which drew idle domestic savings into the organised system. Easy liquidity in the global and domestic markets is causing infrequent inflows in the Indian capital markets.

Foreign Portfolio Investments in Indian capital markets…

Data as on December 17, 2017
(Source: CDSL, PersonalFN Research)
The Reserve Bank of India (RBI) recently released the 16th edition of Financial Stability Report (FSR) — a bi-annual publication. It assessed the stability of India’s financial system with respect to risks emerging from global and domestic factors.

Here are some interesting observations from the 16th FSR about the investment trends in India:

• Among BRIC nations, India remained the second-most attractive destination for Foreign Portfolio Investments (FPI) between January 2017 and October 2017. Russia secured first place.
   
• FPI investments in India were the highest among the BRIC nations.
   
• Banks in India have been pricing their loans at uncompetitive rates vis-à-vis the Treasury-Bill yields. As a result, companies enjoying credit ratings higher than “AA-“ are finding it viable to directly approach mutual funds to secure rather than rely on banks which follow uncompetitive MCLR (Marginal Cost of Funds based Lending Rate).
  
  In other words, corporates with a credit rating of “AA” and below aggressively pursue bank credit. Consequently, the ones whom banks deny credit to attempt to raise money from the markets (including from mutual funds) by offering higher yields.
   
• Following ratings upgrades by Moody’s, India has been incrementally attracting domestic as well as foreign funds in lowly rated securities.
   
• Outperformance of mutual funds is siphoning inflows in mutual funds; conversely, savings are shunning the banking channel in search of better yields.
   
• As far as the money market of mutual funds are concerned, the top five mutual fund houses account for 50% market share. This is a significant percentage.
   
• Seeking better returns, debt schemes are increasingly pursuing investments in low-rated securities. As noted in the FSR debt fund schemes in India prefer “BBB” rated bonds over “AAA” and “AA” rated bonds. 
   
• Despite the poor earnings growth, valuations in India equity markets are were expensive as compared to its counterparts.
   
• Higher liquidity and steady outperformance of equity markets has attracted greater investments in equity mutual funds.

But there are positive observations about the mutual fund sector too:

• The industry seems to be entering a maturity phase considering the rising base of investors and its geographic spread.
   
• Assets Under Management (AUM) of the mutual fund industry rose from Rs 17.55 trillion in March to Rs 20.40 trillion in September 2017.
   
• Between FY 2013-17 and FY 2017-18 (upto July), the on-going Systematic Investment Plans (SIPs) increased from mere 60 lakh to 1.65 crore. Moreover, during the same time period, the cases of premature termination of SIPs has decreased from 1.9 crore to 60 lakh.

What should investors keep in mind?

Investing in equity markets through SIPs is a suitable way to build your kitty toward long-term goals. You improve your chances of achieving these goals when you don’t break-up your mutual fund investments or stop SIPs prematurely.

Nonetheless, investing in debt funds with an expectation of that they are safe and provide higher returns, is off beam. Especially, if you invest in those schemes that compromise on the credit quality of the portfolio to generate higher returns. So, here’s a strategy for investing in the Indian debt market currently…

PersonalFN is of the view that, investing aggressively at the longer end of the yield curve could prove imprudent. To put it simply, investing in long-term debt funds (holding longer maturity debt papers) can be perilous, as most of the rally has already been captured at the longer end of the yield curve.

Given that yields have moved up almost 75 bps in last 6 months, Shorter Duration Funds can be considered as well with a two-three year time frame. High-risk investors can gradually take exposure in dynamic bond funds if the time horizon is over three years.  

Short-term maturity papers look attractive, and fund houses are aligning their portfolio accordingly. Yet, if you wish to take the risk (with the hope of a rate cut in the foreseeable future), invest vide dynamically managed bond funds, provided you have an investment time horizon of two to three years.

Ideally, you’ll be better-off deploying your hard-earned money in short-term debt funds; but ensure you’re giving due importance to the investment time horizon, asset allocation, and portfolio diversification. Consider investing in short-term debt funds for an investment horizon of upto two years.

If you have an investment horizon of three to six months, ultra-short term funds (also known as liquid plus funds) would be the most suitable.

And if you have an extreme short-term time horizon (of less than three months), you would be better-off investing in liquid funds .

Don’t forget that investing in debt funds is not risk-free. Therefore consider the 5-facets while investing in debt funds.

Some other options to invest in debt instruments are tax-free bonds, especially if you are in the highest tax bracket.

A few highly rated corporate deposits and bonds may also yield better returns than bank FDs. But make sure you study the company’s financials before investing, as the risk of default can’t be ignored. This will save you from the financial shocks.

Sensible and astute investment strategy serves the path to wealth creation and is always good for your long-term financial wellbeing.

If you need research-backed recommendations to select the best equity and debt mutual fund schemes for your portfolio, opt in for PersonalFN’s model mutual fund portfolio service ‘FundSelect Plus’ has completed a decade and we are offering subscriptions at a massive 75% discount!  Get access 7 high-performing, time-tested readymade portfolios with a decade-long market-beating track record.  PersonalFN’s track record speaks for itself, as all three portfolios have comfortably achieved higher than their respective benchmarks. Subscribe now!

Try our SIP Calculator to find future value of your SIP contributions.

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dsdmsrureka57@gmail.com Dec 30, 2017 Thank you !

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