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 skukreja@investitude.co.in
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.
Dear Mr Shiv
Now since surprisingly the repo rate has been hiked, scenario for long term income funds again continues to remain negative.
Would like to hear from people how the Fed’s decision to further stretch the tapering program to $65Bn a month is going to effect the Indian Debt fund market? Less liquidity, higher the attractiveness of the $, Re should depreciate further (a little probably), lesser inflow from FII’s …. right???
Hi NKN,
G-Sec yield, general interest rates and the fortunes of Indian debt markets these days largely depend on inflation, fiscal deficit and growth numbers here in India. Repo rate hike seemed like a bad news for Indian markets, but now it has been factored into. Now the focus has again shifted back to the Indian macroeconomic data going forward.
Hi Shiv,also another relevant topic for today could be the impact of the upcoming RBI policy announcement tomorrow (28th Jan 2014) on the prices of tax free bonds. Furthermore, how should tax free bond investors restrategize post the RBI policy announcement?
Hi SB,
I think tax-free bond investments are for a medium to long-term and the investors need not change their strategy in a very short period of time. Most likely, there would be no change in the policy rates tomorrow and if there is a change, I’ll try to do a post on the same after the policy announcement.
Dear Mr. Shiv
Thank u for your comments, Most appreciated.
Thank you!
Dear Sir
I have asked this question to u earlier also. I invested in dynamic & long term income funds last year. I was expecting a rate cut this month since inflation numbers are lower but yesterday I read an article in Live Mint which says that market experts believe that it would take about six months to 1 year for a rate cut to happen.The report goes on further to say that short term income funds or ultra short term, liquid funds should form your core portfolio not long term income funds since it falls in the high risk zone.
I have not gained anything from these funds since there was a steep fall in deb fund NAV recently.
I can hold on for another year or so but I am getting tempted to ride the herd mentality wave of short term funds and wonder why to face such uncertainity with investing with long term funds.Should I still hold on or just exit and invest in Ultra short term funds/Short term income funds?
Is there a future for long term income funds ?
Hi NKN,
The theory is very simple – the higher the risk, the higher the return. Nobody knows what lies ahead and everybody takes his/her call. A few months back, most of the analysts were expecting G-Sec yield to fall below the 7% mark and now when it is moving around 9%, the same analyst community says there is no point investing in the long-term funds.
Trust me, if inflation & fiscal deficit fall to some desired levels, you’ll see the G-Sec rates falling below 8% levels and the same analysts will start speaking in favour of long-term funds. I am not advising you anything here, but if I need to invest my money, I’ll go for the long-term funds and pray for the government to work responsibly.
Dear Mr Shiv
After the repo hike, would u like to revisit this post and update us on the future of long term income funds. I have invested in two dynamic bond funds last year. My horizon is another year or two. I would like to redeem both these funds and invest into an FMP or an Untra Short term fund since returns seem to be better in them.Further I also read that repo rates might actually go up for another six months and then later probably the interest rates might go down which means that all is not well with holding Long Term Income funds at the present and the future being uncertain.
Would u think it is a wise option to redeem since the exit fund period is over or u still think that Long Term Income funds will do well in a year or two.
Dear NKN,
Market participants expect at least one more Repo Rate hike in the October monetary policy of the RBI. I think interest rates have moved up in a series of panicky decisions and I dont know how long these panicky decisions will last. But, I think G-Sec yield around 9% is not a desirable thing for the government as well as the corporate sector. If I was at your place with an investment horizon of around 2 years, I would have sticked to my Income Fund investments.
Dear Ashok, Shiv
Regarding the last bit about FMP ‘s, I have been investing in them for years. Even my investments made in July have shown negative returns of about 4% and I invest only in HDFC or SBI floated funds. Having seen this cycle repeated earlier, I would think the returns would stabalize over a year so there’s really not much to worry. A bit of advice – stop seeing the valuations on a daily basis and worrying 🙂
Great point Salil.
Hi Salil,
If you hold any of the debt security till its maturity, the final return would be similar to the yield it offers when you buy it. So, if you buy G-Secs today at around 9%, do not check its daily movement and hold it till maturity, your total returns would be around that only. So, there is nothing to worry at all.
