Feb 28

Turbulence & Substantiation of Rupee and the Way Out

Global Scenario

Some of the busiest corners of the multitrillion-dollar-a-day foreign-exchange market are quieter these days.

The currency market is experiencing its first slowdown since the 2008 financial crisis. Banks, fearing a global credit crunch brought on by Europe’s sovereign-debt struggles, are lending less, reducing the flow of currency across borders. As currency funds suffered a miserable year, investors decamped to other markets or for the safety of cash.

After surging 55% from April 2009 to April 2011, foreign-exchange volumes flattened out. The main driver behind plateauing volumes was an 8% drop in foreign-exchange swaps, in which banks and other companies lend one currency to borrow another. Trading volume averaged $3.47 trillion a day in October 2011, roughly the same as April 2011,

Trading across many assets, such as stocks and commodities in addition to currencies; evaporated amid concerns that Greece’s debt woes would spread to other countries in Europe.

Some Positive Cues

Though it hasn’t been all downhill, there’s plenty to catch some breath. Some emerging-market currencies, like the Mexican peso and Russian ruble, saw higher trading volumes. The Dow Jones Industrial Average managed to briefly edge above 13,000 for the first time in nearly four years. Greece has secured a series of bailout packages that will sidestep a chaotic default, while the European Central Bank has bolstered Europe’s financial system by providing banks with cheap, unlimited loans. The U.S. economy is picking up steam and fears of a “hard landing” in China have disappeared.

Investors may not believe the world economy is in a better place, but they’ve stopped worrying about it. Currency options-trading suggests money managers have turned unusually calm about future swings in global currency rates despite the economic problems afflicting the U.S., Europe and China–not to mention the threat of an oil-price shock. Analysts say volatility fears are low mostly because central banks in the U.S., Europe, Japan and China are again taking big steps to shore up the global markets.

In Indian context, something happened as we turned the calendar from 2011 to 2012. The fears of imminent collapse two months before Christmas have certainly waned. In Europe the LTRO (long term refinancing operations) performed better even than the ECB (European Central Bank) hoped. Then there is the fiscal compact. There is still concerns about short term funding and still concern about whether the banks will be able to raise the capital. There’s less of a concern about an event shock, but still concern about process shocks as we go along and Greece and other countries have to roll over their debt. That’s certainly had a positive impact on investor sentiment here in India, although Indian exposure to Europe is not dominant. To the extent that Europe seems to be less unstable today, it does help domestic investor sentiment here too and we’ve seen that on all the market indices.

All emerging economy currencies have depreciated in the pre-Christmas months, but Indian rupee depreciated more than other currencies and it was the worst performing currency in the world or whatever. What explains that is that India is a current account deficit economy. Those emerging economies that had a surplus or a small deficit were less hit than countries that have a sizeable deficit like India, and that deficit was growing. So the rupee depreciation was a result of external flows practically thinning out and driven by the dynamics of the current account deficit.

The Ideal Way Out

Eventually India needs to make the balance of payments more robust to inspire confidence. There is need to diversify the export destinations and product mix. As far as imports are concerned, dependence on oil imports should be reduced and one way to do that is to deregulate petroleum product prices in true sense.

Oil prices are a big factor and largely beyond one’s control and are very complex economic and geopolitical factors that drive oil prices. Just looking at the world economic situation, the U.S. growth situation is quite modest and Europe is probably in a recession and Japan is growing but… And then there are the political factors, which is Iran. If Iran is outside the world pool there could be price pressures. If Saudi Arabia because of fiscal concerns, its commitment to extend fiscal supports to other Arab countries, to meet that commitment they might want to keep oil prices at a certain level. There are economic factors, there are political factors and there are market factors, all of them that determine oil prices which are largely out of control. India imports as much as 80% of oil it needs and more than a third of total imports, so oil prices are a big factor for inflation management, for the fiscal deficit and for macroeconomic stability for the country.

