Market Volatility: Recites a new story!!

DIIs come to rescue

August volatility in the markets has come out with a new story. Investors and Market observers feel that the key risks in the Indian stock market is its overdependence on foreign fund flows. But that may not be the case for long, judging by the institutional inflows so far in August, which has been a very volatile month for equity investors across the world.

FIIs have sold Rs 8,841 crore worth of stocks so far in August as problems in the subprime loan segment resurfaced in the US, sparking a sell off in the equity market everywhere. The last time foreign funds had sold as aggressively was in May 2006, when they pulled out Rs 8,247 crore in a single month.

Large inflow or outflow of foreign money continues to influence sentiment, but domestic institutional investors — mutual funds, banks, insurance companies — are now beginning to emerge as a strong counterbalancing force.

In the current month, according to the Securities and Exchange Board of India (Sebi), MFs have been net buyers at Rs 2,869.2 crore (till 27 August 2007), which is the highest-ever since May 2006 (Rs 7893.36). In fact, August 2007 will feature among the top 10 months in terms of net inflows ever since January 2000. In the previous month, fund houses were net sellers at Rs 900.60 crore. Inflows are a result of money mobilised through new fund offerings and also because many of the asset management companies were sitting on cash.

It seems that the investors and the fund houses have changed their investment style. They have started looking current volatility in the market as an opportunity to invest. While Indian investors have become more resilient to volatility, the inflows in the mutual fund industry have also been good. There was a 21.41% rise in AUM of mutual fund industry in the month of July 2007 when it recoded an AUM of Rs 4.87 lakh crore highest since April 2006 (a rise of 89%). Most fund houses were sitting on 15-20% cash in July month, which seems to be flowing in the market now. Further, around 30% of the new fund money was also lying idle that seems to have made to the bourses now.

Meanwhile, it is not only the fund houses that have upped the ante in the recent past. Insurance companies and some of the public sector banks (PSBs) are also believed to be using the current volatility as a good buying opportunity. Incidentally, LIC is believed to have mobilised a few thousand crore in its recently-closed unit-linked plan (ULIP) — Money Plus. According to market buzz, agents were pushed into overdrive to garner money in the ULIPs as it came to a close in mid-August.

Recent instances of the Sensex shedding 400-500 points in one single day could have been much worse, if LIC and SBI had not come to the rescue. However, this can’t be corroborated with figures as there is no data available for insurance companies and banks separately.

BSE provides data under the heading ‘domestic institutional investors (DII)’ that includes banks, domestic financial institutions, insurance companies and MFs. In August, according to BSE, this group is said to have invested Rs 8,518 crore (BSE and NSE), which is only marginally lower than what FIIs have pulled out.

However India’s growth story remains intact. The strong fundamentals will continue to attract foreign investments in the economy along with domestic investors.

Inflation-What the picture depicts?

India is in the midst of a rapid growth regime, thanks to growing consumerism, increasing global competitiveness and massive investment in infrastructure and capacity building. The long-term growth potential of the country is tremendous, and as the global markets has realized this, there are huge and rising forex inflows through FDI, and Indian debt, quasi equity and equity instruments attract huge interests. Also, strong corporate earnings, better visibility for the long term and general rally in the global markets together have facilitated BSE to surpass 15000 mark in July 2007.

One of the characteristic features of the economic performance in the first six-month of the Calendar year 2007 has been easing of headline inflation, which slipped from 6.69% for week ending 27 January 2007 to around 4.40% in July. Higher base effect, impact of monetary and fiscal policies and also sharp appreciation of rupee together facilitated taming down of inflation.

The headline inflation, which is measured by change in Wholesale Price Index (WPI), stood at 4.05% during the week ended 4 August 2007 lower than the previous week at 4.45%. The recent WPI figures though are well in RBI’s tolerance limit, the whole sale price index of all commodities which are given in the lack of eight weeks are being continuously revised upwards, considering the calendar year 2007 creating a high base for corresponding next year figures (though the final index for the week ending 9 June 2007 remains unchanged).

The impact of this high base will be witnessed in the WPI growth figures next year, which may show deceleration as a result. The continuous rise in final all commodity inflation figures has been the result of rising inflation of primary articles as well as manufactured products group index, which grew on an average by 0.07% and 0.27% in January-May 2007 period respectively. Among the manufactured products group edible oil group index grew on an average 0.48% and iron and steel group index grew 0.54% during January-May 2007 (final inflation figures).

