Tuesday, December 13, 2011


As a part of your debt allocation, the choices open to you are:

- Fixed Deposits of banks, post office, corporates, etc.
- Tax Free bonds
- Fixed Maturity Plans of Mutual Funds
- Short Term Debt Mutual Funds
- Longer Term Debt or Gilt Mutual Funds

There are inherent pros and cons for all these options.

1. Fixed Deposits of banks, post office, corporates, etc.
(a) Bank fixed deposit rates range between 9-10%. You do know exactly how much you get during the term.
(b) Fixed deposit of corporate rates is slightly higher depending upon the rating of the Corporate.
(c) For those in a top income tax bracket, even at 10% interest rates, the actual yield post tax (30.9%) would be 6.91%, where you would not be beating inflation.
(d) There is no scope for any capital gain or capital loss. What you give is what you get back at the end of the term.

2. Tax Free Bonds
(a) The Government of India has allowed four companies to issue tax free bonds. The first one to hit the market shortly will be NHAI. They will be 10 year and 15 year bonds.
(b) The interest rates, although not yet declared, will be 50 bps less than the 10 year GSec yield. The 10 year GSec yield has recently fallen sharply from around 9% to below 8.5%.
(c) At 8% interest rate on these tax free bonds, this would translate into 11.58% returns for those in the highest tax bracket.
(d) The bonds will be traded on the stock exchanges and hence there is scope for Capital Gains if interest rates of 10 year GSecs fall to the 10 year average of about 7%.

3. Fixed Maturity Plans
(a) The Fixed Maturity Plans are still giving 9.2 – 9.4% for a one year or 18 month FMP.
(b) There is a little uncertainty about whether the Direct Tax Code will be applicable next year or not. Hence for an 18 month FMP you do not know whether you will get double indexing (hence tax free returns) or single indexing, where some tax would be payable.
(c) However assuming the Dividend option the dividend distribution tax rate at 13.84% would give you net returns of 8.1% at 9.4% yield.
(d) Here too, you know what you are getting and at the end of the term there is no scope for capital gains.

4. Short Term Debt Mutual Funds
(a) The yield curve is currently quite flat. i.e. the short term and long term yield rates are the same i.e. around 9-10%.
(b) The RBI has announced that it will pause in the interest rate hikes. The bad IIP numbers of -5.1%, will ensure that the RBI should not hike rates on Friday.
(c) Government increased limit for FII investments in corporate bond and GSecs by US$ 5 billion each to US$ 15 bn and US$ 20 bn respectively. This has resulted in increase in demand.
(d) The Yield to Maturity of most short term debt funds are around 10% returns. After considering the expenses these yields to you should be around 9%.
(e) Short end of the yield curve offer attractive risk adjusted yields. The short term funds will continue to selectively increase duration as the yield curve is likely to steepen on the back of FII demand and improved liquidity.
(f) Hence, in the next one year, you are definitely looking at capital gains on the short term debt mutual funds and should be 10%-11%++ returns.

5. Longer Term Debt or Gilt Mutual Funds
(a) The was a large fall in the 10 year GSec yields in the last two weeks from over 9% to now below 8%. This was mainly because of:
i. RBI Open Market Operations
ii. Successful FII auction resulting in increased demand.
iii. Moderation in inflation and hope in interest rate easing
(b) However the Government of India is likely to over shoot the borrowing programme and that will result in hardening of interest rates again.
(c) RBI is not expected to cut interest rates before April or so.
(d) For those who can take the volatility in the debt portfolio, can invest in longer term debt mutual funds, to get 13-14% p.a. returns over the next 1-2 years. The average 10 year GSec yields are 7% and in the last GSec bull run the yields went down to 5% in 2009.

