Impact of current falling of  Indian Rupee against US Dollar

We all are witnessing falling value of  the Indian rupee against the US dollar. Our policy maker and economists are trying to find out the way to come out from this situation with their best efforts. RBI has become mute spectator as it has no more options to stop this fall. The windfall from a 23% drop in the value of the rupee against the dollar in the last one year has impacted our equity market, debt position of the corporates , fiscal deficit , capital inflow, import and export figure and overall economic environment. It is very difficult to analyze the overall impact of the falling rupee but here in this article we are trying to study the major impact of falling rupee to the some extent.

Impact on Export and Import Industry

In normal sense, a depreciating rupee should have made Indian exports cheaper and more competitive. But in this fall exporters are not happy due to a combination of shrinking global markets and rising import content of Indian exports, a weakening rupee does not necessarily translate into enhanced exports. Worse, because imports are largely inelastic, with oil and gold accounting for 44% of India’s purchases from overseas, declining exports can only mean that the trade deficit would widen, putting further pressure on the balance of payments.

A weak rupee should make exports cheaper and imports costlier. Both these should have a positive impact on the trade deficit and current account deficit, which is somehow not happening. A part of the problem is that over the past few years, the composition of India’s exports has changed in favour of value-added products, in contrast with the past when primary products and textiles products dominate in import segment. While sectors such as engineering, chemicals, and gems and jewellery have been the key drivers of India’s exports, due to a high import content in such products, the depreciation of the rupee does not fully translate into gains for exporters.

It is a big challenge for India to assess the fair value of its currency. Sometimes, speculators can take the currency far away from its fair value. The rupee depreciation will also put additional pressure on domestic inflation by making imports costlier. A 10% depreciation could have an impact of 140 basis points on inflation over a period of time. (A basis point is one-hundredth of a percentage point)

Impact on debt

On account of their aggressive global expansion strategy and the need to find cheaper sources of funds, as opposed to depending on costly domestic credit, Indian companies have taken dollar-denominated loans. The weakening of the rupee is expected to significantly raise their debt burden in rupee terms. Many information technology (IT) firms do see a benefit in their rupee revenue and, therefore, their margins and profitability, but for quite a few quarters now, the concern has shifted to the revenue front— particularly in Europe and the US.

Impact on capital inflow

Policy paralysis and an inability to pursue serious fiscal correction are great worry for foreign investors, particularly institutional investors. There is a risk of capital inflows holding out due to fears of a weakening rupee, which triggers another round of currency depreciation, setting off another round of a negative macroeconomic response. This has resulted in diminished capital inflows, which in turn have only increased the pressure on the rupee, pushing it down to a record low of 56.38 on 24 May.

Outlook

Since India is globally more integrated than it was in the past—not just in terms of merchandise trade, but also in the actual movement of people and a rapidly expanding corporate footprint . The uncertainty surrounding Europe, struggling with a debt crisis, has only made the outlook that much bleaker. A current account deficit that’s above 3% of GDP will be difficult to finance. The medium-term target should be to bring the deficit below that level. According to many analysts if the overall macroeconomic situation does not change, it is likely that the rupee will remain weak.

Regards,

Arvind Trivedi

Certified Financial planner

Reversal of entry load is only way to revive mutual- fund industry.....?

If you ask me above question my answer would be certainly not. Bring back entry load is not good for investors at all also. In last few months we have came to know about the news of reversal of entry load in mutual fund through various media. Everyone is debating about this issue including market regulator, fund houses and distributor communities. In 2009, SEBI, abolished the entry load-the initial fee charged by mutual funds from investors to pay distributors for the investor’s interest. But recently, financial advisors requested to the regulator to reintroduce the entry load in mutual fund industry to widen the reach of mutual funds. There is no doubt that ending the entry load has impacted the mutual fund industry to the some extent but the real question is the same is reversal of the entry load for investor’s interest. The interest of the investor lies in being suggested a good fund, starting an SIP in it, and then sticking to it. The distributor should raise level of the quality of the advice for the suggesting good fund in unbiased manner. They should not blame to abolishing entry load for struggling mutual fund industry. In my personal experience I have observed that investor is ready to pay the fee for honest and quality advice to the distributor in the most of the cases. 


