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| November 21, 2014 |
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| Weekly Facts | | | Close | Change | %Change | | BSE Sensex* | 28,334.63 | 287.97 | 1.03% | | Re/US$ | 61.95 | -0.39 | -0.63% | | Gold Rs/10g | 26,680.00 | 580 | 2.22% | | Crude ($/barrel) | 76.60 | -2.25 | -2.85% | | FD Rates (1-Yr) | 8.00% - 9.00% | Weekly change as on on November 20, 2014
*BSE Sensex as on November 21, 2014 |
Impact 
Many of you may be wondering how far the current stock market rally will move from hereon. Those who want to invest at these levels would be in dilemma whether to invest at current market levels or to wait for a correction? You see, even if you decide to wait for a correction, it is not an easy estimate and the magnum is often unknown.
Fund managers of equity mutual fund schemes also have similar difficulties. However, they are well-equipped and have enough expertise to decide whether to invest, hold or sell.
So what are they doing now?
It has been observed that, of late a few fund houses have started raising cash component in selective schemes. There is a common factor among almost all such schemes. Debt and cash exposure of mid and small cap oriented funds is higher than that of large cap oriented funds. Furthermore, those with no market cap bias are holding the maximum weightage to debt and cash in their portfolios as compared to those with large cap or mid and small cap orientation.
Cash levels maintained by funds
| | Average Cash Holding (%)* | | Large Cap Funds | 3.97 | | Mid and Small Cap Funds | 5.71 | | Multi-Flexi Opportunities Funds | 6.77 | (Source: ACE MF, PersonalFN Research)
* Cash holding for the respective category of funds are depicted on an average basis taking the portfolio as on October 31, 2014
Within each category given above, there is a huge difference between the weightage of debt and cash component held by funds. For example, multi and flexi cap funds such as Principal Smart Equity, HSBC Dynamic Fund and Quantum Long Term Equity are at present holding more than 30% of their assets in debt and cash as per the portfolio disclosed on October 31, 2014. On the other hand, mutual fund schemes such as UTI Equity Fund, DSP BlackRock Equity Fund and L&T India Equity Fund - which too belong to the same category of funds - are at present holding less than 5% of exposure to debt and cash.
Why fund managers hold such diverse views on market?
Well, rather than opinion of a fund manager about the market direction, what influence the cash holdings of a fund are investment opportunities. Investment opportunities in context to the valuations and the synergies they offer going forward. In simple words, if valuations are low or moderate enough and appear attractive to buy, fund managers tend to hold less cash. But when there are fewer opportunities guided by valuations and synergies; fund managers await a correction.
Returns clocked and Valuations
| Indices | YTD Return (%)* | Price-to-Equity Ratio* | | S&P BSE Sensex | 32.77 | 19.03 | | S&P BSE Mid Cap | 51.45 | 13.66 | | S&P BSE Small Cap | 70.50 | 37.45 | (Source: ACE MF, PersonalFN Research)
* YTD Returns are all as on November 20, 2014 while P/E Ratios are all as on November 19, 2014
As you may know, the mid caps and small caps have run-up a lot this year and have outperformed large caps by a huge margin. As a result, valuations have become stretched in mid and small cap domain. While small caps are grossly overvalued, mid caps are not as attractive as they were about a year ago, vis-à-vis large caps. And this is the prime reason why, fund managers of large cap oriented funds are comfortable to hold maximum exposure to equities (and less cash) while those managing predominant mid and small cap investment mandates are shying away from investing in equities and instead holding more cash.
Is high cash exposure good or bad?
Well, if exposure to cash is high on account of fewer investment opportunities, then giving due respect to valuations rather than mere exuberance could prove to be a prudent approach and might work in favour of the fund provided the market does not ascend further substantially. In fact if the market descends, holding high cash may bring in an opportunity to invest at lower valuations. But if the market moves up, then for the fund manager holding high cash the tide turn against him and will have to suffer the loss in opportunity and impact his fund's performance.
PersonalFN believes, investors shouldn't try to time the market and stay invested as per their asset allocation. If markets are overvalued, fund managers of mutual funds you are invested in, would take investment calls. Such and many other advantages make mutual funds one of the great investment avenues for creating wealth. Having said this, your success depends on your selection of mutual fund schemes.
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Impact 
Now that inflation is cooling off and rupee is emerging as one of the strongest developing market currencies in the recent times, hopes of a rate cut are rising. RBI has bravely held up rates so far in spite of the clamour for reducing policy rates at various forums. You see, when RBI slashes policy rates, it's a hint that, monetary policy stance has become accommodative and thus credit may become cheaper.
A falling interest cycle poses a chance for longer maturity papers to perform better as bond prices and interest rates share inverse relationship. At present the Indian debt market is anticipating a rate cut and not only investors, but even fund managers have become aggressive all of a sudden.
It has been observed that, exposure of debt funds to "non-AAA" rated instruments has gone up considerably of late. "AAA" rating denotes highest credit quality. Usually securities with lower ratings have higher interest pay-outs. Moreover, impact of a rate cut on bond prices is higher on such securities than those with superior credit quality. So, it appears that fund managers are targeting dual benefits. In other words, they are not only keen on utilising opportunities of generating higher accruals but they are also aiming to earn higher capital gains by way of rise in bond prices.
Lower quality debt: is it worrisome?