In Conclusion:
1. For any short term investments of 1 year or so duration invest in Short Term Debt funds. This is going to give you attractive 10%-11% returns without any risk.
2. However do keep 10-15% of your debt portfolio in longer term debt papers – to look at higher returns with volatility.
3. Take prompt action, because the last debt bull run lasted just 3 months.
4. For longer term investors, continue to stick to your asset allocation, which would depend upon your risk profile and the valuations of the market. It is never too clear when the equity bull market will re-start. The Sensex doubled from April 2009 to September 2009.

Sunday, September 25, 2011

Volatility is here to stay – Manage It

It is going to take many years for the global economy to recover from the 2008 crash. With the Lehman collapse, the banks around the world froze and liquidity was very tight. At the time, impact was to the tune of $ 2.7 trillion. The US Government took prompt action to form Troubled Asset Relief Programme to purchase assets and equity from its financial institutions to strengthen the financial sector. Currently the estimated impact from all the PIIGS countries is US$ 600 billion, but the European Stability Fund or the EU is unwilling to commit funds to rescue these countries. 29th September, is going to be a crucial date to see how this problem can be solved.

In recent history, creditors seem to be more willing to cut slack to the defaulters as bailouts are facilitated through the International Monetary Fund. The Emerging Market Debt crisis in the 1980’s/90s lasted for just three years. However, for political reasons, the European leaders are willing to take small steps only when the debt problem teeters on the verge of disaster. Delay in inevitable debt restructuring is what is causing the markets to be volatile. To prepare for the default and to try and re-capitalize their Balance Sheets, European Banks are calling back their loans, and that is why there is currently a huge demand for dollars. Hence the dollar is up, while all currencies, including the rupee weakens. As Hong Kong is the most liquid market after the US, this too is being sold off. Even the safe heavens, gold and silver, are being off loaded, to meet this insatiable demand for dollars.

With Sovereign Debt levels as all time highs and with growth stalled, it is going to take years for the World Economy to recover. Hence over the years, these crises are going to come again and again, and the inevitable volatility in the markets would have to be managed.

Case for Indian Equities:

1. 80% of the World Growth is coming from the Emerging Markets.
2. Although our growth is slowing down, we will still be growing, as per the worst estimate, at 7%+.
3. Valuation of our markets is currently below the long term average. When analysts start considering earnings of FY 2013, then our market’s valuations are at crisis levels.
4. The next quarter results are likely to be painful, but this is already known and factored in.
5. The interest rates should have almost peaked, and lowering interest rates going forward would stimulate growth. Once the RBI signals peaking of interest rates, as the equity markets are forward looking, the markets should rally.
6. Oil prices have already come down, but we are not feeling the impact because of the weakening rupee. However falling oil prices are going to be a huge benefit to us. Further cooling off of commodities, due to global slow down will result in increased profitability of our companies.
7. Monsoons have been good, and are likely to have a bumper rabi crop.
8. Corporate leverage is quite low and cash levels are high. Although companies are currently not building capex, they seem to be willing to buy other businesses, and hence Mergers &Acquisition activity is high.
9. Cement, which is a lead indicator, has not fallen so much in the current melt down. When the capital expenditure and capacity growth re-starts again, the seller of capital goods books profit immediately, where as the buyer depreciates over time, and this leads to excess profits.

Managing the Volatility

1. Stock picking is going to become crucial. On the same day in August, Bharati Airtel reached its 52 week high, Reliance Industries reached its 52 week low. In a rampant bull market all stocks go up, but in these volatile times stock picking is going to become very important

2. Regular booking of profits and re-balancing portfolios would need to be done, to be prepared to face the next crisis. Hence if you were re-balancing every 6 months, you would have to re-balance every three months.

3. Your asset allocation would have to keep on changing depending upon the valuations of the market. As they become cheaper, larger allocation to equity and vice versa. r

Consult a Certified Financial Advisor to assist you through these difficult times.

Sunday, September 4, 2011

Real Estate vs Equity

As an investment advisor, many times I hear people tell me about the fantastic returns they have got in the real estate markets, where as equity have not given any returns at all since 2007. And what can I reply to this indisputable fact!!!.

