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IDFC MF

FY18 union budget walked the talk and performed a fine balancing act – focus on social expenditure and infrastructure without deviating much on the path of fiscal prudence. It is imperative to note the backdrop for the current year’s budget with mounting uncertainties on both global and domestic fronts. With demonetization temporarily disrupting the business environment and moderating economic growth, the market was expecting the government to respond with a dose of populism (cut in tax rates, rural packages, rise in tax deduction limits, etc.) in the budget. At the same time, anxiety was high around factors like LTCG and service tax hike. In absence of any such negative announcements in the budget and with fiscal deficit target at 3.2% for FY18, the budget addressed most of the concerns from equity market perspective.

 

Government stepped up its social expenditure which was up 11% in FY18 (on FY17RE). Allocation for MNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme) set at an all-time high of Rs48,000cr. At the same time focus on capex / infrastructure remains, with the total government infra investment projected to grow 10% YoY in FY18 (on FY17RE) to Rs3,96,000cr (US$58bn). As expected, investment in railways, roads, waterways and other transport infra remains the focus with allocations for roads up 13%, railways up 8% while capex on defense was flat. Disinvestment appears to be a big thrust for FY18 with budgeted revenues of Rs72,500cr (vs 45,500cr in FY17RE and Rs56,500cr in FY17BE).

 

FM provided relief to the low-income individual taxpayers and reduced corporate tax for small companies – the segments most impacted by demonetization, in our view. Personal income tax rates at lower end (income between Rs2,50,000 – Rs5,00,000) reduced from 10% to 5% i.e. an annual saving of Rs12,500. This is small saving for existing tax payers but in the larger context it’s an incentive for the non-payers to become tax compliant. For MSME, corporate income tax has been slashed from 30% to 25% for unlisted MSMEs with turnover less than Rs50cr. This is clearly with a view to promote job creation at MSMEs. As per the government’s data, almost 96% of companies (667,000) filing taxes will benefit.

 

Affordable housing has been given infrastructure status, which could result in lower cost of funding, higher liquidity and wider investor base. There are some further incentives given to developers of affordable housing. Currently, developers can claim 100% deduction on profits subject to certain restrictions like size of the house, geographical location and time taken to complete the project. This budget proposes minor relaxations in these conditions. This increases opportunity size for financiers in the affordable housing space.

 

The amount set forward for the recapitalization of PSU banks remained unchanged at Rs10,000cr for FY18, in line with the roadmap that had been set under the ‘Indradhanush’ scheme. However, the government assured that additional funds will be available for equity infusion in PSU banks, if required. The allocation for last year was Rs25,000cr of which full allocation has not yet happened.

 

Another relief was on NPA provision taxability with increase of allowable provision for NPA from 7.5% to 8.5% which will reduce tax liability of banks (particularly PSBs) who are already reeling under asset quality pressure & higher provisioning.

 

As a measure to deal with bank NPAs is to enhance capital flows into securitization industry through listing and trading of Security Receipts issued by a securitization company or a reconstruction company under the SARFAESI Act will be permitted in SEBI registered stock exchanges.

 

Govt. has indicated its plan to merge public sector oil/gas companies in order to create an ‘integrated’ player. This would perhaps create one public sector behemoth, intended to create efficiencies of capital and other resources. Import duties on LNG import has also been reduced to 2.5% from 5%, thus helping the imported fuel demand. Oil and Gas subsidy is reduced to Rs 27,500cr from Rs 29,000cr for FY17 revised estimates. FY18BE budgeted subsidy is reduced by 9% YoY to Rs 25,000cr.

 

Increased outlays on roads, housing, sanitation and electrification through various schemes would help improving rural economy. In the process, there would be significant opportunity to the construction, cement and metals sectors. A push for social housing should augur well for cement and low cost housing finance companies. For urban India, there is an 80% increase in allocation towards metro rail.

 

Considering the impending implementation of GST in the next few months, there were minimal announcements on indirect taxes which could have an impact on companies within the consumption basket. However, cigarette taxation has increased by 6-7% against an expectation of double digit excise hike so that should be a relief for ITC. This will be the lowest excise duty hike in the last 5 years. The budget has also introduced a cap of Rs 3lakh on cash transaction which can have some impact on high ticket consumption items.

