI. This unexpected move may increase the sell offs by traders and yields may move northwards.

The inflationary pressures were of high concern as evident from RBI statement “Notwithstanding some moderation in recent weeks, food prices remain at elevated levels. In fact, consumer price inflation, as measured by various consumer price indices, has accentuated further. The acceleration in the prices of non-food manufactured goods and fuel items in recent months has been of particular concern.”  

The 10-year paper benchmark 6.35 % 2020 G Sec cooled off to 7.82 per cent, down by 18 bps week on week while the 5-year paper 7.32% 2014 saw yields slipping to 7.18 per cent, down by 13 bps. The cut-off price for the 91-Day T Bill was seen at Rs. 98.91 or at 4.42 per cent compared to previous cut off of 4.34 per cent. There was also a pressure seen on Corporate Bonds. On the shorter end of yield curve, the spread over G Sec in one-year category rose to 142 bps as on Mar 19, 2010, up by 16 bps. In 10-year category, the spread rose to 90 bps, up by 17 bps. The 10-year AAA bond traded at 8.88 per cent vis-à-vis 8.90 per cent as observed in last week.

Bond market nervous amid advance tax outflows

The Bond Markets traded northwards amid thin volumes. The yields sharpened northwards amid speculation that government will complete 60-70 per cent of total borrowing estimates in first half of the fiscal year 2010-11. Since the bond markets have already factored most of the economic developments related to bond markets, the traders awaited for the borrowing schedule program to be announced on March 29, 2010 by RBI before initiating their plan of actions. High inflationary pressures also dampened the mood among traders. The market is expecting an inflation to remain in the range of 9.5-10 per cent, much higher than the RBI estimate of 8.5 per cent. The banks’ credit growth has also shown encouraging numbers giving a fear among traders that the banks would be forced to subscribe to Government Securities and private firms would be crowded out. The banks’ non-food credit growth has reached 16.8 per cent level, higher from 11 per cent recorded in the month of Dec 2009.
The benchmark bond 10-year 6.35 % G Sec hardened to 8.01 per cent, a hike of 4 basis points (bps) over the last level of 7.97 per cent. One basis point is one-hundredth of a percentage. Index of Industrial Production (IIP) for January grew 16.7 per cent year on year basis, little below the market expectation of 17 per cent. The numbers prompted yields to ascend with 10-year benchmark G Sec to end at 8.01 per cent level. The other securities 7.02 % per cent 2016 saw yields rising to 7.68 per cent, up by 1 bps. The five year 7.32 % 2014 saw yields down by 4 bps to 7.30 per cent level and the 8.34 % 2027 yield dropped 2 bps at 8.38 per cent levels. Corporate bonds yields closed lower on weak to weak basis. The Five- and Ten-year corporate bond yields closed at 8.60 per cent and 8.90 per cent levels respectively. Moreover, the advance tax outflows may cramp the liquidity in the market.

Invest in ULIPs – A good Wealth Creator tool in long term

Out of the blue, the Indian insurance industry is the talk of Dalal Street as it has become a major contributor of investment in the equity market. Though premium collection slowed to some extent in early 2009, it has been gaining pace with the overall healthy market sentiment. Premiums collected under ULIPs are a major driver in boosting equity investment. Renewal premium of the industry in the ULIP category increased from Rs.26,638 crore to Rs.37,543 crore, an increase of 41 percent year-on-year. Insurance companies invested Rs.44,358 crore in equity between April and December 2009.

The practice of mis-selling ULIPs has largely been curbed after the insurance watchdog, the Insurance Regulatory and Development Authority (IRDA) introduced investor-friendly rulings, capping charges up to three percent and 2.25 percent for ULIPs with maturities of up to 10 years and those beyond 10 years, respectively. Moreover, the IRDA ruling on solvency ratio, corporate governance, public disclosures, payment made to intermediaries and allowing unit-linked health insurance plans, have greatly benefited the insurance industry.

How do ULIPs perform well in the long-term?

