We are pleased to present “NRI Espresso”, a handy newsletter just for our esteemed NRI investors for the month of July 2011. It is our constant endeavour to serve your growing information, investment and servicing needs and the newsletter is created just for this purpose. This newsletter will be a collection of relevant articles of special interest to you. These include latest news, events, regulatory changes, and information on product offerings. 'NRI Corner', an exclusive section has also been created on our website for your mutual fund information and investment needs.
1. Economy News
RBI extends time limit for FCCB buyback
The Reserve Bank of India today extended the time limit for buyback of foreign currency convertible bonds (FCCB) issued by Indian companies up to March 31, 2012, at discounted rates. The discount rates have been decreased from 15 to eight per cent for premature buyback under the automatic route and from 25 per cent to 20 per cent under the approval route.
RBI eases norms on share issue against capital goods import
The Reserve Bank of India (RBI) said equity and preference shares could be issued to overseas parties, in cases dealt by the Foreign Investment Promotion Board (FIPB), for money payable for importing capital goods and pre-operative expenses.Foreign direct investment (FDI) in activities not covered under the automatic route requires prior approval of the government. Such proposals are considered by FIPB. The existing norms for issuing equity and preference shares under the government route had been reviewed, RBI said in a communication to banks.
India-Malaysia economic pact becomes operational
India's exports of basmati rice, motorcycles and cotton garments will get greater market access in Malaysia. In addition Indian professionals including chartered accountants, architects and medical practitioners will be able to provide their service in that country more freely on a temporary basis. This follows the India-Malaysia Comprehensive Economic Cooperation Agreement (CECA) becoming operational from July 1. The Agreement liberalises trade in goods, services, investments and other areas of economic cooperation. It aims to boost bilateral trade to $15 billion by 2015 from the current level of $10 billion, the Ministry of External Affairs said in a statement.
Gujarat to invest Rs 635 cr in tourism
The Gujarat government will invest Rs 635 crore for infrastructure development and tourism promotion over the next three years, according to Mr Vipul Mittra, Secretary, Tourism and Civil Aviation, Gujarat. Talking to Business Line on the sidelines of a road show to promote the Saputara Monsoon Festival, Mr Mittra said that the tourism budget was enhanced to Rs 200 crore this year to enhance the tourism potentials of the state and bring Gujarat on the international tourism map.
Indian consumption to grow 14% in 3 years: Study
Consumer durables, automobiles, food and personal care products have the maximum growth potential in the country as multinationals shift focus to Asia Pacific and Latin America to drive up their sales, says a study. And Indian consumers will maintain their spending spree despite challenges such as rising prices and higher interest rates, according to an Ambit Capital Research report.
2. Mutual Fund & NRI News
Regulatory Developments – Indian Mutual Fund
• Government detailed the final structure of the infrastructure debt funds, adding that the infrastructure debt funds will be either backed by mutual funds or by non-banking financial company (NBFCs).
o The funds backed by mutual funds will have a trust-based structure, while those backed by NBFCs will be company-based.
o RBI is likely to allow domestic banks to participate in the proposed infrastructure debt funds as sponsors through their mutual fund arms.
• Joint Secretary in the Finance Ministry said that the government has given its approval to foreign retail investment in mutual funds schemes up to $10 bn, adding that SEBI will now issue the notification on framework by August 1.
• SEBI asked mutual fund houses to declare the number of unique investors in every scheme to ensure de-duplication of folios.
• SEBI is planning to cap the life of a MF licence to just one year from the date of issue as it aims to avoid a firm with poor finances to begin operations and put investors money at risk.
• SEBI expressed concern over the unfamiliarity of independent financial advisors in the mutual fund business with the alternate distribution channel of 2 lakh exchange terminals across the country.
• SEBI wanted fund houses to attract the untapped mass of risk-averse small investors through Exchange Traded Funds on fixed income.
• A SEBI panel has proposed a fixed transaction fee of Rs 100 on fresh mutual fund investments.
3. Market Overview
Easing commodity prices particularly crude oil, hopes on resolution of Greek crisis and government announcement of increase in retail fuel prices along with duty rationalization on petro products led to a recovery in the market. The BSE Sensex recouped the losses towards the month-end and closed 1.85% higher. FIIs poured over a billion dollar in last 5 trading sessions and that has made them a net buyer of Indian equities for year till date.
Greek vote of affirmation on austerity measures amidst massive public protest has come as a sigh of relief for global markets. But given the structural issues and lack of growth drivers, the crisis has been avoided for the time being and not completely resolved. Problems in peripheral Europe will continue to hound markets for quite some time, in our view.
Our view has been that moderation in global economic growth, monetary tightening in emerging economies, end of quantitative easing by US Federal Reserve and unwinding of speculative positions would lead to softening in commodity prices. Nymex crude oil price has fallen by 17% over the last 2 months. Industrial metals and several other commodities have witnessed price declines. This augurs well for Indian economy and corporate profitability. Pressure on margins on account of increase in input prices, wages and interest rates was evident in quarterly earnings. Though the WPI back data is steadily being revised upwards and is likely to witness further uptick next month on the back of increase in fuel prices, fall in global commodity prices will help in soothing nerves about inflationary expectations.
