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Investment Insights

Suyash Choudhary

After a long gap of nine months, the Reserve Bank (RBI) on 29th Jan 2013 reduced the Repo rate (short-term lending rate) by 0.25 per cent  to 7.75 per cent

Cash Reserve Ratio (CRR) by 0.25% to 4 per cent releasing Rs 18,000 Cr primary liquidity into the system



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– There is some near term room available for rate easing; which is being exercised currently. But the scope for overall cuts is limited given the extra-ordinary nature of the current economic cycle and the macro-economic risks attendant

– The 25 bps CRR cut infuses INR 18,000 crores of liquidity and may dilute market expectations of near term OMOs. This combined with INR 48,000 crores of bond supply due over the next 4 weeks may keep yields in a range in the near term.

Investment Ideas

There is merit in continuing to remain invested in active duration funds for the following reasons:

– In Budget fiscal deficit target is expected not in excess of 4.8%, and as indicated this year’s revised target is also likely to be within 5.3% with continued reform action from GOI, a further rate cut in March cannot be ruled out

– Demand is still far outstripping supply on the government bond curve between now and March

We continue to manage duration and asset allocation actively in our IDFC Dynamic Bond FundIDFC Super Saver Income Fund – Investment Plan and IDFC Super Saver Income Fund – Medium Term


The Disclosures of opinions/in house views incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alterations to this statement as may be required from time to time. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of IDFC Mutual Fund. Neither the IDFC Mutual Fund / Board of Trustee/ IDFC Asset Management Co. Pvt. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.


IDFC Mutual Fund

IDFC Mutual Fund expects Indian companies to show a lot more financial discipline during the fourth quarter of the current fiscal year. Banks have already written off some of their bad loans and local companies will sell non-core assets to cut debt, Kenneth Andrade, chief investment officer, IDFC Mutual Fund. However, the CIO, who manages Rs 25,000 crore of investor funds and is known for his acumen in stock-picking, raises concerns on political uncertainty ahead of ’14 elections as a fractured majority could adversely deteriorate economic environment for a while

How do you see the year panning out against the backdrop of 2012, which was a turbulent year?
There has been a large economic expansion in the country in the past seven years. The first leg was led by the expansion from corporate and the second leg in the last three years was led by the growth in a consumer-led economy. We have been maintaining that Corporate India will see its last leg of balance-sheet growth or the increase in balance sheet into 2013 March end. Post this, you will see companies having a lot more financial discipline. Banks have already taken write-offs and corporates will deleverage and sell non-core assets. This is similar to 2000. We have come a full circle and are seeing a rewind. This could be the beginning of a new cycle.

Do you think that there is lot of nervousness on the political climate and policy deadlock which is scaring away investors?
Ahead of the elections in 2014 it is not surprising that the environment is uncertain. There is no political consensus and a fractured majority could adversely deteriorate the current environment for some time. But the latest round of events on FDI and attempts to lower subsidy are all in the right direction. As long as the longer term direction is to move to a market-driven economy with some level of subsidization, as a country we should pull it through as the economy tiers upwards in growth. Earnings growth, which is a rarity across the world, is something of a given in the Indian economy which has gotten investors’ attention worldwide.

How are you positioning your portfolio in that case?
We are expecting this year to be a reasonably stable. There does not seem to be any one large macro event outside or internally which will disrupt the entire environment. So, the focus will be back on to earnings growth and the deleveraging of corporate and the economy. We will expand this part of our holding given the fact that cash flows will materialize on the system, balance sheets will stop growing and you would have some part of a capacity actually getting utilized.

So do you think that a large number of infrastructure projects stuck for want of funds and approvals taking-off this year?
We feel that infrastructure will be a stable sector from here onwards. There are several reasons for this. First, there was this execution issue. Many people said that Indian companies will not be able to execute large projects. However, that was resolved as many companies showed their competence on that front. The second issue is fuel supply. The supply is available but the issue is to negotiate and resolve. The third factor is that the price cannot be passed on to the end consumer. However, that, too, will see a resolution in the next two-three years. While this was not the case so far, states have now started passing on the cost to the consumer. So, most of the projects that were unviable as the cost could not be passed on to the consumer will become feasible.

