Being Truly there for your Sister!

Rakshabandhan is an auspicious day in India. The festival signifies love and affection between brothers and sisters. It is a time where brothers reaffirm their duty to protect and care for their sisters during their entire life.

Usually brothers gift cash and or gifts to their sisters as a sign of their love. But what if you could give them something that will truly be there in their life? A sound piece of contribution could end being a much more significant gesture in the long run, both personally as well as her financial future.

Sounds to good to be true? Well here are some options you can consider:

Systematic Investment Plan (SIP) Investments: An easy option, but not not many know it can be gifted or that it can be started with an amount as low as Rs 500 per month. Also, one can not only do SIPs into mutual funds (either equity or debt) but certain blue chip equity stocks as well. So forget those fancy gifts for once and gift your sister that will truly be there for her in the future

Systematic Withdrawal Plans (SWP): A rather new feature in the Indian Mutual Fund environment. Certain AMCs now allow you to initiate an SWP, which essentially is the opposite of SIP such that money flows from the mutual fund to your bank account at pre – specified periods and at specific amounts; but with the added benefit that you can chose your relatives to be the beneficiary of this inflow rather than yourself. Another benefit of such a SWP is that because this inflow would be considered a gift in the hands of your relative, there is no tax applicable to the receiver of this SWP. Perfect way to support your sister with cash flow needs!

Insurance Cover: Few things may convey that you truly care for your sister’s health than an adequate health insurance cover. Now more than ever, health insurance is the need of the hour with parallel rise in not only health costs but also increase in reports of lifestyle diseases and ailments. A health insurance cover will insure that your sister is never financially affected by these hurdles.

On the other hand, providing a term cover for your sister who may have her own financial dependants is a warm way of showing that you are there to share her responsibilities

Estate Planning: This almost always is a personal and complicated topic. But having a solid estate plan is as important as any other life decision. And as a brother you could be the trusted guide to helping her make this important decision.

Furthermore, you yourself can be a part of Estate Planning as a potential guardian to her underage children. Or possibly a trustee in case she needs to make a trust. Ensuring one’s hard earned assets are bequeathed as they intended to is a huge responsibility and who better than a brother to take this up

Gold: The yellow metal will protect her from any economic crisis and will act as hedge during volatile times.But not the cumbersome physical gold that comes with its own headaches and costs. Rather you should consider paper gold i.e. instruments that invest into gold themselves or track their prices. These instruments range from Gold ETFs to the Sovereign Gold Bonds

On this day brothers take a pledge to protect and take care of their sisters under all circumstances. We at Plan Ahead Wealth Advisors understand the enormity of this pledge. And through our experience of understanding the complexities of money and human emotions, we also pledge to help you ensure that your sister stays financially secure in her lifetime.

 

 

 

 

 

 

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What investors should know about the Indian Stock markets?

India is currently among the most watched Emerging Market nations. To top that, the Indian Equity Markets have witnessed unprecedented growth in the recent months. The YTD returns for Sensex alone has been 26% (data from BSE India). The euphoria and high confidence on the Indian Equities has continued to remain, especially from the institutional investors both foreign and domestic.

This is also leading to make many individual investors question whether they should invest in equities or sit on the sidelines. While individual risk appetite and time horizon would be some of the basic factors to understand before investing, there are many other fundamental factors to track. While the debate has been raging on as to which indicators should be looked at or ignored to make sense of the valuations of the Indian equity markets, the following factors can help bring some sense of clarity to the overall picture. Factors such as:

Current Price to Earnings Ratio (P/E Numbers): One of the most traditional tools used globally at gauging the valuations of an equity market of a country. In the last one year alone (based on data from Oct 16 to Oct 17), the P/E Ratio for S&P BSE Sensex has averaged close to 22 times in comparison to its historical average of approximately 17 on a trailing basis. For the BSE Mid Cap and Small Cap of the same period, the P/E valuations are at an average of 33.8 and 81.13 times.

Corporate Earnings: P/E Ratios are directly linked to the corporate earnings of the country. As per Kotak Institutional Equities Estimates, the Expected Earnings for companies representing the Nifty 50 Index are approximately 2% in FY 2018. A variety of reasons are attributed to these low earnings expectations, most famously discussed are the implementations and effects of Demonetization and Goods and Service Tax (GST).