The major objective of ULIPs is to build wealth, steadily in the longterm as well as providing insurance cover, though investors must be clear that, investing in ULIPs is not to get high insurance cover. A fund manager in insurance companies can hold stocks for a longer period than his counterparts in other industries. Hence, churning in portfolio stocks, measured by Portfolio Turnover Ratio (PTR) is relatively less or negligible. Since churning involves costs, it has a major impact on a fund's performance. Higher the Portfolio Turnover Ratio, higher is the cost involved. Moreover, IRDA's cap on charges including a cap on Fund Management Charges (FMC) in case of ULIPs, bring more benefits to policyholders in the form of increased returns. A close look at the performance of other market related products vis-à-vis ULIPs throws up a startling fact. Other market related products lag ULIPs' returns by a large margin in the long run, which confirms that ULIPs are an ideal investment vehicle for wealth creation in the long term. On an average, the historical FMC in other market related products are lower. For mutual funds they come to about 2.1 percent whereas for ULIPs, the maximum FMC is capped at 1.35 percent.

For example, a periodic investment of Rs.1 lakh in a diversified equity linked fund (ELSS) for 15 years grows to Rs. 28.54 lakh at an assumed growth rate of 10 percent, giving a net yield of 7.69 percent

(Considering an average FMC of 2.1 percent). The same amount invested in ULIP for the same period may range from Rs.28.63 lakh to Rs.31.59 lakh at an assumed growth rate of 10 percent, giving a net yield ranging from 7.97 percent to 9.03 percent. The final value falls further if we consider other tax-saving instruments such as PPF, which gives a return of eight percent a year. An investment of Rs.1 lakh a year in PPF for 15 years grows to Rs.27.15 lakh.

So, clearly, ULIPs score over other products in terms of returns and additional benefit such as insurance cover. But it scores below PPF as an investment in ULIPs involves high risks. Returns on ULIPs rise due to lower FMC if the investment choice is a debt fund and assumed rate of return is 10 percent (in debt funds, the FMC is generally about 0.75-1 percent). The table shows the different returns.

However, the high entry costs and operational costs mar the performance of ULIPs on shorter maturity periods. Thus, we see that ULIPs appear to be the obvious choice for investments for creating considerable wealth in the long term.

SEBI’s ruling on Mark-to-Market may shun the attractiveness of Ultra-short term funds

Since the SEBI made mandatory for Liquid Fund managers to invest in papers with maturity of up to 91 days only, the Liquid Funds lost sheen among institutional investors due to reduced portfolio returns. This allowed the market participants to shift its focus to Ultra Short Term Funds (erstwhile called as Liquid-Plus Funds). Thanks to superior returns and tax benefits over Liquid Funds, Ultra Short term funds have found a favour among all class of investors.

However, the market watchdog SEBI still not very confident about the credit stability in the market issued another directive asking all mutual funds to value money market and debt securities with maturity over 91 days (or with maturity up to 182-days) on a mark-to-market basis with effect from July 01, 2010. The ruling will require all fund managers to factor in any movement in securities prices on a daily basis to calculate the Net Asset Value (NAV) of fund. The new valuation method may increase the volatility of Ultra Short Term Funds while Liquid Funds being shorter tenure funds will be less volatile. Currently securities having maturities over 182 days are already valued at daily weighted average (mark-to-market) method. The move will ensure that the Liquid Funds and Ultra Short Term Funds are undeniably liquid by asking them to be valued in a more transparent manner.

Ultra short term schemes which comprise 40 per cent of Indian Mutual Fund industry’s asset under management (AUM) of Rs. 7.59 lakh crore have been fetching returns in the range of 5-5.5 per cent having an edge over its sibling Liquid Funds fetching returns in the range of 4-4.25 per cent. The debt instruments held by Ultra Short Term Funds (or Liquid-Plus Funds) have a longer tenure i.e. the average maturity of these funds is comparatively higher than that of Liquid Funds. Long term papers (over 91 days) help fund managers to generate extra returns over short term papers (up to 91 days). Recently the RBI hiked the CRR by 75 basis points which increased the returns on Commercial Papers and Certificate of Deposits by around 100-150 basis points.

