Should General Elections make you jittery as an investor?

Is it prudent to invest in Equity Markets during an election year?

This doubt is lingering in the minds of many an investor. It stems from the fact that markets largely turn volatile during such events and investors become jittery even when their investment horizon is long term.

It would be good to see some interesting aspects of market behavior using Nifty 50 index as proxy during previous elections which are illustrated below:

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Whenever a stable Government was formed by any party, markets gave handsome returns during the immediate one-year period post elections.

While market swings in the short term depend on the outcome of elections, markets in the long term take a cue from the macros like rate of growth, GDP, inflation etc. While there could be knee jerk reaction to poll results, markets generally recover quickly once they get the comfort of stability plank of the party in contention to form the Government.

One can observe that in last four general elections, investors benefited by investing in election year.

Even in the long term, markets (Nifty 50 index) delivered handsome returns from one election term to another.

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During the entire 5 years tenure, equity markets gave a compounded aggregate growth of 10.5% to over 16% beating most of the other asset classes.

 

Disclaimer: The information, analysis and opinion contained herein pertain only to Market price action for the specified period. The same, (1) do not constitute investment advice offered by the issuer, (2) is solely provided for informational purpose and therefore is not an offer to buy or sell securities, (3) is not warranted to be correct, complete or accurate, (4) may not be copied or redistributed, (5) This report is an intentional literature, intended for information purposes only. The issuer shall not be responsible for any trading decisions, damages or other losses resulting from, or related to this information, data analysis and opinion or their use in any way.

Financial Protection- Insurance as a Tool

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While we plan assiduously for wealth creation, seldom do we think of financial protection to the family in case of untimely death of the breadwinner. Somehow, we take it for granted that nothing untoward would happen to us and we are there forever for the family. While we pray nothing of this sort should happen, it is our responsibility to ensure adequate financial protection for the family in case we are not around.

Hence it is paramount that adequate insurance at the earliest is in place to avoid financial turbulence. There are multiple methods to find out how much insurance coverage is needed to cover oneself fully. We present below the need-based approach analysis.

Need-Based approach Analysis: This method would help us to arrive at a near accurate way of arriving at insurance requirements. The factors to be considered are:

  • Net Disposable Income
  • Inflation
  • Assets/Liabilities
  • Existing insurance cover
  • Financial goals.

Based on the above five factors we arrive upon actual cover requirement. It is always advisable to calculate insurance coverage requirements every 5 to 6 years.

We append below a case description for replacement of income in case of untimely death of the insured:

Case Description:

Mr. A’s current age is 30 and he would like to retire at the age of 60. His current income is 10 lacs and self-expenses percentage is 10%. He owns several assets, Fixed deposit of Rs.15 lacs, Self occupied house Rs. 25 lacs, Gold/Silver/Jewelry Rs. 10 lacs, PPF Rs. 8.5 lacs, Equity/MFs Rs. 5 lacs. His liabilities include a home loan of Rs. 13 lacs, Personal loan Rs. 4.5 lacs and Vehicle loan Rs. 2.5 lacs. He has to create a corpus for his daughter’s Higher Education and Marriage.

1

Net Coverage Required is arrived at considering Present Value of future cash flows after adjusting for life style inflation. 

3

2

It is evident from the above case that an additional coverage of Rs.2.33 crores is required to cover the financial goals and for the family to continue the present life style even in the absence of the insured.

InvITs – A high yielding Asset Class for long-term investors

Infrastructure Investment Trust (InvIT) is a collective investment vehicle that pools together funds from long-term investors to acquire income generating infrastructure assets from developers. It can be looked at as a portfolio of underlying operating Infrastructure Assets with a regular and stable stream of income and cash flows. These cash flows are passed on to the holding trust (InvIT) to be paid out to unit holders in the same manner as it accrued to the Trust.

IRB InvIT is one such Infrastructure Investment Trust set up by IRB Infrastructure Developers Limited. IRB InvIT owns a portfolio of 7 income generating Toll Road Assets in the states of Maharashtra, Gujarat, Tamil Nadu, Karnataka, Punjab and Rajasthan.