Crude Oil Prices: Nearly 80% of India’s energy needs are import dependent. A direct consequence of this is the risk to the country’s inflation rate if the prices of crude oil are to rise. A rise in oil prices results in lower cashflows/profits for companies and higher prices for consumers. Brent crude oil prices are currently firming up at prices upwards of 60$ per barrel. This is a definite concern from an Indian economy perspective.

Exchange Rates: The Rupee is currently considered overvalued basis its 10 year average (Source: Kotak Research). This has a dual impact on the economy i.e. (A) it increases attractiveness of imported products, resulting in increased competition for domestic companies and lower profits; (B) it decreases the value of exported products and therefore hurts the margins of export based industries such as the IT sector. Both have resulted in muted growth prospects for these respective industries.

Bond Yields: In an growing economy like India, both equities and bonds compete for capital. In a equity bull rally, money is taken out from bond markets and pumped into equities, forgoing risk to capital for riskier investments. Currently bond yields are inching up to the mid 2017 high of 6.987% yield for the 10yr G-Sec. However there has only been net inflows into fixed income. Foreign Portfolio Investments into Government Securities have already reached 83.94% of their allotted limit (data dated as per 6^th Nov NSDL)

Inflation Rate: Inflation brings about it own risks to the stock markets. In the last Monetary Policy Committee meeting, the RBI revised the inflation projections for the rest of FY 2018 upwards to 4% – 4.5%. This may indicate a stop to future rate cuts, freezing any possibilities of reduction in lending rates. Medium term consequences for companies could possibly mean dearer than expected debt to  service, resulting in subdued profits and revenue.

Role of FIIs: The way that Foreign Institutional Investors park monies in the market can give an indication to the current picture of that market. While FIIs were very bullish on Indian Equities for most part of the calendar year, starting June they slowly but surely tapered inflows in equity, finally resulting in net outflows in the month of September and October. (Source: moneycontrol)

Global Scenario: On a global scale, economies are starting to look up, with further growth expected. According to IMF Economic Outlook, average expected GDP growth for FY 2017 is 2.5%. Globally, equity markets have participated in this growth including India. What probably may need to be put in perspective is that the rally in Indian Equities may be partly due to the global rallies taking place. Therefore the Indian equities are associated with risks in terms of foreign external factors like outbreak of war in the Korean Peninsula. Such events are likely to have negative impacts on the domestic markets.

Keeping in mind the above mentioned factors, Plan Ahead Wealth Advisors has a definite view that current equity markets are over valued and investors should exercise caution. The not so positive indicators from these mentioned factors should mean a significant correction cannot be discounted, keeping us wary of diving too much into equities without first educating investors of the potential risks in the short to medium term horizon.

 

 

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Break your home bias; go global for diversification – article by Vishal Dhawan in Mint

Asset Allocation should also include global stocks and mutual funds as a diversification strategy is always better. Its always good to get the best of all global markets.

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Our Market Mantra for December 2014

The year 2014 was mostly a year full of positive events for Indian financial markets which caused the equity markets (BSE Sensex) gaining close to 30% in 2014 . Some of the major events that took place are as follows and our outlook in 2015:

1. Historical electoral results – A strong, pro- growth oriented and business friendly government looks good for economic growth and for businesses. This promise has to translate into big reforms on the ground as most of the early work has been focused on getting the bureaucracy and decisions that were deferred forward.
2. The GDP growth for Q3 2014 expanded to 5.3% from 5.7% in Q2. It is expected to pick up further to 6-6.5% YOY in FY16 with growth over other parts of the world remaining subdued and hence the gap of India GDP Growth with Global GDP growth is expected to widen as seen from the data below:

Source:  IMF, credit Suisse Research, Dec 2014

3. Current Account Deficit (CAD) widened in 2Q FY15 due to widening of trade deficit. However, it is expected to be in a comfort zone in FY16 with falling crude oil prices offsetting high import growth of non-oil and gold.

