We are pleased to present “NRI Espresso”, a handy newsletter just for our esteemed NRI investors for the month of June 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
Two MoUs on skill development signed with Germany
India has signed two memoranda of understanding (MoUs) with Germany for promotion of skill development in the country. The first MoU is between National Skill Development Corporation (NSDC) and iMOVE of Germany. The second is between ILF&S Cluster Development Initiative Ltd and Handwerkskammer Rhein-Main (Rhine-Main Chamber of Skilled Crafts). The MoUs were signed by Germany's Federal Minister of Education and Research, Dr Annette Schavan, and the Union Minister of Labour and Employment, Mr Mallikarjun Kharge, here on Tuesday.
India's exports rise 34.42% in April 2011
Exports jumped 34.42% in April 2011 to $ 23.8 billion continuing the fast paced growth of the previous fiscal. Imports, too, continued to rise although at a lower pace of 14/13% to $32.8 billion. The trade deficit for April 2011 was estimated at $ 8.98 billion which was lower than the deficit of $ 11.02 billion during April 2010. Oil imports during April, 2011 were valued at $ 10.18 billion which was 7.7% higher than oil imports of $ 9.45 billion in the corresponding period last year. Non-oil imports during April, 2011 were estimated at $ 22.64 billion which was 17.3% higher than non-oil imports of $ 19.31 billion in the previous year.India's exports grew a record 37.6 percent in the 2010-11 fiscal year due to high growth in the engineering sector, gems & jewellery and petroleum products.
Double taxation avoidance pact with Mozambique notified
India has notified the double taxation avoidance agreement (DTAA) with Mozambique on Tuesday. This agreement will provide tax stability to the residents of both the countries and facilitate mutual economic cooperation, stimulate the flow of investment, technology and services. The DTAA provides that business profits will be taxable in the source State if the activities of an enterprise constitute a permanent establishment in the Source State. Examples of permanent establishment include a branch, factory, office, place of management etc.
Forex reserves up $1.68 b on currency revaluation
The country's foreign exchange reserves increased by $1.681 billion to $310.215 billion for the week ended May 27, mainly on account of currency revaluation. This is the second week in a row that forex reserves have increased.
In the earlier week ended May 20, forex reserves had increased by $1.041 billion to $308.534 billion.
Irda releases M&A guidelines for general insurance firms
The Insurance Regulatory and Development Authority (Irda) today released regulatory guidelines for mergers and acquisitions (M&As) for non-life insurance companies. Insurance companies looking for mergers would now have to take the approval of the relevant high court or tribunal before securing the final nod from the insurance regulator. The solvency margin of the merged entity would also have to meet regulatory requirements.
2. Mutual Fund & NRI News
Regulatory Developments – Indian Mutual Fund
• SEBI asked fund houses to furnish data on all debt oriented schemes launched in April-December 2008 as it suspects that many may not have adhered to proper accounting norms.
• SEBI asked asset management companies (AMCs) to inform it urgently about the steps taken by them with respect to their role in ensuring better corporate governance of listed companies.
• SEBI also told fund houses to inform the investors on an urgent basis about their support or opposition to various business decisions of the companies.
• SEBI notified all mutual funds to provide an option to the investors to receive allotment of MF units in their demat account while subscribing to any scheme (open ended/close ended/interval) from October 1, 2011.
• SEBI also advised AMCs to obtain ISIN for each option of a scheme and quote the respective ISIN along with the name of the scheme, in all Statement of Account/Common Account Statement (CAS) issued to the investors from October 01, 2011 onwards.
• SEBI Chairman said that he does not intend to reverse the rules that restricted the ability of mutual funds to pay commissions to distributors.
• Among future proposals, SEBI panel is considering a new incentive model, wherein investors could be asked to pay a service fee and commissions would be borne by AMCs.
• The government is planning to set up a new class of investors, Qualified Foreign Investors (QFIs), to encourage the flow of foreign capital into MFs.
• A senior Finance Ministry official said that the government is likely to cap investment by non-institutional foreign investors in equity schemes of asset management companies at $10 bn.