Being at a 28% discount to its reduced issue price of Rs. 97.50, IRB InvIT is an attractive proposition for long-term investors who look for periodical returns by way of interest/dividend.  

Basic Features:

  1. Listed on BSE and NSE with a Face Value of Rs.102 in May 2017, yielding 10.5% IRR.
  2. Initially acquired 6 projects with concession period extending up to Sept 2037.
  3. Expectation of 9.5-10% growth (5.5% traffic growth and 4-4.5% price growth).
  4. Each Project SPV distributes at least 90% of its net cash flows to the InvIT.
  5. Within the regulatory framework, InvITs are classified as equity. They are traded in the equity cash segment on the stock exchanges.
  6. Though classified as an equity, InvITs are more of a yield product and should be compared with debt or fixed income products.

Events after Listing:

  1. Currently the investment trust holds 7 toll road concessions costing around Rs.7500 Cr, with another addition proposed in FY 20 costing Rs.1500 Cr. with concession period extending up till 2041
  2. The first six highway projects were funded by equity while the seventh was funded entirely with debt sourced at 8.15%.
  3. Presently the InvIT is priced around Rs.70 declining over 28% since listing. (Reduced Issue Price 97.50)
  4. Liquidity constraint is one of the major contributors for decline in price.
  5. Top 2 projects contributing around 60% of total revenue have concession periods until Jan 2022, cash flow projections beyond that is uncertain.
  6. The toll revenue for Q1 FY19 of Jaipur Deoli and Pathankot Amritsar Project is affected due to lower mining traffic which may continue for Q2 as well.
  7. Conservative estimate for growth poised around 8-8.5%.
  8. New issuance of InvIT by L&T at a higher yield (priced @12% IRR. Canada Pension Plan Investment Board (CPPIB) has subscribed to 30% of the units).
  9. Distribution guidance for FY19 is 12.3%.

Outlook:

  1. The product is virtually perpetual in nature, with concession period extending up till 2041 (considering new addition in FY 20).
  2. Highly suitable for “Patient Capital”. Overseas investors still in the game, whereas short term investors have already stepped out, or are assumed to exit soon.
  3. Considering current price, the product appears suitable for very long-term investors.
  4. Current yield expectation of 13-15%, subject to traffic growth expectation over time appears to be rewarding.

 

What is in it for long-term Investors: 

For the last six quarters, InvIT has distributed income by way of interest. Going forward if growth assumptions are met, investors can expect dividend payment along with interest income. There is a possibility of capital appreciation if interest rates decline. Presently InvITs are available at a discount of 28% (Minimum lot in secondary market is 5000 units).

 

Distribution until now: (per Unit)

For FY 2018:

1st Distribution:             Rs. 1.55   (Rs. 1.05 as interest and Rs. 0.50 as Capital Reduction)

2nd Distribution:            Rs. 3.00   (Rs. 2.20 as interest and Rs. 0.80 as Capital Reduction)

3rd Distribution:            Rs. 3.00   (Rs. 2.20 as interest and Rs. 0.80 as Capital Reduction)

4th Distribution:            Rs. 3.00   (Rs. 2.20 as interest and Rs. 0.80 as Capital Reduction)

 

For FY 2019:

1st Distribution:             Rs. 3.05  (Rs. 2.25 as interest and Rs. 0.80 as Capital Reduction)

2nd Distribution:            Rs. 3.00 (Rs. 2.20 as interest and Rs. 0.80 as Capital Reduction)

 

Taxation

Interest Income:

Residents –  As per tax slab (withholding tax of 10%)

NRIs – As per tax slab (withholding Tax at 5% for NRIs – benefits under DTAA, shall be available)

Dividend:  

Tax Free in the hands of investor.

Capital Gains on sale of units:

Short Term Capital Gains: 15%

Long Term Capital Gains: Nil (If held for more than 3 years)

Capital Reduction:

To be shown as the adjustment to the investments value.

