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’

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’

What is driving liquidity in the markets?

The current rally in Indian market is fuelled by strong liquidity from domestic investors. With low bank fixed deposit rates, subdued real estate market (with high transaction cost) and stagnating gold prices, equities seems to be the most viable domestic investment avenue for investors. Thus in spite of the markets reaching all-time highs & rich valuations there is very strong cash inflows into the equity markets.
One observation is that domestic institutions have been flushed with funds ever since demonetization was announced and even till date the latest rally in equity markets is purely driven by excess liquidity. It may be a mere co-incidence but it could also be possible that the notes that were previously hoarded in homes & not in circulation is flowing into the equity markets after being deposited into banks.
Let us look at the different investment avenues in order of risk expected returns:

 

Product
Tenure
Returns
Notes
Liquid funds, ultra short term funds
Less than 1 year
6.5-6.7%
Safe. Liquidity with some extra return over normal savings a/c. Taxable returns.
Bank FD
1-5 years
6.7-7.2%
Safe & fixed returns. Marginally extra returns with liquidity but fully taxable other than 5 year FD.
Gold
3 years+
6-8%
Returns not guaranteed. Moves in contrary to equities & does well in times of global distress.
Debt funds
1-5 years
7.5-8.0%
Safe but returns may fluctuate. LTCG indexation if held more than 3 years.
PPF, SCSS, EPF, PMVVY etc
7.8-8.65%
7.8-8.65%
Safe & fixed returns. Extra returns but illiquid. Mostly long term government savings schemes.
Hybrid funds
1-5 years
9-11%
Marginally risky. Extra returns due to mix of equity & debt in the portfolio.
Real Estates
3 years+
10-15%
Risky, returns may fluctuate. Illiquid long term investment. Transaction cost of buying & selling is very high (12-15%) & lengthy. LTCG indexation after 3 years holding
Equities
3 years+
14-16%
Risky, returns may fluctuate. Capital appreciation, Liquidity. To achieve high priority long term goals. Tax free after 1 year.
The objectives above are in the order of priorities as well as return which means the liquid fund should be looked for first as liquidity then return, similarly while investing into equity one should keep the capital appreciation as top priority even if it offers liquidity that automatically sets condition for long term investing.
One should look at post tax real return i.e. (Real Return= Return-tax-inflation). Thus for each of the asset classes they should atleast beat inflation post tax to be viable. With inflation currently at ~3-4 all the above assets may be generating positive returns but bank FDs would be giving you the least post tax returns amongst all. (Assuming liquid funds are invested in for 3-6 months to take care of short term liquidity & not an attractive investment avenue).

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’ 

