Arbitrage Funds – Good Bet in Volatile Markets

The calendar year 2015 has been a year of consolidation. After seeing the 30K peak the markets have seen a phase of correction amidst the bout of volatility. These volatile conditions have been conducive for specialized theme of mutual funds, known as arbitrage funds. 

Arbitrage is basically buying in one market and simultaneously selling of an asset in another to gain from the temporary price difference. It is considered as a riskless profit for an investor. Arbitrage funds use these price differences and execute the strategies in various segments such as cash-cash, cash-future etc.

Swing Patterns

Before we delve more in arbitrage funds, following is the analysis of daily swing patterns of Sensex.  In CY 2015, Sensex has witnessed the highest 77 sessions of 200-300 points’ swings, 62 sessions in 300-400 points band. In CY 2014, Sensex saw the highest, 91 sessions of 100-200 points’ swings and 88 sessions in 200-300 points band.

Another striking difference in these 2 graphs is, 2015 observed more high range swing sessions (300 to 800 points) vis-à-vis CY 2014. It was a tough fight between 100-200 band and 200-300 band in 2014 but in 2015, 200-300 band gained prominence over others. These conditions are best suited for arbitrage funds and with use of algorithmic trading these index swings might grow leaps and bounds.

Arbitrage Funds – a hybrid option

Arbitrage funds are categorized as equity funds (with average exposure of more than 65% of equity) but are comparable to debt funds from the return perspective. They offer a near risk-free return along with tax advantage against debt funds i.e no long term capital gain tax if one holds it for more than 1 year. In case of short term capital gains too, arbitrage funds enjoy a tax advantage over debt funds with the indexation benefit factored-in.

The above image captures the performance of “Arbitrage Funds” operational in Indian MF scene.  All the funds are yielding positive on YTD basis. The performance of these stocks have also never faltered on other timelines as well with “Reliance Arbitrage” being the consistent performer with returns of above 8%.

On the AUM front, Arbitrage funds basket has more than doubled from Rs 12000 crores of AUM in Jan 15 to around 30000 crores in Nov 15. JM funds leads the pack with Rs 5675 crores of corpus. Most of these funds have an exit load of 0.25% to 0.50% applicable for 90 days tenure.

In a nutshell, investors need to understand the concept of derivatives before investing in any arbitrage fund. It should not be treated as an equity fund aiming for capital appreciation. The returns of these funds are directly proportional to the volatility in equity markets: the more, the merrier.

Exposure to these funds should not be more than 5% to 10% of the overall portfolio. They can be a good investment candidate for short term or as a “parking fund” for long term equity investments as they offer a tax advantage over debt funds.

The article has been originally published on Finalaya

Are you still in love with Fixed Deposits?

The interest rates have started their southward journey and are creating new nadirs with every passing day. The debt instruments strategies needs to be analysed and the key component of this basket is “Bank Fixed Deposit”. The best part of the Fixed Deposits are liquidity, safety and reinvestments which allures the investors towards them but the lower rates are a deterrence for investment.

The Bank FDs currently quotes in a range of 7.75% to 8% at their peak and one can add another 25 to 50 bps for senior citizens. The rates will further go down if one factors in the tax rate which is applicable as per the tax slab the investor falls in. If we further factor in the average inflation of 5% to 6%, we eventually get a negative return on our FD investments.

Liquidity, Reinvestment and Safety

Bank FDs are definitely liquid and can be broken as per your convenience but this comes as a cost of lower interests as a penalty because of pre-mature withdrawals. Reinvestments at a lower interest rate will impact your financial goals which depends on time horizon and risk profile. Shifting for few enhanced interest rates bps in another bank will not yield any rich dividends. The 1 Lakh Rs safety of savings are not that big impetus for choosing a bank for investment.

Alternate Investments

One cannot deny the safety of Fixed Deposits but the lower interest rates are big turnoffs and thus one should explore and evaluate other options which are relatively safe and outscore the FDs in terms or returns and provides a better tax advantage.

If the fixed deposits are arsenals of the long term financial plan:  PPFs, Tax Free Bonds and Sukanya Sammradhi Yojna (for the girl child under the age of 10 years) are superior options with a phenomenal tax advantage. They fall in the Exempt-Exempt-Exempt (EEE) category with no tax applicability at investment, intermittent income streams and redemption stage.

For the short term perspective with a time horizon of 3 years and above, one can invest in ultra- short and short-term debt funds or FMPs. Arbitrage Funds can be ideal investment options for 1-2 year timeline. These investment paths are not popular because their returns are not guaranteed and are market linked, which is subject to volatility to a certain extent.

Risk Profile also matters

In addition to the time horizon, the investors risk profile is an important factor. If one can take moderate risks, Monthly Income Plans and Corporate FDs are also good investment candidates which yield better returns vis-à-vis the traditional low risk instruments. In corporate deposits, investors should focus on top rated deposits but with the higher rates bounty, premature withdrawal can be a tricky situation.