The Indian Meteorological Department (IMD) announced that rainfall during the current South-West monsoon would to be ‘below normal’ marking a downgrade from its earlier ‘normal’ forecast. Globally, agri-commodity prices have softened recently and with record food grain stocks with the government, food price inflation on a high base of last 2 years is expected to remain under control. However, markets would be closely watching progress of Monsoon as any shock on food prices could aggravate the inflation and fiscal situation.
Global uncertainties, lag effect of monetary tightening, policy gridlock and slowdown in fixed capital formation would take a toll on growth expectations, in our view. The eight core infrastructure industries registered a disappointing growth of 5.3% in May 2011 compared to 7.4% in May 2010. In cumulative terms, core infrastructure industries registered a slow growth of 4.9% in April-May 2011-12 as against 7.9% during the corresponding period of the previous year 2010-11. Slowdown is also evident in discretionary spending as growth in auto sales has moderated sharply.
Though RBI is likely to increase policy rate by 25 bps in next policy setting meeting, we are getting closer to the end of tightening cycle as growth momentum seems to be tapering off. Our bigger worry is on the fiscal side where mounting subsidy bill and shortfall on revenue side and disinvestment targets could lead to slippages to the extent of 0.5% of GDP. As government borrows more money in the second half of financial year, it could crowd out private investment.
As a result of unearthing of a series of scams, the country has been facing policy impasse for almost a year. The governments’ attention has got diverted to managing the political situation and public uproar and there is a sense of inertia within the bureaucratic system. Judiciary and media have been more active while executive working has been in a state of gridlock. This has resulted in severe loss of confidence among business community and getting reflected in slowdown in capital formation. FDI inflows have fallen sharply while Indian corporate houses are looking overseas for further growth as doing business locally is becoming tough. Roll out of GST and Direct taxes code seem to be getting deferred. On top of all these, global uncertainties, high inflation and tight monetary conditions have made matters worse for the corporate India. In this environment, stock market would surely reward companies with stronger balance sheets, high capital productivity and free cash flow generation and having visibility of growth with pricing power. The premium that investors are paying for these attributes has never been so high in recent history. Is this trend likely to change? Our answer would be yes but the key is getting the timing right. Given the current environment and macro headwinds, it may be little early to turn contrarian but the pay-off as and when the trend turns could be quite handsome.
While markets may remain volatile for some more time for the reasons discussed above, we recommend investors to use this as an opportunity to increase exposure to equities in a gradual manner. The long term fundamentals of Indian economy and structural drivers of growth remain intact while valuations are reasonable and in line with historical average.
RBI continued with its anti inflationary monetary policy stance and raised repo and reverse repo by 25 bps points to 7.50% and 6.50% respectively in its policy setting meeting on June 16. This was the 10th rate hike since last year. Wholesale Price Index (WPI) for May at 9.06% came in higher than market expectations and more worrisome was core inflation that was at 7.30%. RBI mentioned that inflation continued to remain its primary concern while there was no evidence of a broad-based deceleration in economic growth. RBI believes that underlying inflationary pressures are not fully captured in the headline number. In fact, the pass-through of higher global energy prices is yet to be factored in. RBI acknowledged that the monetary tightening so far has been effective in checking aggregate demand, but rightly appears ready to sacrifice some near-term growth for stronger sustainable medium-term growth in a lower inflation setting.
The month of June continued to witness the usual tightness on account of advance tax outflows of around Rs.30,000 crores and due to the quarter end demand for funds. Despite the tightness, short term money market rates fell as mutual funds having enough maturities during the month bought aggressively. As far as liquidity situation is concerned, the worst seems to be behind us as structural mismatch in credit-deposit ratio is getting corrected.
The 10 year government bond touched a low of 8.19% before closing at 8.33% during the month. Post RBI policy announcement, government bonds reacted negatively, but rallied thereafter with global environment supporting risk free assets in the wake of Greek crisis. US treasuries touched a low of 2.87% before closing the month at 3.16%.
Bond yields are unlikely to soften much from current levels in the immediate term in view of hawkish stance of RBI and continued supply pressure from government. However, we believe that RBI is near the end of tightening cycle in terms of policy rates and global environment is turning positive for bonds. While the near term pressures are evident, inflation could moderate in medium term given that global commodity prices are showing signs of cooling off. With the past rate hikes taking effect, we could witness some slowdown in growth targets forcing the RBI to soften its stance. But we are more concerned about the fiscal side where mounting subsidy bill and shortfall on revenue side and disinvestment targets could lead to slippages to the extent of 0.5% of GDP. The additional borrowing by the government in second half will keep the downside in yields checked.
Though market may remain in a trading zone for some more time, we believe that investors with risk appetite and longer horizon should consider investing in Dynamic bond fund. There would be trading opportunities both in G-sec and credit markets while core portfolio of short term assets would offer decent accrual income. Investors should take advantage of high short term yields by investing in accrual products like short term funds and Fixed Maturity plans.
