Mutual Funds: Growth Vs Dividend option

Mutual funds, over the last several years,have turned out to be a very popular mode of investing for thousands of small and retail investors in India. And there are reasons for such popularity and the key reason being even the smallest of small investors can participate in the equity markets through the route of mutual funds without no or little knowledge about the equity markets.

That said, while investing in the funds, investors always end up in a situation finding it difficult to choose the right option be it growth or dividend option in a mutual fund. In this perspective, its becomes relevant to understand the difference between the growth and the dividend options in a mutual fund, as taxation also plays a significant role.

What are dividend & growth options –

Investments made under the growth option will not generate periodic income, in the sense that all money invested will continue to be invested until redeemed – i.e. this will give you capital appreciation and hence returns, but not regular payouts. For example, if you purchased 1,000 units of a mutual fund at Rs. 11 and sold it a year later at Rs. 15, this difference of Rs. 4,000 (i.e. Rs. 15 – 11 = Rs. 4 * 1,000 units = Rs. 4,000) is your capital gain and returns on investment.

This type of investment is more suited for long term investing in equity mutual funds, as there are no taxes on long term capital gains. Also, equity mutual funds are prone to short term risk, but in the long term they typically give good returns. This option benefits from the power of compounding since not only is the principal invested, but also the notional profit. It is a good option for those who do not need to depend on a monthly income from their investments for their living.

Dividend Option
Unlike the growth option, investors opting for the dividend option will get a periodic payout in the form of dividend, though the periodicity is not certain. This option is ideal for short term to medium term investments, especially in debt and debt oriented funds. Debt mutual funds and Monthly Income plans (MIPs) are good choices for investors who require a steady monthly and periodical income.

This option will give the investor the benefit of moderate capital appreciation along with dividend returns over the period of holding. It is important to note that due to the payouts, the power of compounding is not as efficient as compared to that of the growth option. Also, investors who do not depend on the dividend income, will face the risk of re-investment, i.e. re-investing the money earned via dividend in an asset class which offers good return. It is important to keep in mind that dividends are neither fixed nor guaranteed and the payouts depend upon the fund’s performance during that period.

Dividend options also make a strong case for retail investors who may not know the direction of the equity markets. In case if they had invested in dividend option of an equity fund, fund based on good performance may declare dividends and to that extent the investor takes the money out of the fund and stays protected from the market’s downside. In case some one is invested in the growth option of equity fund, and if the market cracks down, the notional value of the fund goes down along with the fund’s performance.

Dividend re-investment option
This option tries to make the best of both worlds, in the form of declaring dividends to investors, but not issuing the dividends in the form of cash but re-investing the dividends into the same mutual fund for additional units. One faces the risk of having to pay an entry load each time a dividend is reinvested, and also if there is any lock in (as in the case of an ELSS), the new units will be subject to a further 3 year lock in. The growth option is a better bet than the dividend reinvestment option.

Taxation
Taxation on growth funds is simple, as only capital gains are calculated, and for equity funds there is no tax on long term capital gains, while for short term capital gains it is 15%. In the case of debt funds in the growth option, short term capital gains is taxed at 30% whereas Long term capital gains is taxed at 10% without indexation or 20% with indexation. However, in the case of dividend options, the dividend is tax free in the hands of the investor, but the fund will have to pay dividend distribution tax before it gives the dividend.

Performance difference between Growth & Dividend options:

Contrary to the perception of some investors about the performance difference in growth and dividend options, actually there is no difference in the performance of fund in terms of growth and dividend options. Both the options reflect the performance of the fund, the difference in the NAV is because when dividends are declared, the NAV of the fund drops to the extent of declared dividends. While the growth option remains the same, as there is no payout.

Summary:

• Dividend option aims to give periodic payouts, and these are tax free in the hands of the investors.
• Dividend option is suited for investors who seek regular returns in funds such as debt and monthly income plans.
• When equity markets are good, investors are better off by taking money out of equity funds through dividends.

• Growth option will not pay out any money in the interim; only on redemption will the investors receive the accrual in the fund through growth option.
• Those of the investors who do not need any periodic payouts, growth option is best suited for them.

