July 2013 – OneMint

Weekend links July 20 2013

Let’s start this week with a great column that appeared in Business Standard about FCI’s dominance in food procurement and the absolute waste and corruption that is caused by it. Did you know that the highest paid loader gets Rs. 2.25 lakhs per month for simply loading grains in a truck?

Ajah Shah has a greet column in Economic Times on how the attack on the market for rupee is a mistake.

Another great column in Business Standard on Wrongs of Rights. An excerpt that I really liked:

Rights matter only if they can be enforced. And who will enforce them? A public administration that has been severely undermined by the very political forces that self-righteously pass these laws? Or the courts – an institution that is currently burdened with approximately 30 million cases and in whose portals the average life of a lawsuit exceeds 10 years? Were this to only imply a mockery of the concept of rights, that would be bad enough. But it has far more pernicious institutional effects.

Freakonomics on how the Japanese are trying palm surgery to alter their fortunes.

A very interesting article on The Curious Case of Déjà Vu.

National Geographic on how decapitated worms regrow their heads and their memories.

A very useful comparison on how various sugar substitutes stack.

Enjoy your weekend!

Steep fall in Debt Fund NAVs – Reasons behind Tuesday’s Bloodbath

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

A 3%+ fall in the NAV of an equity mutual fund is somehow acceptable for an investor, as I think almost every investor knows equity markets remain volatile and such a movement in either direction is part and parcel of stock markets. But, how would a risk-averse investor react to such a steep fall in a debt fund scheme?

It would definitely be a rude shock for a conservative investor, who invested in such a scheme a few weeks back, expecting at least a couple of rate cuts from RBI in the rest of the financial year and thereby to earn somewhat better returns as compared to bank FDs.

On Tuesday, July 16th, some gilt funds suffered such a steep fall in their NAVs. Other debt fund categories, such as income funds and dynamic bond funds, also suffered huge losses. Even short-term funds, ultra short-term funds and liquid funds, which are considered as the safest options of mutual fund schemes, generated negative returns for their investors.

So, what caused such a big fall in the NAVs of all these debt funds?

Indian rupee has been falling and the fall is quite worrisome as it has happened quite fast. It is also making headlines in the newspapers and people are talking about it cursing the government, so it becomes more worrisome in an election year. In order to give some strength to the falling rupee, RBI in consultation with the finance ministry and SEBI took some short-term measures on Monday to squeeze excess liquidity from the system.

What are those measures and what do they mean?

* The Marginal Standing Facility (MSF) rate is recalibrated with immediate effect to be 300 basis points above the policy repo rate under the Liquidity Adjustment Facility (LAF). Consequently, the MSF rate will now be 10.25 per cent.

* Accordingly, the Bank Rate also stands adjusted to 10.25 per cent with immediate effect.

First, we need to understand what is Liquidity Adjustment Facility and what the Marginal Standing Facility rate is?

Liquidity Adjustment Facility is a policy tool which allows banks to borrow money from the RBI through repurchase agreements or popularly called repo transactions. As the name itself suggests, LAF has been provided to aid the banks in adjusting their day-to-day liquidity mismatches. LAF consists of repo and reverse repo operations. Marginal Standing Facility rate is the rate at which the scheduled banks can borrow funds from the RBI for their overnight liquidity requirements.

So, before Monday’s announcements, the MSF rate was 8.25%, 100 basis points (or 1%) above the repo rate of 7.25%. On Monday, RBI increased it to 10.25% to make it costlier for the banks to borrow and thereby tighten the liquidity.

Moreover, most of the market participants were surprised by such moves and they are considering these announcements as a prelude to policy rate changes.

* The overall allocation of funds under the LAF will be limited to 1.0 per cent of the Net Demand and Time Liabilities (NDTL) of the banking system, reckoned as Rs.75,000 crore for this purpose. The allocation to individual banks will be made in proportion to their bids, subject to the overall ceiling. This change in LAF will come into effect from July 17, 2013.

Earlier till Tuesday, July 16th, this percentage was 2% of the Net Demand and Time Liabilities of the banking system. So, by reducing it from 2% to 1%, RBI squeezed Rs. 75,000 crore from the system and capped it at Rs. 75,000 crore only from its earlier limit of around Rs. 1,50,000 crore.