For example, There are two way of purchasing the medicine , the one is to direct purchase the medicine from the medical store without consultation of doctor and the other one is  to purchase medicine after consultation of doctor. For consultation we pay fee to the doctor. The same logic work in this industry also. Investors are ready to pay for the quality and unbiased advice.Hoping to restore the industry's fortunes by reversing this decision of banning entry load would be a wrong move for investors.

The end of entry loads was widely and correctly perceived as an investor-friendly act, which addressed the problems of mis-selling and churning to the large extent. Now the competition is for good advice and quality product.  The reasons for the reduced retail inflow were high deposit rates, a volatile, range-bound equity market, and uncertainty over ELSS funds also, not the ban of entry load only.


There are many ways to bring new investors into the mutual fund investment. Here I would like to maintain few of them.

Investor awareness:

Due to the lack of knowledge investor invest into the wrong mutual fund schemes. I was shocked when one of my educated friend related with investment sector once told me that mutual fund only invest in equity market and according to him it is very risky product. For those who want safety of capital this is not right product. Such type of misconception is also responsible for the current status of mutual fund industry. There is really no reason why the fortunes of the mutual fund industry must be pegged directly to the ups and downs of the Sensex and Nifty. While a growing stock market can help inflows into equity funds, there are quite a few other ways to bring investor’s interest in the category.

Promote other category fund also other than equity fund :

Mutual funds just don't manage equity products. They also manage liquid funds, short-term debt funds, fixed-maturity plans, gold exchange-traded funds and balanced funds. These products are eminently suitable for retail investors. (We will discuss these products in detail in the next coming articles) Companies, banks and high net-worth investors reap the benefit of these products. Retail investors, due to the lack of awareness stay away from these products. An awareness campaign on categories such as gold exchange-traded funds or liquid funds can help draw investors into mutual funds. In the current economic condition short-term debt funds are in fact the ideal entry point for a first-time investor into mutual funds.

Investment process should be mad easy :

Now it is mandatory to compile the KYC is compulsory for each investment regardless amount of the investment. This process need should be made more easier. For investing in mutual funds investor need to deal with multiple fund houses, registrars, application forms and account statements. Online transaction portals such as Fundsindia.com, eticawealth.com and Fundsupermart.com have simplified matters.

Rural presence should be increased :

According to the industry data, the share of  rural part of the country in mutual fund is too less. The fund house largely depend upon the urban and metro cities and missing the large chunk of investment amount of rural part. According to the one survey, only 3-4 per cent of households have an internet connection. The industry needs to pay greater attention to investors who don't have internet access too. For this fund house can use traditional avenues such as public sector banks, post offices. Fund house only 20-30% fund get from rural part. So there are tremendous opportunities to reap the benefit through the awareness programme in all the part of the country.

In my opinion only bring back entry load is not the solution for languishing mutual fund industry. Industry can bring new investor from the awareness program, better advice and proper presence in rural india.

Regards,

Arvind Trivedi

Certified Financial planner

Dividend in mutual fund

We all hear about dividend in mutual fund. Each fund house announce dividend time to time depend upon the performance of schemes. Today I am talking about dividend here because some misconception about the dividend. Yesterday when one of my friends was talking about mutual fund investment with me then I had observed that the how much people are confused about this common used term ‘dividend’. So today we are going to understand about dividend in mutual fund.

The first important thing is that the dividend always calculated on the face value of the scheme, not on the fund’s NAV. When any equity fund declares a dividend, the percentage dividend announced is usually calculated on the face value of each unit and not on its latest net asset value. For example one fund’s NAV is Rs 45 and Face Value is Rs 10. If fund house declare 50% dividend, it means Rs 5 dividend per unit on its face value and not 50 per cent of its prevailing net asset value (NAV). That works out to a 11 per cent return on the fund's NAV. Investors often make the mistake of putting money into equity funds based on their dividend announcements. 

The other important thing, dividend declarations by a fund do not add to your returns as an investor. They come out of the fund's overall NAV. After all, an equity fund or debt fund announce dividend after an appreciation in the value of its portfolio. This appreciation is immediately reflected in the NAV of the fund.

When a fund's NAV grows up, it ‘realises' this gain by selling some of its holdings and may decide to return that gain to investors in the form of dividends. That is why a dividend payout usually results in the NAV of the fund dipping to the extent of the payout, immediately after the dividend record date.

