Friday, January 10, 2014

FINANCE SPECIAL..... STRATEGY FOR 2014




FINANCE  STRATEGY FOR 2014

2013 witnessed key changes in the investing landscape. Find out how these will affect your finances and strategies in 2014.


    The investing landscape saw momentous developments in 2013, most of them driven by regulatory actions. Whether it was the introduction of direct plans in mutual funds, new guidelines for health insurance, or the precipitous fall in debt funds, each of these events had a significant impact on your finances. Each development also offered a lesson to the small investor. Our cover story this week sums up these changes, distilling the learning and suggesting strategies for the coming year. The rupee played a pivotal role during 2013. We learnt that it affects nearly every other investment. The RBI raised interest rates to buoy the rupee and the capital markets went into a tailspin. The falling rupee also kept gold prices high in India when global prices crashed.
    The stock markets remained volatile during the year and the Sensex touched an all-time high. However, this euphoria was confined to large-cap stocks. The mid- and small-cap stock indices closed the year with losses, underlining the need to be choosy while investing.
    Inflation was relentless during the year and even uncut onions brought tears to the eye. With high inflation the new normal, investors will need to alter their financial planning. Don’t go by 7-8%, but a more realistic 9-10% inflation rate, while setting long-term goals.
    The high interest rates have pushed real estate beyond the reach of many people. The key lesson is not to buy property as an investment. You would be paying 11-12% per annum on a loan to buy an asset that will grow only 5-6% in value in a year. Only if the value of the property is expected to appreciate by more than 12% per year does it make sense to invest in it.
    The long overdue Pension Bill finally became an Act in 2013. This will give a fillip to the pension sector, which has been neglected till now. Another legislation to set up a real estate regulator to protect home buyers from unscrupulous builders and developers was introduced in Parliament. Going by the time taken by the Pension Bill, it could be years before the real estate regulator is established. Still, a new year is a harbinger of hope, and we believe that the 16th Lok Sabha, which will be elected in five months, will not waste time digging into previous scams but enact laws that prevent fresh ones
RUPEE
Its fall affected most investments To counter the dip, invest around 10% of your portfolio in global funds in the coming year. NARENDRA NATHAN
    After remaining relatively stable for several years, the Indian rupee went into a freefall in 2013. From around 54 per dollar at the beginning of May, it fell nearly 27% to nearly 69 by the end of August. It recovered a bit in the following months, but is still down almost 13% for 2013. Though the US Fed has announced the muchfeared tapering, the decision to reduce the asset purchases only by $10 billion from January 2014 has also helped improve sentiments for the Indian rupee.
    The fall in the rupee had a cascading effect across the capital markets. Between June and August, foreign institutional investors pulled out more than 23,000 crore from the equity markets When the RBI raised the short-term borrowing rates to stem the slide in the rupee, the debt market went into a tailspin. While long-term debt funds bore the brunt, the spike in overnight rates forced even liquid funds to report significant marked-to-market losses . If there was a silver lining, it was the cushioning of the price of gold in the domestic market. The global price of gold crashed almost 28% in 2013, but the fall in the rupee restricted the loss to 3.5% in India.
STOCKS
Sensex was up, others down
Extreme polarisation marked the performance of the stock markets during the year.

