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The shift in RBI’s stance came, but not in the repo rate as most people were expecting today.The Monetary Policy Committee ( MPC) decided to change the stance from neutral to “calibrated tightening” of monetary policy, which in plain English means that rate cuts are probably off the table, and RBI can decide on when to raise or not raise rates depending on how fresh data comes in.

Whilst a 0.25% hike in the repo rate was the consensus view of the expected MPC action today, with some even expecting a 0.5% hike, the policy statement surprised markets – bonds positively, equities and the rupee negatively, with RBI choosing to do nothing, as MPC members voted 5:1 in favor of an unchanged repo rate at 6.50%. This was also probably driven by the fact that there have been two consecutive rate hikes in the last two MPC meetings.

They stuck with their primary mandate i.e. controlling inflation, with the objective to achieve medium term target for CPI inflation of 4 percent within the range of +/- 2%, while supporting growth.

Since the last MPC meet in August 2018, the Indian basket of crude oil has increased sharply by US$ 13 a barrel, whilst global economic activity has been able to withstand ongoing trade tensions thus far. Food inflation has remained unusually weak, which imparts a downward bias to its trajectory in the second half of the year. The risk to the food inflation from a 9% deficit in the monsoon, is also probably mitigated by higher production of major kharif crops for 2018-19 than last year’s record. An estimate of the impact of an increase in minimum support prices (MSPs) announced in July has been factored in the baseline projections.

The projected inflation in Q2:2018-19 is at 4%, 3.9%-4.5% in the second half and 4.8% in Q1:2019-20 with risks on the upside, which were lower than earlier estimates.

With risks broadly balanced GDP growth projection for 2018-2019 was lowered at 7.4% against 7.5 % in August due to strong base effect.Private consumption has remained strong and is likely to be sustained even as the recent rise in oil prices may have a bearing on disposable incomes. However, both global and domestic financial conditions have tightened, which may dampen investment activity. Rising crude oil prices and other input costs may also drag down investment activity by denting profit margins of corporates. This adverse impact will be alleviated to the extent corporates are able to pass on increases in their input costs. Uncertainty surrounds the outlook for exports. The recent rupee depreciating could be negated by slowing down of global trade and the escalating tariff wars.

Global headwinds in the form of escalating trade tensions, volatile and rising oil prices, and tightening of global financial conditions therefore pose substantial risks to the growth and inflation outlook.

Your Investments

As we see change in stance from neutral to calibrating tightening signals that rate cuts are off the table. Concerns seem to be around crude oil prices, global interest rates and the ongoing global developments on the trade front. Equities continue to trade at a premium and whilst it may be very tempting to buy lumpsums as equities have fallen substantially, equity valuations in India continue to be elevated vis a vis long term averages. A gradual entry strategy or a continued SIP/STP strategy is most suited to the current market scenario. It may be a good idea to add fixed income exposure through a combination of largely ultra short term, short and medium term strategies focused on high credit quality portfolios, to avoid any spillover of the continuing bad loan cycle on your investments.

Your Loans

After hiking the repo rate twice in a row, the Reserve Bank of India (RBI) has kept the key policy rates unchanged. However, the central bank has changed its stance on the key policy rates to ‘calibrated tightening’. This indicates that RBI is of the view that there is upward pressure on interest rates which means your EMIs are likely to continue ti go up. Expect banks to raise rates gradually even though RBI kept rates constant today.

Way forward

The next policy is due on December 5, but don’t be surprised for mid course corrections if the data so warrants. Ultimately that’s what caliberated tightening probably alludes to.

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Today marked the 3rd Bi-Monthly policy statement by the RBI for the FY 2018-19 with members voting 5-1 in favor of a rate hike.

This was largely in line with market expectations and was already priced in, as post the release of the minutes of the monetary policy bond yields did not move much in either direction.

