What is - U.S. Fed Tapering - very much in news in recent times

An interesting story will make it understand better…

Mr. Chintamani owns a small sweet shop in Delhi. His wife Bhagyawanti is a home maker and takes care of their two kids Arnab and Barkha who study in college.

Chintamani with great difficulty sets aside Rs. 15,000 a month for household expenses. This amount is sufficient to run the house but not enough to fulfill Arnab and Barkha's growing needs of entertainment and extra-curricular activities.

Arnab and Barkha remain dejected and left out from their peers as they don't have enough pocket money to spend.

Chintamani cannot withstand his kids' sadness and decides to increase the monthly household expenses. He sets aside an additional Rs. 5,000 a month as pocket money as long as the kids behave well, study diligently and score good marks in exams. He wanted to fulfill all their wishes and hobbies even though he had to put an extra effort to earn that incremental Rs. 5,000 every month.

This made Arnab and Barkha happy as they could now do everything that their friends could do or afford. This positive energy reflected into their studies and they scored well in their college exams.

Chintamani and Bhagyawanti knew that their kids are now ready to take on the challenge to earn their own livelihood and become financially independent. So, they decide to gradually reduce Arnab and Barkha’s pocket money by 5% every month till the time they find a part-time job for themselves of their choice.

This process of gradual roll back of pocket money is similar to tapering under way by the U.S. Federal Reserve (popularly known as Fed).

What is tapering?

Tapering refers to the reduction in the quantum of the bond buying programme by the Fed.

The bond buying, also known as the Quantitative Easing (QE) program was launched to kick-start hiring and growth in the US economy. The Fed's first QE program was launched in the midst of the 2008 financial crisis.

But why is Fed tapering now?

The Fed's decision to taper its massive bond buying is due the recovery in the US job market and the confidence that the economy will continue to grow inspite of the tapering.

Hope the above explanation would have given you an idea of the Fed tapering.

Excerpts from TATA MUTUAL FUND. Just name of the character has been changed…

Why do we accept possitives immediately while try to find loopholes in negative news...ANY ANSWER ?

Our friend Mr. Herman Brodie  owner of cognitrend Gmbh, Prospecta Ltd explains its better.. thought of sharing with all of us.

Sure...cognitive dissonance. Leon Festinger had the answer to that in the 1950s

On the contrary, cognitive dissonance explains why investors cherry-pick information to justify decisions they have already made. It explains why the "Wall of Worry" exists. It even provides an explanation for the disposition effect. 

My experience with investment teams is that as soon as they learn about how cognitive dissonance manifests itself in decision-making and how to recognize it, the subsequent group discussions change. Decision makers become more critical and more willing to challenge one another. If I had 30 minutes to teach an investment team just one behavioural topic, it would be about cognitive dissonance.

Your opinion on same if any is welcome…

Here's to a new beginning

Like every year 2013 witnessed its fair share of ups and downs. We had India successfully launch its maiden mission to Mars and closer to business, the Sensex touched an all-time high combined with the mutual fund industry assets nearing the INR 9 trillion mark. But we also had some emotional low points with SRT leaving the cricket field for the very last time and the passing away of the "Gandhian" of our times - Nelson Mandela. I don't want to comment on the political turmoil as much has been said already.  

At i2isolutions we've had our moments of excitement. Firstly, your efforts have helped us grow our Asset Under Management by 12% over the last year. The year also saw our business reach an important milestone of completing a decades since inception. It's a matter of pride that close to 600 investors advised across the globe have remained invested through these years & benefitted from wealth creation opportunity. Mutual  Fund in particular has taken care of long term investment (through Equity Schemes). Short Term investment objective were met through Debt Fund where Post Tax returns were delivered better  than any other asset class including Bank Fixed Deposit.

I would also like to highlight some of our special initiatives to assist you through our website www.i2isolutions.org whereby you are facilitated to track your Portfolio Online. Apart from the Market news on daily basis & Market Updates on periodic basis some useful tools are also provide which can assist you on Taxation aspects as well as allocation of resources to be set aside / invested to meet milestone objectives in life.