MIPs have an equity flavour in them along falling in a range to 10% to 25% along with debt instruments.

Systematic Withdrawal Plans in MIPs and debt funds are good bets for those who have periodical funds requirements. The investors get monthly or quarterly funds either on a fixed mode (fixed withdrawal) or on appreciated mode (only withdrawal of the appreciated funds)

To sum up, the investment pattern should change with the changing times. The inflationary scene will grow with times and thus one needs to amend the financial plan accordingly for a secure and prosperous financial feature. One should choose an investment option which optimises returns, ensures liquidity and minimises tax without compromising on safety.

Other than FDs which other investment options you will choose for higher returns and tax advantages?

The article has been originally published on Finalaya.com

How systematic are your SIPs?

Mutual Funds and especially the Systematic Investment Plan (SIP) approach have emerged as the fad of investing in recent times. The SIPs are safe and convenient means of investing in a bid for wealth creation or a corpus creating. SIP also offers you immunity from the Market volatility owing to various global and domestic factors. MFs also outscores the traditional investment avenues such as FDs, PPF, Post Office Schemes etc. and also is a better financial weapon w.r.t conventional tools in your fight with inflation.

Identify Goals

All of the above statements are correct about MF and SIPs but when the SIP is aimed for corpus or wealth creation, the next question which comes to mind is purpose/goal for wealth creation. With so many advisory avenues such as TV Channels, Financial Magazines and Newspapers, people choose candidates for MF investments and on most occasions it is chosen without any predefined goal.

The SIP(s) needs to be backed with goals and these goal in turn could be a – short, medium or long term goal. The goals can have varieties ranging from car purchase, foreign holiday, child education to a retirement planning. One should be mindful of the fact that Equity MF SIP is not a universal solution for every goal. Equity SIPs are preferred for long term goals and exposure to equity is decided depending on the tenure of the goal and risk profile of an investor.

Don’t mix up Investments

The right candidates should be selected for different goals after a thorough analysis or after a consultation from the financial adviser. The SIP(s) should be demarcated clearly for each goal which facilitates easy tracking of the performance. A fund might be concurrently an investment candidate for more than one financial goal. The apt approach is to separately invest in the same fund as per their contribution to different goals. This will help in performance evaluation of the investments w.r.t a goal and rebalancing the same on a case to case basis.

Case: Fund A might be part of 3 goals X, Y  and Z for the time horizon 5,7 and 9 years respectively. In a performance evaluation “A” might not be a good fit for goal “X” now but still continues to be an ideal candidate for goal Y and Z. Thus it makes sense that investment in “A” should be spread into three chunks as per the contribution in goals X, Y and Z so as to reshuffle “A” with a better fund.

Stay invested

Many investors stop or terminate their SIPs when the markets go down. On the contrary, the SIPs can be supplemented with additional investments in the bear market situation if the saving’s basket allows you to do so. The SIP and additional investment in a market slump will deliver good returns as it facilitates the investors to buy more units at a lower price. This will eventually help in meeting financial goals effectively with more unit purchases at a relatively lower NAV. The portfolio rebalancing approach still needs to be followed to identify any duds in the portfolio.

Step up a Yearly SIP

The SIPs facilitate investment of a fixed sum every month but the SIP amount should also increase as the one’s income rises which in turn increases your savings. Ideally, the SIP should also increase in the same proportion at which the income grows up. These step-up SIPs can play a tremendous impact in attain the financial goals especially the long term goals

Are you over diversifying?

To attain a financial goal, one should focus on 3-4 well diversified funds which will aid in reaching the desired financial milestone. If one is investing in too many funds, it may lead to a situation of over-diversification which defeats the purpose.

The over diversification can due to various factors and some of the symptoms of this disorder in the MF portfolio can be

Ø  Investment in too many mutual funds with any single investment style category

Ø  Owning a MF that is subsequently investing in too many stocks (Ideally a Mutual Fund invests in 20-25 stocks)

Ø  Owning an exorbitant number of individual stock positions  through different MFs

Ø  Investing in different MFs across industries but they share the same characteristics such as defensives (Pharma, FMCG) which tend to perform weak in a booming market

Monitor and Track Progress

After all is said and done, the MFs engaged in targeting the financial goals should be analysed intermittently but definitely not on a daily basis. After all the trust and believing, these funds needs to be evaluated with it’s peers and the benchmarks indices. The investment style variations, fund manager changes, industry patterns also play an important role in driving the fund performance. Thus, they need to be evaluated on these parameters as well. 

Overall, SIP is one of the best techniques to bear the fruits of both market downturn and uptrend. But SIPs should be targeted for specific goals and not vague goals such as wealth creation. If one invests a fixed amount every month it would not only reap benefits of a market crash but would also smartly reach the targeted financial milestones.

Originally Published on Finalaya.com

Axis Bank: Pathetic Customer Service Experience

I experienced a dreadful customer service experience with one of the leading private sector banks.

