Friday, July 19, 2013

FALL IN BOND FUNDS NAV......AN OPPORTUNITY?

 

The Lay Investor will be shell shocked for sure.
First his favourite, “Can never fall Gold fell by 15% and next
his “Can never ever fall” Bond/Liquid Funds Fell by a massive 4% in a single day.
His definition of “safe” investment would have gone for a toss.!
We all now know why Gold fell. (Read http://goodfundsadvisor.blogspot.in/2013/05/do-not-buy-gold-this-akshaya-tritiya.html)

What should you do if you have a investment in Liquid/Bond fund?
WHY BONDS FELL?
The Reserve Bank of India (RBI) in its effort to rein in Dollar decided to tighten Domestic Liquidity and restricted overnight finance to banks as well as sell bonds in a bid to restrict liquidity in the system, a move that would take pressure off a weak rupee. This pushed up interest rates in the domestic money market.
This sudden jolt shook the Banks and they rushed to redeem their investments from Mutual Funds, especially Liquid and Gilt Funds. This resulted in Bond Yields shooting up to above 8% from 7.5%, the single biggest day gain in more than 3 years.
As Bond prices are inversely related to Interest Rates, a Rise in Bond yields pushes the NAV of Bond Funds down and hence, NAV followed suit with a fall of more than 2%. Even liquid funds were not spared and it was a “shocker” for many investors to see the supposedly “safe, very safe” Liquid funds too posting negative returns.
WHAT COULD HAPPEN NOW:
RBI could manage to sell only about Rs.2500 crore worth of bonds out of its targeted Rs.12000 but surprisingly it rejected most of the bids. Thus, RBI has sent a strong signal that these measures were temporary by rejecting bids and RBI is not in favour of strong interest rates.
The Liquidity pressure on Mutual Funds is ignorable as can seen from the fact that Mutual Funds were yet to make use of the Special Liquidity Window opened by RBI as they were eyeing higher yields which clearly shows that they have enough liquidity to manage redemption pressure.


WHAT EXPERTS SAY:
The Most experienced Fund Manager in the Industry on the Fixed Income side, Mr.Amandeep Chopra of UTI assures Investors “no need to panic, stay invested as this is a short term reaction”. In fact, he further goes on to encourage new investors to jump in these funds as these RBI measures are expected to be reversed sooner rather than later”.

IDFC Mutual Fund says that “Bond funds have become much more attractive due to this short term disruption”

TATA Mutual Fund has recommended investment in Dynamic Bond Funds at current levels with a 1 year Investment horizon as the Fund House feels that Investors like PF, Insurance Cos will use this opportunity to enter bond funds and thus ease yields on Bonds.

Kotak Mutual Fund feels that the sharp drop in the NAV of liquid and Bond funds is temporary and the drop provides lucrative investment opportunity for investors across the curve.



WHAT TO DO NOW:

If you have invested in these funds with a horizon of another year to go, you have nothing to worry as interest will accrue to the Funds holding and the NAV would rise. Moreover, the interest rates are expected to fall, at least Not Go Up, and in worst case scenario for an investor, the rates could be stable.  So your money is safe.
Continue to hold and those who would mind a bit of volatility, entering the Bond Funds should give you Double Digit returns, especially after the NAVs have dropped due to “Mark to Market” impact.
In the year 2008, Bond and Gild Funds generated returns of above 20% and next year gave a negative return of -15%, so you need to be very quick to get in and get out of these funds.
Best option would be to invest in Dynamic Bond Funds where the Fund Manager will take the call of moving in and moving out of short term and long term Debts.
The decline in NAV of BOND Funds during current week was a GOD GIFTED Opportunity for those Investors who wanted to Invest in such Funds & had some spare money.
Going forward, the investors can benefit from steady accruals from these funds and also benefit from rate cuts, when they happen.
I would recommend Short Term Debt Fund and Dynamic bond, especially those with lower duration.
Low risk investors should look at Accrual funds.

Enjoy the ride but be warned the ride could be bumpy.