A rating on a security can be low for a number of reasons. Profitability of the company, prospects for the business, financial strength of the company and prospects of the sector are a few of factors that affect the rating. Maturity of the security also plays a crucial role in determining credit rating. Two instruments with different maturities issued by the same company can have different credit ratings.
Are fund managers taking undue risk?
There is always a risk in low quality debt instruments. However, it is important to understand whether fund managers are prepared to deal with potential risk effectively? It is believed that, these days fund managers have started asking for equity collaterals or / and bank guarantees before taking up debt of a company with lower credit quality. Therefore, it wouldn't be right to generalise that fund managers are risking your money. Having said this it is equally important to understand the credit quality of papers your fund invests in. For example, if a fund is investing in predominantly in AA + rated instruments, there may not be any immediate threat to the company or to the investments of mutual fund in the debt of that company. However, if any fund takes aggressive exposure to credit offerings of a company enjoying BBB rating could be a risk despite of having secured equity co-laterals or guarantees.
As you may know risk and returns go hand in hand. But managing a debt fund is not less a challenge than managing an equity fund. Therefore PersonalFN believes, you as an investor must carefully analyse the portfolio traits of a debt fund before investing in it. Consistent track record of the fund and effectiveness of risk management strategies are the touchstones for shortlisting funds for your portfolio. In case you don't have sufficient time or adequate acumen, you can always think of subscribing to unbiased research reports from PersonalFN. Under DebtSelect, PersonalFN talks about debt oriented funds which may prove to be good investments.
Do you think fund managers are taking enough measures to safeguard your investments? Share your views |
Impact
For many of you who are fond of driving and / or riding, it must be a pleasure hopping on to your speed machine of late, especially after fuel prices having mellowed. Both petrol and diesel have fallen by Rs 10 per litre and Rs 6 per litre respectively in the last few months.
But despite cheaper fuel, the price of many other commodities and services hasn't come down. Unfortunately, many good and services costs you almost the same even now. Nonetheless, inflation indicators suggest that over last few months, the Indian economy has managed to curtail rapidly rising prices in a substantial manner.
However the irony is you as a consumer may not have received much benefits. This is mainly because prices at wholesale level are falling rapidly, but they are not being wholly passed on to consumers. Now that inflation has started falling rapidly - and rather rapidly (as suggested by indicators) - a clamour for a rate cut is gaining strength.
Inflation indicators...
Inflation measured by the movement of Wholesale Price Index (WPI) for October 2014 fell to 1.77% marking a 5-Year low. Steady decline in manufacturing inflation and a sharp one in non-food inflation, has caused WPI inflation mellow down further more in October. Similarly, consumer inflation also registered its all-time low of 5.52% since the new data series started in 2012.
Inflation mellows down further...
(Source: MOSPI, Office of Economic Advisor, PersonalFN Research)
The chart above suggests that inflation pressure appears to be waning since June 2014 and now the possibility of it settling at lower levels is being discussed. Before you conclude that inflation is now well within the comfort limits of RBI, you should have a look at how two different indicators of inflation, paint different a picture.
To read more about this news and PersonalFN's views on it, please click here.
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Impact
The erstwhile UPA Government based on the suggestion of the Shyamala Gopinath Committee report, discontinued Kisan Vikas Patra (KVP) in 2011 - once a popular investment avenue (offered through post offices in the country) amongst small savers, especially the risk averse ones. The reason cited by the Committee for discontinuation was that it was prone to money laundering being bearer like instruments.
However, the Modi-led-NDA Government has now reintroduced KVP, vide the union budget 2014-15 albeit with a few modifications, to encourage individuals who may have banked and unbanked savings to invest. Moreover, the intent of this move is to raise rate of domestic savings and make effective use of them for building the nation.
To know the salient feature of revamped KVP and and read PersonalFN's views on it, please click here.
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- Until recently mutual fund business was strongly concentrated in top 15 cities. However, retail participation in cities beyond top 15, has gone up substantially over past 18 months. As per data published by Association of Mutual Funds in India (AMFI) on October 31, 2014, retail Assets under Management (AUM) (from places beyond top 15 cities) stood at about Rs 1,07,000 crore. The AUM went up about 33% from the levels seen 18 months before. It is notable that nearly 20% of total retail assets and 10% of total AUM now comes from beyond 15 cities. The growth in folios from 1.83 crore to 2.4 crore over past 18 months is indicative of rising retail participation in mutual funds from Tier-2 and Tier-3 cities.
Joint initiative of the Securities and Exchange Board of India (SEBI) and mutual fund houses seems to be working for spreading awareness about mutual fund investing beyond Tier-1 cities.
PersonalFN is of the view that, the data points are encouraging and suggest that retail investors beyond top 15 are evincing interest in Indian equities through mutual funds. However to accentuate this further, investor education programme should be conducted judiciously which can help investors pick suitable mutual fund schemes in accordance to their financial needs and risk profile while they endeavour to meet their long-term financial goals. Mutual funds can play a crucial role in making investors wealthy but a prudent selection of them is imperative.
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Collateral: Property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses. Because collateral offers some security to the lender in case the borrower fails to pay back the loan, loans that are secured by collateral typically have lower interest rates than unsecured loans. A lender's claim to a borrower's collateral is called a lien.
(Source: Investopedia)
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Quote : "The basic story remains simple and never-ending. Stocks aren't lottery tickets. There's a company attached to every share." - Peter Lynch
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