This measure made the banks and the corporates to rush to the mutual fund houses on Tuesday to redeem their investments in debt funds, especially liquid funds, ultra short-term funds and short-term funds. Such a huge redemption by these entities caused a very high supply of these securities and therefore a fall in their values.

* The Reserve Bank will conduct Open Market Sales of Government of India Securities of Rs.12,000 crore on July 18, 2013.

RBI conducted this open market operation (OMO) today evening to squeeze an additional Rs. 12,000 crore from the system, but the results of the auction were shocking. Against its notified amount of Rs. 12,000 crore, RBI received bids worth Rs. 24,279.20 crore. But, the central bank accepted bids worth Rs. 2,532 crore only and rejected the remaining bids worth Rs. 21,747.20 crore. But, why the RBI did so?

I think RBI was not comfortable with the low quotes (or higher yields) at which the bids were placed. With this rejection, RBI wants to send a message to the market participants that the measures taken by it on Monday are temporary in nature and people should not use it as an opportunity to ask for higher yields on government securities.

But, at the same time, I think the market participants are also confused and probably right in their decision to quote higher yields as they are not able to adapt to the fast changing market dynamics and really do not know what the ideal yield should be for these long-term government securities in the current highly complicated interest rate environment.

Impact on Stock Markets: RBI measures spread the negative sentiment to stock markets also as the BSE Sensex lost 183.25 points, down 0.91% and the NSE’s Nifty declined 75.55 points or 1.25%.

Impact on Rupee: The booster dose of RBI helped rupee to jump to 59.31 per dollar, up 0.97% from its previous close of 59.895.

Impact on Borrowers: The banks which were planning to cut interest rates on home loans, car loans etc. must have changed their minds by now. So, the borrowers hoping for a rate cut should cut down their own expectations for a low interest rate regime.

Impact on Depositors: Some good news for the depositors. The fear of deposit rates falling has turned into a hope of them rising for a short term. Rajat Monga, CFO of Yes Bank, said that he expects deposit rates to harden 50-75 bps in the short-term.

Impact on the Government Borrowings & Fiscal Deficit: The interest rate tightening will increase the cost of government borrowings and thus worsen the condition of our fiscal deficit. High time for the government to take some bold decisions. Just a hike in FDI limits will not make foreign investors invest in India, they should be able to foresee returns getting generated on their investments.

These are turbulent and testing times, not just for our economy, but for our markets as well, be it stock markets, bond markets, forex markets or commodities markets. The question is, at a time when most of the professional fund managers or the so-called market experts are not able to take their investment decisions, what should a normal household investor do in such a times? It is a million dollar question and again, for most of the conservative investors, investing in bank FDs is the best solution.

JPMorgan US Value Equity Offshore Fund

JPMorgan US Value Equity Offshore Fund is a new fund that will be launched soon, and I came to know about it when Kapil Visht commented about it earlier this week.

The last couple of years has seen US based funds perform very well in India (Read: Utility of US Based Funds in India), and I am certain that mutual fund houses will launch a lot more US based funds in the days to come.

There will be a positive feedback loop where more people learn about US based funds, and ask about it — in turn the funds will launch their own schemes and that will get publicity thereby making more people aware about them, and from 4 the odd fund we have right now the figure is going to reach double digits soon.

JPMorgan US Value Equity Offshore Fund is a fund of funds which will invest in JPMorgan Funds – US Value Fund, which is a fund that invests in American stocks. Interestingly, JPMorgan Funds – US Value Fund is not listed in the US but listed in Luxembourg. The fund’s webpage is located here.

This means that the fund itself trades in Euros while the underlying assets are in USD. For Indian investors, does this add another layer of complexity – Indians invest in INR in a fund that trades in Euros which then buys assets in USD?

The original fund prospectus states that this is a currency hedged fund which means that the USD – Euro currency changes shouldn’t affect your returns but in real terms I don’t know if this is really 100% hedged or not.