 

Budget continued the government’s focus on improving credit flow to farmers, irrigation facilities, soil testing, crop-insurance coverage, and selling and distribution of produce. Fertiliser Subsidy maintained at Rs 70,000cr for 2017-18 (Urea Rs 49,768cr and NBS –Rs 20,232cr). The status quo on subsidy allocation is positive given benign input costs and expected cut in NBS for FY18E.

 

Higher outlay toward rural electrification is expected to increase rural power demand and lower distribution losses. This, in turn, would benefit the power generation segment. Higher budgetary allocation for renewable energy will also facilitate higher capacity additions in the segment through higher disbursement under various viability gap funding schemes and other central financial assistance.

 

Conclusion
 
Equity markets gave initial thumbs up to the budget getting comfort from 3.2% fiscal deficit target coupled with absence of any announcements on changes in Long term capital gain (LTCG) taxation.
 
Going forward, markets will continue to monitor earnings as the impact of demonetization has not been felt materially in the reported 3 Quarter numbers, so far.

 

Last year, the markets had corrected going in to the budget largely due to the risk off trade and bottomed out on the budget day. Thereafter as liquidity improved, we witnessed a rally. For the year ahead, the Union Budget appears to have calmed any frayed nerves, the global sentiments – the first 100 days of president Trump, US Fed’s trajectory on rate hikes and any geo-political sensitivities, however, would continue to influence the market direction.

 
Disclaimer:
 
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
 
The Disclosures of opinions/in house views/strategy incorporated herein is provided solely to enhance the transparency about the investment strategy / theme of the Scheme and should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of IDFC Mutual Fund. The information/ views / opinions provided is for informative purpose only and may have ceased to be current by the time it may reach the recipient, which should be taken into account before interpreting this document. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision and the stocks may or may not continue to form part of the scheme’s portfolio in future. The decision of the Investment Manager may not always be profitable; as such decisions are based on the prevailing market conditions and the understanding of the Investment Manager. Actual market movements may vary from the anticipated trends. 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. Neither IDFC Mutual Fund / IDFC AMC Trustee Co. Ltd./ IDFC Asset Management Co. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, punitive special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

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IDFC MF

Do the Opposite!..

By: IDFC MF

A large majority of successful investors have made their fortunes on the credo of the world’s most successful investor Warren Buffett. It is – “Be fearful when others are greedy. Be greedy when others are fearful.”
 
This is contrarian investing at its heart – the strongly-held belief that the worse things seem in the market, the better the opportunities are for profit, and vice versa.
 
However, the way most investors behave in a completely opposite manner – they are attracted by short-term returns, get greedy and enter equity markets when they are expensive – like at the start of 2008. On the other hand, these very people are struck with fear and decide to sell out when the near-term returns look bad – like at the start of 2009.
 
Now, prudent investing demands the exact opposite in terms of behavior i.e., moving out of equity when markets get expensive and moving into equity when markets get cheap.
 
However, since investors find it very difficult to not give in to their emotions and often follow what others are doing, they end up on the side of imprudence. This is about to change. At IDFC Mutual Fund, we have set out to challenge this issue that investors face through our latest mutual fund offering – the IDFC Dynamic Equity Fund.
 
The core aim of this fund will be to be contrarian i.e., to buy less equity when markets get expensive and more when markets get cheap.
 
In fact, this fund has the flexibility to move from 100% to an effective 30% equity exposure (post hedging) to dynamically reduce exposure to the latter as the stock market gets expensive and vice versa.
 
Thus, if you wish to invest by the credo of Warren Buffett, the world’s best equity investor ever, IDFC Dynamic Equity Fund is what you need in your portfolio.
 