Gopalakrishnan V

Founder & CEO

Money Avenues

Quarterly results – T20 – Infosys

Top 20 takeaways from the Q4 results

Infosys –

1. Delay in declaring the Q4 result owing to internal reasons.
2. Net profit fell by 4.7% on a sequential basis.
3. Revenues fell by 2.8% on a sequential basis.
4. Declares 1:1 bonus for the shareholders.
5. Expects FY16 dollar revenue to grow 10-12 percent in constant currency terms*.
6. Better than the street forecast of 9-11 percent but below the NASSCOM guidance of 12-14 percent.
7. Announces Vision 20-20
8. Wants to touch $20 billion in revenues by 2020.
9. Liquid assets including cash and cash equivalents, available-for-sale financial assets, certificates of deposits and government bonds increased to Rs 32,585 crore at the end of March 2015 from Rs 30,251 crore in March 2014.
10. Revenues from North America declined by 0.7 percent sequentially and 0.4 percent in constant currency.
11. Revenues from Europe slipped by 6.1 percent sequentially and 0.3 percent in constant currency.
12. Revenues from its India business too dropped, down by 4.1 percent sequentially and 4 percent in constant currency.
13. Rest of the world’s revenues fell by 5.7 percent on sequential basis but grew by 0.1 percent in constant currency.
14. Quarterly annualised attrition declined to 13.4 percent in Q4 compared to 23.4 percent in Q1.
15. Attrition rate (last twelve months) dropped to 18.9 percent in March quarter compared to 20.4 percent in December quarter.
16. Infosys added 6,549 employees during the quarter, taking the total base to 1,76,187.
17. The company added 52 clients (gross) during January-March quarter against 59 clients addition in December quarter. Active clients were 950 at the end of fourth quarter compared to 932 in third quarter.
18. For the full FY15, profit jumped 15.8 percent to Rs 12,329 crore on revenues of Rs 53,319 crore (that grew by 6.4 percent) while in dollar terms, profit climbed 15 percent to USD 2,013 million and revenues spiked 5.6 percent to USD 8,711 million.
19. In constant currency terms, dollar revenue growth was 7.1 percent, which was at the lower end of FY15 guidance of 7-9 percent.
20. Stock fell by close to 6% to end below 2000, to be precise Rs 1995.20 at the end of the session.

My Views:

Though the company declared results below the street expectations, the silver lining could be the projected revenue growth of 10% – 12% on constant currency terms for FY 16, which looks impressive, though its slightly below the NASSCOM’s projections. Obviously the street did not appreciate the results as seen in the stock price crash today. This despite the announcement of 1:1 bonus for the share holders. Investors can give some more time to the new management which has unveiled an ambitious revenue growth target of $20 billion by 2020. Having said that, the company’s non performance in Q4 is in line with broad expectations of the sectoral degrowth in the quarter gone by. At the current price, the company is fairly valued and any further weakness in the rupee could help the short term traders as well.

V GOPALAKRISHNAN

FOUNDER & CEO

MONEY AVENUES

Equity: Thy name is volatility…

Indian equity markets seem to be in a hurry to crash and crash more faster. What looked like a great market few weeks back, which was poised to re-touch 9000 levels, now looks doom and gloom all around. All in a matter of few days. But, that’s how the equity markets are designed to behave. Volatility is the order of the day and if a person cannot take a 10% – 15% cut in stock and index prices in a given period, he is in the wrong game. For sure.

So, what’s spooking the markets?!

Well, not many reasons though. Just that FIIs are selling stocks left, right and center in the Indian markets. FIIs are locked in a battle with the government over what is called as MAT – Minimum Alternate Tax. It all started with tax notices being sent to FIIs by Revenue dept for the payment of 20% MAT on capital gains earned by them till 31st march 2015. However, FIIs are exempted from MAT from the current fiscal.

According to reports, the government is not likely to yield to the demand of foreign portfolio investors for a tax waiver on capital gains of previous years. Finance Minister Arun Jaitley already indicated last week that the government is unlikely to intervene with regard to income tax notices directing payment of Minimum Alternate Tax (MAT) by FIIs for past years. Many foreign investors have been receiving notices requesting their MAT calculations for financial year 2011-2012, according to reports. While the government has said that capital gains on sale of shares by foreign institutional investors (FIIs) will not be subject to the provisions of the minimum alternate tax (MAT) from 1 April 2015, concerns of tax demand for earlier years remain.

