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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.
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