This product is suitable for investors who are seeking* :

  • Create wealth over a long period of time
  • Investment predominantly in equity and equity related instruments across market capitalisation
  • High risk. (BROWN)Risk Categories

    Note: Risk may be represented as:

    • (BLUE) investors understand that
      their principal will be at low risk

    • (YELLOW) investors understand that
      their principal will be at medium risk

    • (BROWN) investors understand that
      their principal will be at high risk

*Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

 
Disclaimer:


MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
 
The Disclosures of opinions/in house views/strategy incorporated herein is provided solely to enhance the transparency and should not be treated as endorsement of the views or as an investment advice. The information/recommendation provided is for informative purpose only and may have ceased to be current by the time it may reach the recipient, which should be taken into account before interpreting this document. The decision of the Investment Manager may not always be profitable, as such decisions are based on the prevailing market conditions and the understanding of the Investment Manager. Actual market movements may vary from the anticipated trends. 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. This update 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 / IDFC AMC Trustee Co. Ltd./ IDFC Asset Management Co. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, punitive special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

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IDFC MF

The Odds are in my favour !!!
 
I’m on holiday in Goa and what’s life without a little thrill. I’ve set aside a few thousands to gamble over the weekend at the casino. I’m hoping to get lucky and have some fun. A few hours and halfway into my weekend, I find myself at the roulette table. I’m feeling good, sure that I’ve finally cracked the system got around the numbers and I’m ready to turn my recent down streak into big bucks. A final deep breath and I place my bets…
 
I’m right where the casino wants me… Confident and sure that I can win.
 
All casino games are rigged. Everyone loses money eventually if not immediately. The odds are against the gamblers. Gambling gets people for what their worth: emotionally, mentally and financially. But it can’t happen without our active support, and most of it is self inflicted.
 
We can lose a few thousands at the casino but the effects of overconfidence can be devastating while investing. It’s not hard for some of us to believe that we can beat the market. To other it may appear as being self-centered and arrogant but then we have a system and we are confident that it works.
 
Humans are hard-wired to see themselves in the most favourable terms. We are confident about our ability to foresee the future and are optimistic about our forecasts.
 
This overconfidence gives us the sense that we are above average drivers, endowed with above average beauty and blessed with above average intelligence. When things however do not go as per our forecast we often blame the environment but seldom ourselves.
 
Overconfidence and over-optimism are particularly prevalent when decisions must be made in conditions of uncertainty. In these situations we tend to miscalculate the risk of events and only perceive outcomes that will have be favorable to us . We thus do not take appropriate precautions.
 
Investors who lose money more often (and in greater amounts) than they should, often do so because of overconfidence. Overconfidence can lead to the conviction that one is only buying investments that will be highly profitable and one is only selling investments that no longer have significant upside potential. We tend to;
 
• Taking more risk than we have the ability, willingness or need to take
• Failing to diversify the risks we do take
• Investing disproportionately in a particular stock/ Asset class or security
• Trading too often
 
Of course, if overconfidence and over optimism were the only behavioral biases we needed to worry about then we might, just be able to overcome these on the way to becoming better investors. But they are a starting point.
 
My tryst with overconfidence has taught me ..
 
“Before you attempt to beat the odds, be sure you could survive the odds beating you.”
 
Disclaimer:
 
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.

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IDFC MF

Capital is the lifeblood of industry. Companies have access to capital in the form of equity capital contributed by shareholders and debt borrowed from lenders. Most companies take debt to grow. Debt is a necessary part of a company’s capital structure as it helps to build businesses that grow and generate returns for the shareholders. Companies resort to debt to :
 
 
1. Leverage the initial capital to scale up the business
 
2. Grow & build assets
 
3. Meet short term cash flow mismatches
 
4. Reduce tax burdens since interest costs are tax deductible
 
Building assets can help the company grow and generate higher turnover and sales. If, however, the asset delivers return less than the cost of debt, the company can get into a serious cash flow problem. Debt magnifies both the gains and the losses. Debt unlike equity has a fixed cost in the form of interest to be paid. Companies in cyclical industries are affected by the vagaries of income. These fluctuations can affect the company’s ability to service debt. A company that struggles with its debt burden has to first to pay its interest cost, leaving very little left for the shareholder.
 
