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

Happy 20th birthday Nifty: Stock of the Nation

Nifty celebrates its 20^th birthday today after its inception on 03^rd November 1995. The following visuals captures the growth and de-growth trajectory over the years.

Nifty Journey over the years

Nifty % yields over the timeline

Over the years, Nifty has yielded a CAGR of 12.23% till 3-Nov-2015

SH Kelkar IPO: Social Media Compendium

The Indian primary market is back in action with big names lining up for public offers. CCD IPO just managed to cross the line via institutional investors, the retail and HNI category were in a cautious mood. Indigo IPO which opened on 27th Oct has already created a lot of furore with its hefty dividends to promoters, negative net worth and high pricing.  S H Kelkar, largest domestic producer of fragrance is another name in the IPO bandwagon which opens for subscription on 28th to 30th Oct 2015.

The Rs 500 Crore SH Kelkar IPO has been priced in the range of Rs 173-180 and includes a fresh issue of shares worth Rs 210 crores which will flow into the company. The rest of the portion is an offer for sale by Private Equity Firm Blackstone Group and the promoters. The company is operational since 1922 as a manufacturer of Industrial Perfumes in British India and enjoys a 20% market share in the fragrance industry, according to a market research study.

Pros and Cons

The company has a well-diversified portfolio in the fragrance industry with its “Keva” and “Cobra” Brands. The client base is equally diversified with no client contributing 5% of its revenues. The company has been a big name in the Rs 4000 Crore fragrance industry and has been focusing on expansion in terms of client base (MNCs), geographical and technology strengthening.

On the contrary, company has a huge dependency in the FMCG Sector which is a cyclical industry. The company has a loan book of 180 crores and most part of this IPO will be deployed to retire the debt of the company and subsidiaries. The company is operating at an optimum capacity utilization and is unlikely to go for capex in the next few years. S H Kelkar also has no direct competitors in the Indian capital markets and thus has no benchmarks to gauge the valuations.

Social Media Outlook

I used various social media listening and analysis tools in an effort to capture social media vibes and overall sentiments around this IPO. The timeline chosen for the analysis was from 21st-Oct-15 to 27th-Oct-15.

Click here to read further: http://ow.ly/TVU48

How Social Media perceives Indigo IPO?

The long awaited airline IPO or Interglobe Aviation which operates Indigo is set to hit the primary markets, from 27th to 29th October 2015. The company is coming out with Rs 1272.2 crore issue at a price band of Rs 700-765, offering 1.66 Crore Equity Shares. Besides this, company also planned to offer up to 26,112,000 additional chunk of shares via OFS aggregating the share sale up to Rs 3268 Crores. However, on the first day of their IPO roadshow (19th Oct) few of the promoters decided to offload less shares as part of OFS, thus IPO size came down by 250 cores to Rs 3018 Crores at the highest band.

Turn-ons vs Turn-offs

Indigo, despite being a component of a very volatile airline industry has seen exponential growth in the last few years.  The company has been profitable in 7 out of 9 years of its existence and has focused only on the Low Cost Carrier (LCC) approach for its survival. The LCC operations means sticking to single aircraft type, low fares, no-frills approach and concentrating on “point to point operations”. The company has the highest market share of 37.4% in domestic operations as on 30-Aug-2015.The company also has the highest 11.4 hours per day of aircraft utilization and average age of 3.12 years (youngest fleet) amongst the domestic carriers.

On the flip side, negative net worth and whopping dividend outflow to the promoters have been the most concerning pointers. The RONW was very good since last years but suddenly tanked into red as on Q1 of the ongoing fiscal. The whopping dividend to the promoters just before the IPO has raised eyebrows but company justified it that they have been always investor friendly and will continue this practice even when the company goes public. The negative net worth was also attributed to the dividend outflow to the promoters.

On a thorough analysis, the company paid 80% of the profits as dividends in FY14 and 83% of the profits as dividend in FY15. Analysts have also questioned Indigo’s approach of paying hefty dividends and not building reserves or lowering debt which tantamount to mammoth Rs 3912 Crores as on Jun 30, 2015. The industry and subsequently company also enjoys a huge advantage of lower  oil prices and there is no guarantee that crude will continue to be at this bottom or trough over the long run.

Amidst all these favourable and unfavourable pointers, the IPO price band of 700-765 has been also questioned by the analysts. The analysts and brokerage house feel IPO pricing is on the higher side and company is quoting a huge premium for the all advantages it relishes in the airline industry.

Social Media Outlook

In an effort to capture social media vibes and overall sentiments around the Indigo IPO. I used  “Talkwalker”, a Social Media Listening and Analysis tool. The timeline chosen for the analysis was from 20th-Oct-15 to 26th-Oct-15.

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

Coffee Day Enterprises IPO: Social Media Analysis

Coffee Day Enterprises Limited (CDEL) Rs. 1150 Cr IPO closed on 16th Oct with an over-subscription of 1.81 times. It was the biggest IPO in three years since Bharti Infratel in Dec 2012. Also, huge expectations were set on this one, hoping that this will be the initiator of much awaited revival in the primary market. On the contrary, a muted response was witnessed from all categories of investors in their subscription figures (QIB: 4.39, NII: 0.54, Retail: 0.90 and Employees: 0.86).

On preliminary analysis CDEL which owns a big brand CCD has lots of positives: It acts as a holding company for diversified business such as ITES (Mindtree), Logistics (Sical Logistics) and Financial Services (Way2Wealth Securities Ltd.). The promoter, VG Sidhartha has a good reputation in the Industry and CCD is a well-known brand having presence in almost all major Indian cities. On the flip side, the major negative for CDEL is its dreadful financial performance which continues to sink into hefty losses year after year.

Amidst all the hype of a big bang IPO, CDEL just managed to sail through on the last day as the investors analyzed all the positive and negative aspects about this IPO. The negative sentiments outnumbered the positives which is reflected in the dismal subscription numbers.

I analyzed the CDEL IPO from the Social Media perspective to gauge the overall sentiment around the same.

Please continue to read further @ http://ow.ly/TC2Ip