If you invest in a dividend option of a fund at an NAV of Rs 100 per unit just prior to a dividend of ‘50 per cent', you will find that you get Rs 5 per unit as dividends and the NAV of the fund falls to Rs 95 per unit after the payout. A dividend payout does not affect growth option investors of a fund, for them the realised gains will be retained in the portfolio and the NAV will remain at Rs 100 per unit, in the above example.

The other important thing is that there is no guaranteed dividend scheme in any mutual fund. It totally depends on the profitability of the scheme and market condition. There are also some equity funds who declare a dividend every year. A fund can only pay out a dividend if it is sitting on capital appreciation on its portfolio and has realised some of those portfolio gains. Equity funds, as all of us know, do not record positive returns every year. 

As no one can predict that the stock market will rise or steadily from year to year, one also cannot expect regular or annual dividend payouts from equity funds. This makes it risky for investors who seek regular income to look to the dividend option of an equity fund, for that requirement.

For those who want fix income in regular interval, the only options are fixed deposits with safe entities or the post-office monthly income scheme. These schemes can really guarantee the regular income.

Dear readers, If you have any query regarding mutual fund or any financial product please feel free to ask.

Warm Regards,

Arvind Trivedi

Certified Financial Planner

Simple rule of Investment

Often investing is a complex term for common man. In this article we are trying to understand investment in simple way. For most of the person,  understanding investment is not very easy but believe me it is very easy to understand.

In the investment field widely used term is interest rate. We can divide it in 2 types , one is simple interest rate and second is compound interest rate. For understanding it better we take an example:

Say you lend Rs 100 to your friend at an annual interest of 10 per cent. Your return will be Rs 10 for the first year. If you have given this amount for 1 year, you will get Rs 110 at the end of first year. If your friend does not return you after 1st year and you have given this loan in simple interest rate then after 2nd year you will get Rs 120 (Rs 10 interest in 1st year and Rs 10 interest for 2nd year and principal amount Rs 100).

But in the above example if you have given money to your friend in 10 per cent compound rate, then you will get total Rs 121 (Rs 10 interest in 1st year and Rs 11 interest for 2nd year and principal amount Rs 100).

So now we have clearly understood the difference between simple interest and compound interest. If compound interest calculated half yearly then we will get more value than earlier compound interest yearly calculated. It tells us how many times our interest will be calculated.

Take one example, an interest rate 10 % compounded half yearly means that interest will be calculated every 6 months. It implies an effective half yearly rate interest rate of 5%. The interest of Rs 10000 for the first six months come Rs 500. For the next 6 months we consider Rs 10500 and it will come Rs 525 means Rs 25 more than if the interest was compounded yearly.

Rule of 72

The another interesting thing is “Rule of 72”. This rule gives us a very reasonable idea of the time-frame over which your money doubles. You have to only just divide 72 by the rate of return or interest rate.

For example, if any scheme gives return of 12% compounded yearly then dividing 72 by 12 we get 6. It means your money would be double in approximate 6 years.

Losses recovery rule

There are another very important rule of recovering from losses. We often see in stock market when one stock goes down  x% from one definite price but it need gain more than just x% to get back to the initial value. For more understanding we take one example that when 20 lakh worth portfolio goes down from 15% become worth 17lakh. Now to get back 20 lakh value it have to grow more than 15%. (17.65% which is more than 15%).

The above mentioned rules seem very simple but these rules also equally very important in investment field.

Dear readers if you have any query regarding any financial products, feel free to ask.

Warm Regards,

Arvind Trivedi

Certified Financial Planner

Welcome step of IRDA

As we are aware of mis-selling of insurance product like ULIP. These products are often sold for 3-5 years horizon by false promise of cunning agent. Now the insurance regulator –  Insurance Regulatory and Development Authority (IRDA) whose role has been protecting policyholders' interests along with its role of developing the insurance industry. But at a time when policyholders are being lured to buy insurance products or marketing gimmicks undertaken by the insurer; the insurance regulator - IRDA has expressed its discomfiture and brought out a number of changes to protect the interests' of the policyholders.

In the last few months the IRDA had  expressed many times its uneasiness with the ‘highest NAV guaranteed products' at several forums. The regulator's argument was that such products lead to systemic risks with the way funds were managed, and also pose a risk of a heavy sell-off in equities when stock markets fall. Thus, in order to protect policyholders' interest, IRDA has asked life insurers to stop selling highest net asset value (NAV) guaranteed product.

