Fund houses with an active tax-saving Equity Linked Saving Scheme (ELSS) can launch passive ELSS funds if they suspend new investment into the active programme.
ELSS are tax-saving mutual funds that need to invest a minimum of 80% in equities. It has a minimum lock-in period of three years and can be used to reduce taxable income under Section 80C.
The regulator launched the passive ELSS category in May 2022 in a circular titled “Development of Passive Funds.â€
As per the market regulator’s circular on mutual fund standardisation in 2017, fund houses can only have one scheme in one category. As a result, most fund houses could not launch passive ELSS funds.
What do the new developments mean?
After publishing an announcement outlining the planned change, fund houses are required to suspend new investments into the already actively managed ELSS schemes.
After giving sufficient notice to investors, any Systematic Investment Plans (SIPs)and Systematic Transfer Plans (STPs) into the currently actively managed ELSS should likewise be discontinued, according to SEBI.
Investors in the current ELSS plan should be able to redeem their units, subject to the three-year lock-in term.
Fund houses may have to submit new documents to SEBI for the introduction of passive ELSS schemes.
Fund houses must also tell investors that their investments would be handled as passive funds if they do not participate in an actively managed ELSS plan three years following the cessation of new inflows.
A three-year notice of the closure of an actively managed ELSS scheme must be filed with SEBI by MF.
What does the introduction of passive ELSS funds mean for investors and fund houses?
Most established fund houses have popular tax-saving mutual funds that have gained traction on the back of attractive returns. Hence, fund houses with popular ELSS funds might not welcome this move with open arms.
This move might benefit conservative investors who want to invest passively in equities and save tax at the same time.
Passive ELSS funds can be a good addition for passive investors.
Investors will also immediately benefit from a lower expense ratio, allowing them to save more money in addition to the tax advantage. Passive funds have a lower expense ratio as it is not actively managed.
 This move is likely to be advantageous to new fund houses or MF houses that want to introduce an ELSS fund.
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It’s a new year, and that means it’s time to start making plans for our financial future. As we look ahead into 2023, there are many smart money moves we can make to shore up our finances and ensure long-term success in the years ahead. If you’re ready to get serious about your goals, this post is here to help!
Here are some interesting money moves to make in 2023.
Fixed-income investment
In 2022, we saw a steep rise in interest rates which made investments in fixed-income instruments attractive. Experts believe this might be the right time to lock-in rates and earn stable returns. They believe that the increase in interest rates this year is likely to remain subdued. Banks are offering 7% plus for long term FDs, while medium and long term maturity debt mutual funds are a good bet to take exposure to fixed income now.
Prepaying home loans if holding surplus cash
While the increase in interest rates led to higher interest rates on fixed deposits, it also led to a spike in lending rates. The Home loan rates were 6.7% at the beginning of the year 2022 and ended the year at 8.65%.
 If you have surplus cash, you can consider prepaying loans. Increasing EMI every year in line with a hike in income is also a good option. This can have a remarkable impact on the loan tenure.
Keep surplus handy to invest if markets fall
As the world grapples with uncertainties around the recession, Covid and geopolitical tensions, the stock market is expected to remain volatile in the upcoming months. Any sharp sell-off will allow agile investors to purchase at an attractive cost.
Here’s what you can do:
Have a fund ready to invest in high-quality stocks when available at attractive valuations.
Even a part of your portfolio can be liquidated when necessary. If there is a liquidity shortage, the debt funds or fixed-income assets can be beneficial for cash flow.
This is an indicative plan, and investors may identify their own threshold and triggers.
 Gains from high rates on fixed deposits
Use the strategies to minimize liquidity, reduce tax and make the most of the high-interest rates:
Laddering Strategy:Â In this strategy, instead of depositing a large lump sum, you can split it into smaller deposits of varying terms, with a defined purpose or financial goal for each deposit. This makes the investment more liquid. If opted for a five-year FD and require money after three years, a penalty of 0.1% will be levied to break the deposit. If you have four smaller deposits linked to specific goals, you will have the money when needed without paying any penalty. In addition to that, you’ll also benefit from the rising interest rates. A shorter-term FD can be locked into a higher rate after it matures instead of locking in a large sum for a longer period at a lower interest rate.
Use family to lower tax:Â This is one of the smartest ideas to grow your money. If your parents or adult children do not fall in the tax bracket, you can invest in FDs on their behalf and earn a higher interest rate.
Corporate FDs for higher interest:Â Certain companies offer deposits with higher interest rates than bank FDs. In addition, some of them have simpler premature withdrawal terms. On the flip side, there may be a risk if there is a default. But you can get good quality companies offering FDs. These do not offer tax benefits.