I say that because this is an actively managed fund so you can’t simply compare it with the benchmark and see what the difference is. Currently, the returns for this fund is as follows:

Time Frame	US Value Fund	S&P 500
1 month	-1.94%	-1.50%
3 months	3.53%	2.30%
1 year	20.91%	20.20%
3 years	58.74%	49.10%
5 years	27.71%	25.65%

Performance (as at 30/06/13)
As you can see this actively managed fund has done well for itself in the last few years and as far as past record goes – this active fund has done well. The expenses are fairly high for this fund, and because the fund of fund structure means double expenses, the Indian investor will pay an additional layer of fee over and above the original fund.

At present the options are limited if you wanted to invest in the US by means of a locally listed mutual fund, and I feel this is a good new scheme that gives Indian investors another good option.

List of US Mutual Funds and ETFs in India

Yesterday I wrote about investing in US based funds in India, and I think the most practical way for Indian investors to buy into these funds is to buy mutual funds and ETFs that trade in India and then in turn buy assets in the US.

There are two types of risks that you take when you buy such a fund – the first one is the risk that the American markets fall, and the second one is the risk that the Rupee appreciates. If the Rupee appreciates against the Dollar then the value of your holding will reduce and that’s something we discussed yesterday, and you can read that post to get more details on that. (Read: Utility of US Based Funds in India)

As far as I know there are only three such funds currently trading in India. Here are the details of each of these.

Fund Name	What does it invest in?	1 Year Return	2012 Annual Return
MOSt Shares NASDAQ 10	Passive funds that invests in NASDAQ 100 stocks.	29.3%	16.4%
ICICI Prudential US Bluechip Equity Fund	Actively managed fund that invests in in securities of large cap companies that are part of S&P 500 listed on NASDAQ and NYSE.	32.6%	5.4%
DSP BlackRock US Flexible Equity Fund	This is a fund of funds that invest BlackRock Global Funds US Flexible Equity Fund, which is an actively managed fund that invests in American securities.	–	2.2%
FT India Feeder – Franklin U.S. Opportunities Fund	Is an open-end fund of funds scheme investing overseas that seeks to provide capital appreciation by investing predominantly in units of Franklin U. S. Opportunities Fund, an overseas Franklin Templeton mutual fund, which primarily invests in securities in the United States of America.	36.9%	8.5%

Update: Added Franklin Feeder US Opportunities Fund after receiving Devadoss E’s email below.

I am sorry to say that your inputs are not exhaustive .

Thus, you have clearly left out the top performing Franklin Feeder US Opportunities fund !

So, before you continue to write your inputs, think well and review before publishing !

Sincerely,

Devadoss E

Utility of US Based Funds in a Portfolio

Before the financial crisis in 2008, emerging markets were very popular in the US and other developed countries, and people there wanted to take advantage of the relatively faster growth in emerging nations.

The word ‘decoupling‘ was used quite often and it was believed that the emerging markets no longer depended on the US for their growth, and the situation in the US wasn’t going to affect the markets of these countries substantially.

The financial crisis saw markets tumbling worldwide and people no longer expected emerging markets to remain isolated from the developed ones, and held that the global economy is intertwined and one can’t grow in isolation from the rest of the world.

The last few years however have seen a completely different phenomenon and one that at least I haven’t read about anywhere in advance. The US has outperformed the emerging markets, and the weakening currency of most of these countries has meant that it was far better for someone from India to invest in US in INR than it was for someone in the US to invest in India in USD.

The chart above shows how you would have fared owning something like a Motilal NASDAQ ETF versus a GS Nifty ETS and I’ve also included figures from NASDAQ to show the depreciating Rupee has juiced up the returns.

The main shift in my thinking in the past six months or so has been that Indians need to protect themselves from the falling Rupee and real estate and gold is not the only way to do that. You can own US based funds in your portfolio and find another hedge for the Rupee and also benefit from the rising American markets.

Is this realization too late and is this the right time to buy American stocks? I think yes, the realization is late.

As far as timing is concerned it would have been ideal to predict this trend 1 or 2 years ago, and if you go US heavy right now you’re exposing yourself to the risk of buying into an asset that is going at all time highs and catching up with the trend.