In the last few months, there have been continuous net outflows from Liquid Funds due to high dividend tax structure and restrictions to invest in papers having maturities up to 91 days only. Liquid Funds charge a dividend distribution tax (DDT) of 28 per cent unlike in Ultra Short Term Funds where the DDT is 14 per cent for individual and 22 per cent for corporate, thus, clearly giving a tax advantage of 8 per cent. Treasury Officials, CFOs etc prefer Liquid Funds and Ultra-Short Term Funds over Banks’ Fixed Deposits where interest income is charged at 33 per cent.

By issuing out the current directive, the regulator SEBI wants to make sure that the Oct 2008 Credit Crisis is not repeated where the RBI has to open a lending window for Mutual Funds for a limited period to ease out the crisis. However, the industry will continue to enjoy additional returns in Ultra Short Term Funds, though at a slightly higher risk as long as the tax-arbitrage is in existence over Liquid Funds and banks’ Fixed Deposits. The market will actively watch the upcoming Annual Budget on Feb 27, 2010 where the government may take away the tax arbitrage in Ultra Short Term Funds to make sure that Banks’ FDs are actively used for placing excessive unused funds, thus, bringing out a kind of stability in the credit market.

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SBI vs HDFC – Home loan war is on!

It’s showdown time for the two biggies in the housing finance sector: SBI and HDFC. After the economic meltdown, most banks switched their attention from not-so-profitable commercial lending to retail lending, which have formed a sizeable part of their credit portfolio in the recent past. State Bank of India (SBI) was the frontrunner with its special 8 per cent home loan scheme till it was challenged by Housing Development Finance Corporation Ltd (HDFC). So what does HDFC offer to outdo SBI’s much-publicised scheme?

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Home Loan war is on!

The home loan war just seems to be getting intensive with major domestic lenders such as SBI, ICICI Bank, HDFC Bank and others jumping into the bandwagon. The situation reminds a similar event seen in 2003 when foreign banks lined up to provide home loan at 6 per cent for first 2 to 3 years followed by floating rates unlike 7 to 8 per cent provided by their private and PSU counterparts. ICICI Bank and Kotak Mahindra Bank took the fight further with the announcement of new rates so called ‘teaser rates’. Kotak Mahindra Bank has announced the special offer of 8.49 per cent for 30 months for all loan categories followed by the interest rate linked to retail prime linked rate in subsequent years. Similarly, ICICI Bank offers home loan at 8.25per cent for first two years followed by rates linked to in house built Floating Reference Rate (FRR) in subsequent years. Earlier this year, State Bank of India (SBI), the largest lender in India has launched ‘SBI Easy Loan’ offering home loans at 8 per cent for first year, 8.5 per cent for next two years followed by interest rates linked to State Bank Advance Rate (SBAR). HDFC, an another big lender in home loan segment which once described these moves as ‘teaser rates’ also announced a fixed cum floating scheme where it offers home loans at 8.25 per cent for first three years followed by interest rate linked to retail prime lending rates in subsequent years. However, this time they have given out different reasons such as ample liquidity, improved operational efficiency and good quality portfolios among few. So, the question arises what have made these lenders to jump into lucrative home loan segment and which rates are cheapest at the current conditions?

Lucrative home loan portfolio: is it attractive?

In the current economic scenario, the credit growth has almost dried, currently growing at little over 10 per cent down from 20-22 per cent a year earlier. The banks’ credit portfolio which comprised mainly of commercial loans witnessed slow commercial lending due to subdued market conditions and this led to a fall in net interest income, a difference between interest income over interest expenditure. This forced banks to concentrate to home loan borrowers to cover up the losses. Moreover, the real estate boom after a long two year lull added another spark among prospective buyers, thanks to combined home loan sops from lenders and discount offers from builders. Sops to Customers Banks have been offering sops in terms of low interest rates to new customers, just bypassing the existing customers. Initially some banks offered nil or reduced processing and documentation charges but they had scrapped it too. But the question arises, would the teaser rates jeopardize the cash flows of borrowers if the rates arise in future? The answer lies in the effectiveness of borrowers’ planning.