What segment or space are you particularly bullish on?
We are positive on public sector companies, especially, from bank and power sectors. Most of our funds are drawing down their exposure to FMCG and pharma space due to stretched valuations. Most of these PSUs have survived many cycles and proved that they are as efficient as any other private sector company. They have several natural advantages in terms of their reach and distribution. Most of the PSUs have huge cash reserves and are not leveraged. Most of them are available at attractive valuations. For instance, companies in the utility sector like power and gas have been expanding their capacities in the past few years. The balance sheets are strong. All this while the stock is trading at historical low valuations despite many of these companies enjoying a sort of monopoly status in their segments. We believe it’s a compelling place to be in. In case of PSU banks, the most talked about issues like NPAs, will be resolved in the next 2-3 years


Excerpts from the interview dated Tuesday, 21st Jan 13, Economic Times



3 Rules of Asset Allocation

By: Punam Sharma

When it comes to managing your money, simplicity must be a top priority. This also holds true when it comes to asset allocation. Simplicity must not only drive you while choosing various asset classes, but also how much you choose to invest in each of them.


One thumb rule that has been advised for years is to reduce your age from 100 and then, invest the resultant percentage of your money in stocks. So if you age is 30, you must invest 70% (100 minus 30) of your money in the stock market. On the other hand, if your age is 70, you must keep just 30% of your money in stocks or related instruments.


But this rule doesn’t make a lot of sense in isolation. This is given that a person aged 30 may have a lot of near term financial liabilities to meet – like down-payments for a house and/or car, marriage, higher education etc. Investing a large proportion of savings in stocks, which can lose a lot in the short to medium term, can be devastating for such a person.


On the other hand, an old man of 70 may have paid off all his loans, has children who are well-settled, and earns sufficient money as interest on his investments. For him, taking a high risk by way of investing a large part of money in stocks and related instruments is viable.


Thus, asset allocation decision must not always be dependent on a person’s age. In fact, here are three simple rules of asset allocation that work with people of all ages.


3 Rules of Asset Allocation

Money needed within 1 year should be in cash: This is simple. All money you need in the next one year – maybe for a loan repayment or for incurring a large expense – must be saved as cash. This cash could mean a fixed deposit or a liquid mutual fund. The reason you need to keep this money ultra-safe is because stock market can move anywhere in a one year period and in case they move downward, you may end up compromising on your financial goal.


Money you need in 3 years must also be kept safe: There may be some goals that you may want to meet over the next 2-3 years – like your kid’s school/college admission fee, or for a family holiday. You must invest this money in safe, income-producing instruments like FDs, liquid funds, or recurring deposits.


Money you can keep aside for five years and more must be in the stock market: Stocks have been great long term performers over the past many years. In fact, if you were to go back into the history of Indian stock markets, over every rolling five-year periods starting 1979, stocks have outperformed bonds almost 65% of times. Further, for every 10-year rolling periods, stocks have outperformed bonds almost 80% of times. SO the longer you have your money invested in stocks (or equity funds), the greater is the chance that you will make more than return on bonds.


As we mentioned in an earlier article, asset allocation is one of the most important decisions you will make in your financial life. So it’s important that you are clear and practical in this decision making. Knowing these three simple rules, and practicing them, can bring you a lot of success as an investor.



Are You a Stock or a Bond?

By: Punam Sharma

If you were to condense the secret of successful investing in two words, they would read “asset allocation”.


Asset allocation is indeed one of the most important decisions you would take in your financial life – even more important than picking the right investments or investing at the right time.


Now when it comes to allocating your assets suitably, the first question you ask yourself (or your financial advisor asks you) is – “How much to invest in stocks and bonds?”


This is in fact a very important question to answer. But most people fail to answer a question that is equally, or probably, more important.


This question is – “Am I a stock or a bond?”


Yes, you read that right! Knowing first whether you yourself are a stock or a bond will help you get your asset allocation right and lead you towards greater success in your financial life.


Confused? Well, let’s explain. But before that, you must be very clear about these two basic definitions:


  1. A stock is a share in a company. Its performance is dependent on how the company’s business does in the long term. Since a company’s future is largely unpredictable, so is a stock’s future.


  1. A bond is a financial instrument that is issued when a person lends money to another person. By issuing a bond, the borrower promises to repay the money after a certain interval (without any default), and also promises to pay a certain interest on the borrowed amount. In other words, a bond guarantees a regular income (interest) and a confirmed payout at the end of a predefined time.


Now, is you were to ask this question – “Am I a stock or a bond?” – the answer would lie in understanding yourself – your life, and your career.


If you go by the above definitions if a stock and a bond, you are a stock if your future is uncertain –maybe you have little years of work ahead of you, or you work in a volatile and unpredictable industry (like the stock market) that could decline quickly with little notice.


On the other hand, you possess the characteristic of a bond if you have a stable job that is unaffected by the volatility of the stock markets. Plus you have many years left to work.


Why ask this question?

Unlike any financial advisor would tell you, your total wealth is made up of two components:


  1. Financial capital (your money)
  2. Human capital (you)


This question – Am I a stock or a bond? – will help you answer how you must integrate your ‘human capital’ with your ‘financial capital’, and you can balance the two.