As a long term strategy I feel that just as a few years ago Americans were looking to emerging markets to juice up their returns, Indians now need to look to US for stability and protection of their capital, but this has to be done in a slow and deliberate manner, not as a knee jerk reaction to what has happened in the last 3 or 4 years or so.

Weekend links: July 12 2013

Governance and politics is on my mind this week and you will notice that in this week’s links.

Let’s start the week with one that summarizes all that the UPA government has done wrong in this term.

Whenever you hear from the supporters of schemes like MNREGA or Food Security Bill they talk about the need to support the poor but why does it all have to translate to handouts? Good article on the subject: Why does all charity translate to handouts?

FT on how Freedom and Democracy can become enemies. This article takes the Egyptian example and doesn’t touch upon India but I am sure a lot of us feel the same way about India as well. How represented does an average middle class person feel? Very close to zero I would imagine.

Another excellent piece in the FT – this time on China: Why China will not buy the world?

Now a change in subject – I thought this article that tells you how to compare two Word documents without having to install any software was really good. I wasn’t aware of this feature until recently but it has been around for quite a while now.

Didn’t you always want to know this? Why do mosquitoes bite some people more other than other?

Finally, a really amazing underground bicycle parking that you should definitely watch.

Enjoy your weekend!

Who is eligible to claim 80D deduction?

Any amount paid by an Individual or HUF to an Insurance company as Medical Insurance Premium i.e. premium paid in respect of Mediclaim Policy can be claimed as deduction under section 80D subject to certain limits. (Read: Details on Section 80D, 80DD and 80DDB)

I got the following question about this section the other day:

Sir,

I have some querries for above subject.
Right now I am claiming deduction of Rs 1,00,000 under the above section, since I have a severely handicapped son. Few years from now I will retire and will not have taxable income and I will not be able to claim the above tax deduction. I want the deduction to be claimed by my younger son who is now employed. The elder son who is handicapped will be dependent on him. What should be done for such case. How to proceed?
Thanks in advance for clarifying the problem.

According to this section only the following people can claim exemption:

Taxpayer	Insured Person
Individual	On the health of taxpayer himself/herself, spouse, parents, dependent children of taxpayer
Hindu Undivided Family (HUF)	On the health of any of the member of the family

That then means you can’t claim exemption for any payment made towards siblings but you can create a HUF and then that HUF can claim exemption, and that may be one practical way of getting tax benefit if you are in this situation. Here is an older post that explains the details of creating a HUF.

Shriram Transport Finance NCD Issue – 2013-14

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

Regular readers of OneMint must be quite familiar with NCDs or non-convertible debentures. There have been many such NCD issues in the past couple of years and here is one such public issue for this financial year. Shriram Transport Finance Company Limited (STFCL) will be launching this issue from July 16th and the same will get closed in a couple of weeks time on July 29th.

Size of Shriram Transport NCD Issue, Ratings and Safety

The size of the issue is Rs. 750 crore, including an option with the company to retain over-subscription to the tune of Rs. 375 crore. The issue has been rated AA/Stable by CRISIL and AA+ by CARE.

These NCDs are also secured in nature, which means some specific immovable property or other assets will be mortgaged in favour of the Debenture Trustee to cover 100% of the principal and interest payments. In case the company is not able to pay your principal investment back at the time of maturity or goes insolvent before that, the investors have the right to claim their payments by getting the assets liquidated.

Categories of Investors

The investors would be classified in the following four categories:

Category I – Institutional Investors
Category II – Non-Institutional Investors (NIIs)
Category III – High Net-Worth Individuals (HNIs)
Category IV – Retail Individual Investors (RIIs)

50% of the issue is reserved for the Retail Individual Investors i.e. for the individual investors investing up to Rs. 5 lakhs, 30% of the issue is reserved for the High Net-Worth Individual Investors i.e. for the individual investors investing above Rs. 5 lakhs. 10% of the issue is reserved for the Institutional Investors and the remaining 10% is for the Non-Institutional Investors. NRIs and foreign nationals among others are not eligible to invest in this issue. The allotment will be made on a first-come-first-served basis.