FMPs are quite safe, but not the safest. Extreme difficult economic conditions can make things difficult for FMPs also. Please check this link, read the complete story and you’ll get to know why:
http://www.business-standard.com/article/markets/why-religare-got-lotus-dirt-cheap-108111201035_1.html
Time to do another post on bloodbath Shiv with bond yields reaching 5 year highs of 9.26%?. Were you still invested in gilt funds, before this crash? I think these episodes only increase investor’s old belief that FDs are safest.
Hi Ankur,
The way this government is taking (and forcing RBI to take) foolish steps to correct the falling rupee situation & other economic problems, I think I can write one such post every other day. It is really amazing how these so called great economists (FM & PM) are making so kiddish statements as if every other domestic or foreign investor is a fool.
Earlier when the external situations were actually bad and we were showing good growth and greater resilience, these people were boasting about themselves. Now, when the things have actually improved overseas in US, Japan & Europe, FM is still blaming external factors for India’s downturn. How can he do that? The fact is India has lost its competitiveness in manufacturing & project execution. Lack of correct policy actions is to be blamed for that.
I think most of our politicians get elected to fight inside the parliament and do scams outside. When the apex court asks the government to submit documents to help CBI do its work, the files get stolen from their offices. I wonder what these people have done to improve our lives in all these years.
Yes, I’ve been investing in Gilt funds throughout this period and my debt portfolio is in red at this point in time. Thankfully, I did not convert all my cash into Gilt fund holdings and have enough cash for further investments or diversification.
I still think FDs are the safest but not the best of the investments for long-term, if one seeks growth in his/her investments. These episodes are scary and if it makes investors run away from debt/equity markets, it is the govt only which is to be blamed for all the scams/frauds (2G, Coal, Vadra land deals, NSEL & so on) and for lack of policy actions/reforms.
I’m beginning to wonder about the safety of FDs Shiv, I wish there was an easy way to look at the NPA numbers, and exposure to gold loans and real estate of all banks. The trajectory we are in – I feel the next step is a bank default.
Hi Manshu,
Bank default ?? If it would be a PSU, then the government has enough taxpayers’ money to recapitalize the PSU banks, like they do it for poll campaigning/Bharat Nirman or spending on TV/print media ads on birthdays of top party leaders. If it is a private sector bank, then the government would again force RBI to make another healthy private sector bank to buy the defaulting bank. So, there is no need to worry on that front, our great leaders are there. They will do everything but to make the senior managements of these banks accountable for rising NPAs or zero/negative growth. After all who else will lend to our poor farmers or weak SMEs or corporates like Vijay Mallya’s KFA.
On a serious note, FDs are still the safest as at least Rs. 1 lakh per investor per bank is insured. At the same time, it is a well known fact that the RBI as the regulator is one of the best in the country (if it is left autonomous). Also, things are bad for sure, but not that bad to make a big bank default to leave investors run for their money. This is what I think. For any of our banks to default, we need something like real estate prices to burst and I agree with you on that.
As I said earlier, the key is to focus on India’s manufacturing sector, project execution and increase India’s competitiveness. If we are able to do something on this front, all other problems will stand corrected, automatically.
I dont think there is serious risk of banks failing in India. We have a good regulatory structure as compared to the loose norms prevelant in US at the time of credit crisis. Even now, banks take adequate LTVs before lending, plus real LTVs are even lower as black money component also exists. Gold loans are only small portion of banking system’s portfolio (significant only for few south indian banks).
For anyone looking to get into debt now, why FD? why not short term debt funds? Juicy yields of 11-12%. Best thing to invest in, right now. Yeah, there is credit risk, but if we go for govt short terms or funds with enough diversification, it should be ok. Exit is easy from a short term debt fund, if defaults start occurring.
Hi Shaviv,
my question to you is – why not Gilt funds now ?? Bank FDs are giving 8.5% to 9.5% interest for a period of say 1 year to 3 years. Short-term funds would give say 11% this year, then 8-9% returns next year & then God knows. Average would be below 10%.
10-year benchmark G-Sec touched 9.5% in today’s trade, before closing below 9% (8.9028% to be precise). At around 9%, even if you hold it till maturity, it would give you 9% for the next 10 years. That too, with the govt as the borrower, so there is lowest default risk. The best part is there is huge scope of capital appreciation, whenever it happens. I am sure whenever the interest rates start falling, these funds would give more than 11-12% returns over long-term.