However, the MPC also continued to maintain a neutral stance, indicating that it is trying to play a delicate balance between inflation and growth, and decisions are being taken with the objective of achieving the medium term target for CPI at 4% within the range of +/- 2% and future data prints

The MPC mentioned that domestically various indicators suggest that economic activity has continued to be strong. Significant turn around in the production of capital goods and consumer durables, Progressive monsoon and increase in MSPs of Kharif crops are expected to boost rural demand by rising farmer’s income. Vehicle sales augur well for urban income growth.

Retail inflation i.e. CPI grew to 5% in June from 4.9% in May, driven by an uptick in inflation in fuel. Food inflation remained muted due to lower than usual seasonal uptick in prices of fruits and vegetables in summer months. Adjusting for the estimated impact of the 7th central pay commission’s house rent allowances (HRA), headline inflation increased from 4.5 per cent in May to 4.6 per cent in June. Low inflation continued in cereals, meat, milk, oil, spices and non-alcoholic beverages, and pulses and sugar prices remained in deflation. Factors mentioned above have resulted marginally downward revision in inflation projections for Q2 vis-à-vis the June statement. However, projections for Q3 onwards remain broadly unchanged on account of uptick of 20 bps in inflation expectation for 3 months and 1 year ahead horizon survey of households by RBI’s. RBI’s industrial outlook survey also reported higher input costs and selling prices in Quarter 1 of 2018-19. Input cost of companies polled in services PMI in June also stayed elevated. Farm and non farm input costs rose significantly in June.

The central government has decided to fix the minimum support prices (MSPs) of at least 150 per cent of the cost of production for all kharif crops for the sowing season of 2018-19. This increase in MSPs for kharif crops, which is much larger than the average increase seen in the past few years, will have a direct impact on food inflation and possible secondary impacts on headline inflation. Uncertainty around the full impact of MSP on inflation will only resolve in the next several months once the price support schemes are implemented and procurement by the government is visible.

Based on an assessment of the above-mentioned factors, inflation is projected at 4.6 per cent in Q2, 4.8 per cent in H2 of 2018-19 and 5.0 per cent in Q1:2019-20, with risks evenly balanced. Excluding the HRA impact, CPI inflation is projected at 4.4 per cent in Q2, 4.7-4.8 per cent in H2 and 5.0 per cent in Q1:2019-20.

The MPC notes that domestic economic activity has continued to sustain momentum and the output gap has virtually closed. However, uncertainty around domestic inflation needs to be carefully monitored in the coming months. In addition, recent global developments raise some concerns. Rising trade protectionism poses a grave risk to near-term and long-term global growth prospects by adversely impacting investment, disrupting global supply chains and hampering productivity. Geopolitical tensions and elevated oil prices continue to be the other sources of risk to global growth. On account of these risks, RBI governor stated that by keeping the neutral stance, the Monetary Policy Committee have kept the option of further rate increase or decrease open and dependent on future data.

With an election year upon us and possible fiscal risks emanating, along with global outflows on the back of higher US interest rates and a falling rupee, this may not be the last of the rate hikes in our view.

Your Investments

Financial markets have continued to be volatile and driven mainly by monetary policy stances in advanced and emerging economies and geopolitical tensions. Globally, equity markets have been volatile on trade tensions and uncertainty around Brexit negotiations. However, it also important that public finances do not crowd out private sector investment activity at this crucial juncture.

Capital flows to Emerging Economies declined in anticipation of monetary policy tightening in Advanced Economies. Also currency of Emerging economies have depreciated against the US dollar over the last month on account of strong USD supported by strong economic data.

Equities continue to remain overpriced from a price to earnings perspective in spite of recent corrections and a better growth outlook. However, good results so far by many companies, along with good growth expectations and better capacity utilisation bode well for earnings growth going forward.

Real rates continue to remain positive.The rising G-sec yield makes dynamic bonds and long term bond funds unattractive and the exposure to the same should be minimized. Bonds with a shorter duration of 3 months to 2 years are ideal in the given scenario. We therefore, continue to believe that investors should continue to have fixed income exposure through a combination of lower duration and short term strategies.

Your Loans

With an increase of 25 basis points by the RBI, the deposit rate of the banks could further increase which would be followed by lending rate hikes. Thus we suggest looking at prepaying or raising EMI amounts on your loans to negate the interest rate hike and future hikes that could follow.