SANKET DHANORKAR
    
If you look at the Sensex, it touched its alltime high in 2013. On 9 December, a day after the BJP swept the assembly elections in three states, the 30-share benchmark index reached 21,483. This was largely a sentimentdriven rally, with the outcome of the poll ‘semi-finals’ being viewed as a prelude to the Lok Sabha elections in 2014. Market participants, foreign investors and brokerages are excited about the prospects of a BJP victory in the elections, and Narendra Modi, described by some as the greatest hope for the Indian stock market, becoming the prime minister.
    This was in sharp contrast to the mood prevailing just six months ago. The fall in the rupee between June and August and the measures taken to arrest its slide had brought down the Sensex to 18,500 levels. Foreign investors withdrew almost 23,000 crore from the Indian stock market in a span of three months.
    There was extreme polarisation in the stock markets during the year. Though the Sensex touched its all-time high, the BSE Mid-cap and BSE Small-cap indices floundered. The Sensex gained a modest 7% during the year, but the BSE Mid-cap and Small-cap indices have declined by 10% and 16%, respectively (see chart). As a result of the extreme polarisation in the stock market in 2013, there is now a huge value differential between large-cap stocks and the rest of the universe. The BSE Mid-cap index trades at 7.81 times the one-year trailing earning at this point, whereas the Sensex trades at a PE multiple of 17.83.
    Even within the Sensex, there was a wide divergence in the performance of stocks. Though blue-chip stocks were the toast of the investor community for most part of the year, some stocks witnessed extraordinary volatility. Bhel, Sesa Sterlite and Hindalco saw huge gyrations, tanking as much as 19%, 16% and 11%, respectively, in a single trading session. These are traditionally considered safe havens in weak market conditions. However, these events show that even bluechips are vulnerable to sell-offs and that one cannot invest in these blindly just because of their large size.
    Certain mid-cap and small-cap stocks came under fire mostly because there were question marks on their ability to maintain a steady cash flow and withstand the pressure from a weakening rupee and rising interest rates on debt-laden balance sheets.
FIXED INCOME
Debt options can also lose money
Debt funds fell by 5-6% in July, while long-term bonds traded below their face values.

SANKET DHANORKAR
    
The fixed income landscape is usually a staid affair. In 2013, it was anything but. In July, the bond markets went into a tailspin after the RBI hiked short-term borrowing rates to counter the slide in the rupee. The value of debt funds plummeted almost 6.5% that month, with medium- and long-term bond funds being the worst hit. The bigger shock was that liquid funds, which are considered absolutely safe, were also not immune to the mayhem. For the first time since 2008, liquid funds witnessed a drop in the NAVs. Liquid funds are not expected to decline because the primary source of return is accrual interest. At worst, the NAV can remain unchanged.
    The turmoil in the debt market was temporary and bond yields receded after a few days. In the following months, short-term debt funds recovered, while liquid funds made good their losses. The investors who panicked and exited during this period would have turned their notional losses into real ones. Those who remained invested would have recovered their notional losses within a few weeks. However, long-term debt funds and income funds are still in the red (see table).
    In the second half of the year, the taxfree bonds issued by PSUs brought cheer to the debt market. With coupon rates as high as 9% and no tax on income, investors in the highest 30% tax bracket find them very attractive. The NHB issue, which opens on 30 December, is offering 9.01% to retail investors. The best part is that these bonds can also be traded in the secondary debt market. If interest rates fall, as most analysts expect they will, the value of these bonds will shoot up. However, any gains from selling these bonds will not be tax-free. Any profit will attract capital gains tax.
    The RBI also launched its much-hyped inflation-indexed bonds (IIBs). These instruments are supposed to protect savings from inflation. The first tranche of IIBs did not evoke much interest from investors because they were linked to the Wholesale Price Index-based inflation, not the Consumer Price Index-based inflation. The RBI then came out with the Inflation Indexed National Saving Securities-Cumulative (IINSS-C), which are based on the combined CPI.
    However, the IINSS-C are tax-inefficient compared to the earlier IIBs. They will also not be listed on stock exchanges, thus making them less liquid than IIBs.
MUTUAL FUNDS
Invest directly for big gains
Direct plans introduced in 2013 can be your key to higher returns from mutual funds.