Short-term funds are giving annualised 11-12%, only till the time there is liquidity crunch. Also, risk & return go hand-in-hand.
Sure, better than FD, for long term money. I just don’t like FDs. 🙂 Whenever anyone suggests FDs, I suggest debt funds. I think I’ve done that many times on this website :p
Yeah, for the very short term funds, they have reinvestment risk. But, I’m hoping there will be time to address that as and when short term rates head lower. Maybe, I could get some modest cap appreciation opportunities in 6mo-1yr funds also. While the duration might not be as much as the 10yr, the interest rates might move more in the short end, making the cap appreciation meaningful. Not sure about the best way to approach this.
Your case for long term gilts makes sense, 9% long term is nice. But, back in the 70s, in the US, 10 years yielded more than 10% with spikes towards 15% for an entire period of more than 5 years. So, while there is chance for cap appreciation, there is risk of cap loss too.
I guess some combination of short term and long term would be best, taking advantage of both products.
RBI said today that they might be done with the short-end and they will buy bonds at the long-end to give relief to banks who are taking mark to market losses. Will have to see how long term rates respond and how things go from here.
http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=29341
Actually, I don’t have a blanket opposition to FDs. I guess the main risk with FDs is that the issuer should survive any crisis, but otherwise it has advantages when one is looking to lock in a rate and be immune from capital loss due to interest rate movements. So, depends on what one is looking for.
The FMPs, I invested in May/June are showing a negative NAV. I guess these will correct itself at the time of maturity, but I am still a little worried.
Hi Ashok,
As I mentioned earlier, I think FMPs are less vulnerable to the interest rate risk, but they do carry default risk from those borrowers to whom the money is lent. So, though the probability of fund default is very very low, extreme painful economic conditions can pose some difficulties for the borrowers and ultimately investors’. I dont think you should worry too much about it, FMPs are relatively quite safe. Make sure you have invested with bigger fund houses and the corpus of your scheme is also somewhat bigger.
Hi Shiv,
1. Is there any impact on FMPs? I invest generally in FMPs only whenever I have excess cash ( apart from my Equity fund SIPs).
2. My long-term superannuation/pension fund is in the “Short-Term Debt” category. It is for the long term as it is a superannuation fund. Should I change to a “long term debt” category? Over longer periods (15-20 years), which category debt funds give better returns?
Ashok
Hi Ashok,
1. As far as interest rate risk is concerned, FMPs are generally safer relative to gilt/income funds and even short-term funds. FMPs still carry default risk, but the probability of a default is very low and depends to which companies the scheme corpus has been lent.
2. If I was at your place, I would have moved it to long-term categories. Over longer periods, income funds or gilt funds with high yield & high duration give maximum returns.
Like your analysis. Among the income/debt category, the gilt funds are usually considered as one of the safest options because of their exposure to Govt securities. The fact that these gilts, especially the long term ones are most vunerable to interest rate movements is often over looked , or most investors aren’t even aware of this fact.
Thanks Annapurna!
Interest rate risk gets overlooked bcoz the investors do not have the requisite knowledge and the advisors do not educate the investors properly. They just tell them that these gilt/income funds have given the maximum returns in the last 1 year and are expected to continue giving similar returns. The major problem is that the advisors/agents tell them only those things which the investors like to listen, whether those are correct or incorrect.
Boss…..your article is like a boomarag to me….i clicked on the link (from moneycontrol.com) to know if i should stay invested or quit Birla SF Short Term Fund Growth and IDFC G Sec Fund Growth…have invested on 18th – June and over a month and still returns are negative
Just tell me two things….When will They turn positive and if not shouldn’t i encash with a small loss
Hi Arjun,
Nobody is able to tell when exactly the tide will turn, but we hope this reversal is just temporary and the panic ends soon!
If your investment horizon is short, say less than 1-2 years, you should not invest in any asset class which is volatile, including gilt or income funds. Investment in volatile assets require good entry & exit timings to earn handsome returns, which is possible only with select few God’s gifted people. Short-term funds are less riskier but carry scope of better returns than short-term FDs. So, ultimately it is your decision what you want from your investments.
Thanks a ton …i’m liquidating both schemes and investing in FD
Ok… you are welcome Arjun!