Recently I had a friend tell me that he bought a flat in 2002 for just Rs. 28 lacs and it is now worth over Rs. 1 crore. “It has given me Rs. 8 lacs per year, as much as my annual salary.” Simple math told me that it gave a respectable 15.2% CAGR over the last 9 years. In the same period equities have given 19.5% returns and gold, which was $300 per ounce at that time is now over $1800 per ounce and have given a CAGR 22%.

National Housing Board has come out with an index of real estate “Residex” of 15 cities in India from 2007. Between 1st January 2008 to 31st March 2011, as per that index:
- Four cities, Jaipur, Hyderabad, Kochi and Bangalore have given negative returns.
- Chennai has given the best returns of 24.7% CAGR
- Pune has given just 12.2% CAGR.

Investors’ love affair with real estate is well known. It is an asset of bricks and mortar, instead of an intangible piece of paper which represents your equity investment. You have the potential of getting regular rental returns, and also watching your asset increase over a long period. Every HNI will give me stories of the fantastic returns a longer period or even the super returns in a few months. Forgotten is the 267% returns the Sensex gave us in 1992 or even closer in time, the 152% annualized returns got between April and September 2009.

The problem is that real estate advisors quote absolute numbers when they talk about returns. It sounds a lot more than CAGR returns. For e.g. a flat in Powai, which cost Rs. 40 lacs in 1996, is worth Rs. 4 crores today – a CAGR of 18%. The same Rs. 40 lacs invested in HDFC Prudence fund, would be worth Rs 9.5 crores today – no comparison really!!! An investor cannot really envisage a CAGR of 23.6%.


1. Smaller investment amounts
You can choose the amount you wish to invest in equity mutual funds. You can diversify this investment over different categories of equity funds, over different fund houses. In real estate you have to put a substantial amount in one real estate holding.

2. Liquidity
Bull or bear market, you can always liquidate your equity mutual funds in just 3 working days. The price you get is efficiently determined and not based on your desperate need for funds. In an economic slow down, selling your property is extremely difficult and the price you will get is inversely proportionate to your need for funds.

3. Transaction Costs
Purchasing a property attracts both stamp duty and registration costs. This is prohibitively high. In a regime of zero entry load, there is no cost in purchasing equity mutual funds.

4. Maintenance Cost.
Apart from property tax, there are regular maintenance costs in keeping your property ship shape like painting, repairs, etc. The equity fund manager on the other hand, charges around 1.75% - 2% to maintain an equity portfolio of the best performing equity shares.

5. Regular Income
You can get regular income in the form of rent from your property. The rental income is normally about 3-5% of the value of your residential property and maybe a little more in the case of a commercial property. This rental return is taxed in your hands. You can get tax free returns of the amount you wish i.e. 8%, 10% or even upto 15% (the long term return of the Sensex) through a Systematic Withdrawal Plan from your equity mutual funds.

6. Taxation
You pay zero long term capital gains on equity mutual funds. There is no way that property, with its 20% indexable tax can ever beat a 0% rate.

How then to convince property investors to invest too in equity mutual funds? Did they sell their property in 2008 when the economy slow down started? Do they check the price of their property every month or even every day? Did they snap up great deals when the equity market was on sale at Sensex 8000 level? Do they compare their house in their locality and switch it to another house in another locality which did better in the last 6 months? When they buy an equity mutual funds, do they mentally allocate it to their son/daughter as a legacy?

In Conclusion:

Real Estate has its role in wealth creation as a diversification from Equity. However equity mutual funds need to have an equal allocation to your portfolio of wealth. It is only when you see equity too as an inter generational legacy to be passed down, that real wealth will be created through equity.