BABAR ZAIDI
    
The new year gift by Sebi for mutual fund investors has proved its utility. The direct plans launched by mutual fund houses at the beginning of 2013 churned out better returns for investors than their regular counterparts. In some equity funds, this outperformance was as high as 75-80 basis points (see table). Don’t underestimate the potential of what seems like a minor difference. Even a 75 basis point higher return on a 10-year SIP of 5,000 can make a difference of 50,000 in the final corpus value.
    Within six months of their launch, the direct plans had cornered 25% of the total AUM of the industry. Reliance Mutual Fund had the largest AUM under direct plans, followed by UTI Mutual Fund and ICICI Prudential Mutual Fund. However, a study by Crisil shows that direct plans mostly attracted large investors, such as corporates and institutional investors.
    Direct plans are no different from regular plans except that they have lower charges. The amount that the fund house saves on the distribution and commission expenses is passed on to the investor.
    The year offered very important lessons to mutual fund investors. For one, small was beautiful. A clutch of tiny equity funds delivered spectacular returns (see table), even as giant-sized schemes moved sluggishly. These moneyspinners are not mid- and small-cap funds that invest in little-known stocks and typically have low asset bases. They are large-cap and multi-cap schemes, which invest in blue-chip stocks and are highly rated by Value Research. Their performance is also no flash in the pan but has been consistently good over the past three years.
    However, despite the good returns and high ratings, these schemes have not attracted the attention they deserve. The total AUM of these five schemes grew from 210 crore in January to 234 crore in November. Despite giving a return of 17.36%, the AUM of Tata Ethical Fund grew 7.5%, which shows that some investors actually sold off this moneyspinner.
    On the other hand, gigantic funds, such as HDFC Top 200 and HDFC Equity, gave muted returns in 2013 because of their concentrated exposure to banking stocks. The two largest equity schemes in India had 28-30% of their total corpus in banking stocks. The sector declined by over 10% in 2013.
    This brings back memories of the tech boom and bust of 2000, when equity schemes had lined their portfolios with IT stocks. In 2007, they had made the same mistake with infrastructure and realty stocks.
GOLD
No longer a safe investment
The myth that gold prices only rise was shattered and the metal lost its status as a safe haven.

NARENDRA NATHAN
    
The biggest shocker of 2013 was the crash in gold prices. A correction had already begun at the fag end of 2012, but prices really crashed in 2013, triggered by fears that the US Federal Reserve would scale down and do away with the economic stimulus. However, Indian investors in gold were cusioned against the crash due to the fall in the rupee. As the dollar became costlier, gold continued to fetch a higher price in India. Besides, the government introduced certain measures that pushed up the domestic price of the metal. Import duty on gold was hiked from 2% to 10%, increasing the landed cost of gold. Quantitative restrictions were also imposed on gold imports, such as the RBI’s 20:80 scheme, which mandates that 20% of imports need to be re-exported. As a result of these measures, domestic prices of gold have receded by only 3.5%, compared to the 28% drop in global gold prices during 2013. This gap in the price of gold has created an opportunity for ‘legal smuggling’ of the metal. NRIs returning to India after spending more than six months abroad are allowed to carry up to 1 kg of gold. Jewellers are using NRIs as carriers, even offering to pay for their air fare if they bring in gold for them. Even if they pay the import duty of 10% on bars and coins or 15% on jewellery, the arrangement works out to be profitable (see table).
    The wide difference in the domestic and international prices of gold have led to another anamoly in the capital market. The market price of gold ETFs, which is based on the domestic price of the metal, is far higher than their NAVs, which is based on the landed cost of gold. The difference is as high as 10%.
    Since gold has rallied for more than a decade now, most investors had begun to believe that gold prices can only go up. However, the crash in gold prices has shattered this myth, at least for the global investors. This explains why they are now dumping gold. The gold holdings in SPDR Gold Shares, the largest gold ETF in the world, have came down from 1,351 tonne at the end of 2012 to just 814 tonne now, a fall of around 40%.
REAL ESTATE
Drive a hard bargain in 2014
2013 saw bargaining power in buyers’ hands. Make the most of it till the first half of 2014.

SANJAY KUMAR SINGH
    
With the economy slowing down, job losses mounting and salary increments pared to the bare minimum, the real estate sector found itself in all sorts of difficulties in 2013. High property prices and interest rates on home loans also took a toll on affordability. All these factors led to low demand for housing during the year. For once, however, the buyers enjoyed high bargaining power as builders sought to woo them with price discounts and other freebies. According to the National Housing Bank’s Residex, the index rose 1.92-27.06% yearon-year (y-o-y) in the September quarter in 15 of the 20 cities. However, in 12 of these cities the increase was less than 10%, while in five cities the index declined by 5.56-10.71%. According to the primary market data from PropEquity, a Gurgaon-based real estate firm, developers were able to raise prices by 4-19% in the country’s top 12 markets. What these headline numbers camouflage, however, is that developers were willing to offer discounts in the range of 10-15% on their prices. Even steeper discounts were available in the secondary markets.
    During the year, prices of ready-to-occupy properties rose even as builders were forced to offer discounts on their new launches. There were two reasons for this trend. First, as the real estate sector slowed down, builders faced a cash crunch. The buyers, who were aware of this situation, pressed home their advantage and demanded discounts. Second, the cash crunch affected the pace of construction and project delays were rampant. To mitigate the risk of delays in delivery, buyers chose to pay a premium for ready-to-occupy properties.
    In the second half of 2013, developers offered many attractive discounts and schemes to buyers. The latter, however, did not respond to these offers with customary zeal. Ashutosh Limaye, head of research and REIS at Jones Lang Lasalle India, has an explanation. “When prices are falling and you are getting a good deal, the psychology is to wait for an even better deal to come along,” he says.
 INFLATION
Rising prices is the new normal
There may not be any respite from inflation in 2014, so plan for your goals accordingly.