It started on 3rd Nov 2015 when I walked into their Y.N.Road Branch at Indore with an intention of opening a SSY account in the name of my daughter. SSY stands for Sukanya Samradhi Scheme, a central government scheme for the girl child. I handed over the required documents and a 4k cheque on the same day.

Despite the repeated telephonic and mail follow ups, there was no response on updates about the account opening. On further inquiry, I got a response that the documents are fine and have been sent to Mumbai and they will assist in opening the account.

I escalated this on their customer service mail alias and social media channels as well but the response was "we will soon get back to you" and the "soon" was never quantified.2 weeks passed and they were still clueless on the SSY account status.

On 19th, I again followed up with a telephonic interraction and the response was Mumbai Branch wanted another signature and a zero balance account will be opened as well in my daughter's name. Another instance of moving documents back and forth from Mumbai to Indore and Indore to Mumbai. I declined this because as they said it will take another 7 business days.

The same SSY account which was an awful struggle of 2.5 weeks with Axis was opened today at the nearest Post Office within 5 mins

To sum it up, leading private sector bank has a lethargic approach towards govt schemes and are  "misinformed" about the same. The branches have no co-ordination and have a "procrastination" attitude. I was continuously following up on various channels but there was no communication from their end despite the escalation.

Axis also tried to sell other similar nature schemes of their bank through mailers intermittently but they had a sombre stance about govt schemes. 

The government should track and monitor performance of the private sector banks as well if it wants to address the challenges of "Financial Inclusion".

2015: IPO Rush Sans Retail Hysteria

2015 has been a year of consolidation for Indian Equities. After surpassing key levels of 30K and 9K earlier in the year, Sensex and Nifty have been jittery all throughout amidst the global and domestic factors. However, when we switch our focus from secondary market to primary market in 2015, it has been a wonderful ride after a lull of almost 4 years.

The IPO voyage in 2015 has seen 18 companies boarding the IPO train and resulting in a fund raising of close to Rs. 10000 Crores. This has been a much improved performance since last 3 years. In the past years, 6 IPOs raised Rs. 1260 Crores funds in CY 2014, 3 IPOs mobilized Rs. 1284 Crores funds in CY 2013 and 11 IPOs collected Rs. 6770 Crores Funds in CY 2013.

IPO activity in first half of 2015 has been a dull affair with no big names hitting the bourses. In the second half, big names such as Coffee Day Enterprises, Interglobe Aviation and Syngene struck the Indian IPO scene with relatively big fund raising plans vis-à-vis smaller contributors.

Kindly read further @ http://ow.ly/UPpyO

Samvat 2072 starts positively on a bumpy road

The 2015 Diwali Muhurat trading session ended on a greenish after the slew of Modi government FDI reforms in response to the Bihar Debacle.

The markets may witness a short term euphoria as a result of these FDI announcements but the dismal Q2 earnings and the Dec Fed Meet will keep a check on any run up in the markets.

The broader market situation has been completely gloomy in the last few quarters owing to both global and domestic factors. Even the recent announcements which includes the power reforms as well will take at least 2-3 years to be transformed into any deliverables.

The backbone of the economy, banking system, both private and public are in a complete disarray due to rising NPAs and are lacking the financial prowess.

Even the defensives like IT and Pharma, saviours of the market in tough situations are not performing their roles. The Autos, CDs, CGs and Telecoms of the world are also struggling to be dominant players of the consumption theme.

The overall markets are in a completely gloomy situation and stock specific themes are working. Most of these themes are in mid and small cap categories which are risky propositions when compared to the bellwether stocks.

D-Street is completely looking clueless at this point in time. The interest rates have eased and now is the time for the government to step on the gas pedal for big bang reforms like GST, LAB. They need to  work with opposition parties and the state governments to induce the desired competitive federalism.

All in all, they need to work with all the stakeholders of the democracy via aiming "consensus politics" and not "vindictive politics"

Mid, Small Caps Rule D-Street in 2015

2015 has been a year of consolidation for the Indian Equities after the euphoric ride in 2014. The Indian Markets in CY 2015 have witnessed lot of global events such as Greece Crisis, Brazil Junk Rating and Chinese Meltdown. Indian Markets are still eagerly waiting for the biggest event “Fed Rate Hike” which is scheduled in Dec 2015. Although analysts believe that wait on Fed decision will continue to linger on until early 2016 until the global economic turmoil settles down.

On the domestic front, Indian markets also paused their ecstatic ride because of the hefty valuations and subdued financials results in the last few quarters. The Dalal Street was also anticipating a favour from the Mint Street which was finally delivered on 29^th Sep as a 50 bps repo rate cut. Markets are also expecting a boost from the government in terms of reforms push and phasing out deadlock around the key bills in Upper House of the Parliament. Bihar election verdict on 8^th Nov will also guide the direction of the market in the short term.

Please read further @ http://ow.ly/Uhilj