Tenors and Rate of Interest of Shriram Transport NCD

The bonds will be issued for a tenure of 36 months and 60 months with annual interest option and cumulative interest option. The bonds will offer the base coupon rates of 9.65% per annum and 9.80% per annum for a period of 36 months and 60 months respectively. For Series II and Series V, 50% of the face value will be redeemed after completion of 48 months and the remaining 50% will be redeemed after 60 months from the date of allotment.

Like last year, category III & category IV investors i.e. individual retail and HNI investors including HUFs, will be given an additional incentive over and above the base coupon rate and it will be 1.25% per annum for 36 months and 1.35% per annum for 60 months, making it an annual coupon rate of 10.90% and 11.15% respectively. So, irrespective of your investment amount as an individual, you will keep getting the higher rate of interest, even if you are an HNI with investments in excess of Rs. 5 lakhs.

There is a monthly interest option as well but it is available only under 60 months period and that too with a lower rate of interest of 10.63% per annum, including the additional incentive of 1.23% per annum.

The company has decided to keep the minimum investment requirement of Rs. 10,000 i.e. 10 bonds of face value Rs. 1,000.

Listing on the Stock Exchanges and TDS

These NCDs will get listed on the National Stock Exchange (NSE) as well as on the Bombay Stock Exchange (BSE). Investors will have the option to apply these NCDs in physical form also, except for Series III NCDs, which will be allotted compulsorily in the demat form.

The interest earned will be taxable as per the tax slab of the investor and TDS will be applicable if the interest amount exceeds Rs. 5,000. But, if you take these NCDs in the demat form, the company will not deduct any TDS on it.

Financials of the company

During the year ended March 31, 2013, total income of the company increased by 11.37%, from 5,894 crore to 6,564 crore and the net profit jumped 8.27% from 1,257 crore to 1,361 crore. Assets under management (AUM) figure stood at Rs. 49,676 crore as against Rs. 40,215 crore of last year, a jump of 23.53%. Net interest margins (NIMs) also jumped to 3.64% as against 2.91% of previous year.

Gross NPAs and Net NPAs of the company stood at 3.20% and 0.77% as on March 31, 2013 as against 3.06% and 0.44% respectively as on March 31, 2012.

A couple of significant points to be mentioned here. Shriram Capital is the promoter company of Shriram Transport Finance Company Limited (STFCL) and it has applied for a banking license with the RBI for which the deadline ended earlier this month on July 1st. Also, Ajay Piramal, the Chairman of Piramal group, recently acquired 10% stake in Shriram Capital for a reported Rs. 650-700 crore, valuing the promoter company at Rs. 6,500-7,000 crore. These two events speak in favour of the company and strengthen investors’ confidence also.

Link to Download the Application Form

Why Good News for US Economy is a Bad News for Indian Economy, Indian Rupee & Indian Markets?

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

US economy is recovering fast and probably faster than most of the analysts had expected a few months back. Earlier these analysts had a view that though the US economy is recovering, the recovery would be fragile till the time the employment situation improves. The US Bureau of Labor Statistics on friday released the Non-Farm Payroll numbers and the numbers were extremely good. After adding 195,000 jobs in May, this number got released at 195,000 again for June. So, is the US economic growth back on track and if yes, why is it bad for the emerging markets including India?

The immediate effect of this strong uptick in the US jobs growth is that the US Dollar has further strengthened and US bond yields have risen substantially in an anticipation of a further strengthening of US growth in the near future. The 10-year US treasury bond yield jumped 9.42% on friday itself, from 2.50% to 2.74%. This is a very steep rise in a single day. If we look at the yield movement since May 1, 2013, it has risen from 1.62% to 2.74%, a rapid jump of 68% in just over two months.

1-Year Chart of US 10-year Govt. Treasury Bond Yield

Source: Bloomberg.com

Earlier in June, the US Federal Reserve announced its intention to start tapering quantitative easing (QE) and thereby cut back on its unprecedented asset purchases. This mere announcement of a possible gradual withdrawal of quantitative easing sent all the major international financial markets into a tizzy, as it made the institutional investors sell their holdings quite heavily in almost all the markets, especially in emerging markets like India, massively increase their cash holdings and rethink their investment strategies and asset allocation region-wise.