Ok, that’s what for people who wanted a reason for the market crash. But markets always want a reason to go up and come down. An investor should not really be worked up on such reasons and if he is not able to take this kind of volatility of the markets, he is not in the right asset class for investing. Not very long ago, in the 2nd half of 2013, markets went down on a tail spin, having spooked by currency crash and ballooning Current Account Deficit. But in no time markets recovered and touched all time highs this year. All in a span of 15 months. And, yes people did ask the reason for such a monstrous bull run in the markets. But finding the reasons do not make one, a good investor. But the judgement makes one, a great investor.

In 2013, Indian economy was a sinking ship and most occupants of the ship were fleeing it. It took the efforts of Governor Rajan to stop the decline of Rupee and the announcement of Modi as PM candidate did the rest for the markets to sky rocket. Now in 2015, Indian economy is in a very good position to achieve a high single digit growth over the next few years. Clearly all the major macro economic indicators are improving by the day. Inflation is down to comfortable levels, current account deficit and fiscal deficit under control, Industrial production is improving. Most importantly, RBI has started cutting interest rates after several years, and once that percolates down to the economy, the economic growth will be achieved sooner than later.

Just that the corporate earnings growth is yet to pick up remains the sore point for the markets at the moment. Looks like, Q4 results may not be good at all. Not this alone. In few months from now, important action on interest rate hike is to be announced by Federal Reserve in the US, which can once again spook Indian markets & the rupee and trigger FII outflows in the short term. But such events have to be taken with a pinch of salt and the life has to move on.

Indian equities are bound to scale new highs in the coming years once the economy and the corporate earnings pick up. But, yes irritants such as MAT, Fed interest rates, strong dollar will remain in the short term to trouble and test the investors’ patience.

Keep calm and stay invested!

If not invested, invest now…

V GOPALAKRISHNAN

FOUNDER & CEO

MONEY AVENUES

Choosing the right equity fund(s)

In the current scenario, equity markets in India are witnessing a bout of volatility but then, that’s how equity markets are expected to behave. But since the late 2013, to be precise from September of that year, equity markets have been on a one way up trend for the whole of 2014 and in the March this year, both the key indexes, Sensex and Nifty touched their life time highs. Given the improvement in the performance of the key economic indicators, equity markets in India is a long term story even from the current levels. Inflation is softening, interest rates are climbing down, Industrial activity is slowly picking up and stress areas of fiscal and current accounts are showing moderate deficit rates. The downside is that the corporate earnings are yet to recover in a meaningful manner and Q4 results may actually turn out to be a reflection of that.

Nevertheless, with the growing signs of an economic recovery, Indian equity markets are poised to do well over the next several years and retail investors should be prepared to ride on the wave. Though retail investors have the choice of buying some good quality stocks at the current juncture, they would be equally better off by investing in good equity mutual funds and that too preferably through the route of SIP, which stands for Systematic Investment Plan. This write up is on choosing the right equity funds for investing.

Let’s look at the seven important factors on which an equity fund or funds should be chosen. Though there are technical aspects involved in a fund such as risk matrix, a lay investor is better off by looking at the broad aspects of the fund.

And they are –

• Reputation of the fund house – In India, there are as many as 44 Mutual Funds offering various mutual fund products to Indian investors. The list include Bank sponsored, financial institutions sponsored, private and foreign, NBFCs sponsored mutual funds, all of which are otherwise called as Asset Management Companies. Reputation of the fund house which offers mutual funds, is paramount to retail investors. Though the reputation does not guarantee automatic fund performance, investors can feel reassured about the credentials of the fund if it is offered by a reputed fund house with a long term track record. For investors who are new to mutual funds, reputed mutual fund can be the first starting point for investing.

• Long term track record of fund – Next in the list comes the track record of the funds offered by various mutual funds. Thumb rule should be, investors should invest in fund which has a long term track record, rather than investing in a fund having short term track record or fund which has just been offered through the New Fund offer route, which obviously will not have any track record to showcase. Long term track record demonstrates the journey of the fund in various market cycles over the period and that gives a fair picture about the fund’s ability to navigate bull and bear cycles of equity markets. There are mutual fund schemes which have been in existence for decades with proven track record.