Debt issued by the company has a claim on the company’s assets. Highly indebted companies run the risk of losing this collateral (along with it the growth) if they are unable to settle and service their debts.Borrowing additional capital against the contribution of shareholders equity is called leveraging. Too much debt taken against too little equity is like building a house on a weak foundation. These companies work to benefit for the lender since most of the revenue first goes to pay the lender.
 
In boom times when money is cheap some companies tend to borrow and invest in sub optimal projects. A turn of events and this could prove detrimental to these kind of companies. The key to magnify returns is to invest in businesses that are cash-flow positive and generate returns way above the cost of debt. The lower the debt the more there is for the shareholder.
 
IDFC Premier Equity Fund buys companies that are efficient allocators of capital, have lower debt and have used this leverage sensibly to generate great returns.

This product is suitable for investors who are seeking* :

  • Create wealth over a long period of time
  • Investment predominantly in equity and equity related instruments across market capitalisation
  • High risk. (BROWN)Risk Categories

    Note: Risk may be represented as:

    • (BLUE) investors understand that
      their principal will be at low risk

    • (YELLOW) investors understand that
      their principal will be at medium risk

    • (BROWN) investors understand that
      their principal will be at high risk

*Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

 
Disclaimer:
 
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
 
The Disclosures of opinions/in house views/strategy incorporated herein is provided solely to enhance the transparency and should not be treated as endorsement of the views or as an investment advice. The information/recommendation provided is for informative purpose only and may have ceased to be current by the time it may reach the recipient, which should be taken into account before interpreting this document. The decision of the Investment Manager may not always be profitable, as such decisions are based on the prevailing market conditions and the understanding of the Investment Manager. Actual market movements may vary from the anticipated trends.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. This update 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 / IDFC AMC Trustee Co. Ltd./ IDFC Asset Management Co. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, punitive special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

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IDFC MF

Warren Buffett, the world’s best-ever stock market investor is widely known for dispelling his secrets of sound investing.
 
One of his secrets that he has talked about a lot over the past many years is to focus on companies that generate a lot of “free” cash flow or FCF – cash that is available after all necessary expenses, like operating and capital expenses, are incurred.
 
Buffett often says, and has proved over the years, that companies that generate a lot of FCF and sustainably over the years, tend to have great competitive advantages over their competitors, and this helps them create a lot of wealth for their shareholders.
 
A company that generates a great deal of FCF can do all sorts of things with the money, like it can…
 
• Save it for future investment opportunities
• Use it to acquire other companies
• Buy back shares
• Pay higher dividends to shareholders
 
Positive FCF gives financial flexibility because the company isn’t relying on the capital markets to fund its expansion.
 
In fact, companies that have negative FCF have to take out loans or sell additional shares to keep things going, and can thus become a risky proposition when the financial markets are going through trouble.
 
A company that sustainably generates a lot of FCF is also an indication of a sound and capable management at help, which is another important requirement of a successful business.
 
In IDFC Premier Equity Fund, we invest in companies that are efficient allocators of capital and are able to generate positive free cash flows year after year.

This product is suitable for investors who are seeking* :

  • Create wealth over a long period of time
  • Investment predominantly in equity and equity related instruments across market capitalisation
  • High risk. (BROWN)Risk Categories

    Note: Risk may be represented as:

    • (BLUE) investors understand that
      their principal will be at low risk

    • (YELLOW) investors understand that
      their principal will be at medium risk

    • (BROWN) investors understand that
      their principal will be at high risk

*Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

 
Disclaimer:
 
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
 
The Disclosures of opinions/in house views/strategy incorporated herein is provided solely to enhance the transparency and should not be treated as endorsement of the views or as an investment advice. The information/recommendation provided is for informative purpose only and may have ceased to be current by the time it may reach the recipient, which should be taken into account before interpreting this document. The decision of the Investment Manager may not always be profitable, as such decisions are based on the prevailing market conditions and the understanding of the Investment Manager. Actual market movements may vary from the anticipated trends.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. This update 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 / IDFC AMC Trustee Co. Ltd./ IDFC Asset Management Co. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, punitive special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

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IDFC MF

First Among Equals!..