So effectively, the interest rates vary across all the banks at the current BPLR of respective banks which may vary in future as per the interest rate scenario in future.

Are these loans easily available to borrowers?

Simply no! Rupeetalk has interacted with some of the prospective home loan borrowers and many have complained that banks have put stringent norms before sanctioning these teaser loans to them. Some of the norms put are compulsory new home (no 2^nd home buying), compulsory guarantor, no refinancing, listed developers and increased processing time.

Sanjay Bhange, a prospective home loan borrower applied for a home loan with PNB in last Aug 2009 and got sanctioned his home loan in Nov 2009, that too, after repeated reminders along with a warning for complaint in consumer forum.

The logic is simple: have patience, check the listed developers with them, arrange the guarantor in advance and get all your documents ready before applying for these new home loan schemes.

What can the regulator do?

To some extent, the Reserve Bank of India (RBI) has been successful in creating a positive competition among banks to offer low interest rates to borrowers as banks were initially reluctant to pass the monetary policy benefits given by RBI to them. Currently, the RBI in consultation with a special committee has been working to float a new benchmark rate applicable for all home loan borrowers (old and new). So, in near future, the home loan borrowers will have the ease to select the bank on the basis of services provided.

Is Social Impact/Value Creation Key to Microfinance’s Commercial Success?

All organizations create value in terms of economic, social and environmental components. The aim is value creation in terms of improved social surroundings. Microfinance institutions started their work on a social platform and needed to grow in order to deliver on its potential to reduce poverty. All microfinance programs target one thing in common: human development which is geared towards both the economic and social uplift of the people they cater for. It needs to scale up rapidly to reach out to poor in large numbers, it must realize its potential as a broad platform and social environment and it must tap the commercial financing to achieve the first two goals.

No doubt the grass is growing rapidly. Microfinance has been establishing new norms of behavior and cultivating a new level of trust. Like any other emerging industry, microfinance has grown by leap and bound in last few years and consolidations or tie-ups are inevitable among the top 200-300 microfinance institutions. Commercial banks have begun partnering microfinance institutions in an innovative way where they outsource a majority of lending activities with new and improved technology. In today’s environment, commercial financing represent the largest source of financing. If microfinance has to scale up significantly, it must look beyond its basic social building. In recent developments, microfinance institutions have also extended its lessons to other business opportunities for providing goods and services sought by poor.

So, the question arises: does it confine to just social impact or value creation? May be true or false; true in the sense that the basic concept of microfinance is to bridge the societal gap among poor human beings while false in the sense that it must look out of box to provide continuous cash-flows to needy persons for which it needs capital. Nevertheless, rapid technology growth has made the flow easier enabling maximum people to come in its vicinity.

Today, many microfinance institutions have started tapping commercial financing in order to spread their reach to billions instead of millions. Stakeholders who eye a pie of the microfinance institutions pre-capitalization require an assessment of social impacts, impacts on lifestyle and empowerment issues etc. They also analyze the society as a system and societal impacts, hoow deeply it is connected to the poor people where it has worked and how deeply it has gone in improving their livelihoods.

But the greedy game has followed its own course. There is no denying the fact that the high recovery rates (as high as 96 per cent) have forced commercial lenders to move towards microfinance institutions in order to tap the burgeoning growth in micro-lending. The MFI growth has been diluting the interests of microfinance. For the success of an MFI, rapid growth is not necessary rather how deeply it goes in assessing the societal impacts. The signal is clear: Reach to big numbers without making big bucks. But commercial greedy lenders will surely imbalance the strong pillars of pyramid i.e. microfinance. It may lose its relevance in the years to come. White claims that microfinance is a proven anti-poverty intervention thus seems ambiguous.