• Performance track record – Though one should not rely only on the past performance track record of the funds while investing, past performance does give a glimpse of how the fund has performed over the years in various market cycles when compared with the fund’s chosen benchmark. A benchmark can be Sensex, CNX Nifty, CNX 500, CNX mid cap and several other indexes depending on the sector and stocks. Choice of benchmark depends on the objective and the portfolio of the funds. Investors must definitely look at the past performance track record of the fund before choosing the right equity fund.

• Comparison with peer group – While individual performance of a fund may give you an overall picture, but may not give you a complete picture. By comparing a fund with the other peer group funds, one can judge if the fund has under performed or out performed the peer group funds. There are enough data available for such comparative studies and investors should definitely go through them before choosing the funds. One should choose funds which have not only done well, but have outperformed the peer group consistently.

• Quality of the portfolio – Its important for the investors to choose a fund based on the portfolio of the mutual funds. While not all investors have the skill to go through and comprehend the stocks in the mutual fund portfolio, a basic screening can give you an idea about the portfolio. For a lay investor, presence of good and well known companies will provide comfort to the investors than the presence of little known or unknown companies. Portfolio of mutual fund companies differ from each other depending on the investment strategy of the fund and the fund manager. So its important to do a basic screening of the portfolio through the fact sheet.

• Fund Manager’s track record – A fund manager is like a captain of a flight or the ship. He or she is the person who manages the fund on a daily basis, navigating the fund in the ups and downs of the volatile equity markets. It’s important for the investors to know and understand the track record of the fund manager of a particular fund. Websites and publicly available material do provide the track record of the fund managers. A fund manager with a long and consistent track record is likely to do well when compared with the new comers.

• Fund Size – Last but not the least important factor will be the size of the fund in which you are planning to invest. Larger the size, better it is for the investors. For the simple reason that, in general  large funds will have more investors and smaller funds will have lesser investors. On a day to day basis, a fund will see many investors coming in and investors going out and that process should not affect the investors who stay in the fund. A large fund can absorb shocks caused by large exits from the fund. Also, the fund expenses work on a slab basis. Higher the fund size, lower the expense of the fund and vice versa. Fund with larger size will charge lower expense compared with a fund with smaller size. These advantages give an edge to larger fund size.

While the above mentioned factors are basic screening in nature, investors should preferably consult a qualified investment advisor who can provide deeper insights on choosing the ideal equity funds given one’s financial goals and objectives.

V GOPALAKRISHNAN

FOUNDER & CEO

MONEY AVENUES

+91 9 55 11 55 11 6

moneyavenues@yahoo.in

10 reasons why you should have a personal health insurance…

It’s true that people are more and more worried about health related issues and health care costs and there are reasons behind it. Lifestyle related diseases are on a steady rise in India due to adverse work schedules and stressful conditions. But thanks to the innovations and technology in the field of medicine, we live longer and longer, than in the past, overcoming health challenges. Our average life expectancy is certainly going up on the higher side. Well, longer life does not mean, a hale and healthy lifestyle in the current scenario. Yes, we live longer, but the cost of health care is zooming in the recent years and in all probability, health care costs are set to rise multi-fold in the coming years. For people who are employed with companies, have the advantage through the group insurance cover offered by the employers to the employees. But having said, that may not be sufficient for the people at all times when they have to tackle various health related issues and health care costs.

Let’s look at ten reasons why one must have personal health insurance cover:

• Company group insurance cover may not be adequate: Companies offer health cover and hospitalization cover for its employees and their dependents through group health cover. But that may not be sufficient at all times and more so in case of expensive health care costs. In several instances, we see many companies not extending group cover to the dependent parents of the employees, who are forced to shell out extra bucks to cover them as well. So it’s ideal to have a separate health cover for self and the family through which one get adequate health insurance covers at an affordable cost.

• Comes in handy during times of job transition: People are not going to work with the same organization forever. Gone are the days, when people spent their entire career in one company and in the current scenario people seek changes and are always on the move. During the times of transition from one company to the next company, a person may not have health cover till the time he or she joins the new firm. So it’s always better to have a personal cover for self and family which will come in handy during the times of job transitions.

• Group cover conditions change from employer to employer: Though most corporates offer health cover to their employees, the terms and conditions vary from each other. The size of cover, extension of cover to dependents are some major differences between companies. So if you have got certain health insurance privileges while working with company A, that may not be the same if chose to work with company B. In fact, many companies do not offer health cover for the dependent parents or offer very little cover, forcing employees to pay extra bucks for including their parents in the cover. Having a personal health cover at all times for the family is the most ideal decision one can make.