3. Market Overview
Most of the equity indices globally were in red in May and India was no exception. Foreign Institutional Investors (FIIs) were sellers to the tune of $ 1.5 billion and Sensex lost 3.31% to close at 18503. Midcaps outperformed large caps during the month. The macro environment has been a cause of concern given the stickiness in inflation and deceleration in growth momentum. Quarter IV FY2011 (March 31, 2011) GDP growth slowed to 7.8% primarily due to a deceleration in fixed investments. For the financial year FY 2010-11, the GDP growth was revised downward to 8.5% from 8.6%. The deceleration in fixed investments, which commenced in 2QFY2011 due to policy uncertainty, continued in quarter four with growth slowing to 0.4%. The situation on the inflation front remains worrisome as the increase in global crude oil prices is yet to be passed on to consumers (with the exception of petrol). Inflation is expected to remain elevated over the near term, particularly as local fuel prices are raised, and global commodity prices (especially oil) remain high. In the near term, headwinds from higher commodity prices, tight monetary stance and uncertainties on the policy front could have a dampening effect on the growth trajectory. However other indicators such as tax collections, corporate sales, credit off take and exports growth indicate positive momentum.
Corporate earnings season for quarter ending March 2011 was concluded in the month of May. Aggregate adjusted earnings growth for the benchmark BSE Sensex companies at 3% yoy was significantly lower than expectations. The weak performance could largely be attributed to a substantial miss by some of the key index heavyweights. Excluding these, growth was relatively healthy at 12% (and more in line with consensus expectations). While revenue growth remained robust, the margins disappointed. Revenues rose a robust 25% yoy (ex Energy). But rising input costs took a toll on profit margins across sectors. The consensus earnings growth estimates for FY2012 are at 20%. We firmly believe that for an emerging economy like India where penetration levels, across sectors, remain very low the parameter to focus on may not necessarily be margins alone but earnings growth as well. As long as strong revenue growth feeds through higher net profits, we would not be overly concerned. Considering that India has just started to reap the benefit of demographic dividend, we think domestic consumption including consumer staples and consumer discretionary are long term winners in the game. We are quite positive on healthcare sector which has opportunities both in global as well as domestic markets. FY2011 trade data peg exports touching US$246bn up 38% YoY – significantly higher than the government target of US$200bn. Going forward, a combination of external factors might temper export growth, however, we believe that a renewed thrust on exports is positive for the economy as a whole and particularly for plays in the engineering, automobiles, pharmaceuticals and refining space.
Indian investors have been staying largely away from the equity markets for almost three years. While both wealth and income effect suggests that higher allocation towards equities is just a matter of time. Higher interest rates and volatility in the markets have been a dampener for flows into equity funds. However, we expect the trend to change in second half of this year. The positive triggers that the market has been waiting for is primarily big push from the government on the reforms front and softening of global commodity prices and consequently inflation in India. After the state elections results in which left parties have been voted out in their strongholds like Bengal and Kerala, expectations have increased that the government would now step up on the reforms agenda. The upcoming Monsoon session of the Parliament could see more bills being tabled, including the key GST, Land acquisition, mining and FDI in Insurance and Retail. The Government has also showed some strong intent in addressing the scam allegations, with several high profile arrests in the last month. Markets would also be watching progress of Monsoon closely. Poor monsoon could not only make the inflationary situation worse and complicate problems for the RBI; it would put tremendous pressure on government finances as subsidy bill mounts So far, the indications are that monsoon is likely to be normal this year. While the volatility in equity markets is likely to continue for some more time, valuations of companies have corrected sufficiently and there is value emerging at lower levels. Over the next few months, as markets deal with uncertainties on the global as well as domestic front, investors should take advantage of the volatility and increase allocation to equities in a gradual manner.