Every new year brings with it - HOPE !!! With the general elections round the corner, we HOPE for a stable government at the centre to help bring the country back on the path of sustained long term growth. As someone once said ...The New Year always brings with it another chance to get it right!!!

On behalf of Investment to Insurance Solutions, here's wishing you a Happy New Year.

HAVE A CLEAR CUT INVESTMENT STRATEGY IN PLACE TO SUCCEED IN ALL TYPE OF ECONOMIC ENVIRONMENT:

The Portfolio (Total Existing Investment) should be mix of following products based on pre-defined objectives, when your gross Annual income lands you in higher Tax Slab.

1         And you are looking for investment horizon more than 1 year

2         And you don’t want to take stock market or Equity oriented Mutual Fund risk.

3         You have both the option of investment (i) Lump-sum as well as (ii) Recurring

4         You also have long term Goals.

Scenario - I

We appreciate your decision for avoiding stock market or Equity oriented Mutual Fund risk for investment horizon of less than 3 years.

 At the same time we need to look for better Post Tax yielding investment avenues within Fixed Income categories. (Remember your Bank Fixed Deposit pre tax returns are around 9% which means if you are in highest tax slab it is around 6%).

Now when inflation is around 8% we are actually having negative returns on our savings.

The solutions to same lies with Debt Funds of Mutual Fund (there is no exposure to equity Market)

·         If your investment horizon is more than one year you can safely invest into Short Term Plan of debt Fund (managed on accrual basis)

·         The returns after one year are treated as Capital gains & tax rate attracted to same is just 10%. (Times like now when inflation is on higher side indexation benefits are also provided which makes entire returns tax free.

·         The Post Tax Returns in process lands you with 8% to 9.50%. AROUND 25% - 30% ABSOLUTE MORE THAN TRADITIONAL BANK FD WITH EQUAL QUALITY OF SAFETY.

·         The Fund has no locking period & no entry load & no exit load (.50% before 1 year on an average)

·         You could exercise both nature of investment i.e. Lump-sum as well as recurring

Scenario – II

For investment Horizon of 3 to 5 years time frame we would request you to appreciate the importance of participation in equity through Mutual Fund for the following reasons.

1         Indian economy grows around 15% annually on rupee term, i.e. GDP + Inflation. Accordingly if our long term savings is not growing at same pace we are actually under-growing.

2         How should we realize the same? No rocket science is required. Just invest in Equity oriented Mutual Fund (MF because it substantially reduces & manages equity wealth better than individual) when PE ratio of bench mark sensex e.g. BSE Sensex, NIFTY 50 e.t.c. are trading below 15 PE. Historically investment done below 15 PE has delivered HANDSOMELY in excess of 15% CAGR for 3 year investment horizon. Having said that it’s not guarantee, just phenomenon.

Year Ending March 31st	SENSEX	One year Forward P/E	3 Year CAGR IN (%)	5 Year CAGR IN (%)	Event
1993	2281	15.7	14	11
1994	3779	19.9	-4	0
1995	3261	24.7	6	9
1996	3367	23.3	4	1
1997	3361	20.6	14	1
1998	3893	24.6	-3	-5
1999	3740	19.7	-2	8
2000	5001	24.2	-15	5
2001	3604	15.8	16	26
2002	3469	12.1	23	30	Global Market meltdown in aftermath of 9/11 crisis
2003	3049	9.2	55	39
2004	5591	12.5	33	12
2005	6493	12	34	22	Unexpected defeat of BJP
2006	11280	15.9	-5	12
2007	13072	15.4	10	6
2008	15644	20.4	8	4
2009	9709	21.1	21	N.A.	Sub Prime crisis, Lehman collapse
2010	17528	17.2	2	N.A.
2011	19445	17.5	N.A.	N.A.
2012	17404	14.7	N.A.	N.A.
2013	18836	14	N.A.	N.A.
Sep-30,2013	19380	13.2	N.A.	N.A.	Tapering of QE, Concerns on Indian economy, high fiscal deficit 7 current account deficit,high inflation & depreciating INR

P/E >= 20.  P/E>15-20. >=15 P/E.   Source: Bloomberg, CLSA & BSE India

A negative environment is what makes low P/E investing difficult, as adverse news flow adds to fear. .