Great analysis, it gives a lot of details on what were the reasons for the decline in the Debt Fund NAVs. Please keep up the good work.
Regards
– Kapil Visht
Thanks Kapil for your motivating words!
With the grace of God, I hope this caravan never ends !!
Shiv – thank you for taking the time to write this post and explain the reasons up to the fall very clearly, I for one wasn’t able to grasp everything that happened and why liquid funds fell, and I feel really good about the fact that one of the best explanations about this event to be found anywhere on the web is on OneMint. Thanks!
Yes. Can you show how much the liquid funds fell, their short residual duration should imply minimum interest rate risk.
Thanks Manshu! I am glad that you found the article that good! 🙂
Shiv – this article was so good, I’m now reading-up on all your past articles here. Thank You.
Thanks Amit!
I’m glad that you liked it!
Hi Shiv
Good analysis. Though the reasons are a bit technical for lay investor to understand, the way you have taken pains to explain the same is appreciable.
Many investors have locked themselves in various kinds of debt funds, as part of their contingency fund requirement – what should they do now? Or should they ignore this volatility.
would like to know your views on the same (may be another detailed post can help)
thanks again.
Thanks Abhinav for your motivating words!
I think a panic situation is not the best of the times to exit any investment and the current situation looks to me some kind of panicky. Though there is no guarantee that my observations are 100% correct and the yields might still rise sharply from hereon, I think the government cannot afford to have a rising interest rate environment. If it turns out to be that way, it would really be disastrous for the Indian economy and no asset class would give +ve real returns in the next 6-12 months.
If you still need a post even after such long explanantions above, I’ll try to do that.
Hi Shiv,
Gr8 article…
Bit i feel now u please throw light on wht u feel shd be our strategy…Let it be your perspective, bt we wud like to know wht a CFP feels…
Wht do we do to the money invested in Ultra short term funds in last 1 month?? Do we freshly invest in the same?? we at small businesses really need to know this….all we knew ws practically liquid plus funds r the safest bets…
Kindly advise
Thanks Anna!
I have shared my views above in my reply to Mr. Pattu. Also, I think this is short term panic and there is no reason to worry for the investors in the ultra short-term, short-term or liquid funds categories. The returns might get a little volatile but if your horizon is longer than say 7-30 days, then these funds should not give -ve returns. These funds are better than bank returns. Please stay invested.
Thanks Shiv..i did read ur detailed explanation to Pattu…I also feel reassured after wht u said on staying invested in liquid and liquid plus schemes…
Do you suggest tht this is a good entry into Dynamic Bond Funds or do we wait till July 30 credit policy??
Hi Anna,
A dynamic bond fund could be a great fund, if the fund manager himself is dynamic and has a good vision for the interest rate movement. But, it could well turn out to be a disastrous if it is otherwise. I generally take my calls on gilt funds or income funds.
I think from here onwards up to the monetary policy, interest rate movement would be quite volatile and dependent on rupee movement. There is a 65-75% probability of the yield going downwards and 25-35% probability of it shooting upwards. It is up to you whether you want to wait for the clarity to emerge or take a bold call.
Debt funds are not wrong products but they are being sold in wrong way ..as a substitute for fixed deposits which is not the case in actual.
No asset class is wrong. There is no doubt about it that most of the advisors/agents here in India sell wrong products. But, the problem also lies with the investors as they do not want to listen to the correct perspective and always follow the herd. If I was asking my clients or friends last year not to invest in Gold, they were just not ready to accept my reasoning. If I have been telling them to invest in equity or long-term debt funds for the past 6-12 months, they are just scared to do that and tell me not to discuss any investment in equity or equity linked MFs. The same people were ready to invest huge lumpsum money in equities or ULIPs during 2004-2007.
Can anybody make me understand why IRDA does not take steps to stop misselling of insurance products? or why banking managements encourage their staff to sell insurance products and that too in the name of investments? It is all about personal benefits and nothing else. People are just not ready to pay Rs. 500-1000 for an unbiased financial advice, but they are ready to get looted by a banking agent.
thanks for reply
It was just general opinion.
No, I agree with your opinion and think it is quite valuable. But I wanted to say the problem is not just one-sided. It has many factors behind it and the parties, which have ability/powers to correct it, have no such intent/efficiency to do it.