Foreign Institutional Investors (FIIs), who had pumped in a huge amount of money into the Indian markets till May 2013 this year, pulled out heavily from the Indian debt markets and equity markets in June, to the tune of $5.68 billion and $1.85 billion respectively. This huge pullout by FIIs, good prospects of US economic growth, strengthening of USD, no relief from the bad GDP growth numbers & deficit numbers here in India etc., all have resulted in a steep fall in the value of Indian rupee and hardening of bond yields.

After hitting a low of 7.09% immediately after its auction in May, the 10-year 7.16% benchmark govt. bond yield has risen quite swiftly to 7.49% by friday. With the US non-farm payroll numbers announced on friday, the yield is expected to rise further here in monday’s trading. Similarly, the rupee is expected to cross 61 level mark against the US dollar on monday.

With the yields moving higher and the rupee getting weaker, the case for the RBI to cut interest rates has got very weak. So much weak that some of the analysts have started issuing reports predicting the inflation to take a U-turn once again and the RBI to raise its policy rates to stem the rupee fall and contain prices of imported goods. It is again going to put a lot of pressure on some of the struggling debt-heavy manufacturing companies.

So, at a time when Indian economy badly requires foreign money inflows to bridge their current account deficit and to strengthen the falling Indian currency, there is a big threat that the FIIs are thinking otherwise. FIIs are ready to move their money back to the US debt and equity markets at the slightest of signs of US growth getting stronger and Indian growth not moving out of the mire.

So, what should the Indian investors do in the current situation? – I think the declining trend in India’s economic fundamentals should take a U-turn very soon, probably in the next few days or few weeks. Indian govt bond yields, which had fallen down quite sharply in May, have risen with a similar intensity in June and should top out sometime this week from a short-term perspective. The investors, who are sitting on the sidelines to invest in the gilt funds or income funds to make money due to interest rate fall, should put a certain percentage of their investible surplus into these funds sometime this week itself.

Though not easily visible, some of the Indian economic fundamentals have also started improving. As the US growth returning back to some normal levels is a good news for the global economies including Indian economy in the long-term, I expect the equity markets also to do well from medium-term to long-term perspective. The investors are advised to go stock specific and do a thorough research before committing their hard-earned money to any of the stocks. Probably I am sounding too optimistic on the Indian markets than the actual picture at the ground level, but only the investors, who invest in markets in advance before they actually make a turnaround, make good money in these markets.

Tax Free Bonds to be issued by AAI

The Airport Authority of India (AAI) is going to issue tax free bonds to the tune of Rs. 1,000 crores shortly, and AAI is going to be the first company in a while to issue tax free bonds.

I think the primary reason for this is that the yield on these bonds is capped to the yield on Government securities of equal duration, and those yields dipped earlier this year.

As Shiv wrote a few days ago these yields are rising back again (Read: Why government bond yields have suddenly started rising?), and I feel that you can expect a rate of around 7.5% for a 10 year bond when AAI issues these tax free bonds.

Since AAI is a mini ratna, and a government owned company, there is some sort of an implicit guarantee that the government will honor AAI’s bondholders in case it falls into trouble so then the question of whether to invest in this issue will be driven primarily by how much interest rate they can offer, and since that interest rate can’t be more than the equivalent G-Sec yield, you have a fair idea on how much that yield is likely to be as well.

At around 7.5% – the tax free rate will be definitely lower than rates offered by bank fixed deposits, but then of course those aren’t tax free. I think you’d be able to get about a percentage or slightly more in a good bank for a comparable duration.

If you buy debt mutual funds right now then there is a risk that they go down in value as the yields go higher, and the listed bonds are already trading at a premium and we will have to compare their yield to this to see if AAI tax free bonds are lucrative or not.

Other than this, I can’t think of any other suitable comparisons, and I think if the yield is decent, this might present a good opportunity for investors to allocate some of their assets too.

I’ll have a more detailed post when the issue details are out, and if you have any particular things that you want to see covered in that post please leave a comment or if you have any thoughts on this please leave a comment.