Source:  RBI, Citi Research, Dec’14

4. Fiscal Deficit for the first 8 months of FY15 (Apr-Nov) came in at 99% of the budget estimate of 4.1% for the full fiscal year. Whilst it is still possible that the government could achieve the target by controlling spending for this year, the fiscal deficit target of 3.6% of GDP in FY16 could be difficult to meet.

Source:  Budget Documents, Citi Research, Nov’14, BE=Budgeted Estimate

5. Earnings Growth: The private sector in India remains in a deleveraging cycle, saddled with excess debt. However, Corporate Earnings should be better than estimates as corporate margins are significantly below the long term averages and should improve gradually as capacity utilization and business conditions improve in the next 2-3 years which is when the full impact of lower interest costs and softer commodity prices will show up in corporate profits.

Source: Motilal Oswal Research, November 2014

The outlook for equities in 2015 could be challenging, but things look promising from a longer term perspective and there is merit in increasing allocation to equities in a phased manner and staying invested. However, every investor should look at their own specific asset allocations rather than specific asset class performances.

6. Inflation declined to a series low due to lower commodity prices, slowdown in consumer demand, low growth in MSPs and falling oil prices. CPI inflation eased to a series-low 4.4% in November 2014 from 5.5% in October 2014 in year-on-year (y-o-y) terms. This primarily reflected a sharp decline in food inflation to 3.6% in November 2014 from 5.7% in October 2014, as well as a fall in core-CPI to 5.5% from 5.9%. In fact, WPI inflation declined to 0% in November 2014.

Source: CSO, ICRA Research

In the December Policy review, RBI kept the rates unchanged and revised the CPI target to 6% for March 2015 and also as per RBI, the risks to the Jan 2016 CPI target of 6% looks balanced. There could be concerns during the first quarter of 2015 as RBI waits for certainty with regards to lower/stable inflation, and fiscal adjustments during the budget before commencing any monetary easing and interest rate cuts. Global concerns over interest rate hike in US and movement of global crude oil prices will also keep investors guessing on the direction of interest rates in India.

Fall in inflation and slow economic growth would lead to cut in interest rates in future. As seen from the chart below, bond yields have moved sooner than policy rates more often. Currently also, the yields have fallen in anticipation of a rate cut.

Source: RBI, Bloomberg

RBI is also targeting a real positive return on interest rates to potentially move savings from physical assets to financial assets. This could mean that a 6% CPI inflation would synchronize with a 7% repo rate – which means a 100 bps cut in repo rate over the next 18 months.

Investors will need to have a sufficiently long time horizon ( 12-24  months) when investing in duration strategies now, especially given that the first 25 bps of the expected cuts are perhaps already in the price.

Thus, we would recommend continuing to stay invested in a portfolio with a mix of longer maturities and accrual funds, which are likely to benefit as interest rates are expected come down in the next 18-24 months.

7. The global equity markets also continue to perform well with US markets reaching new highs. Crude oil prices corrected to a 5.5 year low due to significant new supply of shale gas from U.S., slowdown in global demand, and a reduction in per unit consumption in automobiles due to better and efficient technology. So, there’s enough reason to believe that oil prices will remain favourably low. Obviously, a sharp drop in oil prices can potentially create some pressures in oil exporting countries like Russia and in market players who were perhaps overextended in trading.

Also, lower oil prices reduce inflationary pressures and current account deficits allowing emerging market central banks greater freedom to stimulate domestic economies.

We think 2015 is going to be a year of divergence in economic growth and central bank policy. While the US is leading developed markets growth, Europe and Japan are struggling for growth at this point of time and China is still in search of its sustainable growth formula. So we could have central banks across the globe moving in a de-synchronized manner where US is looking to normalize its interest rate structure, while Japan and Europe will still continue to adopt loose monetary policy conditions to fight deflation in their economy. This divergence in policy action will increase market volatility and require investors to pay more attention to risk management.

8. Currency: Dollar strength and one of the drivers of this trend is the shale gas revolution which US is experiencing and its impact on shrinking the US economy’s current account deficit. This could pose some challenges for emerging markets but stronger fundamentals should limit the financial risks for those emerging market which have already gone through a course correction over the last 18 to 24 months.