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retirement

It is one of the biggest, if not biggest, money question that often keeps people awake at night. The uncertainty of whether what you have earned and saved is enough for that dreamy retirement life can be quite stressful. And it is this ambiguity that often leads to making incorrect assumptions which, in a vicious cycle, leads to misguided money decisions.

Through this blog, we hope to focus of some items that need to be looked at to better judge just how much preparations you need for your Golden Years.

  1. Goals:

First of all, it is important to accept that your retirement will not mean doing absolutely nothing for the remainder of your life. Chances are you would still be at least partially responsible for your child’s post graduation/ marriage. If not those, then planning for those holidays and long travel plans, or having a dedicated medical corpus or even starting philanthropy or your own consultancy would need financial planning and funds.

There even might be recurring goals to consider such as cars. If you drive a Honda City today, chances are you would want similar car throughout your life. Assuming a Honda City costs Rs 13.75 lakhs as of today, you would need Rs 65.8 lakhs at the start of retirement just to fund purchasing the same car every 5 years (accounting for 7.7% inflation)

 

  1. Your Current Expenses:

While we usually have approximate amounts in our heads, rarely do we know our exact expenses for a year. If you think you may know, even so the detailed expenses are not known. If you do track and compare average expenses of the year versus that of two years ago, you would probably see higher than expected changes. This is due to inflation and lifestyle changes. It is critical to keep tabs on your expenses, as discretionary expenses tend to creep up and inflate your overall expenses.

  1. Changing Expenses during Retirement:

It is common notion that expenses will reduce once you retire. But data and experience shows otherwise. For example: Travelling and Medical costs tend rise whilst dependent cost tend to go down and groceries tend to remain the same.

Also, how expenses change depend on the stage retirement you are at. Early on during retirement sees uptick in expenses due to higher travel and entertainment costs. Then they slowly start coming down in the intermittent phase of retirement. Towards your super senior years, they tend to same constant.

  1. Medical Costs:

As per Willis Tower Watson Global Medical Trends Survey Report 2018, medical inflation in India is currently at 11.3% p.a. In other words, the cost of the same surgery will double every 6.5 years! Your retirement needs to plan for this.

  1. Lifestyle Expenses:

Urban inflation is around 7.7% p.a. on an average in the past 20 years. But that does not account for everything. We aspire for better things during our retirement. For example, you would have a Sony Home Theatre System which would cost approximately Rs 35,000. But aspirations would strive for a Bose System which is closer to Rs 90,000. That is a 181% jump! It is crucial to have both sets of inflation accounted for during retirement.

  1. Life Expectancy:

An incorrect assumption of life expectancy can have significant consequence. Data shows the life expectancy of Indians is closer towards 70 years and above. Furthermore, it is a fact that women have higher life expectancy than men. So planning for your spouse’s life expectancy is something which is not given adequate thought.

Life expectancy in developed countries are much higher. And as India steadily progresses to that status, it can be reasonably assumed that our life expectancy will only increase.

These are just some items, amongst others, that need to be carefully looked at to ensure you are planning for a good enough retirement corpus and are financially well placed to live your retirement years in peace.

To provide an even deeper understanding, Plan Ahead Wealth Advisors is conducting a seminar on Planning for Retirement on the 7th of July 2018.

For a complimentary invite do write in to us or leave us a comment to this blog.

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Oil has always had a major influence on India. Whether it be politics, stock markets or the general state of the economy, oil continues to have it’s say in these matters. And this is so because India is a net crude oil importer to meet it’s ever growing demands, and it is not just about energy requirements.

brent crude price chart

Oil in the last year has gone up 48.5% (Brent Crude Price in USD), whilst in the last three months alone it is up by 16.9%! This huge surge can and probably has started to show it’s effect across the various aspects of the economy. But as an investor into that economy, we hope to underline the impacts of this event on your portfolio holdings.