Too many players, too many regulations…

India remained coupled with the ongoing global financial crisis albeit the extent of losses was small as compared to other nations where a lot of financial institutions collapsed. India, the favorite destination for foreign money witnessed an unusual concept ‘flight to safety’ which resulted in sharp depreciation of mutual funds’ assets under managements (AUMs). Some mutual funds defaulted in payments too but the timely action by SEBI along with RBI helped Indian mutual fund industry in achieving new heights in terms of AUM. Currently, the whole industry AUM stands at Rs 7.63 lakh crore with 38 pillars supporting the base. Many players entered the bandwagon witnessing the high growth rate year after year. SEBI announced a series of regulations in 2009 to protect the interests of investors and improve the liquidity conditions. SEBI started the year prohibiting the declaration of indicative portfolios and indicative yields in Fixed Maturity Plans (FMPs) by mutual fund and its distributors. It also directed liquid fund schemes to purchase debt and money market securities with maturity of up to 91 days only effective from May 01, 2009. It also directed all mutual fund players to discontinue the nomenclature of ‘liquid plus schemes’ as it gives a wrong impression of added liquidity. The above regulations were directed by SEBI witnessing the serious liquid crisis in Oct 2008. Investment in Liquid Fund schemes with papers with maturity up to 91 days only has drastically reduced the returns from 7-8 per cent to 2.5-3 per cent compounded annually. This has resulted in mass redemption from liquid fund schemes.
In India, mutual fund investment is a push-strategy rather than a pull strategy as mutual fund distributors sell the products in lieu of high upfront commissions paid from investors’ investments. The SEBI announced the most awaited decision of the Indian mutual fund history where it directed the mutual fund houses to scrap all entry loads effective from Aug 01, 2009 and empowered the distributors and independent financial advisors (IFAs) to negotiate the commission for the services rendered. The retail investors welcomed the ruling while the distributors and IFAs opposed the decision as their earnings were at stake. Indian investors are not comfortable in writing another cheque for distributors. The above ruling created a stir in mutual fund inflows in equity category and the investment dropped drastically month after month. Some large mutual fund houses dig their profits to incentivize the distributors and IFAs while it became a question of survival for small mutual fund players. Fund houses reacted by increasing the exit loads which were also later regulated by SEBI putting a cap up to 1 per cent for all redemptions within one year and no exit loads beyond 1 year. To some extent, fund houses started pushing Portfolio Management Services (PMS) where it earns a fixed return in lieu of services rendered.
The cautious approach by SEBI in regulating Indian mutual fund industry and empowering the investors with improved investment conditions resulted in an increase in total assets under Indian Mutual Fund houses. However, the equity schemes continued to witness the lackluster in terms of investments.
Come to Nov 30, 2009. The retail investors have found another opportunity in terms of investments. Mutual funds units are now allowed to trade through registered brokers of recognized stock exchanges and NSE has already provided an online trading platform to all brokers. Thus, the need for enhancing the reach of mutual fund schemes to more towns and cities will be addressed through this channel. The existing secondary market set up in 1500 towns and cities will provide another opportunity to retail investors to invest in mutual funds. To some extent, the issue of holding multiple statements of accounts would be taken care and all the mutual fund units would be in dematerialized form.
But the question remains - are we ready to swallow too many regulations in such a short span of time? May be or may not be. SEBI could have been slow in introducing the exemption of entry loads in a phased manner so that it could give some time to IFAs to settle with their new business environments. As per ICRA Online report, the average maturity period for equity stands at 2-3 years much lower than its fundamental rule of 5-10 years. Equity has always been termed as a long term investment product but the recent ruling of allowing mutual fund units may result in increased churning of mutual fund investments. Moreover, the transaction charges as levied by brokers stands at 0.3-0.5 per cent for retail investors on either side trading, thus, making it 0.6-1 per cent on both side transactions. Apart from this, the brokers may charge an additional fee for recommending mutual fund scheme to investors. Thus, the whole concept of zero entry-load vanishes and moreover, the churning will also increase putting an extra onus in terms of increased fund management charges as portfolio turnover ratio will increase. Mutual fund houses will also benefit in terms of frequent exit loads being charged from investors.
No doubt, SEBI rulings will help retail investors with improved investment environment but it should also monitor the other anomalies as mentioned above. Investors must have some reasons to smile and become an informed and disciplined player.