So, if you are young and work in a safe industry (like if you are a doctor, government employee, teacher), your human capital (years of earning, ability to earn) is greater than your financial capital (money you earn, save and invest). Thus, in such a period, you must balance out by increasing your financial capital, and especially your investments in stock market.


As a general rule of thumb, when you are young, you should hold your financial capital in more aggressive investments (like stocks and equity mutual funds).


On the other hand, if you are close to retirement or if you are already retired, or even if you are young but work in a risky industry like stock market, your financial capital is most likely more than your human capital.


Given your low human capital, you should balance out your investments by investing in safer investments (like bonds and fixed deposits).


On the other hand, if your job is secure and you are a bond, make sure your savings and investments tilt towards stocks and equity mutual funds.



Answering this question – “Am I a stock or a bond?” – is a very important step you would take at the start of your financial life. The insights you can get by answering this can be amazing.


These will not just add a new dimension to your financial life, but also lead you to the path of sound and effective investing.


Note: ‘Are You a Stock or a Bond?’ is the name of a book written by Moshe A. Milevsky, a finance professor at York University in Toronto.



Asset Allocation: What & Why

By: Punam Sharma

You must have heard of the proverb – Don’t put all your eggs in one basket. Well, there’s a 400 year old story about the origin of these golden words.


There was once a farmer’s wife who wanted to raise money selling eggs. She anticipated that she was going to make a good income from this business. One day, she loaded all her eggs in a single basket and went to the market.


On the way to the market, she was not cautious and tripped over a rock. Not only were the eggs dashed, her hopes were too.


This proverb not only cautions us against getting our hopes too high, but to remain objective, level-headed, and to diversify.


400 years later…

Four hundred years later, the advice is still good: Don’t put all your eggs in one basket. The only difference is that now we’re talking about “nest eggs” – your savings, which you plan to rely on for the rest of your life.


As the above story and proverb imply, “diversity” is the key to protecting your savings and investments. That is where the concept of “Asset Allocation” comes into the picture.


But what exactly is asset allocation and how does it matter to you?


In simple words, asset allocation means allocating your savings into different investment key assets like equity/stocks, mutual funds, bonds, FDs, gold, and real estate.


These are the assets that can help you grow your savings over a period of time, but at varying rates of return and different levels of risk. So you must be very clear where you are allocating your savings.


It would be great to know whether stocks, bonds, gold, or real estate will perform the best (and which will fall) over the next few years – but that is impossible. However, when you distribute your savings using some simple asset allocation strategies, you can set yourself up for achieving good returns on your money in the long term. At the same time, asset allocation can protect your wealth from a catastrophic downside.


As an investor, your goal is not to find the “best” allocation, because no one knows what that will be. Instead, you must try and choose an allocation that has performed well in various scenarios and won’t give you a heart ache.


Historically, the returns of the major asset categories – like stocks, bonds, and gold – have not moved up and down at the same time. So, by investing in more than one asset category, you reduce the risk that you’ll lose money and ensure that your portfolio’s overall investment returns will have a smoother ride.


In addition, asset allocation is important because it has major impact on whether you will meet your financial goals.


For instance, if you don’t include enough stocks and equity mutual funds in your portfolio, you may not earn a large enough return to meet your goals that are 10-15 years ahead – goals such as your child’s education and marriage, or your retirement.


On the other hand, a portfolio heavily weighted in stocks or equity funds, for instance, would be inappropriate for a short-term goal, such as for an upcoming loan repayment or saving for an upcoming family’s function.


Asset allocation – An important decision

“Allocate assets wisely. Proper allocation of capital is an investor’s No. 1 job.” ~ Charlie Munger


In the late 1980s, Gary Brinson, a noted money manager and financial analyst in the US, along with his colleagues, published two comprehensive research studies of 82 large pension funds.


They concluded that asset allocation accounted for over 90% of the return variability among the funds (in other words, 90% of the difference in return among two pension funds was due to their asset allocation strategies), with a less than 10% contribution from market timing and actual stock and bond selection.


Several other studies have also shown that a long term portfolio’s performance is largely determined by asset allocation and less than by market timing and individual stock or bond selection combined.


Why? Because while market timing and selecting a good stock or bond is obviously important, the problem is that nobody achieves long-term success in the former (market timing), and almost nobody in the latter (selection of a good stock/bond).


The only thing that you as an investor can control and influence is your asset allocation. Finding the right balance between high risk (like stocks) and low risk (like bonds or cash) investments is the key to managing risk in a portfolio. That’s the power of asset allocation in your hands.







One Idiot is part of the IDFC Foundation’s commitment to educate the youth of India to be financially independent