Highest NAV-guaranteed products are those that promise to pay the highest value the fund achieves during a certain period, like five or seven years. However, to maintain that NAV consistently, insurers have to take risks by investing in stocks aggressively, which could lead to undue risks, as per the IRDA. It is notable that, these products had become the largest selling

Some of the other actions undertaken by IRDA to uphold policyholders' interests' are:

·         Single premium policies to be issued only under special categories

·         A minimum death benefit of at least 10 times of the annualised premiums in case of traditional products

·         New guidelines for traditional insurance products

·         Approval of new insurance products to be restricted to those following the framework suggested for new product design

From the above steps undertaken by the IRDA, policyholders are set to benefit in a number of ways. With the ‘highest NAV guaranteed products' being squashed by the IRDA, there would be less mis-selling under the name of highest NAV guarantee. Increasing the minimum life cover will help policyholders as in case of any unforeseen eventuality the policyholder's family receives a sizable amount. We believe that though the IRDA is taking stern actions in order to safeguard the policyholders' interest, it should have adopted a proper clearance process, thereby discarding at the very first stage itself, by providing sufficient explanation in the public domain, thus making policyholders' aware as well. It would be wise for the IRDA to be proactive rather than reacting with policy changes in its role of protecting the interests' of the policyholders who have already been victim by mis-selling

Dear readers if you have some query regarding any financial products, feel free to ask.

Warm Regards,

Arvind Trivedi

Certified Financial Planner

Traditional Life Insurance Plan

We often read and hear term ‘traditional life insurance plan’. I don’t know how many of us know about this term. But my personal survey among my friends shows they don’t know exact meaning of this widely used term.

There are main two type of life insurance available in the market, one is ULIP (Unit Linked Life Insurance Plan) and the other is ‘Traditional Life Insurance plan’. ULIP is directly linked with stock market and it is more transparent than traditional life plan. But due to high charges and much volatility in stock market now ULIP has become less attractive. However too much miss selling of ULIP products is equally responsible for this. Now for safety of capital and and guaranteed return insurance customers now looking for traditional policy.

Traditional plan gives a low return than ULIP but due to safety of capital people tend towards these plans. These products  are recession proof and not linked with the ups and downs of the stock market. It is suitable for those who seek insurance rather than investment. Depending on your financial objective, loan liability and family responsibility you can choose a suitable traditional plan. Keep in mind there are many other investment avenue which can also fulfil of your financial objective in much better way than these traditional plan. We can divide traditional plan into two types:

Term Insurance Plan or Pure Insurance Plan:

It is pure protection plan. This type of provides only death cover- that is, the insurer pays the sum insured to the nominee on account of the policy holder’s death. Some policy offer the return of premium (ROP) where if you survive the entire policy tenure, the insurer return the part of the premium or entire premium according to the terms of the policy. Each earning person who have dependant must purchase this. Now a days online term plan is available with very dirt cheap rate. It should be part of in everyone’s portfolio.

Endowment Plan:

An endowment plan serves as saving plan with protection. The insurer pays the sum insured plus declared bonus during the policy tenure if the person insured survives the entire policy term and if the insured person die during the policy term then the nominee get sum insured and bonus if any. The insurance premium is too much high compare with term insurance plan premium.

 Money Back Policy:

This plan is very similar as endowment plan. The only difference is the insured get some survival benefits at regular interval during the policy term. Some policies participate in the company’s profit by means of bonus. There are main 3 type of bonus company offered. One is reversionary bonus, it is direct added to the sum assured. It is calculated by simple or compounded method depend on company’s term and condition. Two- terminal bonus, it is offered to the customer at the time of maturity of the plan. Three, cash bonus. It is the bonus decleared by a company and comes in the form of cash.

Traditional plans can also act as collateral in times of emergency. The company offer loan up to 75-90% of the surrender value of your policy to fulfil your emergency requirement.

Dear readers if you have some query about any financial product please feel free to ask. You are most welcome for your feedback and questions.

Regards,

Arvind Trivedi

Certified Financial Planner

Is India Infrastructure Growth story over ...?