Also though the overall inflation rate was barely above the 4% mark in early August, official statistics reveal that the price index for the food articles group had risen by 8.36% over a twelve-month period. Within this group, cereal prices have hardened by 8.72% and fruits and vegetables by 10.42%.The spurt in pulses is a modest 3.33% because large-scale imports have beefed up their availability.

The rise in edible oil prices has been the sharpest at 13.46%, implying that, despite liberal imports, the supply-demand equation is skewed.

Though, sugar and gur have charted a downward course, with their prices plunging by nearly 18% and 13%, respectively, the soaring food prices are a reality but this is not reflected fully in the wholesale price index- measured index. This is because of low weights accorded to food items in this index.

The food articles group has a weightage of about 15%; if to this, the 11.5% weight assigned to a subgroup —- food products in manufactures—-is reckoned with; just 26% of the weight is allotted to the food group in this index. That’s too low to impact on the final inflation figure. Though overlooked, the food inflation contained in the wholesale index is substantial and should engender concern.

Outlook
While there is an abatement of inflation in the recent period, upward pressures persist emanating from high and volatile international crude prices, the continuing firmness in key food prices and the uncertainties surrounding the evolution of demand-supply gaps, both globally as well as in India. In this regard, it is essential to carefully monitor developments relating to continuously assess the risks to the inflation outlook. It is also necessary to assess aggregate supply conditions and the supply response to the impulses of demand in the short-term, while stepping up efforts to expand production capabilities over the medium-term.

Infrastrucuture: Losing Momentum

Slower growth in five of the six core sectors pulled down the overall growth rate in the index of infrastructure industries to 5.3% in June 2007 against 7.7% in the year-ago period.

This is the slowest growth rate in the past year in the country, raising concerns about an overall economic slowdown.

This is a significant drop. On the supply side, the economy is dependent on the infrastructure industries so the June numbers are a cause of concern as it could have an impact on overall growth.

The highest dip in growth of production was in coal. This is not good news as a dip in coal production growth will have an impact on all the sectors, including steel and power and this is another area of concern. Coal production during June this year stood at 32.34 million tonnes.

Another crucial sector which saw a dip in production growth was crude petroleum, which recorded a negative growth of 1.8% against 1.2 %during the same month of the previous year. Data also showed that the growth in crude oil production has been slowing down since December 2006. The dip in coal production and crude petroleum shows the problem is on the supply side.

The only core infrastructure sector which showed healthy growth during June was electricity. Electricity generation registered a growth of 6.8% (provisional) in June 2007 compared with a 4.9% growth rate in June 2006. Electricity generation grew 8.3% (provisional) during April-June 2007-08 compared with 5.3% during the same period of 2006-07.

The slowdown in the infrastructure index follows a similar deceleration in industrial growth in June, which slipped into single digits of 9.8%, the lowest in the past three months, from 10.92% in May.

The slowdown in industrial growth is attributed to a dip in manufacturing production, which stood at 10.6% in June as against 11.7% in May.

The economy has shown signs of a moderate slowdown due to the monetary tightening measurers initiated by the Reserve Bank of India as well as the appreciation of rupee, which is impacting export growth.


The growth of the six infrastructure industries, with a combined weight of 26.7% in the index of industrial production (IIP), during the April-June quarter also decreased to 6.9% from 7.4% in the first quarter of 2006-07.

Crude petroleum production declined to 1.8% in June 2007 compared with a growth rate of 1.2% in June 2006. Crude petroleum production declined 0.7% during April-June 2007-08 compared with 0.2% during the same period of 2006-07.

Though petroleum refinery output did not decline, its growth slowed down to 9.8% in June 2007 from 10.5% in June 2006. However, petroleum refinery production registered a growth of 13.2% during April-June 2007-08 compared with 11.9% during the same period of last year.

Coal production growth plunged 1.3% in June 2007 compared with 11.8% in June 2006. Similarly, it fell drastically to 0.7% growth during April-June 2007-08 compared with an increase of 8.0% during the same period of 2006-07.

Cement production growth slowed down to 5.6% in June 2007 compared with 11.7% in June 2006. For April-June 2007-08, it slipped to 6.8% compared with an increase of 10.2% during the same period of 2006-07.

Also witnessing a decline in growth rate was finished (carbon) steel production at 5.6% in June 2007 compared with 10.2% in June 2006. Finished (carbon) steel production growth rate declined to 7.7% during April-June 2007-08 compared to an increase of 10.3% during the same period of 2006-07.