Veena Malgonkar
Certified Financial Planner

Saturday, August 6, 2011

The Currrent Global Crisis

The Sensex hit a 13 month low on Friday. This was along with the global panic in the equity markets due to the following:

1. Sovereign debt worries in Europe especially in Greece, Ireland, Portugal, Italy and Spain. The yield in 10 year treasuries in Italy and Spain suddenly spiked up in the last week. Large sums of Italian treasury mature next month and that increased market jitters. This increased fears over contagion over the entire regions as it has high exposure to Italian debt.
2. Slow down in the US economy. The ceiling on the debt will result in spending cuts and lowering of the stimulus of economic growth.
3. US debt rating has been cut from AAA to AA+ by S&P. We have yet to see the impact of that event on the equity markets.

Developed markets out performed Emerging Markets year-to-date as investors rotated positions. Hence Developed Markets saw net inflows and Emerging Market funds net outflows.


Our markets have been range bound for the last two years. The Sensex touched 17000 level on the way up in September 2007. After touching a Sensex high of 21200 in January 2008 and a low of 7700 in October 2008, it retouched 17000 again on the way up in September 2009. It is now been 2 years, and the Sensex level in still in the same range of 17000 to 20000. Due to global factors we are currently again at the bottom of the range.

We do have our own problems the major of which is inflation. Persistent inflation has caused the RBI to continuously raise interest rates. Higher commodity costs combined with higher interest costs has resulted in fall in profitability of our Corporates. Our fiscal deficit position too is not healthy. Constant scams, paralysis of the Government’s workings, lack of reform, also stunts India’s development.

Case for India.

1. There is nothing fundamentally wrong with the Indian economy.
2. The PE of our markets, when the Sensex first touched 17000 was 23.17 times. Although the market has gone no where, the PE is currently, at 18.03 times, due to the growth in earnings. The long term average for our markets from January 1991 is 19.76 times. The markets always look at one year forward PE, and 2012 PE is at 14 times. By December 2011, the market will start looking at 2013 earnings at that is at 12 times. 12 times one year forward PE represents crisis levels and we are definitely not in such a bad condition as the rest of the world.
3. With fears of a global slowdown, commodities, especially oil, has started falling. This is good for India as 70% of our import bill is oil.
4. We are likely to be near the top of the interest rate cycle. With commodities cooling off, inflation should also cool down. Further with a good monsoon food inflation too should show some softening. Stable interest rates will have a positive impact on our markets.
5. Past experience suggests that strong economies tend to out perform after dips caused by external factors
6. Weakness in developed markets will redirect flows back into emerging markets, such as India. This will result in a re-rating especially as valuations are now attractive.

Action to be taken:

1. For new equity investors, the risk / reward ratio is in favour of reward. Invest in the equity market, based on your asset allocation.
2. For investors already in the market, re-balance your portfolio and add to equity. If the market continues to fall, you can consider increasing your weightage to equities in your asset allocation.

Take advice of a Certified Financial Planner to build your portfolio based on your asset allocation.

Saturday, June 25, 2011

Equity market – The only way!!!

“The Death of Equity” was the cover article (subtitled “How inflation is destroying the stock market”) in the Business Week which appeared on 13th August, 1979. It said, amongst other things, “For better or worse, then, the US economy probably has to regard the death of equities as a near-permanent condition….” The biggest bull market in the US of all time had already started by the time this howler was read, and lasted upto 2000.

We appear to be at the same stage in our economy. Inflation is causing costs and interest rates to go higher. Although sales growths in the last quarter have been great, profit margins are getting eroded. The future looks bleak with the global economy slowing down and Europe in the mess. Is this too the “death of equities”??

Our equity markets are truly causing us frustration. The markets first reached Sensex level 17000 in September, 2007. It went on to reach the all-time high of Sensex 21000 in January 2008, crash to 7000+ by October of the same year, hover in the same range till March 2009 and then take off to reach 17000 Sensex level by September 2009. In has now been in this range for almost 2 years or to make it worse you are at the same level at which you invested 4 years ago. Further “safe, secure” debt investments are giving us 10% interest. What then is the case for Equities???