Monthly income:Â Fixed deposits are a good option if your retired parents need a regular income without any risk. Opt for a non-cumulative fixed deposit, where interest is paid out at predetermined intervals, be it monthly, quarterly, half-yearly or annually. The interest rate may be slightly lower than the cumulative deposit. But, the senior citizens will be assured peace of mind.
Prepare for medical contingencies
With the surge in Covid cases, preparing for medical contingencies is crucial. It requires both financial and physical readiness. Besides adequate insurance and sufficient funds, you need a logistic plan. The increased health concerns necessitate bigger coverage. Implement the following strategies to ensure sufficient insurance at optimum cost.
Maximum employer cover:Â Opt for the maximum cover provided by the employer to you and your family. It’ll be 20-30% cheaper than the market plan. But that shall not be enough. It is suggested to hold regular insurance cover as well.
Keep a buffer amount:Â A buffer amount will be essential in case of delay or any issue with cashless reimbursement, where you need to pay upfront during admission.
Taking control of your finances in 2023 and making smart money moves is essential for overall financial health. With careful planning and the right mindset, anyone can get their financial house in order and create positive outcomes in the years ahead.
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In the last few weeks, you might have heard of two mutual fund houses being acquired by another company. And, as an investor, you might wonder if these acquisitions affect you as an investor
It depends on the firm that is acquiring the fund house.
Let us look at two recent activities.
Bandhan Bank taking over IDFC Mutual Fund
IDFC Mutual Fund will now be known as Bandhan Mutual Fund after the market regulator okayed the change in ownership.
A group made up of Bandhan Financial Holdings Limited (BFHL), GIC, and ChrysCapital has bought IDFC Mutual Fund. The Reserve Bank of India (RBI), which oversees the banking industry, also gave its permission last month.
After the proposed transfer is complete, BFHL will possess around 60% of IDFC AMC, while GIC and ChrysCapital will own about 20%.
This makes Bandhan Financial Holdings Limited (BFHL) the newly acquired mutual fund sponsor.
However, this takeover will not lead to any change in the fund management as a press release by the fund house had mentioned that the present management and investing operations team will remain the same.
The complete transfer will require a few weeks.
Present investors might be allowed to exit from the funds without any exit load.
Investors have nothing to worry about as Bandhan Bank don’t have a mutual fund arm and the fund manager team will remain the same.
The takeover of L&T MF by HSBC MF
This acquisition is different. It is because these two are already in the mutual fund industry, and both of the fund houses have their own schemes.
Schemes of the same kind from both fund houses are often merged when one fund house is sold or combined with another. Fund houses must do it because a fund house can have only one fund from each of the categories specified by the fund house.
For instance, equity funds will combine with the new entity’s equity plans. Debt, hybrid, and every other sort of scheme will also be combined with the same kind of scheme of the new organisation. This can occasionally result in a modification of the fund’s management and core characteristics.
In this merged entity, Ravi Menon and Kailash Kulkarni will have joint leadership duties as co-CEOs. Venugopal Mangat will serve as the Chief Investment Officer (Equity), and Sriram Ramanathan will serve as the Chief Investment Officer (Debt).
It would be better to look at these funds’ performance if you are an investor of any merged funds before taking any action.
You can talk to your financial advisor if you are in doubt.
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In the last one year, when the market stayed at the same levels, a few funds like Nippon PSU Bank BeES, quant Quantamental, quant ESG Equity, CPSE ETF, ICICI Prudential Infrastructure Fund have outperformed the index.
However, we don’t believe in looking at funds from a year’s performance point of view, this is relevant when investors get drawn to investing in funds who have shown better near-term performance.
In the case of equity funds, we need to look at the performance over the long-term horizon, such as five years or more. Looking at one-year returns and making an investment decision based on these returns might not be the wise thing to do.
But for academic reasons, it is interesting to check the funds topping the charts and understand the reasons behind their performance, especially when the broader market hasn’t moved much. Nifty 50 was around 18,600 in October 2021 and again at 18,600 on November 2022.
If you are a first-time or new investor, it is essential to remember that the ranking of funds across different time horizons tends to vary, and the same fund might not lead the returns table year after year.
Let us dive into the top five mutual funds in the last year.
For this article, we are looking at the chart shared by Manoj Nagpal on Twitter.
Nippon PSU Bank BeES
As the name suggests, the fund is a passive fund that invests in PSU banks and tracks the underlying index. The attractive one-year return of 45.09% is mainly on account of the stellar performance of the PSU Bank Index.
PSU Bank stocks have rallied in the past couple of weeks.
In the last few years, these PSU banks have been in the news for all the wrong reasons after the RBI’s asset quality review. Lending to various corporates led to the accumulation of severe NPAs. However, since FY18, the sector has been slowly getting better, and gross NPAs have gone down from their highs.