Led by roads and ports, power and telecom sectors, credit disbursement by banks to the infrastructure sector has grown in the last two years at 43 %and 36 per cent, respectively, according to industry chamber Assocham.

The chamber conducted a study covering financial years 2000 to 2007 on sectors such as iron and steel, construction, petroleum, power, telecommunication, roads and ports.

The study revealed that compounded growth in credit disbursement has been highest in the power sector at the rate of 58%, followed by roads and ports at 46%.

Lending to power as a share of infrastructure lending was 22% in 1998, which grew to more than half of the total infrastructure lending to Rs 57,863 crore in March 2006.

Outlook
The government may increase the credit exposure limits of banks to corporate groups taking up infrastructure projects. The finance ministry has asked the Reserve Bank of India to allow banks a bigger credit window for such companies, with the aim of helping credit flow to infrastructure sectors like roads, airports, power and ports.

At present, the credit exposure ceiling is 15% of the bank’s capital funds (equivalent to net worth) in case of a single borrower and 40% of capital funds in case of a borrower group. Borrowers belonging to a group may exceed the exposure norms of 40% of a bank’s capital funds by an additional 10% (a total of 50%), provided the additional credit exposure is on account of extension of credit to infrastructure projects whereas in the case of a single creditor, the limit can go up by 5%.

Retirement planning: Start early, save prudently

Mutual Fund a better option amongst all

You may wonder how to go about planning for retirement. You may have been procrastinating, thinking that it is a complicated exercise, which is beyond you. That’s not true. Retirement planning can be as simple as you want to make it.

Mutual funds offer a host of scheme-types to suit varied needs of investors. One such need is retirement planning. Stocks and post-office schemes in isolation may not be the ideal investment avenues for individuals to plan for retirement.

Stocks, because they are too complex and post-office schemes because they may not be able to give you an adequate return considering the high cost of living.

Start planning
The first step is to start setting aside some of your income to build up your retirement kitty. If you are young, even setting aside a modest amount (say, 10% of your income) will suffice. However, if you are older, set aside as much as possible. Make sure you do this on a regular basis. Merely doing this once or twice is not enough.

Invest what you set aside
Simply allowing the amount set aside towards retirement to lie ‘in a coma’ in your savings bank account, earning a measly interest, will get you nowhere. You should invest this amount.

Invest regularly
Investing a lump sum amount at one go, will not fetch the same kind of returns that you will get by investing the same amount in smaller portions over a period of time. This is referred to as systematic investment plan (SIP) by fund houses and allows investors to benefit from rupee-cost averaging.

Avoid drawing from your retirement savings as this defeats the very purpose of starting early.

Review your retirement portfolio from time to time (every 2 years or so). If there is an increase in expenses at present or if you anticipate higher expenses later, you may have to commit more resources to meet that shortfall.

Retirement investment options
‘Where should I invest?’ If you are young, the best investment option for you is equity. Stock markets around the world, including the Indian stock markets, have proven that investing in equity over the long term (over a decade and above) ensures significant wealth creation.

Why are we so gung-ho on equity funds vis-à-vis relatively safer instruments like bonds, fixed deposits, property and gold? There are several reasons for that, but we list the three most important below.

Equities have a proven track record over the long term. Several studies have shown that over the long term (about 20 years) stocks have, in most instances, outperformed all other comparable asset classes viz. bonds, property, gold, fixed deposits. So if you do your homework well, there is a good chance that you will benefit from better than average long term returns.

Equities are your best bet to counter inflation. The abovementioned study also reveals that gains on equities have been highest after accounting for inflation. In other words, equities counter the inflationary impact better than other asset classes.

Currently, given the concerns about inflation and interest rates, investors are better placed to appreciate this point.

If you are uncomfortable with investing in equity directly, use the mutual fund route. Mutual funds offer various equity schemes; the basic equity schemes are diversified equity funds (these invest in equity of companies across different industries), sector funds (these invest in equity of companies in a particular industry like pharma, telecom, banking, etc.) and index funds (these invest in equity of companies forming a particular stock market index like the BSE Sensex, NSE Nifty, etc.).

By investing in equity through mutual funds you are relieved of having to track the markets regularly. However, do keep an eye on the scheme’s performance. Ideal option in early part of your career is to systematically invest in diversified equity funds. While in 20s and 30s, consider small-mid cap funds and even contrarian funds.