Superior Dollar Returns/Alpha over S&P 500 (U.S)

NIFTY (Popular Indian equity index) has delivered huge alpha (dollar terms) over S&P 500 (U.S) every time rupee depreciated beyond certain level.

In last 10 years, there were three occasions wherein rupee depreciated against dollar beyond 15% in a span of less than a year due to various reasons.

It is interesting to note that, NIFTY long trade initiated at the point (INR depreciated in excess of 15% against USD) has delivered up to 230% alpha over S&P 500 (U.s) in next one year.

Blog 1

In the last few months (Since February 2018), INR has depreciated against USD in excess of 15%.

Based solely on past observations, an Investor can look at Indian markets for alpha over US Indices during these periods.

Blog 2

 

Gold at Discount !!!!

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Indians treat Gold not just as an asset class but a symbol of prosperity. For ages it has been the traditional form of investment in India.

What if such a commodity can be bought at 10% discount? Current prices of Sovereign Gold Bonds (SGB) offer such an opportunity and these are listed on NSE. Unlike other forms of holding gold, SGBs offer an interest at 2.5% per annum.

(SGB maturing in Nov 24 (SGBNOV24) is available at 2756 per one gram against market price of 3080 as of prices quoted on 26th Sep

SGB route is a great form of exposure to gold compared with having Physical Gold or investment in Gold funds.

Gold is considered a natural hedge against inflation and a better bet in times of market volatility. One should allocate at least 5% to 10% of their investments in gold to bring down the volatility of their overall portfolio.

Advantages of Sovereign Gold Bonds over Physical Gold/Gold ETFs

  • SGBs offer 2.5% annual interest while physical gold is an idle asset and ETFs do not offer any interest.
  • SGBs can be held in De-materialized form or as a Certificate of Holding, hence no risk of theft and no wear and tear.
  • They can be redeemed at 999 purity while purity of gold ornaments/bars/coins is always suspect
  • Cost of holding is very cheap compared to physical gold which requires paying locker rents for safe keeping
  • Ornaments/Coins/Bars come with a making charge hence cost is much higher than actual value of gold, whereas SGBs come at market value.
  • SGBs are exempt from capital gains if held till maturity, whereas physical gold and ETFs attract long term capital gains.

 

SGB Scheme Features

Features
Sr no. Item Details
1 Issuer RBI
2 Eligibility Resident Indians – Individuals, HUF’s, Trusts, Universities & Charitable Institutions.
3 Tenor 8 Years (Exit option from 5th year)
4 Minimum Investment 1 Gram of Gold
5 Maximum Investment Individuals & HUF – 4 Kg & Trusts – 20 Kg per fiscal year
6 Interest Rate Fixed rate of 2.50% per annum, payable semi-annually on the amount of initial investment.

SGBs at a Discount

Presently, Sovereign Gold Bonds are trading at a discount to physical gold. This is purely because of liquidity. But if one is planning to hold the bonds till maturity one can expect to get a discount of around 10% to 12% on various maturities. This gives a great opportunity for investors who are planning investment in gold assets. They can reap the twin benefits of earning interest on their investments and tax exemption on capital gains. Many of us have the tendency of buying gold for a future event like child’s marriage. The jewelry so purchased may not be in vogue when the children grow up. Exchange of gold for newer designs incurs cost and loss of value. Investing in SGBs makes sense as full market value can be realized at the time of redemption.  

Likely Winners!!!!!!!

Winners

Steering your investments through equity markets at current market scenario in the backdrop of spiked volatility, stretched valuations and pre-election uncertainty, exposes your portfolio to higher risks. Trying to time the market at this juncture might set up more adverse bets. Since September 2017, we have experienced market peak towards January end and subsequent corrections of over 10% by March end. Encasing this market movement, we filtered scrips from Nifty 100 & BSE 200 Indices which outperformed market in both the scenarios. The filtered scrips were further validated across last 2 years performance vis-à-vis Indices. To encase the pre-election uncertainty, we filtered sectors which outperformed the Indices in past pre-election period i.e. 1 year prior to the outcomes of elections. We have identified 6 scrips in the Nifty 100 Index and 11 scrips in the BSE 200 Index which might outperform the Indices for the period of 1 year from now. The following table highlights the Scrips.

