It pays to stay invested in the long run…

The myth is equity investing is risky business. Find below a chart to show how it makes sense to stay invested in stocks in the long run. Holding stocks for a year or so may give negative returns but if held for more than 5 years returns have always been positive. (Even in 2008 when the markets crashed). So equity investments are not that risky if held for more than 5 years. If we have a good portfolio of stocks timing doesn’t matter, if held for more than 10 years expect double digit returns. To top it all the chart below only shows index returns & stock portfolios outperforming the index will give higher returns. Please note that returns calculated are only on the principle and not dividend, if included returns will be higher.

SENSEX Returns over the last 19 years
Returns (%)
Date SENSEX 1 3 5 7 10 12 15
Year Years Years Years Years Years Years
27-Nov-98 2782              
26-Nov-99 4705 69.13            
27-Nov-00 3969 -15.64            
27-Nov-01 3288 -17.17 5.72          
27-Nov-02 3174 -3.45 -12.3          
27-Nov-03 4989 57.18 7.92 12.39        
25-Nov-04 6035 20.97 22.44 5.11        
26-Nov-05 8889 47.29 40.95 17.5 18.05      
27-Nov-06 13774 54.95 40.28 33.18 16.58      
27-Nov-07 19128 38.87 46.89 43.22 25.19      
26-Nov-08 9027 -52.81 0.51 12.59 15.52 12.49    
27-Nov-09 16632 84.25 6.49 22.48 26.7 13.46    
26-Nov-10 19137 15.06 0.02 16.57 21.17 17.04 17.43  
25-Nov-11 15695 -17.98 20.25 2.65 14.63 16.92 10.56  
27-Nov-12 18842 20.05 4.25 -0.3 11.33 19.5 13.86  
27-Nov-13 20420 8.38 2.19 17.74 5.79 15.13 16.44 14.21
28-Nov-14 28694 40.52 22.28 11.52 5.96 16.87 20.14 12.81
30-Nov-15 26145 -8.88 11.54 6.44 16.41 11.39 14.80 13.39
30-Nov-16 26652 1.94 9.28 11.17 6.97 6.82 13.18 14.97
29-Nov-17 33602 26.08 5.40 12.27 8.37 5.80 11.72 17.04
No of Rolling Returns 19 17 15 13 10 8 5
Negative Returns 6 1 1 0 0 0 0

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

Importance of nominee in a mutual fund investment

Providing a nominee may be a simple but important step in making a mutual fund investment. The importance of this step comes in when a nominee or legal heir has to claim the investment proceeds after the death of a mutual fund investor. A joint-holder, nominee or legal heir can claim the proceeds. The process is called transmission.

Asset Management Companies (AMC) have a common procedure for transmission of units, however, there might be a slight variation in formats or documents required across AMCs, but broadly the process is the same.

The nominee or legal heir should submit the required documents along with the letter requesting transmission of units to the AMC. It is necessary to contact every mutual fund house separately where the deceased person had investments.

There can be three situations:

  1. Transmission to surviving joint holders
  2. Demise of sole or all holders, where nominee is registered
  3. Demise of sole or all holders, where nominee is NOT registered.

In all the cases, surviving holders or nominees or legal heirs should submit the following common documents with the AMC.

  1. Letter requesting for transmission of units-It should be in the AMC’s specified format.
  2. Original or duly notarized or attested photocopy of death certificate of the deceased unit holder
  3. KYC confirmation of nominee or claimants or surviving unit holders
  4. New bank mandate in AMCs specified format with attestation from bank branch manager or a cancelled cheque with account number and holder’s name printed on the cheque or bank account statement. The bank mandate has to be given on bank’s letter head or, if on a plain paper, bank branch seal, employee name and number seal should be affixed on it
  5. FATCA self-certification

Now coming to the most important part, while in case of situation 1 and 2 one will require the documents stated above in case of situation 3 where nominee is not registered needs two additional legal documents- Indemnity bond signed by all legal heirs confirming the claimant and individual affidavit by legal heirs. However, if the claim amount is above a certain hurdle limit, the claimant will be required to produce a notarized copy or probated will or succession certificate by a competent court or Letter of Administration, which makes the process harder.

The problem arises if claimant’s name in the identity documents or bank record and AMC’s record do not match. For instance, the identity documents carries middle name and AMC’s record do not or vice-versa, or different spellings. So, while mentioning nominee, make sure the details match the nominee’s identity records. Also, if the claimant is a minor, all stated document of the guardian will be required. If all required documents are in place, the process will take up to 15 days after submission of request letter and relevant documents.

Finally, all these things are possible only if the investor keeps someone informed about his investments. If no one is aware of the investments, the investment will keep lying as unclaimed. So, make sure that you keep the nominee or someone in the loop about your mutual fund investments.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

Charging up the Electric Vehicle story…

Battery is the most important component of an Electric Vehicle (EV). The EV era would force a paradigm shift and the fortunes can change dramatically depending on how well they adapt to the new reality.