If you are older, you should invest a portion of your retirement corpus in equity and the balance in debt. A ratio between equity and debt of approximately 50% each, would be suitable. Again, mutual funds come to the rescue. They offer hybrid schemes, which invest a portion of the corpus in equity, and a portion in debt. Some of these schemes are Monthly Income Plans (MIPs), which invest about 25-30% of their corpus in equity and the balance in debt, Capital protection schemes, which also invest like MIPs, but with the added comfort of guaranteeing return of your capital, and balance funds, which invest about 35-40% of their corpus in debt and the balance in equity.

If you are moving headlong into retirement, you could use debt schemes of mutual funds. These schemes invest in a number of debt securities, most of which are not directly accessible to individuals. Some debt securities that debt schemes invest in are commercial paper, call and money markets, government treasury bills, corporate bonds, corporate debentures, government securities, etc. Some debt schemes suitable for building your retirement corpus are income funds (which invest in medium-to-long-term debt securities, i.e., securities with tenures of 5-7 years and above), gilt funds (these invest mainly in government securities) and floating rate funds (these invest in debt securities which have a floating rate i.e. the interest rate on these securities is reset when there is a change in market interest rates).

Charges
Market-linked pension plans are very similar to mutual funds in their functioning. They also offer various options, growth, balanced and income according to the risk preference of the customer. However, there is a vast difference between mutual funds and insurance companies when compared on the basis of investment or management charges. Market-linked pension plans offered by insurance companies charge a hefty sum in the form of administration and investment charges. The first is knocked off even before your contributions are invested and can make a dent in your corpus.

Moreover, given the intense competition in the sector, mutual funds have stared phasing out entry/ exit loads. The same might happen with insurance companies too with the entry of more players and with more schemes becoming available.

If you are investing in such plans now, do build in the charges while computing your overall returns.

Tax implications
From a taxation perspective too, mutual funds and insurance companies differ. From the assessment year 2006-07, the total amount of deduction available under Sections 80C, 80CCC and 80CCD cannot exceed Rs 1 lakh. Since the contribution to pension plans qualifies for deduction under Section 80CCC, the maximum deduction available is Rs 1 lakh only.

Mutual fund pension plans do not qualify for rebate under the section. However, contributions towards certain specified funds, such as the UTI Retirement Benefit Plan and Frankin Templeton India Pension Plan, qualify for rebate. Both funds envisage redemption of amount invested (along with growth) when the investor reaches the age of 58. Option is then provided to either retain the amount with the fund or opt for pension in the form of dividends/systematic withdrawal or withdrawal of the lump sum at the prevailing NAV or a combination of the two. Both funds invest in a mix of debt and equity. Since investment in equity in the case of both funds is below 65% of assets, both the funds do not qualify to be equity-oriented funds.

Plain vanilla mutual fund Systematic Investment Plans (SIP) do not qualify for either deduction or rebate. Therefore, you should opt for SIP only if you have exhausted your limits under section 80 CCC. Taxation policies may change over a long period and it makes sense to make the most out of it, when it is available.

Exit option
Market-linked plans and mutual funds are more flexible. They not only allow you to choose your asset mixture according to your risk - return requirements and give you an opportunity to earn a higher return, you can also walk away with your accumulation (equal to the NAV of your units) if you are not too happy with the performance and invest elsewhere.

Here mutual funds score over normal (not market linked) insurance plans. Mutual fund schemes require a lock-in of three years and thereafter you can exit any time by encashing your units at the prevailing net asset value (NAV). In case of non-market linked pension plans, only a portion of your contribution is returned if you surrender an insurance plan during the contribution period. All these factors must be borne in mind before you decide on the product that is right for you.

End Note
Retirement planning is still at a nascent stage in India, and the options are limited, as of now. But this is a growing area, and many choices will become available soon enough.

As of now, you can allocate funds among the Employees Provident Fund (EPF), Public Provident Fund (PPF), Post Office Monthly Income Scheme (POMIS), systematic investment plans (SIP) of various mutual funds (they allow you to contribute a sum of money regularly, like a recurring deposit scheme), the UTI Retirement Benefit Plan, the Franklin India Pension Plan or pension plans offered by various insurance companies.

You can opt for a market-linked plan that operates much like a mutual fund or a simple plan that allows you to pay a fixed premium every year and gives the option of taking an annuity at the end of the contribution period.

But do consider the positives and negatives of all the products before choosing the one that suits your requirement best.