Table

To view the detailed report kindly click the below link:

Reports@wealthfirstfinserv

Disclaimer: The information, analysis and opinion contained herein pertain only to stock price action for the specified period. The information, analysis and opinion contained, (1) do not constitute investment advice offered by the issuer, (2) is solely provided for informational purpose and therefore is not an offer to buy or sell securities, (3) is not warranted to be correct, complete or accurate, (4) may not be copied or redistributed, (5) This report is an intentional literature, intended for information purposes only. The issuer shall not be responsible for any trading decisions, damages or other losses resulting from, or related to this information, data analysis and opinion or their use in any way.

Fixed Maturity Plans vs Fixed Deposits

FMP

Fixed Maturity Plans (FMPs) are closed-end debt funds having a fixed maturity period.

Unlike other open-end debt funds, FMPs are not available for subscription on a continuous basis.

A fund house comes out with a New Fund Offer (NFO) for a specific duration. NFO will have an opening date and a closing date. Upon expiry of the closing date, the offer to invest ceases to exist. The offer document indicates the instruments in which the fund proposes to invest as well as floor & ceiling within 5% range of the intended allocation.

FMPs usually invest in debt instruments like Treasury Bills, Commercial Papers, Certificate of Deposits, Government Bonds, Corporate Bonds, and Bank Fixed Deposits.

Based on the duration of the scheme, fund manager allocates the money in instruments of similar maturity. Unlike other debt funds, the fund manager of FMP follows a buy and hold strategy. There is no frequent buying and selling of debt securities like other open-end debt funds. This helps keep the expense ratio of FMPs at lower level vis-à-vis other debt funds. (average expense ratios are around 0.4%)

FMPs and FDs have lot of similarities between them. Both require you to stay invested for a fixed duration. Both of them are available in varying maturities to suit your convenience.

However there is a difference when it comes to returns perspective. FDs offer a guaranteed return while FMPs show an indicative return. It means that the return offered by FMPs is not assured but only indicative in nature. There is a chance of actual returns being higher or lower than the returns indicated.

Fixed Deposits Fixed Maturity Plans
Returns Guaranteed returns Indicative returns
Maturity Varying maturity periods Varying maturity periods
Liquidity Ease of premature redemption, higher liquidity Restricted liquidity
Tax Efficiency Interest income is added to your annual income and taxed as per the applicable slab. FMP Dividend – a Dividend Distribution tax is levied

FMP Growth – Capital gains tax apply

Tax Efficiency:

One can avail indexation benefit on capital gains if FMPs are held for more than three years. Indexation benefit is not available for Fixed deposits. Thus FMPs become more tax efficient if held for more than three years.  FMPs are suitable vehicles for investors who fall in the higher income slabs.

Most FMP NFOs offered during the month have a tenor of 37 months and beyond. So the maturity typically extends to FY 2021-2022. Thus inflation index pertaining to FY 2021-2022 is reckoned for calculating cost of acquisition. Even if one assumes an average cost inflation index of 4% per annum for next 4 years, indexation benefit of 16% will be available for the investor. If inflation indexation for next four years is an average of 5% per annum, then cost of acquisition is 20% higher and one may end up  paying only a nominal amount as capital gains  tax on the income earned.

Look for the investment objective of the scheme, indicative yield and investment strategy. Once you are in sync with these, invest an amount that you can leave invested for three years or more to reap the benefits of tax efficient returns.