EQUITIES

  1. Inverse Relation:Data indicates that Nifty and Crude Oil prices have an inverse relationship. Between 2014-2017 whilst oil prices saw a significant drop the equity markets showed significant upwards trends. However the latest data seems to suggest that this inverse relation is currently not being witnessed, at least temporarily, with both the markets undergoing volatility and oil prices sky rocketing. Oil price rises however do impact both debt and stocks and hence need a careful watch.

nifty vs crude

  1. Oil Sector:Oil Marketing Companies (OMCs) are directly impacted by oil price movement. While retail prices have been continuously raised for the last few days, the worry remains that the government may ask these companies to absorb further hikes rather than passing them to end consumers for controlling inflation. Such a move could dampen their stock prices in the immediate future. Therefore if your stocks portfolio has high exposure to such stocks its time to review the same.
  1. Other Sectors:Besides oil companies, other sectors that do get affected are the Aviation and Consumer Durable sectors. For airlines, jet fuel is the single largest cost. Hence rises in oil prices prove serious strain on their margins. This can also be seen through their Q4 results. Also, a lot of companies such as rubber, paints, lubricants, chemicals and even footwear are heavily dependent on oil derivatives as raw materials for their products. Therefore a higher oil price has an indirect impact on their profit margins.
  1. Any positives?:Higher oil prices invariably lead to a slide in the Indian Rupee (which we will discuss below). But a weaker rupee can be a positive for IT and Pharma companies as a lot of their business in exports of services and goods.

FIXED INCOME

  1. Widening Current Account Deficit (CAD) and Fiscal Deficit:As India imports most of it’s oil needs, rise in oil prices means more money spent for the same amount of oil. This increases the Fiscal Deficit i.e. our expenditure is more than the revenue. As such the government then has to borrow more to meet this gap. This also puts serious pressure on the gap between total imports and exports and invariably leads to a ballooning CAD, resulting in loss of foreign exchange reserves.
  1. Weakening Rupee:As mentioned above, oil affects the CAD of our country which in turn has a direct impact on the currency due to higher Fiscal Deficits, Increased Borrowings and Current Account Deficits.

Year Rupee Dollar Exchange Rate % Change Avg. Brent Crude Oil Price per barrel ($) % Change
15-06-2008 42.48 91
15-06-2009 47.75 12.41% 58 -36.26%
15-06-2010 46.45 -2.72% 77 32.76%
15-06-2011 44.7 -3.77% 100 29.87%
15-06-2012 55.51 24.18% 110 10.00%
15-06-2013 59.53 7.24% 110 0.00%
15-06-2014 60.06 0.89% 110 0.00%
15-06-2015 63.6 5.89% 58 -47.27%
15-06-2016 67.5 6.13% 35 -39.66%
15-06-2017 64.62 -4.27% 55 57.14%
15-06-2018 67.45 4.38% 76 38.18%
  1. Inflation:Rising oil prices means rising input, freight and transportation costs for companies, which finally means bills and expenses increasing for the end consumers. In other words, strong reasons for rising inflation in the country.
  1. Where is the actual Impact?:For fixed income investors currently holding debt mutual funds, the above event has a negative impact on the underlying benchmark I.e. 10 year G Sec Bonds. As such, the yields of current 10 year G Sec bonds goes up, which results in a loss in value of bonds held (both sovereign and corporate). In fact, for any investor who may have recently put money into debt mutual funds may be experiencing a notional principal loss!

While elevated oil prices have certainly bought about uncertainties in both fixed income and equities, as an investor it is crucial to know the fundamental reasons of investing into your current investments, along with a certain understanding of when you would require the monies i.e. your time horizon. Like oil, there are always other factors that have short term impacts on portfolios, but by ensuring your appropriate asset allocation through consistent professional advice, your portfolio will likely navigate such times.

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bonus 4

Anxious times lie ahead for employees across India as the season for the annual bonus starts in full swing. People often consider bonuses as “money found” rather than “money gained” and therefore almost always consider using these pots of income for discretionary expenses such as gadgets and treats and vacations. While there’s nothing wrong in indulging oneself, it is also equally important to have the big financial picture in mind.