India has one of the highest saving rates in the world; however investment into the equity market is abysmally low. Equity markets are equated with risk - and investing in fixed deposits is perceived to be a safe, secure investment, as the capital is secure. However, currency has never been designed to function as a long term store of value. Due to inflation it has always lost value over time.

Warren Buffett personal shareholding fell by $34 million in one day on October 19, 1987. And how much did he lose – zero, because he did not sell. Peter Lynch, legendary manager of the Magellan fund averaged 29% p.a. returns over a 13 year period. However, according to him the average investor got negative returns in this fund in the same period. People lose because:
1. You observe a significant, but temporary decline
2. You mistake the decline as a permanent one.
3. You panic.
4. You sell.

As a long term loaner, you are likely to get about half the returns that a long term owner gets. You are guaranteed (depending upon credit worthiness) to get back the currency that you have lent out. But currency is not purchasing power and the longer the time horizon, the more de-coupled currency and purchasing power becomes. Therefore you have to look for an investment which more efficiently preserves purchasing power.

You have to believe that the twin engines of capitalism and technology will drive superior equity returns. You have to believe that real returns, net of inflation and taxation will build wealth over time. And finally you have to believe that “volatility” will result in temporary declines and a larger permanent advance.

Way to invest in equities:
1. If you need funds to meet a goal over a short term, say upto 5 years, save and invest in debt instruments. If your goal is long, equities are the only way.
2. Invest through mutual funds, as you would be leaving the equity investment, in a tax efficient way, to professionals.
3. Invest through a Systematic Investment Plan, because rupee cost averaging ensures that you outperform your mutual fund manager.
4. Invest with an asset allocation, with only a small percentage in debt. This asset allocation will let you know when to add to equities and when to book profits – without trying to time the market.
5. Believe that there will be periodic big sales. If the declines went away, the returns would go away. Those sales are huge opportunities, if you have not finished buying in the equity market.
6. Even for retirees, systematic withdrawal is an equity strategy for potential growth of income and principal throughout your retirement. But do have one year’s living expenses in a liquid fund, for times of major falls.
7. Our Government has recognized the need to invest in equities by giving tax free returns to holder of equity. Make the most of this opportunity while it lasts.

And finally have a Certified Financial Advisor to guide you through the process.

Tuesday, March 1, 2011

Budget 2011 – 12

As per a report by the financial service company - Citi “India, thanks to its robust growth, is expected to surpass China — and the United States — by 2050 to become the largest economy in the world." However, closer at hand, our GDP is estimated to have grown at 8.6% in 2010-11. The target for 2011-12 is 9%.

The fiscal deficit has been bought down from 5.5% to 5.1% of GDP and is targeting 4.6% in 2011-12. Borrowing plan is pegged at Rs 3.43 trillion, against the expected Rs 4 trillion. But this might be difficult to achieve with the spiraling oil prices. By 2012 there is likely to be a shift from physical subsidies to cash transfers by the use of smart cards issued through the Aadhar Scheme. Disinvestment target is Rs 40,000 crores – Government is to retain 50% ownership.

The budget was on the whole market neutral with the main positive been absence of increase in excise duty on cigarette, and no roll back of the stimulus of reduction of excise duty on automobiles.

The Direct Tax Code will be implemented from 1st April 2012.

Direct taxes – Individuals
1. Exemption limit enhanced from Rs 160,000 to 180,000 for men. Women's limit remains at Rs 190,000 on the lines of the DTC which is gender neutral.
2. Exemption limit for senior citizens increased from Rs 240,000 to Rs 250,000. The age for senior citizens reduced from 65 years to 60 years.
3. A new category of super seniors introduced for those above 80 years. The exemption limit under this category is Rs 500,000

Direct taxes – Corporates
1. Surcharge on domestic companies cut to 5% from 7.5%
2. MAT raised to 18.5% of book profits from 18%. SEZ’s profits to be included under MAT
3. Foreign unit dividend rate cut to 15% for Indian Companies.

