In August Equities declined amid concerns of sell off in the emerging markets, including currencies on US Fed’s announcement of monetary policy normalization, and policy measures taken by RBI to arrest rupee slide. Uncertainty due to political environment, Syria war, supply of PSU paper and high interest rates along with rising inflation led to downfall. On 16 August, the Bombay Stock Exchange’s (BSE) Sensex saw its steepest fall in the last four years (769 points) on the back of an FII pullout and thin domestic participation. But soon the things changed.  On September 4, 2013 Dr Raghuram Rajan assumed the charge of Governor of Reserve Bank of India (RBI) after D Subbarao. Improving sentiment in the global market with receding expectations of US-led military strike on Syria and strength in the rupee made Sensex climb up. Sensex surged 727 points on 9 Sep, the highest single-day gain in four years. Shrinking trade deficit for August at $10.9 billion buoyed sentiments.

Events which will have impact

• The FOMC meeting scheduled on September 17 and 18, which could see announcement of trimming of Fed’s bond purchases programme(QED) is likely to set medium-term trajectory for most global markets.
• Our own central bank, led by the new chief, Raghuram Rajan, is set to announce its monetary policy review on Friday 20 Sep.

What happened in August 2013

On 16 August, the Bombay Stock Exchange’s (BSE) Sensex saw its steepest fall in the last four years (769 points) on the back of an FII pullout and thin domestic participation. Naturally, all this has affected the equity funds badly.

The domestic data remains weak: GDP growth of 4.4% in Q1 FY14 (vs 4.8% in Q4 FY13) and Inflation inching higher to 5.8% in July vs 4.9%. Uncertainty due to political environment, Syria war, supply of PSU paper and high interest rates along with rising inflation posed a downside risk.

Equity : SENSEX and Nifty, declined by -3.75% and -4.71% respectively during the August-2013. Amongst the sectors, the metals (13.11%), IT(7.64%), and technology (3.89%) were the key outperforming sectors during the month. On the other hand, Capital Goods (-13.88%), Realty (-10.88%), and consumer durables (-10.33%) were at the lagging end of the performance. During this period, the equities market saw a net withdrawal of around US$ 900 mn from the spot equities market

Debt : The month of August remained quite volatile for the bond markets. In the debt space, bond yields rose sharply crossing the 9.35 per cent mark for 10-year government bonds. Rising bond yields hit bond prices and led to a fall in the net asset values (NAVs) of bonds, which led to a fall in the value of investments. The debt fund categories, particularly the ones with long duration, such as long- and medium-term gilt funds and income funds have faced the maximum heat. Their category average sat on the negative. Their one-month returns have been -4.67 per cent and -2.54 per cent, respectively.In an effort to shore up rupee and curb volatility, RBI announced a slew of measures in August.

Gold  : The month of August witnessed the highest raise in gold prices in rupee terms . Gold prices in rupee rose 16.23%  due to depreciation in Rupee by 10.23%.

Outlook for Sept 2013

Instead of trying to time the market, you should maintain the discipline of asset allocation between equity and fixed income based on your risk appetite and investment horizon. Current State of Indian Economy explains what is ailing Indian Market.

Equity : Market will be volatile. Don’t invest lump sump into the market but if you believe in Indian equities for long..term ( around 5 years) than continue with your SIP.In the prevailing market scenario, investors should avoid rate-sensitive sectors, overleveraged companies and those with weak business models because a falling rupee will result in higher inflation.

Debt : Bond markets will remain range bound as uncertainty around the unwinding of the Fed’s asset purchasing program continues to dominate market sentiment. FOMC meeting scheduled on September 18 will provide further cues to the market about the timing of tapering of the bond buybacks by the Fed. Debt fund returns, unlike those from interest-bearing deposits, such as bank deposits, aren’t assured. They can fluctuate with market conditions, especially inflation, interest rates, global and domestic economic conditions, among others.

If you are planning to buy debt funds, cautiously choose the duration of the fund based on your capacity to endure risk. Investors with a long-term investment horizon of at least three years could opt for long-term debt funds or dynamic bond funds. Experts believe that short-term bonds at 11.5 per cent or so have peaked out. Therefore, new investors with a short-term investment horizon of 3-6 months could also park in short-term funds, if they are longing for liquidity along with good returns.