The whole reaction from RBI has started from trying to prevent foreign exchange speculators
to use Rupees to take undue benefit from depreciating Re.
In this connection I would like to know how the speculators get access to Dollars and Rupees.
I am a Resident individual and have a SB a/c with SBI.Imagine a situation like this.
To day:One US dollar=Rs 60
I go the Bank with Rs 60000 and ask them to change it to 100 Dollars.
Will I get 100 dollars?If the answer is NO,why NOT? If I cannot get 100 Dollars from SBI can I go to a private Exchange dealer and get 100 or slightly less Dollars?
Also I want to know if I cannot get 100 Dollars how a speculator can get it?
Suppose I get my 100 dollar note I keep it me and wait for say one more month.
Situation after 1 month
1Dollar=Rs 65
I take my 100 dollar note to SBI/FE Dealer and ask them to give me Rs 65000 or slightly
less.Will I get this?If the answer is Yes I make a profit of Rs 5000 from this deal.If the answer is NO,WHY NOT?
Why are you looking for Physical dollar ???
On NSE you can find US Dollar Future. There are so many currency derivatives.
http://www.nseindia.com/live_market/dynaContent/live_watch/curr_der_stock_watch.htm
Will suggest you to read a intresting post which I received few week earlier
Indian Equity Market and INR/USD, not in Sync with each other
A typical relationship was established between Sensex and INR/USD since FY06, accordingly :
1.When Sensex use to be around 19,000, corresponding INR/USD rate use to be around 42-45. So, we should see the possibility of INR appreciating to that level in order to justify the current Sensex which is around 19000 ???
However, even the most Optimist person would think again about such appreciation, but such possibility cannot be ruled out completely.
2.And, If that relationship is not completely broken, then theoretically, Sensex should be at a level around 10,000.
It sounds, most Pessimistic, but that is what the chart tells us.
Both the above scenario, emerge out as conclusions when one analyses the below chart.
Chart: Relationship in Sensex and INR/USD over Medium term.
Other Observations:
1.In 2008, when market fell by 60%, during the same time INR/USD depreciated by 32%.
2.Thereafter, till Nov-10, market gained by 150+% at the same time rupee appreciated by 14+%.
3.Since Nov-10, the INR/USD has depreciated by 37% however market has fallen by just 11%.
4.If one just concentrates on the graph, and believes “other things being constant”, he may conclude that index should be at a level much below the level reached in March-09.
Background:
Over the past few months, stock market participants are very nervous due to strong depreciation in INR/USD. As the rupee depreciates, worries over costly imports, Current Account Deficit (CAD), questions about the future economic growth arises. Some have opinion that India will no longer remain to be one of fastest growing economies of the world, and people everywhere opine that India will return back to “Hindu rate of growth”, implying a low growth economy.
All the nervousness gets reflected with the sharp fall in benchmark indices. But our market bounces back each time after a sharp fall to present a view that all these are not real worries, and thus the volatility persists.
Our 4QFY13 Result analysis, titled “Problem at Bottom of Pyramid” shows that currently Indian economy is actually in a dire state.
We are eagerly waiting for your short comments, you can mail us at quants.partner@yahoo.com, quants.partner@gmail.com, quants.partner@hotmail.com
About Us:
QuantsPartner.com is a website which aims to help investor and analyst by providing Excel Financial models and a 2 minute scanner of a company in PDF .
The scanner is a 6 page “chartical report”, where you will get a quick overview of the company as a whole. Once an analyst has fair idea about the company’s financial health, and he wants to undertake a detailed analysis, and share it with other, he should look for “Financial Model” (an excel file) which has all the data in a standardized form for easy n smooth working. As you tinker with basic numbers, its impact on all other numbers & ratio can be seen.
http://www.quantspartner.com/Dollar_vs_INR.aspx#
This post was really great.
I enojyed reading this, it clearly shows the interlinking of various makets, Debt, Equity, Forex.
Though it was most lucid, than I read whole drama anywhere else but still there is much more room for lucidity. A persom with 10+ years of market experience would find easier to grasp, but people new to markets wont find it easy to get it.
Thanks Lalit for your kind words!
The measures taken by the RBI themselves are complicated to understand and explain, so probably that is the reason I could not simplify the language more than this.
This post is disappointing on so many levels.