• Life styles diseases are on rise: Our life styles are rapidly changing, given our erratic work conditions. People are now more prone to diseases due to life style changes caused by stress and other work condition factors. Lifestyle changes are also due to lack of physical activity on a day to day basis. As a consequence the health care costs are on the rise for tackling such illnesses and diseases. And remember, the cover offered by your employer may not be sufficient at all times.

• Health care costs are not affordable but health insurance is affordable: Health care costs and hospitalization costs are not affordable and they keep going up based on inflation. Thanks to innovation and new technologies, medical world is able to make people live longer, but such health care comes at a huge cost. But the glad news is that the health insurance is very much affordable for all. An average normal male aged 35 years just needs about Rs5/day for a cover of 1 lac per year. Is it not affordable? So go ahead and take a personal health insurance cover.

• Earlier and younger, the better: Every one has to retire some day. It may be at the age of 58 or 50 or even earlier, given the rising trend of early retirements in the corporate world. While during the career, people had the luxury of having corporate group health cover, but when they move out, they have to rely on personal health insurance. If someone has to buy a personal health insurance beyond the age of 50+, it becomes more difficult and complicated due to the health and age related issues. People at a younger age manage to get insurance much faster and much easier with a wide cover. So, don’t wait for your retirement. Plan for your health insurance right now.

• Wider coverage: In the current scenario, corporate health covers may not be adequate at all points of time. But health insurance companies offer wider cover on personal health insurance. Coverage in many cases go up to a crore of rupees in some products. But one can always choose the coverage based on the budget and requirement of the individual. And remember, most employers offer moderate group health cover, which may at times be insufficient to fulfill health care costs.

• Health care costs are zooming: Health care costs are zooming. Thanks to innovations and technologies in the field of medicine, people live longer, but that comes at a huge cost. It is better to be prepared to handle such high costs by having a personal health insurance cover at the earliest.

• Cover must for dependent parents: Elders, senior citizens and dependent parents are most prone to health related issues. Many companies do not offer cover or sufficient cover for the dependent parents, which forces the employees to shell out extra bucks for getting them the health cover. But there are many health insurance companies which offer products designed for elder and the aged people. So go in for a separate cover for the elders and parents.

• Save taxes: Last but not the least, personal health insurance helps you save taxes under section 80D of the Income tax act. Premiums up to Rs 25,000 for self and the family and Rs 30,000 for senior citizen dependent parents can be shown for tax exemption under section 80D. In a normal case you cannot claim exemption under section 80D since your employer pays for the group insurance cover.

So what are you waiting for? Go ahead and buy health insurance at an affordable cost.

V GOPALAKRISHNAN

Founder & CEO

Money Avenues

+ 91 9 55 11 55 11 6

moneyavenues@yahoo.in

Gold losing shine?!

More bad news is haunting gold and this time the fears of a rate hike, sooner or later,  by Federal Reserve is giving jitters to the gold price which, yet again is nearing the key support level of $1150/Oz, after hovering in the range of $1200 – $1300 for a long duration, more so during the times of Euro and Greece crisis.

The Fall in gold prices is phenomenal considering the metal touched historic high of $1900/Oz as recent as August 2011 and ever since it has been on a downward trend losing over $750/Oz over the last few years. The rise and the fall had been equally meteoric, considering the past which had seen only upside for a long time. The reason for the rise and the fall had been due to the shift in the asset allocation pattern of the global investors in the metal, post financial crisis and after the recovery.

Post 2009 financial crisis, global Central banks, particularly Federal Reserve, started influencing the direction of the financial markets, when they pumped in trillions of dollars by way of quantitative easing in order to revive the economy, the financial and the banking sectors. Gold price benefited due to sluggish economic conditions and the risk aversion made large investors invest more and more money into gold, and that eventually took the prices to historic $1900/Oz in a frenzied move. A weak dollar, during the financial crisis and its aftermath, helped gold rally to such high levels. Federal Reserve, also, in order to propel the economy, repeatedly cut interest rates and brought it to near zero levels, which helped push more money into gold.

