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18 August 2012
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The author is happy to inform the blog readers that he completed Level 2 of Charatered Financial Analyst (CFA) Program from the CFA Institute, USA, a few months back.
SUMMARY: Different asset classes give different size of returns depending on the time periods. In the Indian context, common stocks provided fabulous returns between 2003 and 2007. Gold and other commodities have been giving hefty returns since 2003. Stocks of consumption-oriented and pharmaceutical companies have been doing well since 2008 and real estate too has given sturdy returns in the last decade.
Now the time has come for Indian investors to forecast that interest rates will fall even though predicting interest rate movements is difficult. The probability of interest rates going down is very high considering the slide in GDP figures. Despite the entrenched inflationary pressures, rising fiscal deficit, deficient South-West monsoon and global headwinds, the Reserve Bank of India in all probability is likely to reduce its benchmark interest rates in the next few months. Indias new finance minister, Mr P.Chidambaram, seems to be veering round to the view of lower interest rates stimulating GDP growth. All these developments point to a softer interest rate regime, which will trigger a rise in bond prices. If investors are of the same opinion, they can consider investment in gilt mutual funds that invest predominantly in government securities of longer maturity. Two gilt funds I have zeroed in, after extensive research, are: 1. Birla Sun Life Government Securities Fund Long-Term, and 2. Kotak Gilt Investment Regular. These funds are of low-risk category and they invest mainly in government securities. Due to their exposure to government bonds, they bear no default risk but they carry interest rate risk, the risk that bond prices may fall when interest rates rise. Please read on the full article
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RBI has been under pressure to reduce interest rates from several quarters, including the industry and finance ministry. But, RBIs hands are a bit tied in the face of grim outlook on inflation front and it has been impressing upon the Central Government to rein in its ballooning fiscal deficit. Due to the deficient South-West monsoon, the government will be hard pressed to spend more money on relief measures for the drought-affected population in rural India. The good thing is that food grain stocks with the government are more than enough to alleviate the drought impact. The governments inaction on the policy front continues for long with no clarity on economic reforms, pass-through of increased diesel and LPG prices to the consumers and other measures. Doubts have been expressed about the governments ability to reduce fiscal deficit to a manageable level in the face of many adversities. Some pundits are of the opinion that RBI may not be able to reduce interest rates in the next one or two months in the face of entrenched inflationary pressures. However, the new finance minister, P.Chidambaram seems to be rooting for interest rate cuts. International rating agencies, S&P and Fitch have put negative outlook on Indias sovereign rating. Threat of Indias sovereign debt rating downgrade is imminent at which rupee may weaken and the chances of FIIs pulling out their money from G-Secs are more likely. FIIs hold only a small percentage of G-Secs. However, any big selling from FIIs may dampen G-Sec prices in future.
It may not be optimal for investors to hold the gilt funds for longer periods. They have to exit the gilt funds if any one of the following events occurs: 1. The investment gives a pre-tax return of 12% to 18% in a short span of 3 to 6 months. 2. Other assets classes, like, equities, commodities, etc., have fallen very sharply. If such an event occurs, investors can switch their funds to such asset classes for better returns. 3. The 10-year G-Sec yield touches a yield of 7.5% or lower from a peak level of 9%. --Appendix I - Returns of Select Gilt Mutual Funds
Name of the Scheme AUM Rs crore
30-Jun-12 Birla Sun Life G-Sec fund Long-term
NAV (Rs) as on
16-Aug-12
Crisil Rank 1 2 2 1
ICICI Pru Gilt Investment IDFC G-Sec Investment Plan-A Kotal Gilt Investment Regular
Returns % 2010 2009 % % 9.3 17.5 5.2 (6.7) 3.4 (9.3) 4.9 (5.0)
* from 1.1.12 to 16.812; Data source: MoneyControl.com; AUM assets under management Rank Ranks are given by Crisil Limited Rank 1 is the highest rank.
Abbreviations: CBLO collateralized borrowing and lending mechanism a money market instrument of CCIL; FII foreign institutional investor; GDP gross domestic product or national income; IIP index of industrial production measuring countrys industrial activity; NAV net asset value of the fund; RBI Reserve Bank of India; SLR statutory liquidity ratio, the minimum that banks have to keep in government securities; Yield - A bonds yield is loosely defined as the income one earns on it as a percentage of what one spent on it. Theoretically, it is calculated by dividing the amount of interest it will pay during a year by its price. Disclaimer: The author is an investment analyst and writer. His views are personal. He has a vested interest in the stock/bond markets. He may change his views very fast without any notice depending on the market and economic conditions. His views should not be construed as investment recommendation. There is a risk of loss in equity/bond investments. Investors need to consult their certified financial adviser before making any investment decisions. For authors articles on financial markets, just click: www.scribd.com/vrk100
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