First such posts represent knee jerk reactions by bloggers. It will spread just the opposite of financial literacy, panic. Don’t we have enough of that already?
It is very disappointing to see a CFP make a statement like “what should a normal household investor do in such a times? It is a million dollar question and again”
Is that what you will say to your clients?
This statement, “for most of the conservative investors, investing in bank FDs is the best solution” is always true irrelevant of this latest occurrence.
‘Investors’ when they use debt fund should recognise the risks. There is no free lunch. If one wants ‘good’ post-tax returns then prepare for volatility, else stick to FDs and RDs. As simple as that.
This kind of new gives scandal mongers just another opportunity to blame AMCs for educating investors.
Pattu,
I think your reaction is too hasty.Shiv in a brilliant analysis has explained the scanario leading to the sharp decline in NAVs of Debt mutual Funds.
And in reply to the specific queries raised by some commentators including me,he has expressed his opinion regarding the exit from Debt Funds.It is left for the individual investors to take a call.Please understand he is not soliciting business.He has taken much trouble to write this Blog.PLEASE appreciate this.This kind of volatality in debt funds is new to investors.Naturally they are jittery.
A brilliant analysis requires the correct perspective and outlook. I do not see that here. So I find it difficult to appreciate the work put in. Cooking a good meal takes a lot of effort but the incorrect amount of salt will spoil the whole thing.
My point is that most investors are better of not knowing the reasons. Those that understand volatility will appreciate this analysis. However,this bunch will hardly loose any sleep over this development.
Let me ask you a question: This -3 t0 -4% fall is this something new for such funds? Is this the worst ever? Most articles on this development make it sound so.
When you embrace volatility the reasons for them hardly matter. I choose not to worry about things that are beyond my control.
Understanding the risks involved is crucial for the investors and investing according to the duration and importance of the goal is paramount. Trouble is most people chase after returns without perspective. Whan CAN go down, WILL go down. This is financial literacy 101.
This analysis (excluding the last para) is 102.
Hi Mr. Pattu,
If this article has created some kind of panic among the readers, I take the responsibility and apologise for that. But, I had no such intention, as I am not any NEWS TV anchor who is seeking a higher TRP for my TV programmes.
But, I think CFPs are also human and can very well commit mistakes, the common investors who are so busy in their day-to-day jobs too need to know what all is happening & the reasons behind it, the so-called market experts & fund managers also panick when markets fall and not everybody is like you to invest intellectually in stock/debt markets and not panick when the markets fall.
What you are trying to say is that I should not have done something which others are also doing. But, please tell me how many people are there to understand the correct perspective and outlook. If the investors, govt., RBI, experts were so wise, it would not have resulted in such a panic on tuesday itself.
Expression of perspective and outlook does not always result in positive reception, it backfires most of the times and honestly speaking, I’m not scared of that. Also, I welcome your criticism with open mind and I’m glad that you shared it.
First thanks for your detailed response. Not many people have the maturity to handle negative criticism like you have.
Please note I have nothing against the reasons you state for the ‘bloodbath’.
I think you should have mentioned what investors should do. Basically tell them not to panic and provide a strategy for the future to both the existing investor and potential investors.
After all your analysis and information the way you have ended the article gives one the impression that you are as clueless as the rest of us.
Of course a CFP is a human being too. That argument works when he/she has made a mistake. You cannot use that when you implying you don’t know what to do. Under such circumstances, a CFP has only two choices. Either provide a perspective and be a guiding light to investors or
say nothing, learn, decide and then write.
Let me as you a question. Say you are invested in one of the funds you have listed. What would you do now? YOU. No general statements please.
What i would like to specifically know is:
why did you (hypothetically speaking ) invest in such funds?
what duration did you have in mind?
what would you do now?
will you continue to use such funds in the future?
Sure, let me first clarify certain things first and then I’ll give straight answers to your queries. Though I’m a CFP, I’m not writing articles here on OneMint as a part of my advisory profession. Advisory is what I do for my clients as per their needs, risk appetite, asset allocation and personal circumstances. If I share an opinion, which is probably applicable to all the readers, then it might create some confusion here like it did last week when I share my thoughts under this post: http://www.onemint.com/2013/07/09/why-good-news-for-us-economy-is-a-bad-news-for-indian-economy-indian-rupee-indian-markets/
As a CFP you’ve given me 2 choices. If I write nothing till the time I’ve some perspective, I’ll not be able to share anything here which is non-controversial.