By: IDFC MF

If you want to know what kind of companies to invest in, it’s important to know how a company is valued. Only when one understands what creates value in a company, can one look for characteristics that create value. In The Theory of Investment Value, written over 75 years ago, John Burr Williams set forth the equation for value: “The value of any stock, bond, or business today is determined by the cash inflows and outflows—discounted at an appropriate interest rate—that can be expected to occur during the remaining life of the asset.”
 
While for a bond, the coupon rate and therefore cash outflow/inflow is fixed and predictable, the same cannot be said of companies whose equity we hold. Equity therefore is a security with a variable coupon rate. The reason why some companies are more predictable than others lies in the fundamental business they engage in and their market position in their industry.
 
Market leaders may display some demand side advantages such as products with strong brands which are habitual in purchase, high search costs i.e. Cost of searching for alternative products, nature of products, high exit costs (costs for retraining on new products etc). Alternately, they could display supply side advantages like economies of scale and scope, lowest cost producers, licensed entry etc.
 
The entry barriers these businesses build (demand or supply related) ensure that they are relatively protected from competition. Companies with strong entry barriers display predictability of cash flows which is a prerequisite to predicting company value. Hence, market leaders find themselves in an enviable position versus competition.
 

If one can identify these market leaders and invest at a time when the risk return is in their favour, one can be set up for potentially favourable investment returns in the long run. Investing in market leaders is a not a “get rich quick” recipe but one which requires patience and conviction in equal doses. As Warren Buffett says, “Time is the friend of the wonderful business and enemy of the mediocre”
 
IDFC Premier Equity fund has attempted to build a portfolio around companies that, we believe, display or are on their way to market leadership.
 

This product is suitable for investors who are seeking* :

  • Create wealth over a long period of time
  • Investment predominantly in equity and equity related instruments across market capitalisation
  • High risk. (BROWN)Risk Categories

    Note: Risk may be represented as:

    • (BLUE) investors understand that
      their principal will be at low risk

    • (YELLOW) investors understand that
      their principal will be at medium risk

    • (BROWN) investors understand that
      their principal will be at high risk

*Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

 
Disclaimer:
 
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
 
The Disclosures of opinions/in house views/strategy incorporated herein is provided solely to enhance the transparency and should not be treated as endorsement of the views or as an investment advice. The information/recommendation provided is for informative purpose only and may have ceased to be current by the time it may reach the recipient, which should be taken into account before interpreting this document. The decision of the Investment Manager may not always be profitable, as such decisions are based on the prevailing market conditions and the understanding of the Investment Manager. Actual market movements may vary from the anticipated trends.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. This update 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 / IDFC AMC Trustee Co. Ltd./ IDFC Asset Management Co. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, punitive special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

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IDFC MF

The verdict is an absolute majority for the BJP led NDA! The formation of the Government will be a mere formality. The markets have given thumbs up to this majority (after 30 years, since the 1984 elections, a single party has been able to cross the half way mark). This puts a lot of uncertainty out of the way and with this mandate the Government would be able to assert changes in the policy and make it more productive.
 
What has been wrong with the current economic cycle?
The current Indian economic cycle has been marked with some deficiencies, in our view:
 
A fall in financial savings to GDP: This in turn has been manifested in a persistently high credit to deposit ratio with banks even at a cyclically low level of GDP. Partly because of this, transmission of RBI policy rates to banks’ lending and deposit rates has been weak. The other manifestation has been in a steadily rising current account deficit at least up until last year. Any cyclical uptick in investments may put upward pressure on the current account unless savings also simultaneously pick up.
 
A steady deterioration in capital efficiency: The other hallmark of this cycle has been a marked fall in capital efficiency or a rise in incremental capital output ratio (ICOR). Studies suggest that had ICOR sustained at historical averages, GDP growth would have been much stronger currently even at the current investment to GDP ratio.
 
The outgoing Government strategy – The UPA led government targeted the fiscal deficit towards social sector spending. This largely fuelled the consumption boom. Inflation was a residual effect of the same as capacities struggled to keep pace with the demand. Investments came to a grinding halt as higher cost and availability of capital, regulatory hurdles and policy abeyance kept a lot of projects unfinished and capacities unutilized impacting corporate profitability and balance sheets.
 