Service Tax
1. Continued at 10%
2. More services included in the service tax net including life insurance.

Housing Finance
1. Existing home loan limit enhanced to Rs 25 lacs from Rs 20 lacs for dwelling under the priority sector.
2. Low cost housing loans of Rs 15 lacs to continue to get 1% interest subvention.

Infrastructure Financing
1. FII limit for investing in corporate bonds, with maturity greater than 5 years, increased by US$ 20 billion
2. Tax free bonds of Rs 300 billion to be raised by Government undertakings to boost infrastructure development
3. Tax exemption upto Rs 20,000 for investment in infrastructure bonds extended by one year.

Mutual Funds
1. SEBI registered Mutual Funds to accept subscription from foreign investors who meet KYC requirements for equity schemes.
2. Dividend Distribution Tax for debt schemes:
(a) For corporates: 30% + surcharge for debt schemes
(b) For individuals and HUF: 25% for money market and liquid schemes.
(c) For individuals and HUF: 12.5% for other debt schemes.

Friday, February 25, 2011

An New Innovative way to donate - from HDFC MF

HDFC MF is in its 10th year of performance. To celebrate their place in the mutual fund industry, they would like to give back and have chosen the cause of Cancer to pay back to society. The fund would invest in a 3 year FMP, with regular dividend payouts.The following would be the benefits of the scheme.

1. HDFC Bank, and CAMs would be waiving their fees.
2. The fund would act as a three year FMP and at the end of the term your capital would be returned.
3. Regular dividends would be declared. You would have the choice of donating all the dividends or 50% dividend to the Indian Cancer Society.

Although I do hope that you will donate the full amount, but if you do donate only 50%, and assuming 8% is distributed:
(a) You will get 4% tax free returns.
(b) You will get 50% credit under section 80G i.e. Another 2%
(c) At the end of 3 years you will get your capital back. Hence with indexing this will result in a capital loss, which can be adjusted against the capital gains of any other FMP maturing during that year.

HDFC is hoping to collect at least Rs 200 corers, which would mean about Rs 15 crores donated every year. These funds would be mainly used for giving cancer treatment to the poor. To manage this amount, a committee has been set up which includes luminaries like Keki Dadiseth, etc.

The minimum investment is Rs 100,000 and I am putting in this amount. I do request you to please also donate some amount to this cause and support HDFC MF in their endeavour. It does make economic senses as well, as if you donate 50% of the dividend, you would not be out of pocket at all. Please do circulate this message to all your friends and associates too.

The fund is closing on 4th March.

Please do assist this worthy cause.

Sunday, January 23, 2011

Gold and Silver

“Gold gets dug out of the ground in Africa, or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”
Warren Buffett

However the run up of gold over the last two-three years and the huge run up of silver over the last one year have proved that not every one agrees with Warren Buffett.

US Dollar is currently the global standard of value. However when dollars can be easily created on a whim, it becomes a phony standard of value. Gold has been the store of wealth since Alexander’s time and continues to endure. Gold is the asset which cannot be inflated, yields nothing, and is no one’s liability. Hence gold and silver is the ultimate standard of value.

In the US, where interest rates are close to zero, the case for holding gold (which also gives no income) increases. Also when real interest rates (after inflation) become negative, which is happening in India too, the case for gold and silver becomes irresistible.

Hence keeping at least 5-10% of your portfolio into gold and silver is a must and would act as a “chaos hedge”, when the equity markets, inflation, etc are uncertain.

1. The gold silver ratio, slumped to a 40 month low of 46.1 with the more than 90% rise in silver prices in the last one year. It has dropped below 45 times only twice in the past 25 years.
2. Disappointing economic news will continue to drive gold in the coming year.
3. The sharp rally is likely to be over, but further high could be seen in the coming year ahead.

1. Silver has more than 35% of its demand coming from industrial uses.
2. The run up in silver is likely to continue in the current year.
3. India’s demand for silver is just starting to pick up, and this can boost silver prices more