And whilst the list of to-do items can be endless, we at Plan Ahead Wealth Advisors have distilled that list into a few essential options.

  1. Payoff those Debts: As crucial as it can get, reducing those crushing debts can go a long way to ensuring long term financial happiness. With that thought in mind, one should ideally those pay the ballooning credit card and personal loans which have very high interest cost. This could be followed by any car or educational loans, though do remember that an educational Loan has certain tax benefits. If nothing else, prepaying your home loan should also be considered though the pros and cons of prepaying the loan might be best arrived at after consulting with a registered investment advisor.
  1. Replenish Emergency Funds: Keeping funds aside for unforeseen events is a handy tool. And ensuring that tool is always at optimal levels is critical. Therefore, if you had dipped in those funds previously, the bonus is a good opportunity to return them to their originally intended levels. Ideally, anywhere between 3-6 months of expenses, including any EMI or insurance premiums, should be available in such funds.
  1. Revisit your Insurance Needs: Speaking of insurance premiums, it is common knowledge that with age, insurance requirements change. Chances are high that as you age, your health insurance premium might be bumped up or that you realize that your life cover is inadequate and needs an increase. Using your bonus for such needs is a prudent way to utilize the same.
  1. Pay attention to your unfunded Financial Goals: There may be certain milestones that may not have been attended to by you earlier. Some may be upcoming in the next year, while others could be years away. Earning a bonus is always a great time to re look at those goals and use the bonus to bridge any gaps that may be there to fund such items. This could also be, but not limited to, ensuring adequate investments into tax saving instruments as appropriate.
  1. Invest in yourself: They say the biggest asset anyone can have is himself/herself. Therefore, using the bonus to upgrade your skills/knowledge can be a rewarding decision for the future either by increasing your prospects for that next big professional leap or even increasing your earning capabilities.

While the above are some of the “to-do” items with bonuses, there are also certain “do nots” that one should look out for, such as:

  1. Although quite common, never over spend beforehand, especially with credit cards, with the assumption that you will receive adequate bonuses in time to cover for the same.
  1. Money in savings accounts usually vanishes quicker than one expects. So, don’t wait too long on deciding what to do with that bonus. You may find out that by the time you decide what to do with it, it has already been spent somewhere unknowingly.

Bonuses are the result of your hard work throughout the year, so ensuring that your bonus works as hard as you have, can go a long way to a financially secure future. By considering the items listed above, you are more likely to arrive at the right choice of what to do with your bonus. And if you are still confused, it is always advisable to bring on board professional advice to ensure that you are on the correct path.

 

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mutual-fund_660_102417043136

Like it or not, your Mutual Fund holdings, at least some if not all, are already undergoing significant changes. While the changes in some were predictable, there are instances where the proposed changes were never imagined. Now, everyone from advisors and distributors to AMCs and mostly importantly the investors are starting to scramble to make sense out of the commotion!

Since the mutual fund AMCs have started to list out the changes in their schemes, there have been plenty of eyebrows raised with some of their decisions.

For example, one particular AMC had a Liquid Fund and a Money Market Fund prior to re- categorization. As per the new re-categorization rules, there is a Liquid Fund and a separate Money Market Fund Category. The AMC has gone ahead and moved their existing Liquid Fund into the Money Market Fund category and vice versa!

Another major example is that of another AMC, where they have changed the mandate of an existing MultiCap Fund to that of an Aggressive Hybrid Fund (where only up to 80% can be invested into equities ) as per the new rules. In addition, they have decided to merge one of their existing Balanced Fund with this newly formed scheme. The N.A.V. of this newly merged entity would be that of the earlier existing MultiCap Fund.

The same AMC has dealt another googly by changing an existing pure Equity scheme to a Balanced Advantage Category Fund (a fund that manages debt and equity allocation on a dynamic basis). Note that there is no cap on either asset class as per new rules. Furthermore, they have merged another existing Balanced Fund into this new scheme, while keeping the N.A.V. of the prior equity fund. The fund could now theoretically go 100% into debt or the other way as per the discretion of the fund manager.