The RBI monetary policy actions which focused on an inflationary stance delivered a larger than expected rate action of 50bps as compared to the market consensus of 25bps. The latest hike was the ninth increase since the RBI began hiking rates in early 2010 and has effectively raised policy rates by a total of 400bp. The 50bp is the first of that magnitude in the current tightening cycle and the tone of the policy statement remains hawkish. The RBI acknowledged that the monetary tightening so far has being 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 monetary stance and the weekly supply of bonds in an environment of resurgence of inflationary concerns led to an up move in bond yields over the month. The movement of short term rates has charted the liquidity scenario. The government cash balances with the RBI have moved from large surplus positions till March 2011 to huge borrowings under Ways and Mean advances (WMA) in the current financial year so far. Huge tax refunds and the draw down by states have resulted in Government borrowings under WMA staying above the limits. This has resulted in government resorting to issuance of Cash Management Bills, and higher issuances of regular Treasury bills. We expect that the liquidity situation could remain tight on the basis of higher issue of T-bills and the regular Gilt auctions. This could result in short term yields remaining elevated and having an upside bias in the near term. Our Fixed Income schemes had maintained a lower duration leading into the monetary policy. Subsequent to the up move in yields, we have been incrementally adding duration, primarily with a trading view in the long term funds. The elevated short term rates provide a good investment opportunity in accrual based products such as liquid, ultra short and Fixed maturity plans.
The near term outlook for Debt Mutual Funds would also be shaped by the regulatory guidelines which could impact flows into the funds. The RBI has recently capped the investments overall by a bank in Debt Oriented Mutual Funds at 10% of the Net Worth. The dividend distribution rate for corporate investors in Debt funds would also be aligned to that in Liquid Funds from 01st June 2011.
4. Fund Focus – Thematic Funds
The Indian mutual fund industry has always believed in innovating and responding to the changing dynamics of the market. ‘Thematic funds’ is one such group that is gaining popularity by an increasing focus within Asset Management Companies (AMCs) to differentiate their offerings to investors. A strong distribution push, coupled with investor appetite for enhanced returns, has driven the growth of thematic funds in the country.
By definition, thematic Funds are mutual fund schemes that aim to capitalize on a particular theme or idea that runs across sectors. The strategies followed by such funds may include investment based on a particular investment style or a specific investment segment or a specific investment sector. For example, “infrastructure” oriented funds was among the most popular themes during the bull phase that began in 2003. The theme mandated schemes to invest across various sectors associated with infrastructure, such as construction, railways, telecom, among others. The underlying assumption was that the “India Growth Story” would see the infrastructure sector being the largest beneficiary. Besides this, consumerism, banking and financial services, agriculture, arbitrage, contrarian strategy, dividend yield, were some of the other themes that fund houses have explored.
Looking back, the need to launch thematic funds arose after the dotcom bust of 2000. During the dotcom phase, mutual funds had largely come out with IT sector funds. When the IT bubble burst, funds realized that investment risks were much higher in a sectoral fund due to concentrated portfolios as choice of stocks was restricted. This gave birth to thematic funds with a view to broad base investment choice for fund managers as well as to diversify risk seen in sectoral funds. Thus, thematic funds have a key advantage of investing in more than one sector as well as achieve a close to diversified portfolio. Also, thematic funds can take advantage of a sector when it doing well and reduce the exposure to this sector in bad times. At the same time, it can switch to another profitable sector as well, in line with the theme.
Riding on the superlative growth of well performing sectors, thematic funds strive to provide superior returns to investors. Riding on the superlative growth of well performing sectors, thematic funds strive to provide superior returns to investors. For instance, the infrastructure theme which focused on core sectors of the economy topped the returns chart in the period January 2007- May 2008 and even outperformed diversified equity schemes. These funds gave an average return of 26% compared to 16% by diversified equity funds. The same analysis when conducted for the latest 1-year period ended May 2011 reveal that funds with Banks, FMCG and Healthcare gave better returns than diversified equity funds that gained at an average of 7% during the period. They also beat returns of the S&P CNX Nifty of 9%. Thus thematic funds could offer a dual advantage of good returns as well as portfolio diversification for investors if one chooses the apt theme.
Thematic funds also come with a set of risks. First and foremost, investors must be well informed about the theme they choose as well as the specific risks associated with the theme. It would be advisable to choose broad based themes compared to narrow themes as the latter may have a shorter life. One must also note that a thematic fund may not suit one’s core portfolio of schemes but should be more of an “alpha generation” strategy for returns enhancement. Investors should invest in thematic funds so as to aid their diversified portfolio of mutual funds to earn higher returns and benefit from the uptrend in the chosen theme. Thematic funds require investors to keep a close watch on performance of the scheme and take a rational decision if the theme is not expected to do well.