Financial Mess in Cosmopolitan working Women

For quite a long time women had been depressed in India before being given the opportunity to lead in parallel to men in all walks of life. Exceptional to everyone’s expectations, they performed well and proved their worth in personal and professional life both. But the cosmopolitan life have made these women extravagant splurging without checking their limits. So, the usual money-manager tag being given to women seems to die away and the money management remains a history for them now.

Sameera, in mid 20s, well-educated has been working in Mumbai for quite a long time. By God’s grace, she managed to start earning handsomely in few years of work making her more independent and giving her own identity. And similar to this, her lifestyle also changed shifting from Nokia GSM to Blackberry, splurging more on shopping, restaurant foods et al with minimum thinking on Personal Finance. They have the notion in mind that their dream men would bring all the charm and comforts to their life.

Let us understand Sameera’s financial position and read her lifestyles since she has been earning. She currently holds a credit card where she has got a significant dues pending, thanks to her openhanded expenses. She is still unaware of the various nuisances and hidden charges on her credit cards which the credit card company adds every now and then. Her fault is : she didn’t read the fine prints of credit card and neglected the nuisances of overspending on credit card. She also has a medical insurance provided by her current employer which is also not sufficient in city like Mumbai where medical expense can unbalance your financial kitty. In the name of life insurance, she has got nothing much, means she is under-insured. This is not the new story with a cosmopolitan unmarried earning girl. The story does not end here with Sameera. Rita, Deepali, Anjana, Midul and others share the same story and are least interested in future financial requirements.

Here are some reasons why working women should have balanced financial positions and should decide about it little early without ending into a financial mess:

1. First of all, they should have enough life insurance in terms of Pure Protection schemes. Should any unfortunate things happen in future, their nominee would get the entire sum assured. It works well when the women are married and are burdened by home loan debts, kids’ education expenses and other major expenses. And if they take insurance early in their life, it will cost less to them and there are additional discounts being offered to them by insurers due to less prone to risks.
2. Women should take medical insurance policy at an early stage, when the insurance seeker is not suffering from any ailment. This is important because as one ages, there is likelihood of developing ailments which can be fatal too. Moreover, women are more prone to health care services due to their inherent conditions.
3. Disciplined investment always pays well in the long term. The working women should make systematic investments into various saving products at an early age so as to get a compounding effect on their returns.
4. Since for many women, their dream job might be a dream for fulfilling their cherished dreams, they should avoid splurging and must keep checks on their expenses. Incase they use credit cards more often, they must pay the bill in time else the interests on credit card dues can put them in debt trap.

Smart work, smart thinking, multi-environment adaptability and loyalty to the company are some of the flying colour words which define today’s women but when it comes to their own money management skills, they score very low and mess their financial conditions. They must follow a disciplined approach towards their personal savings and check their expenses.

Is the time ripe for Indians to invest globally? What are the most attractive options for Indians to build a more global portfolio?

The global financial markets saw a series of events in the last two years with the abruption of subprime crisis followed by fall of investment banking behemoth Lehman Brothers in US. The whole process disrupted the world financial markets including India too, thus, giving a silent killing to the concept of ‘Decoupling’. The central banks in mutual relationship with their central governments declared a series of relief programs/packages. The combined global measures along with increased consumer consumption improved the global sentiments and markets performed comparatively better in 2009 YTD. India emerged as the 2nd best performer with a return of 73 per cent – its third best domestic performance in a year in its history-- in YTD 2009 followed by Brazil, Thailand, Taiwan, China etc. Russia remained at the top slot with an overall return of 90-plus per cent in YTD 2009. Nevertheless, other developed markets such as Japan’s index, S&P 500 etc gave returns in the range of 20 per cent.