NARENDRA NATHAN
    
The year 2013 started with a double-digit rise in consumer price. Though there were hopes that inflation would ease as the base effect kicked in, the year actually ended with higher inflation. Even the wholesale price inflation remained sticky during 2013 and ended the year on a high note. Several factors contributed to the rise in prices. The crash in the rupee made imports costlier, pushing up the prices of certain goods. Food inflation was the biggest culprit. Prices of onions, one of the most widely used vegetables in Indian kitchens, shot up to stratospheric levels in 2013. In some urban markets, onions were selling for 120-140 per kg in September. Onions have 0.18% weight in the wholesale price index and potatoes have 0.20%.
    Households are also buffetted by another form of inflation—lifestyle inflation. This kicks in when individuals raise their standard of living following an increase in earnings. For instance, the concept of eating out has changed dramatically in the past 10 years. Not only are we eating out more often, but have also upgraded to swankier restaurants over the years. However, the normal inflation is computed on the basis of the increase in food prices at restaurants we used to visit earlier. It doesn’t take into account the fatter bills we run up at the new eateries we now visit.
    Financial planners usually adjust goals for the normal inflation of around 7-8% per annum. They rarely take lifestyle inflation into consideration. You might have planned for a small car three years ago, but now need a bigger car because your lifestyle has improved.
 INSURANCE
Still not good as an investment
Changes will make policies more customerfriendly, but investing in insurance is still a no-no.

BABAR ZAIDI
    
Irda’s 2010 guidelines for Ulips had capped the charges and made unit-linked plans more customer-friendly. However, the new guidelines for traditional life insurance plans, which were supposed to kick in from 1 October, but will now be effective from 1 January 2014, have not been formulated with quite the same zeal. The new guidelines ensure a higher surrender value for policyholders, reduce the minimum period and mandate that policies offer a higher life cover. However, Irda has not brought down the commission payable to the agent, though it has linked the agents’ commissions to the premium paying term of the policy. Irda also laid down new guidelines for health insurance companies in 2013. The key changes include raising the minimum entry age to 65, lifelong renewal and provision to port from a group plan to an individual policy. Insurers must have standardised definitions of terms, exclusions and critical illnesses as stipulated by Irda. The contribution clause, under which a policyholder who had more than one health policy could claim a proportionate amount, has also been abolished. A policyholder can now fully exhaust a policy and claim the leftover amount from his second policy. He can tweak the claim amount under different policies so that the sub-limits under various heads are not crossed.
    One key development during 2013 was the establishment of insurance repositories. An insurance repository is like a demat account for insurance policies. It costs a company roughly 600 a year to maintain and update the records of an insurance policy in the physical form, but if the policy is held in an e-insurance account in electronic form, the cost is just 80-100 a year.
    However, the regulator’s nod to banks acting as insurance brokers should be viewed with trepidation by customers. Bank executives are notorious for misselling.
GLOBAL DEVELOPMENTS
FIIs remain bullish on Indian stocks
Shrugging off the impact of tapering of the US stimulus, FIIs continue to be attracted to India.