 Illustration:

FMP Vs FD

 

Stay Invested

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Stay Invested :

It is but a common tendency that investors become restless when the schemes they invested into do not perform as per their expectations. One should bear in mind that a scheme may not perform in the short term but may give a better return in the long term. So it is important that investors take a decision of moving out of a scheme only after observing the performance of the scheme vis a vis a benchmark or a peer at least for a period of 8 quarters. The following points need to be considered while shifting between the Funds:

  • Does the scheme return consistently beating the inflation?
  • Does the existing investment outperforming against benchmark/Other Peers?
  • How long did you stay invested in the current scheme?
  • Associated Cost & Reinvestment risks?

 

  1. Does the scheme return consistently beating the inflation: The ultimate objective of investing in Equities via Mutual Fund route is to beat the inflation. If your scheme returns are not beating the inflation consistently, then you may consider moving to a better performing scheme with similar investment objectives.
  2. Does the existing investment outperforming against benchmarks /Other Peers: Quite often we come across investors who are unduly worried about the performance of their MF schemes. The non-performance could only be a short time phenomenon. It is not every time your fund’s performance would be the best among the categories. For Example: In a Cricket match, it is not always that Australia would win every international tournament. At times they also underperform in the tournaments and it doesn’t mean that they will not perform well in future. Similarly in Capital Markets, every day is a new match and every quarter a series. One may need to consider moving into a better performing scheme only when the scheme performance is consistently below the category average/benchmark.
  3. How long did you stay invested in current scheme: Timing the market is a very difficult art. Instead time in the market is within the investors’ control. It is observed that long term investments ride off volatility and give steady returns. At times we see investors who had invested six months back that too in SIP mode, get restless as their investments are turning negative or underperforming other peers. In mutual funds one needs to stay with a scheme for at least 2 years. Even after 2 years if the scheme continues to underperform the peers/benchmark then one should exit the scheme and move to a better performing one.

Associated Cost & Reinvestment risks: Frequent churning of portfolio is not advised. Whenever investors are thinking of shifting the investments from one fund/scheme to another fund/scheme, they need to understand the most important risk i.e. Reinvestment risk associated with it. Also he should note the cost associated with it in the form of Exit loads. The time lag from redeeming and reinvesting may sometimes alter the NAVs such that one may end up reinvesting at a higher NAV thus impacting the overall performance of the portfolio. There were many instances when the scheme from which one has exited starts performing well and the one entered not doing well. So it is paramount that one should track the performance atleast for 6 quarters before taking any decision.

Asset Allocation Strategies

 

goals_and_strategies

Asset Allocation strategy is a dynamic process. It plays a key role in determining the overall risk return of the portfolio. A model portfolio looks something like this:

Equity: 70% Debt: 10% Real Estate: 15% Gold: 5%

Asset

However there is no one ‘fit for all’ solution. A portfolio’s asset mix should reflect the long and short term financial goals at any time. Let us dwell upon a few strategies of establishing asset allocations and examine their basic management principles.

Strategic Asset Allocation:

This method is based on the over-all expected return of the portfolio. It adheres to a proportional mix of assets which together would give the expected return. If one aims at a return of 13% on his portfolio and if stocks  historically have given an annual return of 15% and bonds 8%, then a mix of 60% in stocks and 40% in bonds would help him achieve his goal of 13% return. Since equity markets are volatile a portion of the investments are kept in bonds thus reducing the risk. This is the simplest and passive investment strategy of all. It is a buy-and-hold strategy, and a shift in values of assets causes a drift from the initially established expected return.

Constant Weighting Asset Allocation:

A constant-weighting approach to asset allocation addresses the problem of undue variations in the expected return. This approach needs continuous rebalancing the portfolio depending on the shift in values of the asset classes.  If one asset has decreased in its value you will buy more of that asset, and if the value increases you sell a portion of it. This helps in rebalancing the portfolio and the expected returns are in tune with the financial goal. There is no hard-and-fast rule for timing portfolio rebalancing. A common rule of thumb is that whenever an asset class moves by more than 5% in value, we will rebalance the portfolio such that the original expected return is maintained.