But since the last 12-18 months, we saw Federal Reserve withdrawing stimulus package, what was widely known as Quantitative Easing as the US economy showed signs of recovery and the process of withdrawal is still on at the advanced stage. Added to it, based on economic indicators, there are strong voices in the US calling for interest rate hike, which is now proving to be a bad news for the gold prices. As I write this column, the gold price is hovering at around $1150-1160 levels, which are crucial, as the mining cost of gold is also expected to be in that range, making it cost price equal to selling price. And that’s a bad news for the gold mining companies.

Dollar is the key –

As seen, weak dollar supported the rise in gold prices till 2011. But the scenario between 2011 and now has changed drastically. Dollar index, which is measured against basket of global currencies is currently at new high since 2003, making gold prices even more vulnerable in the coming days and months. Any surge in dollar will make the commodities more vulnerable as they are pegged against the dollar. The future does look bleak for gold if Federal Reserve chooses to hike interest rates leading the prices to fall to the level of $1000 – 1100 in the next 12 months or so. Of course any future crisis in Greece and Ukraine, geo-poltical tensions  may offer some kind of support to gold price once in a while, but over the longer term price of gold is headed towards downwards from the current levels.

In Indian scenario, multiple factors play important role in gold prices. Namely Rupee movement, import duties, demand&supply and budgetary proposals.

Weaker Rupee: Rupee will turn weaker or depreciate if Dollar shoots up and that’s what we already see in the markets now. Any depreciation of rupee will keep the prices of gold higher in India, even if global prices fall any further. Strong rupee/lower gold price and vice versa.

Import duty: At 10% import duty, gold has become expensive to import and that is keeping the gold prices steady in our market, as gold traders pay premium to buy gold from the importers. Any reduction in import duties will lead to further fall in gold prices in the market.

 Demand & Supply: While supply is in short because of various import restrictions, even a moderate demand will keep the prices high in the current scenario. Once the restrictions go on supply, prices are expected to fall in Indian markets in line with the global trend.

Budgetary proposals:  Government has made some significant proposals in tapping the idle gold reserves in the country and if implemented effectively, that will increase the supply of gold. Increase in supply will naturally bring down the gold prices.

Overall, rupee movement and supply holds the key for price in India.

On the global front, possibility of interest rate hike and the strength in Dollar are the two major factors which can determine the future of gold prices. With no major Geo-political developments, gold is all set to fall in the coming months. Which is the ultimate support, is the billion dollar question. And the answer to that lies in the upcoming FOMC meeting which will decide on interest rate hike.

Happy Investing!

V Gopalakrishnan

Founder & CEO

Money Avenues

RBI cuts rate – Time to look at debt/bond funds

Softening of inflation and fiscal consolidation road map unveiled by the government  in the budget encouraged RBI to cut Repo rate by 0.25% on 4th March. This follows a rate cut earlier this year of same quantum, marking the beginning of a falling interest rate scenario, which has been long over due in the economy. Now that the inflation has moderated to manageable levels, RBI has started targeting interest rate in order to propel the economic growth to desirable levels. And that could trigger a wave of positive changes in the economy in the coming months and years.

In this scenario, what should the investors do now?

Till the year 2013 along with its preceding years, investors were caught in a peculiar investment trap. Equity markets were sluggish and gave poor or negative returns; inflation was galloping which forced RBI to raise rates consistently, thus making debt/bond funds unattractive for investors. Only solace being the average returns offered by the banks on their deposits. The scenario completely changed in 2014, when equity markets marched towards historic highs and the party still continues. Added to that, 2015 has seen cuts in interest rates which makes debt/bond funds highly attractive for investors.

With the back to back surprise interest rate cuts, RBI has firmly set the stage for further loosening of interest rates in the coming months. And we could see interest rates coming down further over the next 12 months, making long term debt funds/bond funds and Gilt funds, attractive investment options for the investors.

In a falling interest rate scenario, cost of loans will get cheaper and that will cheer the borrowers of home loans and other loans, by the individuals. At the same time the interest rates offered by Banks and companies on fixed deposits will also come down, making them unattractive to the investors, who would want stable attractive returns for a longer term.

On the other hand, equity markets, buoyed by positive sentiments since late 2013, are trading at historic highs. And such bull markets usually attract lot of investors who invariably end up investing most of their funds in equity or equity oriented mutual funds, as is the case in every other bull market. But this bull run in the equity markets is all set to be complemented by the vibrant debt markets, which will provide attractive returns after the series of rate cuts announced by RBI.