Hence, we continue to reiterate to build a well diversified portfolio with having exposure of between 10-15% into international investments to hedge against currency risk.

9. Gold prices could continue to remain under pressure in the short term due to the fear of interest rate hike in US. Whilst the INR currently looks a little overvalued and is expected to depreciate, Gold as an asset class could gain value as it has an inverse relationship with the Indian currency traditionally.

Hence, we continue to believe to have gold as small part of the portfolio for the purpose of diversification and hedge currency risk.

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Market Mantra November 2014

Indian Equity markets once again touched all time highs by crossing the 28500 level on the BSE SENSEX due to various reasons like structural reforms made by strong government, weak commodity and oil prices, inflation easing further, improvement in macros and continued foreign flows on the back of strong  liquidity conditions overseas

Equities:  The CNX Nifty and CNX Midcap increased by approx. 6% in the last one month. The local market sentiment has remained buoyant through the last few quarters as the market anticipates a strong domestic recovery and lower interest rates in an improving policy environment. Various macro factors like GDP growth, Current Account Deficit (CAD), Fiscal deficit (FD), IIP, WPI and CPI are showing an encouraging trend in FY 2014-15, compared to last year FY 2013.

Source:  Citi Research, HDFC MF, Colored rows refer to yearly data; other represent quarterly data

Corporate margins are currently at cyclical lows, and though earnings are still to significantly pick up and may take a few more quarters, better managed companies are starting to show some traction. As corporate margins normalize from depressed levels and as interest rates move lower, current P/Es that look expensive could start to look much more justifiable.

However, it is critical to have a long term horizon for investors buying into equities as always, as there could be volatility in the short term, especially with a consensus positive view on India. A consensus positive view tends to be a good contrarian indicator very often, so having a long term view and holding some cash to buy on corrections could be a good idea.

While the U.S. continues to normalize its monetary policies, the same does not apply elsewhere. To overcome weakness in Europe, China and Japan, the respective central banks are taking steps towards more monetary easing to stimulate growth in their economies.

Emerging Markets like India and China have adopted a more flexible exchange rate system, increased Foreign Exchange reserves and managed their external debt in an efficient way thus far.

Source: MSCI, Credit Suisse, I/B/E/S, FactSet, J.P. Morgan Economics, J.P. Morgan Asset Management “Guide to the Markets – Asia.”

Investors should remain disciplined in maintaining a well-diversified portfolio by investing across domestic and international equities. A global economic recovery should favour equities, especially emerging markets like India and China that are likely to benefit from a global recovery.  Both emerging markets and developed markets should benefit as a result.

Over the long term, the INR should continue to depreciate vs. the USD at nearly the rate of inflation differential between India and US (last 30 years CAGR of INR depreciation vs USD is 5.5 %; inflation differential between India and US is 4.8%). Therefore, we continue to recommend building international exposure in the portfolio for the purpose of diversification and act as a hedge against currency risk.

Fixed Income: While the equity market is on a high, there are good investment opportunities that we foresee in the fixed income market. There are various factors that impact inflation and the table below shows that they are moderating:

Investors should start looking at bonds and bond funds (a combination of short, medium and long term options would be recommended, depending upon investment objectives and risk appetite) as a means of hedging their future reinvestment risks.

Globally the gap between US &Indian interest rates is currently high, yet, a sharper than expected reversal in US interest rates could lead to volatility / challenges for the Indian fixed income markets as well. Foreign portfolio flows into debt have also been at a high for many months now, as can be seen from the graph below, and thus investors need to be cautious about any reversal in fund flows. Thus maintaining a long term view on fixed income investments (18-36 months) wouldalso be crucial.

CPI inflation eased to a series-low 5.5% in October 2014 from 6.5% in September 2014 in year-on-year (y-o-y) terms.  This primarily reflected a sharp decline in food inflation to 5.8% in October 2014 from 7.6% in September 2014, even as core inflation was unchanged at 5.9%.

Source: CSLO, ICRA Research

However, RBI may not cut the rates in the upcoming monetary policy in December unless they are very sure of achieving CPI inflation target of 6% by January’2016. In addition, it may want to reward investors with continued positive real returns of between 1%-1.5% p.a. over and above inflation, which should help monies move from physical assets like real estate and gold to fixed income instruments as well.