It is for these reasons that RBI commentary for the last few years sees a role for monetary policy more towards anchoring inflation and inflation expectations while largely leaving the job of growth revival to the government. Anchored inflation can potentially incentivize savers and start to correct the savings balance. Whereas, a government focused on improving the policy environment and ensuring better supply linkages can potentially improve capital productivity and hence growth. The problem however, and admittedly more visible through benefit of hindsight, has been that the RBI until very recently has had a multiple indicators’ approach which in turn may have allowed softer rates than warranted. Whereas, government’s efforts on policy have been more visible only recently.
 
A new RBI and now a new Government:
The steady built-up of domestic macro-economic balances came dramatically to the fore last year with the Fed taper debate. However the lesson has been well learnt by policy makers and the RBI has steadily fine-tuned its policy focus since to anchor it around bringing CPI inflation down. Thus the central bank has set a specific mandate to itself to achieve a steady rate of disinflation that sees CPI down to 8% by January 2015 and to 6% by January 2016. In our view, this will continue to be the dominant trigger for monetary policy setting. The macro-economic logic for this course of action is well established: only by anchoring inflation expectations can savers be incentivized and savings to GDP brought up.
 
While the mandate is well established, what proportion of the burden needs to be borne by monetary policy can change depending upon whether government policies are complementary or not. It is here that the new government can play a large role given the decisive mandate that has been handed to it. Strong decisions around credible fiscal compression that were difficult in a coalition can now potentially be made. Supply side measures that can ease input cost inflation and improve potential rate of growth can also help the disinflation process. If these are forthcoming, the RBI may be able to take a back-seat even as it carefully monitors whether the disinflation process remains intact.
 
So the question to be asked is what can the government do to improve the growth cycle – Can a capex cycle start in a high interest rate regime? A high credit to deposit ratio are the main deterrent to the immediate revival of the new spends. At a micro level the low capital efficiency of existing projects would defer an immediate expansion of a capex cycle. Thus the immediate focus for the New NDA led Government has to be on releasing cash from the system, generating incremental demand and restarting the investment cycle. The low hanging fruits would be to get the cash flows rolling from unproductive assets with capital infusion. The focus would necessarily have to be on how well the fiscal deficit is spent. Productivity gains and elimination of bottlenecks would be a path the administration would follow.
 
A period of adjustment
 
From a fixed income perspective, in our view, we are in a process of policy adjustment that will ultimately reduce or weed out the 2 large ills of the current economic cycle as described above. Towards the end of the process India can finally see positive real rates as inflation is controlled. This will provide a large incentive for bond asset allocators who have thus far faced continually negative real yields for a long time. How long and bumpy the adjustment process is from hereon will depend to a large extent on what portion of RBI’s burden the government of the day can share. With the 2014 election results, the mandate is in place. What needs to be watched now is delivery.
 
From the equity markets and corporate sector perspective the deleveraging cycle that has been underway with corporate India should culminate over the next couple of years. Along with a clear policy framework one should expect growth to stabilize and then pick through gradually. The sentiment has clearly changed. As the single largest democracy with a single party majority, attracting capital should not be a big challenge. The focus in equities has dramatically changed to focus on return rather than the risk the asset class has.
 
Disclaimer:
 
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
 
The Disclosures of opinions/in house views/strategy incorporated herein is provided solely to enhance the transparency and should not be treated as endorsement of the views or as an investment advice. The information/recommendation provided is for informative purpose only and may have ceased to be current by the time it may reach the recipient, which should be taken into account before interpreting this document. The decision of the Investment Manager may not always be profitable, as such decisions are based on the prevailing market conditions and the understanding of the Investment Manager. Actual market movements may vary from the anticipated trends.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. This update 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 / IDFC AMC Trustee Co. Ltd./ IDFC Asset Management Co. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, punitive special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

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IDFC MF

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.

 

Conclusion
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.

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IDFC MF

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.

 

Conclusion

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.

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IDFC MF

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.

 

References:

http://www.gardecapital.org/PDFs/brinson.faj.v42.n4.pdf

 

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