And this provides an ideal opportunity for the investors to diversify substantial money into debt funds and gilt funds which can generate much better returns which comes with a slight risk compared to moderate returns offered by the bank fixed deposits. Investing in debt/bond funds also act as a hedge to the investors’ portfolio, which may otherwise be skewed largely towards equity investments.

So, how does Debt funds or Bond funds work?

Essentially, a debt fund, otherwise called as bond fund or income fund, is a fund which invests in various debt instruments and bonds spread over different maturities (time horizon) and they are traded in the debt markets, dominated by large institutions like Mutual funds.

So how do debt/bond funds react to changes in interest rates?

Simply put, Interest rates and bond prices are inversely related, which means, if interest rate falls, the bond prices go up and consequently the returns of the debt/bond fund portfolio also goes up. In essence, the prices of bonds held in debt/bond funds react positively when interest rates are cut.  Alternatively, if interest rates are hiked, the value of bonds decline, thereby negatively affecting the returns of the debt/bond funds.

Presently, we are now in the first case scenario, where interest rates are cut and that will make bond funds or debt funds more attractive than ever before in the coming months. With two rounds of interest rate cuts, we are firmly headed towards a scenario of falling interest rates over the next 12 months or so. And this falling interest rate scenario will help the debt/bond funds to generate higher returns in the coming months. With plethora of debt/bond funds offered by mutual funds, investors, based on careful analysis, should choose debt/bond funds for better risk reward over the medium to long term. As a word of caution, debt/bond funds do not offer fixed returns because of the sheer nature of the portfolios and the regulation. As they are designed to offer better returns than the conventional products like deposits, they carry some bit of risk which an investor must be aware of.

We are in a sweet spot of a long term bull market in equities. Added to it, debt funds will also be very attractive from this year for the investors. And this kind of twin bonanza in investing is getting witnessed for the first time after several years. As they say, make hay when sun shines.

 

V Gopalakrishnan

Founder & CEO

Money Avenues

 

Over to RBI…

As expected, Budget’ 2015 turned out to be a vision document of the Modi government, by laying more emphasis on economic growth, job creation and fiscal discipline. In a clear indication of things to come, Finance Minister has kept the fiscal policy on a flexible mode, there by indicating large scale public spending to propel the economic growth. For instance, Infrastructure has been ear marked with 70000 crores.

2i’s – Inflation & Interest rate

Two major developments between the budgets of last year and this year were of huge importance in the current context.

First, the skyrocketing inflation came down sharply over the last 6-9 months, largely due to external factors led by fall in global crude oil prices. Had the inflation stayed at those higher levels, this year’s budget could have turned a lot more different in the tone and the content. More emphasis would have been laid on inflation control rather than targeting economic growth in this budget.

Secondly, RBI for the first time, this year, cut interest rate after a prolonged period of rate hikes over the last few years to control the spiraling inflation. Series of interest rate hikes by RBI  in effect stalled the economic growth and consequently affected the industrial growth in the country over the last couple of years.

Falling inflation and interest rate cut came in as welcome developments for the government’s agenda of pushing up the economic growth in this budget. Now, the action shifts to Mint Street on Monetary front for aiding the economic growth. RBI is expected to cut interest rate further, which can augur well for pushing up the economic growth in the country, even as the finance minister spoke of achieving double digit economic growth in the coming years. Having cut the rate by 25bps earlier this year, RBI is expected to exercise series of cuts this year to ease the monetary controls in the system and pave way for smooth take off on the economic growth cycle.

With government focused on economic growth along with flexible fiscal policy, RBI’s Monetary action through rate cuts will be keenly watched, as lower interest rate will be key for economic growth revival.

V Gopalakrishnan

Founder & CEO

Money Avenues

Achche Din Budget?!

Money Avenues

Proper diagnosis of a disease makes it half cured, says an old adage and that perfectly describes the Union budget’ 2015.

Mr. Arun Jaitley, through his maiden full fledged budget, has just done that, quite perfectly. His job is half done, having diagnosed the ills in the economy. If people had expected (many, indeed expected) a “big bang” & “game changer” budget, they would have been hugely disappointed. Because one budget, obviously cannot resurrect the sagging fortunes of the Indian economy, which has been languishing for the past several years. One budget cannot offer cure to all the illnesses. All it needed was to take a firm first step in the long journey of achieving the economic growth, which has been in the doldrums for a prolonged period.