Gold: Gold may continue to see downward pressure globally, with weak commodity prices, and less fear amongst global investors. The government has removed gold import restrictions in spite of the fact that gold imports went up significantly in the last festive month to $3.75 billion. Hence, allocating only a small portion of your investments into this asset class continues to be a good strategy in our view.

We came across a very interesting table recently showing the returns on CAGR basis and the risk measured by standard deviation over 1, 3 and 5 years holding periods of the BSE SENSEX, 1 year SBI Fixed deposit (FD) and Gold in INR terms for the last 30 years:

Source: Bloomberg, HDFC MF

As you can see from the above data that:

FDs vs Gold: Fixed deposit returns are very close to the Gold returns in the last 30 years; however the volatility or risk in gold is much higher compared to the risk in FD. Hence, Gold is not a superior option compared to FDs to invest in from a risk perspective.

Equities vs Gold:  Long term returns on equities are much higher than returns on gold (appreciation in Sensex was 5x of gold*). Volatility of equity returns is high but to a lesser extent (3x over 3 year holding periods and 2x over 5 year holding periods). Equities are therefore a superior asset class compared to gold for long term investments and for those with tolerance to volatility.

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Market Mantra October 2014

India equity markets celebrated Diwali in style, with the Nifty regaining the 8,000 mark and the Sensex moving above 27000.

There was plenty of positive news flow from India like the Government announcing a series of policy reforms including diesel deregulation, gas price hikes and e-auction of the cancelled coal blocks. The victory of the BJP in the Assembly elections in Maharashtra and Haryana too buoyed sentiments.

Equity:

Nifty increased by 1.02% whereas CNX Midcap increased by 1.44% during the month.

The Price to Equity ratios continues to show that equity market valuations are above 20 Year average and it is therefore critical to see earnings pick up to justify current valuations . Early signs show that it is starting to happen as you can from the chart below on both PAT and EBITDA margins for Nifty companies:

Source: Motilal Oswal Research, 2014

In the graph below it is very clear that investment growth has picked up recently in India compared to some of the other emerging markets (like Brazil, Russia and Mexico), but needs to rise further for economic growth to improve structurally.

Source: Morgan Stanley Research, October 2014

Global economic growth woes continued – the IMF downgraded its economic outlook on the globe due to weaker than expected global activity in the first half of 2014, along with ongoing Middle East tensions, the Ukrainian and Russian standoff, along with the Hong kong political unrest. The new epidemic disease Ebola is also a big concern in U.S, African and European countries. News from Europe also continues to be challenging. The US ended its bond buying program but maintained its stances on keeping interest rates low for a considerable period, in line with market expectations. Whilst it is very tempting to move to a 100% domestic portfolio in this environment, we continue to recommend to have at least 10% of the portfolio invested globally for the purpose of global diversification, as well as act as a hedge against currency risk.

With projections of GDP growth of 5.5 percent in FY 2014–15 and 6.5 percent in the following year, Q2 2014 GDP growth came at 5.7%, above the consensus expectations. We believe that the Indian economy is on the cusp of a growth uptrend and this will contribute to growth in corporate earnings as we have shown in our charts above in this article and hence will justify strong performance of Indian equities, especially with oil and commodity prices coming off. However, it is critical to keep you asset allocation intact.

Source: MSCI, Credit Suisse, I/B/E/S, FactSet, J.P. Morgan Economics, J.P. Morgan Asset Management “Guide to the Markets – Asia.”

Fixed Income

CPI inflation eased to a series-low 6.5% in September 2014 from  7.8% in August 2014 in year-on-year (y-o-y) terms and Core-CPI inflation (excluding food, beverages & tobacco and fuel & light) declined significantly to a series-low of 5.9% in September 2014 from 6.9% in August 2014 (refer chart below)

Source: CSO, ICRA Research

Inflation related to fuel & light moderated to 3.5% in September 2014 from 4.2% in August 2014 in y-o-y terms. Softening of prices of various commodities including crude oil and domestic fuel prices would benefit the CPI trajectory in the near term and hence we continue to expect the Reserve Bank of India’s (RBI) January 2015 target of restricting CPI inflation below 8.0% to be achieved.