SANJAY KUMAR SINGH
    
Despite India’s many macroeconomic travails, foreign institutional investors (FIIs) remained bullish on the Indian equity markets in 2013. Their optmism holds lessons for retail investors who consistently pulled money out of equities during the year. By 20 December, the net FII investment in Indian equities had touched 1,10, 626 crore. Only in June, July and August, when all emerging markets witnessed capital outflow after the Fed chairman spoke of tapering, did FIIs pull money out of the Indian equity markets. Once the fear of tapering died down in September, the net inflow was strong once again. What makes the Indian equity markets attractive for FIIs?
    One reason is that India remains an attractive long-term destination. “In the post-2008 crisis era, there are very few structural long-term growth stories. India is one of them,” says Sankaran Naren, chief investment officer, ICICI Prudential Mutual Fund.
    When US Fed chairman Ben Bernanke first spoke of the possibility of tapering, he spooked the global financial markets. India, like all other emerging markets, witnessed capital outflows. Both the equity and debt markets tanked. The rupee fell below 68 per dollar. It was prompt action by the RBI and the government, and the subsequent announcement by the Fed in September that tapering would be postponed, that saved the day.
    During this turmoil, many FIIs stayed put. “They could see that if India could get some capital flow, it would manage to tide over its problems (of the rupee’s sharp depreciation),” says Prasun Gajri, chief investment officer, HDFC Life Insurance. They were proved correct.
    FIIs have invested mostly in the larger, better-quality stocks in the defensive sectors. “These sectors have given reasonable returns and did not fall much during the summer upheaval. So FIIs did not have much to worry about,” adds Gajri.
    One reason India is likely to attract the FII inflow even in 2014 is that valuations are attractive. “While the Sensex and the Nifty are near their all-time highs, valuations are still below their long-term averages,” says Harsha Upadhyaya, chief investment officer (equity), Kotak Mutual Fund. The one-year forward PE ratio for the Sensex is less than 14.5. The broader indices are even cheaper.
    Retail investors should take a leaf out of the FII book and become long-term investors in Indian equities. “Retail investors have trimmed their equity allocations in the past six years and become underweight in this asset class. They should move to a more balanced allocation to equities, at least to the same level as they had in 2005,” says Naren.
    Retail investors, on their part, cite the underperformance of equities for not investing. “If past returns in an asset have been bad, it creates an opportunity to invest in it,” argues Naren. BANKING
Free banking nears its end
Increase in customer-friendly features came with charges, and this trend is likely to continue in 2014.

AMIT SHANBAUG
    
There is no such thing as a free lunch, and banks made this a rule in 2103. Many banks strated charging for valueadded services that customers had enjoyed for free till now. This is not really a new trend but something that has been going on for the past few years. Banks started charging customers for additional cheque books, bank statements and non-maintenance of the minimum balance a few years ago.
    In 2013, banks also billed customers for SMS alerts. Most banks had imposed a flat fee of around 60 per annum for savings accounts and around 100 for current account holders for all SMS alerts. However, in November, the Reserve Bank of India directed banks to charge customers not a flat fee but as per actual usage. Phone banking, too, which was free till now, is now chargeable after a certain limit. From 1 November, some banks have started offering only first two calls free in a month, and subsequently, a charge 50 per call is levied on the customer.
    Also with effect from 1 November, some banks have started charging a fee of 100 after the first four free cash transactions in a month. This is the charge if a specified balance is maintained; in case of nonmaintenance, all transactions will be charged at 100. Earlier, 50 was charged per cash transaction in case the specified balance was not maintained.
    Some, like HDFC Bank, have revised their interest rates on outstanding amount after the credit free period for credit card users from 3.05-3.15% to 3.25%, with effect from 1 October.
    The debit card annual fee too has been revised by many banks from this year on. The charge has been revised to 150 from the earlier 100 in urban centres. Other banks have introduced an issuance fee of 100, which was not levied earlier.
    Though the hike in service charges or introduction of additional fees is not exorbitant, it will certainly add to the customers’ burden annually.
    Harsh Roongta, chief executive officer of
Apnapaisa.com explains that the Reserve Bank of India has not restricted any bank from charging fees where it incurs a certain cost. “If the charges are within the permitted limits, the banks can inform the customer and pass it on to them,” he says.
    R K Bansal, executive director of IDBI Bank, explains that service charges may go up further in the coming year. He points out that after the Bangalore ATM attack incident, many banks are now considering stationing of guards at all their ATMs. This is likely to add to their costs, which ultimately will be passed on to the customers.
    With the government deciding to invite private sectors to banking and provide licences to new banks, the competition for market share is going to be difficult in the coming days. More services will be charged by your bank in the near future.
ETW131230

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