Also visit http://equityadvise.blogspot.com

Saturday, July 6, 2013

MAXIMISE YOUR RETURNS ON IDLE MONEY

MAXIMISE YOUR RETURN ON "IDLE" FUNDS : 
 
Suppose you get your Salary/Rent on the 1st of every month.
It is unusal for you to have your entire months expenses on the 1st itself. The expenses will be staggered and spread throughout the month.
Ex
Mobile bill on 5th
School Fees on 10th
Credit Card on 15th
EMI on 20th
Monthly SIP on 25th
Till these expenses come up, you tend to lock your money in Bank wherein you are getting 4% (yes, some banks do offer 6% for Saving Bank Account, but these rates come with lots of conditions like balance of more than 1 lakh)
So, when I consider 4%, you are better off investing in Liquid Funds where returns match 1 year Fixed Deposits. Right now, even the underperforming liquid funds have been giving 8%, which is DOUBLE the rate of Saving Bank Deposit.
Another Advantage of investing in Liquid Funds instead of keeping in SB account is that Liquid Funds are in true sense “liquid” that is, you get your money within 24 hours and whats more some AMCs also offer ATM Card for your investment which you can use to withdraw money anywhere, anytime.
Theoretically speaking Liquid Funds are not Capital Safe but Liquid Funds invest in Money Markets, Short Term Corporate Deposits and Treasury and hence very liquid and very safe as all these instruments have very low risk and enjoy high liquidity.

Open Ended  - Debt: Liquid -  one Year Return
 Fund
 NAV (Date) 
 Returns(%)
 Return as on


 Escorts Liquid
18.52  (3-Jul)
9.78
7/3/2013


 Principal Retail Money Manager
1,345.26  (3-Jul)
9.46
7/3/2013


 Peerless Liquid Super Inst
13.12  (3-Jul)
9.13
7/3/2013


 Tata Liquidity Management Plan A
1,619.69  (3-Jul)
9.08
7/3/2013


 Taurus Liquid Super Inst
1,293.96  (3-Jul)
9.07
7/3/2013


 Kotak Floater ST
1,964.69  (3-Jul)
9.05
7/3/2013


 Indiabulls Liquid
1,166.53  (3-Jul)
9.05
7/3/2013


 ICICI Prudential Money Market Reg
165.95  (3-Jul)
9.04
7/3/2013


 Templeton India TMA Super Inst
1,785.54  (3-Jul)
9.03
7/3/2013


 Birla Sun Life Cash Plus
192.10  (3-Jul)
9.01
7/3/2013



Returns Chart as on 4th July 2013
Another point to note is that since Savings Account Interest is de-regulated, the interest on SB Accounts also vary and is not fixed. Which means now if the bank has set the interest rate at 6%(increasing interest rate scenario) .It can also reduce below 3.5% also when interest rate dives low.
My personal feeling is, there will always be a gap of at least 1% in Favour of Liquid Funds compared with SB account.

TAX ANGLE :

Recent hike in Dividend Distribution Tax to 28.3% (including Cess & Surcharge) may make many wonder SB Account with its upto Rs.10000/- Interest as Tax Free a better option.
I beg to differ for 2 reasons.
  1. The Average returns of Liquid Funds has always beaten SB Account Interest by a minimum of 1%
  2. True, Dividend on Liquid Funds are taxed at 28.3% but Interest on SB interest is added to your overall Income and is taxed as per Tax Slabs.
  3. Interest on Liquid Funds is paid out on Daily basis where Interest on SB Account is paid on Quarterly basis.
  4. There is no charges by AMCs if minimum balance in Liquid Fund goes below the prescribed minimum balance, whereas Banks charge anywhere between Rs.50 to Rs.1000.
So, if you an investor who comes under High Tax Bracket of 30%, you are advised to go for Dividend option wherein your Capital Gains is nullified and if you are in Lower Tax Bracket, you can go for Growth option and take the advantage of Indexation to reduce your Tax Outgo.


Prudent financial planning says that an investor should have some Contingency fund to face any Emergency situation in Life. So, keep cash at home and the balance should be divided in SB Account and Liquid Fund depending on your requirements.
I normally advise investors to keep 1/3rd of Contingency Fund in Liquid Funds.
After all, an 8% return with 1 day Liquidity is always much better than a 4% in SB Account!
Caveat : Do not use Liquid funds for Investment use them purely for parking your Temporary money.




Also visit http://equityadvise.blogspot.com

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