In conclusion, at any given time there is generally one theme in the market which may find greater investor interest due to the prevalent macro-economic conditions. Therefore allocating a smaller part of the portfolio to such schemes as an add-on to the core portfolio of diversified schemes would help investors to enhance their returns. Investing in thematic funds depicts cyclical patterns and witness significant value erosion during a downturn but opposite is also true in bull phase wherein it can give superior returns. Hence investors must take an informed decision on the choice of a broad theme that is apt for the current times.
SBI PSU Fund is an excellent example of 'Thematic Fund'. To know more about the fund click here
5. Feature Article – Impact of inflation in making investment in equity market
Inflation depicts an upward movement in the general level of prices. To put it simply, it means what one could buy for Rs 100 today he will have to pay Rs 105 for the same if inflation increases at the rate of 5%. In India, the inflation is primarily measured based on wholesale price index (WPI) which measures change in prices of a selection of goods at wholesale rates and is released by the government on a monthly basis. Currently inflation is hovering around 8.5%. Inflation not only raises the cost of living by raising prices of products and services but it also reduces value of investments. As inflation gradually reduces the purchasing power of money it is imperative to understand the impact of inflation on our investments.
For example XYZ has invested Rs.1 lakh in fixed deposits maturing a year from now. Such a deposit typically earns a 10% rate of interest, which will earn him interest income of Rs10,000 at the end of one year. However, this is before one pays income tax on this. Assuming that he is in the lower tax bracket of 20%, he will pay a tax of Rs 2,000, leaving him with only Rs 8,000, an 8% after-tax returns. At that time, lets suppose inflation is 7%, the first 7% of the after-tax 8% return will basically offset this price rise. Thus his real wealth increases only by 1%. At this rate, it will take over 70 years to double the real wealth. If inflation goes to say 8% then, he will never see an increase in his wealth; on the contrary he will be much poorer in the long run.
So, in order to maintain his present purchasing power, i.e., the ability to continue to afford goods and services in the future that he enjoys today and for wealth to increase he should invest in those assets where rate of return is higher than the rate of inflation in the country. Although no plan can give inflation-proof future earnings, the one based on a few basic rules can provide a suitable protection. The most proven way to beat inflation in the long run is to invest a part of the total portfolio in equity markets depending on the individual risk profile and financial goals. The most preferred route to equity investments would be through mutual funds and that too via Systematic Investment Plans (SIPs). Equity provides a better hedge against inflation but the investment horizon needs to be long. Equities also have the advantage of liquidity as well as zero-capital gains on long-term holdings (as of now). The example below clearly highlights that over a period of 4 years average returns from equity (BSE Sensex and S&P CNX Nifty have been assumed to represent equities) as an avenue of investment has outperformed inflation by a wide margin.
The result of changing lifestyles and aspiration needs has increased the need of money, which at times becomes difficult to be met by plain vanilla savings. Fixed deposits or administered savings are no longer sufficient to meet ever-increasing standard of living. Today, the savings philosophy has also changed. Earlier savings preceded expenditure while it is now vice-versa. Thus the time has come to save intelligently through various avenues of investment which can beat inflation and help our money grow to meet future requirements. Equities fit the asset allocation bill for generating high returns provided one starts early, as equities can give the best returns only in the long run. Hence, despite being riskier, equities provide the best available investment avenues to convincingly beat inflation.
Investments in equities are not completely unfazed from the inflationary risks and are impacted by inflation, but in the short term. For example, real estate, banking, auto, consumer goods / durables and manufacturing industries are affected by rising raw material costs and dearer money (inflationary impact). But the impact is short lived as these negatives get wiped out in the long run. Thus, the key lesson that inflation teaches us is to diversify investments, with one portion (based on age and risk profile) committed to high reward but riskier instruments like equities. In sum, idle money in a savings account may almost certainly see loss of purchasing power and decrease real wealth. This may be a bigger risk than investing in equities.
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. Investment Objective: SBI PSU Fund - The objective of the scheme would be to provide investors with opportunities for long-term growth in capital along with the liquidity of an open-ended scheme through an active management of investments in a diversified basket of equity stocks of domestic Public Sector Undertakings and in debt and money market instruments issued by PSUs and others.
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.