Nevertheless, the probability of a Repo rate cut in 2014-15 remains low, as the RBI is likely to continue to focus on containing inflationary expectations to improve the likelihood of restricting CPI inflation below the January 2016 target of 6.0%.

The below chart shows the Interest rate differentials between US and India:

Source: Axis Mutual Fund

There is a fear that higher US rates will draw FII money away from India. This is not borne out by history. During 2004-06 even with rate hikes money continued to flow into India from FIIs. Secondly, back in 2004 at the start of the cycle, US rates were at 1% and Indian rates were at 4.5% implying a 350 bps differential. By the end of the Fed rate hikes, the rates were respectively 5.25% and 6.50% implying a differential of just 125 bps. In contrast currently the US is close to zero (officially the overnight target is 0 to 0.25%), while RBI is at 8%, a differential of nearly 800 bps.

Hence, we recommend having the fixed income portion of the portfolio comprising of both accrual and duration strategies where accrual strategies will lock into current high interest rates and duration strategies will start benefitting once the interest rates start coming off over the next 12-24 months.

Gold:

Demand for Gold has seen a rebound in recent days in India and China. India celebrated Diwali, the biggest gold buying festival  which boosted physical demand for the yellow metal on support of low prices. Meanwhile, a surge in Gold imports pushed up the India’s trade deficit for September to $14.25 billion of which Gold imports accounts for $3.75 billion. This raises questions on whether there can be some quantitative restrictions or higher import duties put on gold , to bring down the demand. Hence, allocating only a smaller portion of your portfolio in Gold continues to be a prudent strategy.

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The Red Sea has shifted…thanks to the Fed

For the uninitiated, the Red Sea is a seawater inlet of the Indian Ocean lying between Africa and Asia. Thanks to the announcements of the Federal Reserve in the US late last night, and Ben Bernanke’s very clear commentary of how he expects the Federal Reserve to run its monetary policy over the next 18 months or so, the Red Sea shifted to financial markets today.

From equity markets to currencies to bond markets, there was a sea of red across the screens in markets today, be they emerging markets or developed markets. Whilst it is widely believed that market participants hate uncertainty, it seemed that they hate certainty even more. The statement and timetable from the Fed essentially covered two items

1. A tapering off of fresh buying of securities from the current level of USD 85 billion per month that they are at currently starting from later this year. Most analysts seem to expect that to be around September 2013.

2. A gradual end to all buying of securities which could happen by mid 2014.

Of course, this is provided that unemployment in the US gets lower and inflation starts to rise. There is now an expectation that interest rates in the US start to move up from end 2014, early 2015.

Whilst none of this was unexpected, the clarity seemed to have upset market participants, who wanted to run to the safety of the US dollar and US treasuries.

Whilst this reaction could well continue for a while longer as different constituents look at these events through their own prisms and risk comes off, and also move further to US treasuries where yields become more attractive, past experience indicates that events of these kind, though negative in the short term, create opportunities for investors to rebalance their portfolios, both amongst asset classes and within asset classes.

Over the last thirty years, yields on US treasuries have moved up substantially multiple times. In over two thirds of these instances, this has resulted in gains for equities as well,  especially in Asia. Such events provide entry opportunities to add exposure to equities.

It would be interesting to look at this from a historical perspective. Over the last thirty years, yields on US treasuries have moved up substantially multiple times. In over two thirds of these instances, this has resulted in gains for equities as well, especially in Asia. Thus, investors need to look at opportunities provided by events of this kind to add exposure to emerging market equities, especially as valuations are reasonable. For example, Indian markets currently quote at a trailing price to book of 2.7 against a historical average of 3.6. Ditto with forward price earning ratios, which are currently at about 14 times, against a historical average of 16 times. With most investors already underweight on Indian equities in their portfolios, we think this is a good time to start buying. In addition, cooling oil and gold prices could be great for the Current Account Deficit that has everyone in India so worried today, providing a further kicker to equities.