Gold imports of course have added to the misery arising from BoP crisis. We need to provide other safe havens and need to attract more stable flows, FDI for example. And finally we must encourage, if not pressurize our corporates to hedge their foreign exchange exposures. They don’t do that adequately. They do cost benefit calculations, if the rupee is not moving rapidly, they calculate the cost of hedging is higher than the risk they take by not taking. But as happened in the pre-Christmas months, it can certainly overshoot, so corporates should hedge more.

Feb 08

Before Investing in Mutual Fund

A mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. When you invest in a mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unit holder of the fund.

Mutual funds are considered one of the best available investments being very cost efficient and also easy to invest in as compare to others. Thus by pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. But the biggest advantage to mutual funds is diversification, by minimizing risk & maximizing returns.

Mutual funds are set up to buy many stocks as they automatically diversify in a predetermined category of investments, i.e. growth companies, emerging or mid size companies, low-grade corporate bonds, etc. The most basic level of diversification is to buy multiple stocks rather than just one stock.

Regulatory Authorities

To protect the interest of the investors, SEBI formulates policies and regulates the mutual funds. It notified regulations and issues guidelines from time to time. MF either promoted by public or by private sector entities including one promoted by foreign entities is governed by these Regulations.

SEBI approved Asset Management Company (AMC) manages the funds by making investments in various types of securities. Custodian, registered with SEBI, holds the securities of various schemes of the fund in its custody.

The Association of Mutual Funds in India (AMFI) reassures the investors in units of mutual funds that the mutual funds function within the strict regulatory framework. Its objective is to increase public awareness of the mutual fund industry.

Types of returns

There are three ways, where the total returns provided by mutual funds can be enjoyed by investors:

  • Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it receives over the year to fund owners in the form of a distribution.
  • If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.
  • If fund holdings increase in price but are not sold by the fund manager, the fund’s shares increase in price. You can then sell your mutual fund shares for a profit. Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.

Advantages of Investing Mutual Funds:

  • Professional Management: The basic advantage of funds is that, they are professionally managed by well qualified professional. Investors purchase funds because they do not have the time or the expertise to manage their own portfolio. A mutual fund is considered to be relatively less expensive way to make and monitor their investments.
  • Diversification: By purchasing units in a mutual fund instead of buying individual stocks or bonds, investors’ risk is spread out and minimized up to certain extent. The idea behind diversification is to invest in a large number of assets so that a loss in any particular investment is minimized by gains in others.
  • Economies of Scale: Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors.
  • Liquidity: Just like an individual stock, mutual fund also allows investors to liquidate their holdings as and when they want.
  • Simplicity: Investments in mutual fund is considered to be easy, compare to other available instruments in the market, and the minimum investment is small. Most AMCs have automatic purchase plans popularly known as SIP where investor can reap the benefit of mutual fund by investing as little as Rs. 50 per month basis.

Disadvantages of Investing Mutual Funds:

  • Costs: The biggest source of AMC income is generally from the entry & exit load which they charge from investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.
  • Dilution: Because funds have small holdings across different companies, high returns from a few investments often don’t make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.
  • Taxes: When making decisions about your money, fund managers don’t consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.

Feb 02

Workshop on Capital Markets by Intelivisto in Ghaziabad, NCR

Intelivisto has launched iMAP (Intelivisto Mentoring And Accelerate Program) to bring the youngest work force of the world (students in India) and industry experts at one forum so that both can play their significant role in the mission of re-emerging India by synchronizing and synergizing their efforts and required skill-sets for financial markets in particular.
Workshop on capital markets was the first in the series of interactive programs under the iMAP program and conducted on Jan. 14th-15th, 2012 at Kaushambi, Ghaziabad based state-of-the-art auditorium of Adroit Financial Services Pvt. Ltd. Final year students of MBA-Finance from various management institutes across NCR and professionals from Adroit Financial Services Pvt. Ltd. attended the workshop and interacted with each other.
Students, those have been selected for this iMAP program, comes from institutes like Bangalore School of Business, Delhi, Delhi Business School, Netaji Subhash Institute of Management Sciences, Birla Institute of Management & Technology, Greater NOIDA & Rukmini Devi Institute of Advanced Studies etc. Some aspiring CA students and traders from Master Trust Ltd. also participated in the program.