If you ask me above question, my answer would be no. There are still remain growth potential in this sector. Many of us have invested in infrastructure fund in last 4-5 years but return was not within expectation. There was the time when each analysts and advisor was bullish in India infrastructure growth story but somehow down the line this sector has been totally failed to generate the return. These funds are not performing well. So now what is the options those investors who have already invested in this sector fund, this is the big question? Many financial planners now giving advice to quit or stay away from these funds and invest some other promising sector.

But just stop before reaching any decision and think about once that is it wise decision to quit these funds at this moment. My opinion is different on this sector. In my opinion existing investor should increase exposure in these funds and for new investors who have some risk appetite must take the exposure in these funds now.

For those who are new investors, first understand what is the meaning of infrastructure? It includes railways, telecommunications, oil-gas pipeline, airports, electricity, roads and bridges, irrigation water supply & sanitation, ports sectors. As these mentioned sectors are backbone of our economy and government   of  india is very serious for infrastructure growth. At present we are growing at around 7% GDP growth and to achieve double digit growth, the infrastructure sector have to grow. The planning commission has provisioned fund two and half times more than previous plan.

The government now seriously working on PPP (Public Private Partnership) model for infrastructure growth. As we witnessed  the tremendous telecom sector growth  by the participation of private sector. Now PPP model is frequently using in road, airport and power sectors. The private participation will increase the efficiency of the project and complete in time bound manner. Till date project delay is the main problem in the way of infrastructure growth.

If India’s GDP grow in double digit in the next 5 year then this sector will automatically grow. Now the question is, which infra funds good for the invest now. The largest corpus fund is ICICI infra fund is available in current time. Its corpus is now around 2,114Cr Rs. now. IDFC Infra and some funds are also good fund available in this category. Do your own research also and consult from your financial planner before investing this sector fund.

The bottom line is this sector has not been performing from last 4-5 year and for new investors it is golden opportunities to take some exposure in these funds for more than 5 years in view of long run for handsome return.

Dear readers if you have some query about any financial product please feel free to ask. You are most welcome for your feedback and questions.

Regards,

Arvind Trivedi

Certified Financial Planner

Mutual Fund Basics

By the simple definition Mutual Fund pools the money of the investors, who share a common financial goal and invest the corpus collected into a number of financial instruments to maximize the returns.

We can divide the mutual fund by using many criteria. One of the very popular criteria is market capitalisation. Before going forward we should know here about market capitalisation. The market cap is that figure which we obtain from the total no. of outstanding shares of a company in the stock market multiplied by the market price of the company’s share.

By the market capitalisation method, we can divide the mutual fund into three types:

1.   Large Cap

2.   Mid Cap

3.   Multi Cap

Large Cap Mutual Fund

The returns are generally low when compared with other asset classes as they are exposed to lesser risk, but on the long term, these funds have outperformed its peers. It is advisable to invest in Large-cap Mutual funds during volatile market conditions. The primary objective of the large cap mutual funds is to generate robust capital growth by investing investor’s pooled fund into the large bluechip and frontline companies whose market capital is large. Different mutual fund houses have different parameters for selecting the large cap companies in their large cap mutual fund. More than 1000 crore of market capitalization are taken as large cap companies by the most of the fund houses.

Mid Cap Mutual Fund

As we can understand by its name that this type of funds invest into mid sized companies that have the potential to generate higher return. It is more voletile and having much risk than large cap mutual fund. Investors who want to diversify their portfolios and willing to take a certain amount of risk should definitely invest money in these kinds of funds for a longer period of time. Most of the fund houses consider, Rs 500 crore  to Rs 1000 crore market capital companies as a mid cap  companies. The Mid cap companies are directly related with the market movements and generate solid returns during market upswing.

Multicap Mutual Fund

This type of fund invest investor’s money into various types of companies including large , mid and small cap which can generate the decent and stable return. The major advantage of these types of fund is that the investor’s money invested into many sectors and many type of companies, so if one sector perform bad the other sector balance the loss by making good return. It is perfect investment instrument for those who want growth as well as stable return.

So at the end of this article one thing is very clear that depending upon the risk appetite, an investor should invest into these different types of mutual funds for a longer period of time. Large Cap Funds offer a stable return with exposed to less risky assets while Mid Cap mutual funds gives a higher returns but exposed to higher risks. Multi Cap mutual funds are perfect for investors expecting a decent return and without being exposed to too much risk.

(If you have any query or feedback about investment or financial planning please feel free to share.)

Regards,

Arvind Trivedi

Certified Financial Planner