The EV battery should have the following five capabilities: 1. High energy density – the weight of the battery should not weigh over the performance hence lithium scores over others as it has high energy density 2. Design of the battery should be such that it gives maximum range per charge 3. How fast the battery charges 4.How long the batteries can be used before being replaced 5. The cost at which all the above features come in.

The biggest challenge for the battery manufacturers in India is the sourcing of raw material. Lithium is the key raw material for the batteries to be used in EVs. Most of the reserves for lithium are concentrated in South America (~70%). Chile’s Atacama Salt Flat is home to the world’s largest lithium carbonate reserves. Global demand for lithium carbonate is projected to more than triple from 188,000MT in 2016 to 611,000MT by 2035 as per reports. Private entities like the battery manufacturer along with the government need to do strategic investments in these mines for sourcing lithium. As the interest in lithium keeps going up, there would be more exploration to find fresh deposits. Lithium could become the “white gold” for the industry in future. Cobalt is another mineral resource often used in lithium-ion chemistry that could come under strain as EV demand grows.

The choice of a battery design and the chemistry depends on the vehicle type for which the battery is being made for. The industry as of now is getting itself ready with various technologies to provide the optimum source of power to an EV and reduce the price difference between an EV and an internal combustion engine (ICE) vehicle. There are also debates going on regarding the optimal format for charging infrastructure. Discussions revolving around swapping of batteries vs charging station are still on. Each of these methods has its own merit.

Currently the Central Electrochemical Research Institute (CERI) in Tamil Nadu is working on lithium-ion manufacturing in India and has targeted a capacity of 100 units/day. Bharat Heavy Electricals Ltd (BHEL) has entered into a MOU with the Indian Space and Research Organization (ISRO) to develop lithium-ion batteries & Suzuki announced a $184 mn investment for a factory with partners Toshiba Corp. and Denso Corp. in April 2017. How the two leading battery manufacturers in India, Exide Industries Ltd & Amara Raja Batteries Ltd adapt & scale up technologies also needs to be seen.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

Debt Mutual Funds: Duration Funds vs Accrual Funds

A debt fund holds debt instruments, and these instruments pay a particular coupon (interest). An accrual strategy is holding a bond, earning the interest due, collect the principal at maturity and reinvest it in fresh bonds. Liquid funds, ultra-short term funds, short-term debt funds, income funds and credit opportunity funds primarily follow an accrual strategy.

A fund following a duration strategy seeks to gain from bond price rallies when interest rates fall. When interest rates fall, bond prices rise – since new bonds will carry a lower interest, existing bonds become more attractive and thus prices rise until yields match the new bonds. A duration fund will try to make capital appreciation from the bonds it holds.

An accrual fund does not try to time the interest rate cycle. Given the rate scenario and its own mandate, it will look for those instruments that deliver an optimal yield. A duration fund, on the other hand, will estimate the direction interest rates will move and adapt the portfolio to maximize the chances of bond price appreciation.

Duration potential is felt the most in government bonds (sovereign bonds or G-secs or gilts). Gilts are the most liquid debt instruments and also among the few instruments with very long maturity (10-20 years). They tend to therefore reflect rate cuts and rate cut expectations the most. Therefore, a duration fund will load its portfolio with gilts when it anticipates rate cuts. If you see a debt fund holding a large proportion of sovereign bonds, you will know that it is playing duration. These funds will have high average maturities (usually above five years). As gilts don’t pay high interest, the yield-to-maturity of these portfolios will be low. Investing in gilts is for the capital appreciation they offer and not for the interest component.

An accrual fund will primarily have corporate bonds or NCDs, commercial papers, bank bonds and certificate of deposits. It will have minimal to no holding in gilts. Depending on the type of accrual fund it is the average maturity of the portfolio ranges from a few weeks to a few months to a few years. Depending on the fund, the yield to maturities will be higher than duration funds.

When rates are falling duration funds delivers more than accrual. Accrual funds too use duration strategy in a falling rate scenario (as the top-rated corporate bonds they hold can be traded) to push up returns.

Duration funds are inherently more volatile. As bond yields and prices fluctuate on both actual and expected rate action, the NAVs of the funds will also fluctuate. Funds also actively manage the portfolio, upping or dropping the gilt holdings, adding to volatility. Apart from the volatility, the risk is that the fund gets the interest rate call wrong. These funds are generally meant for holding periods of more than two years.

Accrual funds have lower volatility. But they aren’t automatically lower risk than duration. Risk in accrual funds comes in when the funds hold debt instruments that are of lower quality or credit rating, called credit risk. Funds take this risk for the higher coupon such papers offer. Rating downgrades hit bond prices and thus NAVs. Defaults by shakier companies, though rare, can cause losses. So when picking an accrual fund, you need to be careful and look at the portfolio.