Also, let me tell you that I’m not clueless about the markets. I have a view and I’m taking actions with my family’s investible funds and managing clients’ portfolios also.
Here are the straight answers:
* Yes, I’m invested in 3 of the Gilt funds for the past 2-3 years. Recently in early June (June 3-5 to be precise), I liquidated 70-75% of my investments in Gilt funds & moved to cash. I moved some money to direct equity also.
* What would I do now – In the last three days including today, I have reinvested 30% of my liquidated money back into Gilt funds, as I think these RBI measures are temporary in nature and govt. cannot afford to have rising interest rate environment. But still it does not mean that the yields cannot rise from here. As an investor, I’m taking this rise in yields as an opportunity to once again invest in Gilt funds and will book profits when the yield again falls to the levels between 6.75% to 7.25%.
* I invested in these funds when the yield was around 8.50% a couple of years back. I expected the yields to fall and thus to earn me some capital gain. Also, debt funds are more tax-efficient than FDs or NCDs.
* I wanted the maximum duration possible. I hope you are asking for duration here and not maturity.
* I’ll exhaust my 70-75% surplus cash into these Gilt funds till monetary policy on 30th July and after policy announcement, I’ll take a fresh call. I expect RBI not to hike repo and reverse repo on 30th. The maximum RBI should do is to hike CRR by 25 bps.
* Absolutely, why not.
I think it is fairly obvious to everyone that writing guest posts is not part of your profession. However, you are writing as a CFP and there as expectations associated with that.
With respect to the link, confusing topics are expected to generate confusion. It is nobodies fault. My issue here is different I want you to provide generic advice. I fail to understand how “If I share an opinion, which is probably applicable to all the readers, then it might create some confusion”. One would think it is the other way around.
Your statements confuse me. Does this
“As a CFP you’ve given me 2 choices. If I write nothing till the time I’ve some perspective, I’ll not be able to share anything here which is non-controversial”,
imply you don’t have a perspective about this right now? Your response below certainly indicates that you do and choose not to share it in the blog.
In any case I did not say YOU are clueless. I said the way you ended the post gives me that impression.
Thank you for your straight forward answer. How I wish you have written this in the post in a generic way. That would helped investors much, much more.
When I meant duration, I was referring to the duration of your financial goal. I am also surprised at a such active churning of such investments. In this context I agree its not for everyone.
what does the ‘absolutely not’ refer to?
Please read it carefully, it is not ‘absolutely not’. It is my response to your last query which is “will you continue to use such funds in the future?” and my response is “Absolutely, why not.”
I hope you are satisfied with my straight forward answers! Thanks for your inputs!
Yes my bad. Sorry.
Yes I am impressed with your straightforwardness to my questions, but I remain unconvinced by your overall response. Since we both have better things to do, we will leave it at that.
Sure, thanks!
Dear Shiv,
Today, 21 July, 13 is my first exposure to your valuable article on Why Debt MFs took a big beating on 16 July, 13. I found your analysis very solid, and your narration very
substantive to the subject. I am a large investor into Kotak Gilt Inv Reg MF for the past 12 months, and the big drop on the NAV within 24 hours came as a rude shock, but I am not
very disturbed, as I am well read on Gilt and other debt MFs.
I have registered my email address with your website, a few minutes ago, and eagerly look forward to reading your valuable views on various financial subjects, and events of interest to all knowledge thirsty Retail Investors, on a continuous basis into the long future.
A small request for you: Would you be so very kind to place an article on which class
of debt MF one should invest during the normal cycle range of the bench-marked 10 Year Bond Yields, which I have read to be 8.50% to 6.50%, ofcourse, I clearly notice that the historical data ranges from about 12% to about 5.3%, which lies at the spectrum extremes, and not very common for general usage/referance.
Many thanks in advance !
Dear Alexander,
Thanks for your kind words and also for getting registered for our mailers!
FYI, OneMint is Manshu’s website and I’m just a small contributor to this big & great library of posts built by Manshu.
Also, it is good to know that the recent events havent disturbed you and you have enough understanding of the product(s) you are invested in. I’ll definitely try to do a post on your suggestion, if I’m able to get enough data on the same. Thanks!