Blog

Understanding RBI Steps to Arrest Rupee Decline

November 16th, 2013

RBI

The RBI Governor had a Media Briefing on last Wednesday. The Governor tried to calm market fears on major two issues. One, the Impact on the Rupee as the Oil Marketing Companies (OMCs) Dollar Demand is back into the market and Second the concern on RBI Policy rates.

The Key takeaways from his briefing are as below:

  • The Governor Expressed satisfaction on the fact that the trade deficit has been quite in control and he estimated current account deficit at USD56 Billion for the current year. This estimate stands USD32 Billion lower than last year and well under 3% of the GDP. The Exports over the last five months have been growing in double digits. Additionally RBI has already raised USD 18 billion through recent initiatives of FCNR (B) and banking capital.

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Accrual v/s Duration Strategy – Where to Invest ??

September 5th, 2013

Debt Fund Investors are usually confused as whether to go for Duration-based funds or funds with Accrual Strategy. Let’s understand the basic rationale of the strategies.

Duration Based Strategy:

The funds which follow the Duration based strategy invest in long term bonds and benefit from the fall in interest rates. They earn from capital appreciation along with the coupon of the bond. These funds are exposed to interest rate risk and if the interest rates move up these funds bear capital losses.

All long term Income and Gilt Funds follow the duration based strategy.

These funds are advisable for investors who can ride with the volatility associated with the fund.  The Funds can generate better return in a time when the interest rates are set to move downwards.

Accrual Based Strategy:

The funds which follow accrual strategy generally buy short term instruments and prefer to hold till maturity, this reduces the interest rate risk. Corporate bond funds invest in high yielding corporate bonds which have a shorter maturity period.

FMPs, Ultra Short term bond funds and Short term bond funds follow this strategy.

If an investor needs a steady return from his Debt portfolio and is not ready to take higher risk he should invest in Accrual based funds.

An Investor can also adopt a combination of both the type of funds in his debt portfolio as per his risk profile.

How to decide

Both the strategies have their own merits and have different risk reward proposition for the investor.

Let’s compare the performance of Income Funds of both the categories:

Duration vs accrual

 

Looking to the returns of last one year we find that both the categories have earned similar returns, but as we move to the most volatile period i.e from 15th July 2013 till date we find the Accrual funds have flared well compared to the duration ones.

The Accrual funds benefited because of  two reasons, first they  generally carry a shorter maturity of around 1.5 to 3 years and interest rates in India at the shorter end are quite attractive compared to longer end secondly these funds have not faced redemption pressures as the investors were restrained by heavy exit load in some of the funds.

The current scenario depicts a risk reward in favour of the shorter end of the curve. The RBI shocker has disproportionately impacted the short term curve and we feel the investor should choose a mix of funds few with extreme shorter maturities and few with longer maturities. The strategy will effectively give a balanced duration to the portfolio and capture the opportunities given the inverse yield curve.

 

Opportunity in the Troubled Times

August 26th, 2013

Time to Invest in Debt Funds.

Recently the RBI imposed Liquidity tightening measures to curb Rupee Volatility. The liquidity tightening has resulted into higher bond yields. The shorter term as well as longer term interest rates have spiked up. This provides us an entry point to Invest in Debt Funds.

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Inverted Yield Curve and its impact

July 28th, 2013

Inverted Yield Curve and its impact

In the last article Understanding the Yield Curve we understood the basics of the yield curve; let’s focus more on the current situation wherein the G-sec yield curve in India has inverted significantly.

Yield Curve is a leading indicator of the economy & a good predictor of future economic activity.

Steep Yield Curve i.e. Positive spread between shorter and longer duration papers is generally followed by period of stronger growth and lower volatility, whereas inverted yield curve, where the yield on shorter duration papers is higher than longer ones, is followed by poor growth and recession.

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Understanding the Yield Curve

July 25th, 2013

The recent upheavals in the Debt market have left the investors puzzled and frightened about the debt markets. Let us understand some of the basic concept of debt markets.

What is a Yield Curve?

Interest rates typically vary with maturity.

The graph or figure which depicts the yield on bonds of the same credit quality and liquidity against maturity is called a Yield Curve.

Ideally, yield curve should be plotted for bonds that are alike in all respects other than the maturity; but this is extremely difficult in practice. Bonds that have similar risks of default may be different in coupon rates, options etc.

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Top Three Financial Regrets of Millionaires

July 15th, 2013

Nigel Green CEO at The deVere Group recently published the results of a Poll conducted on 659 of their international clients. The Clients were from Europe (including UK), Asia, Africa, the Middle East and the US who have investible assets of more than 1 million Pounds (or equivalent).

The results of the poll reflect how the High net-worth Individuals care for their financial well being and would like to “remain on track” to reach their financial goals.

The Top financial Regret as per the poll is not having put into place a regularly reviewed personal financial plan earlier in their life. 57% of the surveyed had this overriding regret and thus sends us a signal how important the high net-worth individuals value the benefits of long term planning and understand the importance of routinely reviewing the plans to ensure that they are on track to reach the financial goals.

Financial Plan review

The Second Biggest financial Regret was not consistently reviewing and assessing the performance of their investments. 18% of the surveyed felt the need of regularly assessing the performance of their investments.

The Third financial Regret was taking on too much unnecessary debt. 13% regretted that they accumulated unnecessary debt.

12% of them indicated other regrets like not saving enough to fund their children or grandchildren education or not having built enough estate for their heirs.

The above poll depicts the regrets of the millionaires globally, do we have similar regrets or a more bigger financial regret..

Most of the Indians do understand the Importance of a Personal Financial Plan and Investing early in their life, but majority of the Indians don’t take the first step.

Please step up and take your first step. Prepare a Financial Plan and Review it regularly, it will keep you away from Regretting later.