Table 1- Performance of MSCI Indices
Indices YTD 1 Yr
MSCI EM Asia 59.88% 92.20%
MSCI BRIC 76.02% 105.63%
MSCI Europe 26.53% 39.73%
MSCI The World Index 20.51% 24.30%
MSCI G7 Index 17.36% 19.33%

A look on table 1 depicts a very clear picture that emerging markets have outperformed the world index and Europe and G7 index by a huge margin. The world index has given return of 20.51 per cent in YTD 2009 as compared to MSCI BRIC which gave 76.02%in YTD 2009. In terms of valuations, India is trading at 15x PE FY2011, near to its historical average of 14.2x while China and Hongkong is trading at 17.3x and 14.5x FY 2011. US’s S&P 500 is trading at 14.5x PE while Russia and Korea is trading in single digits. So, in terms of valuations, India has reached a stage comparable to world markets but the opportunities are endless in India in terms of returns.
The developed markets are still to experience a handsome improvement in various economic parameters. The treasury rates are still quoting at their all time lows prompting the global investors to invest in emerging markets like India. So, logically at this point, the time is not ripe for Indians to invest in global markets as the domestic market provides a better opportunity in terms of valuations and earnings.
Let us understand the need of global portfolio: Investors, by and large, build global portfolio primarily because of diversification opportunities they offer. However, global funds are subject to currency risk and country risk. The retail investors in India are still not financially educated to build a global portfolio on their own- the reason being the small tick size and lack of known avenues. The investors are still inclined towards bank deposits and other traditional investment products. In India, mutual funds have travelled a long path in building AUMs, currently hovering at Rs 7.5 trillion crore where global dedicated funds’ share stands at Rs 7.5 k crore as on Sept 2009 despite being allowed an exposure limit of $ 7 billion for overseas investments by Indian mutual funds.

Table 2- Performance of Global Funds (India)
_____________________ 1 Yr 3 Yr
Frankling Asia Equity Fund 60.79% 9.82%
Tata Growing Eco Infra Fund 83.28% -
ICICI Pru Indo Asia Equity Fund 89.19% -
Fidelity International Opportunites 71.63% -
Principal Global Opportunities Fund 68.75% 4.69%

The table 2 depicts the performance of global mutual funds operating out of India. Most of the funds are dedicated to Asia and emerging economies. They have given returns in the range of 60.79% to 89.19% in one-year category, much lesser than the diversified fund category of around 100 plus per cent. Some of the funds invest in global assets directly while others invest in overseas mutual funds, also known as feeder funds such as DSP BR World Energy Fund, Franklin India International Fund etc. In the current market rally, the domestic diversified funds have performed better than the global funds and there have been no clear trend for performance in global funds. However, the mutual fund route seems to be right option to build a global portfolio rightly through India’s dedicated global funds and foreign-based funds. Investors need to take into account of the volatile currency risk and country risk. In the near term, dollar has reached to its 14 month low value against Rupee. So, the concept of dollar carry trade is widely practiced in the investment circles. Global investors take the PN (participatory notes) and PE (private equity) route to invest in India while Indians mainly high-worth investors follow the PE and buy-out route. Some of the well defined ways to diversify internationally and build global portfolios are given below:
1. Index investments- If investors hope are a return close to average market return; it is advisable to go for passive funds such as ETFs.
2. Invest in global funds with low expenses.
3. Go for offshore funds as they offer tax advantages over onshore funds on profit accumulated.
4. Avoid funds with frequent turnover i.e. with high turnover ratio.
5. One can also invest in international shares directly. During the economic downturn, some of well known stocks such as Citi, JP Morgan, AIG etc were trading at excellent valuations.