Other parts of Asia also seem to have similar valuation opportunities, with a very large part of Asia quoting at a significant discount to long term averages on both PE and PB parameters. Whilst buying equities is always fraught with downside risks over short periods of time, buying at reasonable valuations has always played out well over the long term. Building a diversified portfolio across emerging market equities is recommended, even though it may be tempting due to a home bias, to run a 100% domestic equities portfolio for Indian investors. Investors can also look at equities in markets like the US where a recovery could kick start a virtuous cycle, driven by corporate sitting on cash rich balance sheets, at higher levels than ever before.

On the fixed income side, with the Indian rupee under pressure due to the strength of the US dollar, and inflation likely to reemerge, interest rate cuts could get slower and less predictable, making it important that investors use a combination of both duration strategies like income and dynamic funds, as well as accrual strategies like short term bond  funds, and deposits in their portfolio. In case they were overweight duration strategies, they need to rebalance.

Gold hit a two and a half year low, and whilst it could be tempting for investors to add further to their portfolio, the significant exposure that most Indian portfolios already have to gold through a combination of jewelry and investments, would make it difficult to recommend further exposure.

Whilst it is very tempting to stay out of financial markets at this stage and come back later, market timing simply does not seem to work. So stay invested and keep investing. Of course this assumes you’re in it for the long term.

Ultimately, if you go to North India in summer, you know its going to be very hot. You don’t panic because the temperature has gone above 45 degrees Celsius.

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India GDP slowing down – what should you do?

You have been probably watching reports over the last few days indicating a slowdown in the Indian economy. Some of the lead indicators like automobile sales also seem to be pointing towards that.

While this possible slow-down may have created a certain level of anxiety, you need to remember that the slowdown that is being referred to, still estimates a growth rate of seven per cent to eight per cent per annum, projecting India as one of the fastest growing economies in the world. Other parts of the world including Europe and the US which have a slow paced growth, are exhibiting signs of a further slow-down. Lets take a look at the options available to you during the slowdown.

Revisit your financial goals:

In case you have any of your goals that are likely to be reached over the next 24 to 36 months, ensure that the funds required for these goals are in fixed income instruments such as bank deposits, short term mutual funds or liquid funds. For example, if you have been saving up for the down payment of a home or sending your child to his or her college of choice in the immediate future and have the money in equities, you do not want to jeopardize that plan due to a sharp stock market correction. If your financial goals are long-term in nature, you need to ensure that your overall asset mix is appropriate for your targeted portfolio returns, and rebalance if necessary.

Ensure that you have 10 per cent of your portfolio in gold:

With gold prices close to lifetime highs, a large number of investors who do not have gold in their portfolio are very hesitant to include gold into their portfolios at these prices. Gold needs to be viewed as a protection for the rest of your portfolio. If you are hesitant to buy gold at these prices, you could consider a systematic exposure to gold through using systematic investment plans (SIPs) in gold mutual funds.

Prepay your Loans:

With returns from fixed deposits, fixed maturity plans and short term bonds at attractive levels, it is very tempting to lock your money at these rates. If you have outstanding loans, restrict your fixed income exposure to emergency funds and use excess funds to prepay your loans. Remember that most of the loans tend to be of the reducing balance in nature while returns from the fixed income instruments are compounded. You may therefore need to take the help of your financial planner to decide whether to prepay your loan or buy that fixed deposit or mutual fund instead.

Keep some money handy for a sharp correction:

In case there is a correction in excess of 10 per cent in the equity markets, make sure that you have some cash handy to increase your equity exposure through buying blue chip stocks, index funds or diversified equity funds with good track records.

Keep adding if the markets fall beyond that as well, so that you can get the benefit of lower equity prices for your long term equity portfolio.

This article was written by Vishal Dhawan, CFP^CM and appeared in the Asian Age  on 11^th June 2011 .

 

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Should you Buy or Sell Gold Now?

Gold must constitute 10-15% of portfolio

As an investor, you would have noticed two commodities swinging wildly over the last couple of weeks  silver and oil. The swings in silver have obviously been far more worrisome with the prices falling by more than 30 percent over a very short period. Oil, to a lesser extent, has also swung violently over the last few weeks.  With gold prices also close to record highs, a large number of investors are concerned about their strategy to be followed. Lets try to address some of their concerns.