Tactical Asset Allocation:

This is a moderately active strategy. While the asset allocation is strategized in tune with long term financial objectives, a portion of the assets is positioned in such a way as to benefit from any short term profit opportunity. Overall strategic asset mix is returned to, once the desired short term profits are achieved.  This strategy demands a lot of discipline and one should be well versed with markets to recognize when short-term opportunities have run their course, and then rebalance the portfolio to its long-term asset position.

Dynamic Asset Allocation:

This is a very active asset allocation strategy. This is polar opposite of constant-weighting strategy. With this strategy one would sell assets that are declining and buy assets that are increasing in value. For example, if the stock market is showing weakness, you sell stocks in anticipation of further correction in the market; and if the market is bullish, you buy stocks expecting further gains in the market.

Insured Asset Allocation:

This strategy involves in establishing a base portfolio value, below which the value should not be allowed to drop. An active management strategy is exercised to increase the return on portfolio as much as possible provided the portfolio stays above the base value.  If the portfolio should ever drop to the base level, you invest in risk-free assets so that the base value becomes fixed. This strategy may be suitable for risk-averse investors who desire a certain level of active management but understand the security of establishing a guaranteed floor below which the portfolio is not allowed to decline. Investors who wish to maintain a minimum standard of living post retirement can look at this strategy.

Conclusion:

Asset allocation strategy depends on the investor’s financial goals, earning capacity, age and risk tolerance profile. It can be an active process to varying degrees or strictly passive in nature. The above strategies are only general guidelines on how investors can use asset allocation as their core strategy in wealth creation or income generation.

Asset Allocation – The most important aspect is always missed out!!

Asset-allocation-strategies

The year 2017 has been a fabulous year for equity investors. BSE Sensex has given a return of 28.05% whereas Nifty 50 has delivered 28.69%

There will be a natural inclination for all those investors who missed the bus to think shifting their investments from other asset classes to equity and equity related Mutual Funds. This may skew the risk-reward unfavorably if markets do not perform as expected. This is where they need the professional advice of a Financial Planner in getting their investments allocated proportionately to various asset classes.  This approach optimizes the return while reducing the risk on the portfolio.

What is Asset Allocation?  

It is an investment strategy that attempts to balance risk versus reward by adjusting the percentage (weights) of each asset in the investment portfolio based on the investor’s risk appetite, financial goals and the time horizon to reach these goals. A Financial Planner looks at different asset classes and how they respond to market events. The trick is to allocate your resources among different asset classes which do not respond the same way to market forces, i.e., they do not have similar co-relation. A proper asset allocation reduces the volatility of the portfolio.

Asset allocation will vary from one investor to another. An aggressive investor can look at investing 75% in equity and equity related mutual funds, 20% in Fixed Income funds and 5% in gold, while a risk averse investor may look at investing more into low risk assets like Fixed Income. It mostly depends on the need and risk profile of the individual.

A retired person may invest a significant portion of his savings in a Fixed Income portfolio which generates a steady source of retirement income. His need is to preserve what he has while living on the proceeds. Growth is not a consideration for him. However, a young corporate employee will be looking at building wealth and can afford to be an aggressive investor and allocate most of the resources to Equity.

While there is no fixed formula for asset allocation, a prudent investor can look at 60% in Equity, 30% in Fixed Income, 5% in gold, 5% in bank deposits.

Pitfalls one should avoid while preparing the Asset Allocation:

Ignoring short term funds requirement (Emergency or Contingency Fund):  Investors tend to invest their entire surplus without allocating for contingencies. An amount to take care of the investor’s present life style for at least 6 months should be set aside as a cushion. This could be for contingencies like loss of job, medical emergencies etc., It is suggested that this amount is invested in ultra short term debt funds or liquid funds..

Over weightage on Physical assets: It is a general tendency to acquire physical assets as these give a false sense of security.  Over weightage to Physical assets, particularly real estate, runs the risk of illiquidity and is very opaque in pricing.

We will talk about the various asset allocation strategies next week. Happy investing…….