4. Personal Finance
Systematic Investment Plan (SIPs)
Systematic Investment Plan popularly known as SIP is a method of investing a fixed sum, regularly, in a mutual fund scheme. It is very similar to regular saving schemes like a recurring deposit. SIP allows one to buy units on a given date each month, so that one can implement a saving plan for themselves. A SIP is generally preferred for an equity scheme and can be started with as small as Rs 500 per month.
The biggest advantage of SIP is that one need not time the market. In timing the market, one can miss the larger rally and may stay out while markets were doing well or may enter at a wrong time when either valuation have peaked or markets are on the verge of declining. Rather than timing the market, investing every month will ensure that one is invested at the high and the low, and make the best out of an opportunity that could be tough to predict in advance. SIPs thus make the volatility in the market work in favour of an investor and help in averaging out the cost called “Rupee Cost Averaging”.
For example, with Rs 1,000 one can buy 50 units at Rs 20 per unit or 100 units at Rs 10 per unit depending upon whether the market is up or down. Thus, more units are purchased when a schemes’ NAV is low and fewer units when the NAV is high. Hence, when the two cases are taken together, cost is averaged out. The longer the time-frame, the larger the benefits of averaging.
SIPs also help in availing benefits of compounding. This means the earlier one starts an SIP and longer the investment horizon, the larger the benefits. The reason being, each rupee one invests earns a return, which ends up as more rupees to earn a return, allowing investment to grow at a fast pace. Higher rates of return or longer investment time periods increase the principal amount in geometric proportions. This is the single most important reason for investors to start investing early and keep on investing on a regular basis to achieve the long-term financial goals.
The table below illustrates benefits of SIP investing and that of compounding over the long term with different rates of return and different time periods. For e.g. if an investor begins early in his career and invests Rs 2,000 through SIP every month, he or she would invest Rs 6 lakhs over 25 years as the principal amount. This amount will grow to Rs 65 lakhs at a conservative compounded annualised growth rate (CAGR) of 15%. At a higher CAGR of say 20%, the amount will grow to Rs 1.71 cr over 25 years. This is the power of compounding and of rupee cost averaging. This amount can be further higher if the SIP amount increases every year as one’s income rises. For higher amounts, such as investing Rs 5,000 through SIP over 25 years would generate Rs 1.63 cr at a CAGR of 15% and Rs 4.26 cr at a CAGR of 20%.
Unlike direct equity investing, wherein one must be in constant touch with the market as well as invest fairly large amounts to buy good scrips; this is not the case with SIPs which not only takes care of the investment quality through professional fund managers but also makes investors more disciplined in their savings thus leading to wealth accumulation. For non-resident Indians (NRIs), the SIP facility provides an ideal opportunity to invest in the high growth domestic market. To invest, they need to have a NRI bank account and fill out the relevant documentation for investing in a mutual fund.
Disclaimer: In the preparation of the material contained in this document, the AMC has used information that is publically available, including information developed in-house. Information gathered & material used in this document is believed to be from reliable sources. The AMC however doesn’t warrant the accuracy, reasonableness and/or completeness of any information. For data reference to any third party in this material, no such party will assume any liability for the same. Further, all opinions included in this newsletter as of date & are subject to change without any notice. All recipients of this material should seek appropriate professional advice and carefully read the offer document and before dealing and or transacting in any of the products referred to in this material make their own investigation. The Fund, the AMC & Trustees and any of its directors, officers, employees and other personnel shall not liable for any loss, damage of any nature, including but not limited to direct, indirect, punitive, special, exemplary, consequential, as also any loss of profit in any way arising from the use of this material in any manner whatsoever. The recipient alone shall be fully responsible / are liable for any decision taken on this basis of this material. This newsletter is prepared for distributor and private circulation only. The distributor will abide by the regulation/ code of conduct issued from SEBI/ AMFI from time to time.
Risk Factors: Mutual Funds and Securities Investments are subject to market risks and there is no assurance or guarantee that the scheme's objectives will be achieved. As with any other investment in securities, the NAV of the Magnums/Units issued under the scheme(s) may go up or down depending upon the various factors and forces affecting the securities market. Past performance of the Sponsor/AMC/Mutual Fund/Scheme(s) and their affiliates do not indicate the future performance of the Scheme(s) of the Mutual Fund. The names of the scheme(s) do not, in any manner, indicate either the quality of the scheme(s) or their future prospects and returns. For scheme-specific risk factors please refer to the offer document of the scheme. Please read the offer document before investing.
Statutory details: SBI Mutual Fund has been set up as a trust under the Indian Trusts Act, 1882. State Bank of India ('SBI'), the sponsor is not responsible or liable for any loss resulting from the operation of the schemes beyond the initial contribution made by it of an amount of Rs. 5 lakhs towards setting up of the mutual fund. Asset Management Company: SBI Funds Management Private Limited (A joint venture between SBI and AMUNDI) -191, Maker Tower 'E', 19th Floor, Cuffe Parade, Mumbai 400 005. Trustee Company: SBI Mutual Fund Trustee Company Pvt. Ltd. Mutual Fund investments are subject to market risks. Please read the Offer Document carefully before investing.