In some accrual categories, the credit risk is more or less clear. Liquid funds stick to very short-term papers of the highest quality. Income funds are meant for holding periods of over two years and these funds take limited to no credit risk. Credit opportunity funds make it a point to take high credit risk. It gets tricky in short-term and ultra-short term funds as some take credit risk in various degrees and some do not.

Duration suits investors who can take bouts of volatility in their debt fund returns. Dynamic bond funds are the best since they change their portfolio and strategy as per the rate scenario leaving little to do on your part other than sit tight. Gilt funds need timed entry and exits as duration works only on falling rates and thus suit only informed investors. Accrual suits moderate and conservative investors as they do not have much volatility and are stable.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

Creating a new normal…

The Indian markets have been scaling new highs with NIFTY remaining above 10,000 for over a month. The current rally in Indian market is fuelled by strong liquidity from domestic investors. As strong inflows continue into domestic mutual funds reforms initiated by the Modi-led government reaffirm the faith of foreign investors ( as evident from a rating upgrade from Moody’s) in the India growth story which could well stay for another 7 years.

Domestic mutual funds continue to attract flows from investors with assets under management (AUM) of the industry increasing by Rs.51,148 cr in October to touch a new high of Rs.21.41 lakh cr. As per data from the Association of Mutual funds of India (AMFI), equity-oriented mutual funds (including arbitrage funds), balanced funds and equity linked savings scheme (ELSS) funds saw net inflows of Rs. 21,900 cr in October. In September, these funds saw inflows of Rs.27,077 cr. For the first seven months of the current financial year, cumulative inflows into these funds have tripled to Rs.1.51 lakh cr as compared to Rs.46,840 cr in the same period of the previous year.

Foreign institutional investors (FIIs) who took a break from buying Indian shares in August and September are returning after recent government announcements such as the Rs.2.11 lakh cr PSU bank recapitalization plan. Over October and November so far, FIIs have invested a net of $1.9 bn in Indian equities. US-based Moody’s on 17th November upgraded India’s sovereign credit rating by a notch to ‘Baa2’ with a stable outlook citing improved growth prospects driven by economic and institutional reforms. This is expected to further boost FII investments into India. For the year to date, they are buyers to the tune of $7.4 bn.

September quarter results for most companies have already been declared & results have largely been in line with expectations. After its muted performance in the June quarter due to the transition to GST, India Inc is getting back on track going by the September quarter results. Post GST implementation GDP growth numbers, IIP & PMI index have all taken a hit, how they recover over the next few months will also be closely monitored. With real estate and gold giving subdued returns, investors have been looking at equities as an investment avenue. Thus in spite of the markets reaching all-time highs & rich valuations, strong cash inflows into the equity markets should continue for some time.

The markets seem to be consolidating above the 10000 NIFTY mark. Corporate performance & economic data which comes in H2FY18 will be critical. Last year post de-monetization Q3 & Q4 numbers for most companies & the economy were impacted. Thus the general expectation is that H2FY18 numbers should be significantly better y-o-y. Any correction in quality stocks is a good opportunity for investors to enter or re-enter the stock markets at lower prices if they had missed out previously. Given that the markets are at all-time highs one needs to tread with caution at current levels. For long term investors one should keep accumulating on dips as the markets are braced for significantly higher levels over the next couple of years.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

Public Provident Fund…Did you know?

The Public Provident Fund (PPF) is one of the most popular savings vehicles in India. One of the reasons for this is the tax benefit it offers – it comes under the EEE (exempt-exempt-exempt) tax status. What this means is that at the time of investment, the interest earned, and proceeds received at maturity are all tax-exempt.

Here are some lesser-known facts about the PPF that can help you make a more informed investment decision:

  • PPF comes with a lock-in period of 15 years. As per the Public Provident Fund scheme rules, the date of calculation of maturity is taken from the end of the financial year in which the deposit was made. It does not matter in which month or date the account was opened. For example you made your first contribution in June 2014. The lock-in period of 15 years will be calculated from the March 31, 2015, and the year of maturity, in this case, will be April 1, 2030.
  • A minimum contribution of Rs.500 per annum and maximum of Rs 1.5 lakh per annum is allowed. You either make lump sum or monthly contributions, but it cannot exceed 12 in a financial year. Any contribution made above Rs.1.5 lakhs is not eligible to earn any interest.
  • As the lock-in period of the scheme starts from the end of the financial year in which the deposit was made, if you make an annual contribution you make a total of 16, and not 15, contributions during the tenure of the scheme.
  • It is recommended that one must invest in PPF before the fifth of every month in case of monthly contributions (in case of cheque, ensure that the payment to PPF is received). This is because the balance taken for calculation of interest is taken as the minimum between the fifth day of the month and end of the month. In case lump sum annual investments, it is advisable to do it before 5th April.
  • Only a resident individual can open a PPF account and joint ownership is not allowed. However, a minor is eligible to open a PPF account with a guardian. A guardian can either be the father or the mother (not both) or a court-appointed guardian. A grandfather or grandmother cannot open PPF account on behalf of their grandchild except in cases where both the parents have died.
  • Non-resident individuals (NRI), Hindu Undivided Families (HUF) or body of individuals (BoI) cannot invest in PPF. Recently, government notified that the day an individual becomes an NRI, the PPF account will be closed. The interest paid from that date till the closure of the account shall be equivalent to the post office savings account i.e., 4%, as against 7.8% earned by PPF.
  • Even though PPF has a lock in period of 15 years, it offers partial liquidity through loan and partial withdrawals. You can take a loan after 5 years and the interest rate charged on the loan is more than 2% of the interest earned on the scheme. From the 7th year as you become eligible for withdrawal, then you are not allowed to take a loan. Also, a subscriber shall not be entitled to get a fresh loan until the earlier loan has been paid off along with the interest. Only one withdrawal is permissible during the financial year.
  • Since PPF comes under the EEE status, any withdrawals made before the expiry of lock-in period is exempted from tax. However, you are required to declare that you have withdrawn from PPF while filing your income tax returns.
  • A PPF account cannot be attached by a person or entity to pay off any debt or liability. Further, even a court order or decree cannot make a person liable to pay off his debts using money from his PPF account.
  • If you don’t make atleast a minimum contribution, i.e. Rs 500, in a particular financial year, your PPF account will become inactive. To revive an inactive account, you will have to pay a penalty of Rs.50 per year for the number of years the account has been inactive along with a minimum contribution of Rs 500 per year.
  • If you discontinue your account, then you will not be eligible for loans and withdrawals until the account is revived by making a payment of penalty fees and minimum contributions. However, the account will be eligible to receive interest as per the prevailing rate.
  • After maturity, a subscriber has the option to extend the maturity period of the PPF account in a block of 5 years. The account can be extended for ‘N’ number of blocks of 5 years each. It will continue to earn the prevailing interest rate even if you do not make any contributions. However, this extension must be given within a year of maturity.
  • A person has the option to transfer his/her post office PPF account from post office to banks (authorized by the government) or vice versa.
  • PPF accounts are exempted from the ambit of wealth tax.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’

IPO bidding rules to maximize chances of allotment

Primary markets have been hyper-active over the last year & the pace has only picked up over the last couple of months. There has been 30 IPOs since last Diwali garnering over Rs.45,000 cr of which Rs.14,000 cr was raised in October 2017 & we have another ~Rs.20,000 cr worth IPO lined up in the first 10 days of November. Six stocks Avenue Supermarts, Shankara Building Products, Salasar Techno Engineering, CDSL, Apex Frozen Foods and Sheela Foam delivered multi bagger returns.

IPO investment is a good source of earning to the retail investor if selected properly. One check everyone can do is to look up the grey market premium on offer in the IPO. This information is readily available online. But even after due consideration of fundamentals and valuation of any IPO and subsequent subscribing, it is not necessary that one get share allotment. Thus, merely subscribing to any public issue does not guarantee for share allotment especially when the IPO is over-subscribed multiple times. To enhance the possibility of share allotment one should keep in mind the following things.

The chances of rejection are high in case if the applications are incomplete or filled with some error. So it is always better to fill the application form with due care. The application must be complete in every sense and no column is to be left blank.  Since January 2016, SEBI has made ASBA (Application Supported by Blocked Amount) mandatory for subscribing any IPO. Under this method, the money is blocked in the account linked to the application & the amount is withdrawn only in case of allotment. One simple process I follow to negate mistakes is to fill up the online ASBA form available on the BSE website. If you are careful filling up the form for the first time, on all subsequent occasions the data such as bank account number & DP a/c details can be recovered & updated thus chances of making a mistake are minimal.

Retail investors can tick the cut-off option which indicates their willingness to subscribe to shares at any price discovered within the price band. The cutoff price is at upper band in case the IPO is over subscribed.

Most importantly SEBI allows maximum 5 applications to any IPO from a single bank account to a retail investor. Also, a retail investor can bid for shares worth a maximum of Rs.2 lakhs in any IPO. It is always advisable to subscribe in minimum lot size but the number of application should be on higher side. Thus you can bid one lot each in the name of every family member in their DP account instead of bidding multiple lots in your name. This increases the chances of getting a higher allotment.  There is the draw of lots for allotment to retail investors in case any issue is subscribed multiple times. And the lucky investors get a bid of minimum one lot.

Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’