Another example is that of an AMC that had an Ultra Short Term Fund and separately also ran a debt fund that primarily invested into bonds of Banks and PSUs. Post the introduction of the re- categorization rules, the AMC has merged the above Banking and PSU fund into the Ultra Short Term Debt Fund. It has further gone on to change the mandate of an existing Short Term Debt Fund into a Banking PSU Fund as per new rules. Now imagine the plight of an investor who was anyways confused with the huge universe of schemes. If he/she is not careful, he/she might end up investing into the current Banking and PSU fund expecting to remain in that category when it actually will get merged into an Ultra Short Term Fund. Or he/she may invest into the current Short Term Debt Fund not realizing it will become a Banking and PSU fund shortly. These unintentional errors could have big implications later on the mutual fund portfolio.

There are thousands of mutual funds schemes out there. And if not selected right, which can often be the case, investors end up with a plethora of funds in their portfolio over time. Now imagine looking at your fund list and realizing that a lot of them are going changes and may come out as something new and unintended. In such a context, it is easy to make unintended errors or make ill informed decisions in deciding what to do next with your mutual fund portfolio.

It is with this concern in mind that Plan Ahead Wealth Advisors is conducting a seminar tomorrow at The Regus, Andheri West to enlighten both our clients and their friends and families, on the impact this massive reorganization of mutual fund schemes will have on their portfolios and how they can navigate these changes in an efficient way.

While it may seem a little inconvenient to come out on a Saturday 19th May 2018 to attend this event, the take away from this event could lead to much better decision making on your current mutual fund holdings in the immediate future!

 

 

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Screen Shot 2017-12-06 at 9.04.46 PM

Today marked the first Bi-Monthly policy statement by the RBI for the new FY 2018-19.

The MPC notes that there has been a recovery in growth on a domestic level and various structural reforms introduced will support further long term growth. The MPC recognizes the downside risk to private financing and investments as well as growth on both a global and domestic level is brought out by deteriorating public finances and rising trade protectionism.

The MPC stated that the GDP growth is projected to strengthen from 6.6% in 2017-18 to 7.4% in 2018-19 with H1 2018-19 reflecting growth in the range of 7.3-7.4% and 7.3-7.6% in H2 2018-19 supported by revival in investment activity and global demand.

The MPC revised down the CPI for FY 2018-19 to 4.7-5.1% in H1 and 4.4% in H2 (inclusive of the HRA impact) keeping in mind that factors such as the revised formula for MSP (minimum support price), impact of HRA, further fiscal slippages, a weak monsoon and volatile crude prices could all pose upward risks to the near term inflation outlook.

Amongst the midst of global and local market volatility in both the equity and bond markets, the monetary policy committee maintained their neutral stance and kept the policy repo rate and the reverse repo rate unchanged at 6 percent and 5.75 percent respectively.

5 out of 6 members voted in favor of the policy while one member voted for raise in rates by 25 basis points.

The 10 year G-Sec fell sharply from 7.3% levels to 7.12-7.13% indicating that the market is putting to rest any near term rate hikes.

Your Investments

While the RBI does talk about economic recovery as well as a possible sustained long term recovery one can not ignore the volatility brought about by the juxtaposition between global recovery and the possible trade war between the United states of America and China.

Equities continue to remain overpriced from a price to earnings perspective in spite of recent corrections. Real rates continue to remain positive and interest rates (benchmarked by the 10 year G-sec) have cooled down from their high ranges of 7.7-7.8%.

We continue to believe that investors should continue to have fixed income exposure through a combination of accrual, short to medium and hold strategies. Considering a large state loan calendar interest rates could revert back to an upward movement scenario and thus we recommend maintaining only a 10% exposure to dynamic bond fund that have the flexibility to move across bond maturities.

Your Loans

For the first time in 2 years banks started increasing interest rates indicating a change in rate cycle. This rise in lending rates was brought about by the rapid increase in bond yields.

The RBI has maintained status quo on rates and has allowed banks to spread their bond losses over 4 quarters. This action by the RBI could cause lending rates to stabilize.

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