Duel Benefits: How to save tax with Mutual Fund investments…

As we are nearing the end of the Financial Year there has been a spurt in activity with regard to tax saving investments. Investments are potentially your second income & security for a better future & thus should be planned carefully so that poor investment choices are not made. But all said it is human nature to wait till the last moment & then act in haste to complete your tax saving formalities. Thus many tax payers are currently looking for various options to save income tax u/s 80C. While there are several options, one of the attractive avenues is tax saving funds known as ELSS.
ELSS or tax savings funds provides tax savings u/s 80C upto a maximum of Rs.1,50,000/year. Tax saving MFs has the potential to give significantly higher tax free returns as compared to other investments like life insurance, tax saving FD, PPF, NSC etc; ELSS has a lock in period of 3 years as compared to 5-15 years for other products. Returns from ELSS could on an average be about 12-15% but could also be higher in better market conditions as compared to 7-9% for other investments. A point to note here though is that more than 65% of the portfolio consists of equity investments & thus these returns are not guaranteed.
Who should invest…
ELSS is advisable for investors with moderate risk taking ability wanting to invest in equities while also enjoying tax benefits on the same. This can be a good investment for a new investor as it will give them exposure to equity markets and the lock-in period will ensure they maintain fiscal discipline. One of the best ways to invest in equity fund is via SIPs as it negates the timing risk of investment and irons out market fluctuations as discussed by me in an earlier article. Before investing in any fund one should check the fund manager & fund’s performance and the portfolio of the fund.
What are the potential returns…
It has generally been seen that in the long run equity markets generate about 14-15% returns & thus we can safely assume that ELSS should give about 12-14% returns in the long run given that it may invest a part of its investments in debt funds also. But these returns are not guaranteed & could be higher or lower depending on overall market conditions. ELSS is mainly compared to NPS (National Pension Scheme) & ULIPs ( Unit Linked Insurance Plan). ULIP is an insurance plan & invests the premium paid (after various deductions & charges like agent commission & mortality charges etc) in either equity or debt & most ULIPs have a lock in period of 10 years or more. Thus the actual amount invested especially in initial years could be significantly lower than the premium paid. NPS, on the other hand, is a retirement solution and not exactly a savings option. It may have limited exposure to equity depending on the plan and lock-in period is generally extended till the investor’s retirement. Also, lump-sum withdrawal can be taxable.
To conclude…
Though ELSS has a mandatory lock-in period of 3 years, it is not compulsory to redeem the amount after maturity and the investor can continue with the investment as long as he wants & maybe wait till he gets favorable market conditions to withdraw the amount. As discussed in earlier articles, in the short run markets may decline and fluctuate but in the long run market returns mirror economic growth of the country which would be the cumulative of GDP growth & inflation. We expect this to be between 14-15% on an average going ahead. Among all tax saving investments this is the only investment which accounts for inflation in its returns. When one takes inflation into account, traditional investment routes are sub-optimal due to the fixed interest rates and the falling value of the rupee. Real returns post inflation would generally be in low single digits.

The best course of action is to check the amount you are left with of the Rs 1.50.000 Sec 80C limit at the start of the year, divide it by 12 and start a monthly SIP of the amount immediately.

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’ 

Time to invest in the stock markets ….

The Indian stock markets have been buoyant over the last year with both the NIFTY & the SENSEX clocking over 30% growth in the last 1 year. The BJP led NDA government has been perceived to be a more investor friendly and reforms driven leading to improvement in sentiments. In addition to that a clear majority in parliament will bring more stability in the government & help taking more tough decisions.

In addition to this there has been an improvement recovery in economic parameters over the last year. There has been manufacturing growth , marginal decline in inflation & overall GDP growth rate and improvement in credit offtake. There has been a marginal easing of interest rates & I expect interest rates to decline further going ahead.

With the BJP in power markets are expected to remain positive going ahead. I expect excellent returns from the markets over the next 5 years even from current levels when markets are close to all time highs. So this is possibly the best time to enter/re-enter the stock markets in a big way and you will definitely get excellent returns atleast for the next 5 years if not more ….. so start investing wisely ….. equities is the place to invest now !!!!!

We should take advantage of this and focus more on investing in equities: think beyond bank fixed deposits. For example: In the year 1999 SBI allotted shares at Rs.100/share, Current Price is Rs. 2500, Rs. 1,00,000 invested in 1999 in stock of SBI has became Rs. 25,00,000, If someone had invested in a Fixed Deposit of Rs.1,00,000 in 1999 it has grown to only about Rs. 4,00,000.

Just to re-iterate the point on investing in equities now:
Sensex History
1979- 100 points
1988- 600 points
1998- 3600 points
2008- 21600 points
2018- 129600 points … ??
6X every10 yrs ! Don’t know exact but 60% of it is 3X from here in just 4 years…
Stay Invested!
Just to aid savings and help you take advantage of investing in the markets on the one hand there has been an increase of Rs.50,000 deduction u/s 80c …. take advantage of it by investing in SIP of ELSS(tax exempted mutual funds).

There has been a marginal correction in the stock markets, a few frontline stocks post budget. The outlook over the next few years remain positive. This is a good time to enter the markets. The couple of sectors I am positive on are banks (SBI) and Infrastructure ( L&T).

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’