As expected, two broad themes were touched upon, at length, in this budget. And they were a) economic growth recovery b) fiscal…

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Achche Din Budget?!

Proper diagnosis of a disease makes it half cured, says an old adage and that perfectly describes the Union budget’ 2015.

Mr. Arun Jaitley, through his maiden full fledged budget, has just done that, quite perfectly. His job is half done, having diagnosed the ills in the economy. If people had expected (many, indeed expected) a “big bang” & “game changer” budget, they would have been hugely disappointed. Because one budget, obviously cannot resurrect the sagging fortunes of the Indian economy, which has been languishing for the past several years. One budget cannot offer cure to all the illnesses. All it needed was to take a firm first step in the long journey of achieving the economic growth, which has been in the doldrums for a prolonged period.

As expected, two broad themes were touched upon, at length, in this budget. And they were a) economic growth recovery b) fiscal discipline. And of course other aspects such as Make in India, job creation, infrastructure development, industrial growth and host of other issues got packed into those two themes.

On the economic growth, the economic survey made pointed observations about the current state of economic affairs and its future outlook, which by all accounts paint a rosy picture over the next few years. Today’s budget reiterated the possibility of a double digit economic growth in the coming years. And in reality, such a rate of economic growth, is very much achievable, given the inherent strengths of our economy. Remember, Indian economy had achieved 7% – 8% growth in the early 2000s, only to fall back to 4% levels in the recent times, largely due to internal issues, rather than being global.

Key aspects in the budget included lowering of corporate taxes, higher allocation on infrastructure, flexible fiscal deficit target to name a few.

Corporates should be delighted at the lowering of corporate tax from 30% to 25% which gives them breathing space in a scenario weighed by falling economic growth, shrinking industrial output, fall in sales and profits of the corporates. In the recent years, the corporates suffered due to rise in labor costs, input costs, higher debt and interest costs. Corporates, like any other segment in the society bore the brunt of a sharp economic slowdown. The reduction is a huge relief for the corporate sector, in general. Reduction is also a good incentive for the corporates to kick start the capex, in order to achieve desirable economic growth and creation of jobs.

Fiscal discipline has been on the focus for the past several years, owing to irresponsible and mindless populism causing severe fiscal slippages. Right to food security, MNREGA and various popular subsidies caused severe dent in the government finances over the last few years. As long as economic growth was in place, governments did not feel the subsidy pinch. But the country’s finances were strangled when the economy started falling and the country witnessed historically high fiscal deficit. Hence, the urgency to rein in the ballooning fiscal deficit.

Growth Vs Fiscal Deficit –

Classical time tested formula to rescue a falling economy, is to boost the government investments. Now that the economy has reached its bottom in growth, with a solace that the decline has been arrested,  this budget, in order to revive the growth, has taken a calculated risk of keeping a flexible fiscal policy in order to fund investments in the economy. In essence, FM has set a target of 3% of GDP as fiscal deficit at the end of 3 years, instead of earlier target of two years, which gives enough flexibility to boost investments. And for the growth to come back, government has to invest substantial money to pump prime the economy. Incidentally, Rail Minister too has committed a substantial investment in Rail sector over the next 5 years. All such investments require to have a flexible fiscal policy and the thinking behind this logic, is that, once the growth comes back in the economy, fiscal deficit will automatically get adjusted with a better economic growth. Kudos to the finance minister, for taking a calculated risk of not following a rigid fiscal policy for achieving a better economic growth. One should not forget the fact that, he has committed a reduced fiscal deficit in the next three years.

Taxing super rich, increase in service tax are measures aimed at collecting higher revenue to offset the fiscal gap. Rationalization of subsidies has been promised, which can prune the fiscal deficit to desirable levels. Personal income tax issues have been left untouched, except the medical insurance exemption limit which has been raised.

Overall, the budget has to be seen as a vision document of the government for the next 5 years, rather than hoping for stars and moons. There is ample scope of economic activity, outside the budget and that’s what has been planned by the government through this budget. Now that the FM has diagnosed the ills in the economy,  the cure has to follow in the coming months by way of concrete steps to revive the sagging economic growth.

Gopalakrishnan V

Founder & CEO

Money Avenues