Is it gold’s turn next to witness a sharp fall?

While there are multiple reasons for the significant swings in commodity prices ranging from increased margins from commodity exchanges to interest rate hikes in India and China, it is important to understand the reasons for the fundamentals behind the price increase in gold.

Significant increase in money supply:

Ever since the housing crisis in the United States and the subsequent impact on financial markets due to the collapse of Lehman Brothers, there has been a significant amount of money that has been pumped into the world economy by central banks. Since the supply of money has increased significantly,there is an expectation that money in its traditional form will continue to lose value. Gold is being seen as a safe haven in this environment.

Diminished supply from central banks:

A large number of central banks were selling gold till a few years ago, providing a continuous supply of gold and keeping prices suppressed. This has changed in the recent times, with central banks like India and China actually increasing their holdings of gold to diversify their US dollar dominated currency. This increased demand from Central banks has helped in both keeping the prices steady as well as providing confidence to investors who hold gold. Track record of being a good hedge against inflation: Over the long periods of time, gold has demonstrated the ability to be a good hedge against inflation. With a large number of central banks raising interest rates to combat inflationary trends, gold is being increasingly looked at as a part of the portfolio to hedge against inflation. So what should you do now?  Ensure that gold makes up 10 per cent to 15 per cent of your overall portfolio with its track record of diversifying portfolio risk and low correlation to equities, it is a critical part of your portfolio. If you have less than 10 per cent of your portfolio in gold, you should continue to buy. If you have in excess of 15 per cent of gold in your portfolio, you should sell. Use volatility to your advantage by buying in tranches if gold prices fall. You also have the option of buying gold funds that allow you to invest systematically through Systematic Investment Plans (SIPs) or Systematic Transfer Plans(STPs).

This article was written by Vishal Dhawan, CFP^CM and appeared in the Asian Age on 14^th May 2011 .

 

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Don’t act on impulse during chaotic times

OVER THE last few weeks, international events have dominated the headlines with the natural disaster and its nuclear fall out in Japan causing panic in global financial markets, the West Asian crisis driving oil prices upwards, rating downgrades in Europe, news of China slowing down as per their next five year plan and mixed numbers from the US, leaving investors confused.

With the significant integration that has happened in financial markets over the last few years, tracking each of these events and its implications on your portfolio is becoming an extremely challenging task. While the most common reaction to each of these events is to act immediately, we believe that most immediate reactions on the basis of news flows ends up being sub optimal.

Think back about the investors who sold their portfolios in 2004 due to election results not being in line with what they had expected. The Sensex is up more than five times from those election day results.

So what should investors do?

• Revisit your financial goals — If your financial goals are more than five to seven years away, it may be prudent to do nothing as most events of this kind do not impact long term port-folios immediately. However, there is clearly a need to analyse each of these events to understand whether they can have long term impacts on your goals. If all of this sounds too complex, take the help of an expert who can give you an overview of the impact of these events on your portfolio.
• Brace yourself for higher inflation — As oil prices move upwards due to the West Asian crisis and commodity prices start to move up once again asJapantries to rebuild itself, get ready for high inflation rates. Prepaying loans and adding commodities — agricultural, industrial and precious metals, to your portfolio would be good ideas in a high interest rate environment.
• Focus on track records — While it may be tempting to add the most exciting idea to your portfolio at this point as prices have fallen, it is extremely important to have your monies in investments that have track records over long periods. Whether it is mutual funds or large company stocks or developers with property under construction, focus on names with track records. Stay with the tested in these times.
• Avoid getting too pessimistic or too optimistic – Emotions tend to swing wildly when asset prices swing either way. Avoid the temptation of getting too greedy when prices are up or too fearful when prices are down.
• Build truly diversified portfolios — Having a few dozen equity mutual funds and stocks and bank deposits in multiple banks does not necessarily create a diversified portfolio. Look for a greater degree of diversification — for example, adding international exposure to a domestic portfolio, debt mutual funds to a fixed deposit portfolio. Diversify across multiple asset classes.

This article was written by Vishal Dhawan, CFP^CM and appeared in the  Deccan Chronicle on 26^th  March 2011 .

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