Scenario – III

Having seen the above two scenario we can ourselves make out what is good for short term & depending upon risk appetite  what should be the long term investment criterion . Goal based objective also falls in same league so as investment pattern i.e. Recurring OR lump sum depending upon the time investment horizon & long term only if it justifies your risk appetite.

RBI BUSY SEASON CREDIT POLICY - OCT' 2013

The RBI continued the process of normalizing the conduct of monetary policy with a 25bps reduction in the MSF while simultaneously hiking the repo rate by 25bps to 7.75%. The RBI also announced additional access under term repo for a cumulative availability of funds to the extent of 0.5% NDTL. With the additional access under term repo which amounts to Rs 40,000 crores, over and above the 1% of NDTL access under overnight repo and Export credit refinance, the recourse to funding under MSF may gradually reduce.

In simple term, going forward park your resources in liquid fund & monitor inflation closely… once its come down in comfort zone say in next couple of month … move into equity fund with long term view or into accrual based Short term debt fund with time horizon of at-least 12-15 months to reward yourself with annualized post tax returns around 10%.

Financial Wobble

 The last two months namely has been quiet volatile for Indian economy with regards to all asset class. The problem started with plumbing of Rupee to Rs. 69 from 53-54 levels in May 2013. The depreciation which was long due for some time resulted in this sharp fall with the news of recovery of largest economy of world – America.

In Macro term CAD (Current Account Deficit), Fiscal Account Deficit rose up sharply. Industrial output data, unemployment data, inflationary pressure all added fuel to already subdued economy on exchange front.

From MICRO perspective, we saw free fall of Sensex by 10% (on positive note recovered 7%) and also Bond yield rose sharply by 10% - 20% across duration, but eventually settling down at meaningful level.

The panic was not only seen back at home but in all the developing, emerging & frontier economy as well. US Dollar was seen emerging stronger against currencies of all these economy.

The major culprit for all unfavorable scenarios was the announcement of US Federal to slow down austerity back home which signal the recovery of US economy. Eventually the FII’s started redeeming their investment from emerging markets & increasing the allocation in US Treasuries. As we were already struggling with existing CAD problem it further got multiplied.

With new RBI Governor in office and his initial initiative backed by govt. policies Rupee fall is seen arrested and confidence in Indian market seems to be returning with FII’s investment of 6000 cr (aprox) in equity market & more importantly in excess of 3500 cr. investment in Indian debt market.

 We still maintain, debt segment of Mutual Fund is the best segment ever with interest rate settling down and Short Term Rate giving very good option of returns in excess of 10% & with indexation Tax Free returns of around nine percent. 

Depreciating Rupee matter of concern? Inflation Index Bond, NRI Bonds on offering…

Very recently (since couple of months back) when Gold was plummeting, it signaled the rise of its competitor Dollar. All global economies maintain their financial reserves in these two asset class i.e. American Treasury Bills and Gold. Composition changes with changing economic scenario.

Since last week when the news started unfolding regarding recovery of the American economy & that they are considering to reduce the stimulus flared Dollar against all currencies worldwide (intensively against currencies of emerging market including India.)  

Interesting point is where it settles. Current Account Deficit is still a major concern for our country. The improvisation on same is main economic challenges which are huge on account of rising Crude prices & gold imports. In order to improvise same govt. is planning to raise Dollar deposit thru NRI Bonds, which shall be in news within a month’s time. It should be a good opportunity to all our NRI friends to invest in same at very lucrative rates.

Investor back home will also be oblized with Inflation adjusted Bonds (new kind of product) which shall be ensuring your return over & above the governing inflation rate.

Further, we re-iterate that Bank FD should be replaced with equally safe & secured Debt Funds which are providing around 9% tax free returns.