Investors who can afford to lock in their money until maturity could also invest in a fixed maturity plans (FMP) which are close-end debt schemes, where the duration of the debt papers is in alignment with the tenure of the scheme. This alignment eliminates the interest rate risk.

Indian Rupee: Government & RBI takes measures to defend currency: Government & RBI took several measures like hike in import duty in gold & platinum from 8% to 10%, silver from 6% to 10%; cut amount local companies can invest overseas without approval from 400% of their networth to 100%; residentsto remit $75K abroad vs 200K earlier; tightened gold import rules; provide dollars directly to state oil companies

Gold : Going forward, seasonal factors, especially the approaching festival season and associated rise in gold demand in India, continuing strong demand from China, and a pick-up in central-bank acquisitions, should contribute in increase in demand.

Foreign institutional investors (FII) : The FII holding in Indian equities is at a record high, their investment has crossed $220 billion, around 48% of the market’s free float.

FIIs holding in India

Other Investing options

Currently the other investing options that are available are given below.

• Fixed Maturity plans : With equity and bond funds turning increasingly volatile in the last few months, investors are flocking to fixed-maturity plans (FMPs). And, mutual funds are selling more FMPs.FMPs are target-date funds that buy bonds to be redeemed within a specific period. These offer maturity periods of a month, six months, one year or two years and invest in corporate bonds, commercial paper and certificates of deposits that mature around these time periods. An FMP maturing after a year is taxed as long-term capital gains, with an indexation benefit in the growth option. This makes FMPs extremely attractive for investors in the highest tax bracket. In Aug, fund houses collected Rs 9,866 crore from FMPs, against Rs 3,687 crore in June, according to data from Value Research. In May, when bond yields stood at 8.5 per cent, FMPs mopped up Rs 1,798 crore.For FMP’s open AMFI
  
• Non convertible debentures(NCD) :
  • Muthoot Finance, whose non-convertible debenture (NCD) issue closed on 16 Sep, raised Rs 300 crore.
    • The NCD issue has eleven investment options
    • The face value of each NCD is Rs 1,000 and the minimum application is for ten NCDs (Rs 10,000)
    • The maturity periods varies from 400 days to five years.
    • The interest payout options are monthly, annual and cumulative and the coupon rate ranges from 11.50 per cent to 12.25 per cent per annum. The NCD with a maturity at 36 months and a cumulative interest payment option has the highest yield of 12.55 per cent.
    • The NCDs are proposed to be listed on the BSE.
    • The NCDs have been rated AA- by CRISIL and AA- by ICRA.
  • IIFL Secured Bonds
    • The issue will open for subscription on September 17 and will close on October 4.
    • The NCDs will be listed on both BSE and National Stock Exchange.
    • The NCDs have an investment horizon of 3 years and 5 years.
    • Its prospects IIFL (pdf)
    • SREI Infrastructure, whose issue closes on 17 Sep and is offering 11.75 per cent, has so far been able to raise only Rs 80 crore against its issue of Rs 200 crore (including an over-allotment option).
• Tax free bonds : Our article Understanding Tax Free Bonds explains Tax free Bonds in detail
  • Rural Electrification Corporation (REC)’s tax-free bond issue, saw good response and is on course to closing much ahead of schedule. Within five days, the Rs 3,500-crore tax-free offering has mopped up about Rs 2,900 crore, owing to investments from retail investors.The last day of the issue is September 23. Our article  REC Tax free bonds explains REC Tax Free Bonds in detail.
  • Housing and Urban Development Corporation (HUDCO) issue
    • opens on September 17 to raise up to Rs 4,810 crore. The issue will close on October 14
    • For retail investors applying for bonds upto Rs 10 lakh, the coupon rate shall be 8.39% per annum for 10 years, 8.76% for 15 years and 8.74% for 20 years.

From Business Standard Tax-free bonds squeeze private companies’ NCDs

What are you investing in these days? How do you think Indian Economy will be in near future? How are you deciding your investments?