PSU banks have worked hard to improve how they lend money to businesses. This is clear from the fact that credit growth in the corporate segment has slowed down and that corporates’ credit ratings have improved significantly.
As a result, PSU Bank Index has given a return of 58.7%* in this calendar year, and if we look at the top fund category that has generated the highest return in the past year, it is the PSU thematic category. This fund category also considers funds that invest in PSU banks and other PSU companies.
Quant Quantamental
Quant Quantamental Fund is second on the list, with 20.16% returns in the last year. The gains may be due to its high portfolio allocation to Adani Enterprises and ITC, whose stocks have given attractive returns in the last year.
Also, the fund has recently added Sun Pharmaceutical Industries to its portfolio.
Quant ESG Equity
Quant ESG Equity is another fund from the Quant house to feature in the top five funds in terms of its one-year returns. Its performance can be attributed to its top constituents, such as Adani Ports and Special Economic Zone, Trent and SBI. However, it is essential to remember that the fund turnover is high. This means that the portfolio undergoes regular churn to deliver attractive returns.
CPSE ETF
Central Public Sector Enterprises Exchange Traded Fund invests in PSUs. This fund was introduced as a part of the government’s disinvestment program in 2017.
PSU-based funds across the board have experienced significant gains in the past year. The CPSE ETF has had strong gains due to this surge in PSU equities. In the last year, the CPSE ETF had gains of 18.60%.
The fund also belongs thematic PSU fund category.
ICICI Infrastructure
The next fund on the list is ICICI Infrastructure Fund, a sectoral fund that invests predominately invests in companies related to the infrastructure sector. The fund gained 17.24% in the past year.
The fund’s top constituents, NTPC and L&T, have given stellar returns in 2022.
The sector has gained on the back of the government’s ongoing drive for infrastructure, which we can see from the performance of the infrastructure funds.
The fund category was the third-best performing equity category, with 14.13% returns in one year.
Our Take:
One year’s return is a very short span to consider the performance of equity mutual funds. We suggest that you not make hasty decisions based on one year’s performance. Also, we can see that these funds are mainly sectoral and thematic funds. Sectoral and thematic funds carry the highest risk out of all the equity mutual fund categories. These funds have the potential to give attractive returns and also lag behind other funds when the theme is no longer in the picture. So, these funds are suitable for investors who can take high risks. Also, these funds should not be a part of the core portfolio. However, if you can take high risk and understand market trends, you might allocate up 10-15% of your equity portfolio to sectoral and thematic funds.
*as on 2nd December
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In a move that is seen as a big win for investors, the Securities and Exchange Board of India (SEBI), to ensure that investors’ money is not lying idle with brokerages, directed a mandatory rule. Under the new directive, if any money remains unutilized in a client’s account for more than 45 days, it will have to be transferred to the investor’s bank account within five working days from the first Friday of that quarter. This will help reduce the risk of misappropriation of funds by brokerages and also ensure that investors’ money is not lying idle.
This decision was taken at a meeting of SEBI’s board last week and aimed at protecting investors’ interests.
When did it start?Â
It is important to note that this is not a new rule and was first introduced way back in 2012. However, it was not being followed by brokerages strictly, and hence SEBI has now decided to implement it strictly. Starting from the first Friday of this month, i.e. 7th October, all unused funds in trading accounts would be automatically transferred back to the investor’s bank account on a quarterly basis. The move aims to simplify the process for investors and reduce the risk of fraud.
“This will help investors as they would not need to worry about transferring funds to their trading account before making a transaction. This will also bring down the risk of fraudulent activities as brokers would not be able to use clients’ funds for other purposes,†said a senior SEBI official.
How does it work?
The regulator said that the move would help ensure that investors’ money is not lying idle with brokerages and will also help them earn some interest on their money.
This is a welcome development move by SEBI and will go a long way in protecting investors’ interests as it ensures that brokerages do not unnecessarily hold their money. It also aligns with SEBI’s efforts to protect investor interests and promote best practices in the securities market.
The move comes after SEBI received complaints from investors about brokerages holding on to their money without any reason. Under the new rule, if an investor does not have any outstanding positions or pending orders at the end of the day on the first Thursday of a quarter, the brokerage must transfer the unused funds back to the client’s bank account by the close of business on the following Friday.
What does this mean for investors?Â
For investors, this move by SEBI is a big win. It will help them earn interest on their funds or use it as they see fit and make it easier for them to keep track of their money.
What are the benefits of this move?
Some of the benefits of this move include:
1. Improved transparency– By returning unused funds to investors’ bank accounts, brokerages will have to be more transparent about how they use client money. This will help to build trust between investors and brokerages.
Greater fairness– Some brokerages may use client money for their own purposes without the client’s knowledge or consent. This practice will no longer be possible under SEBI’s new directive, ensuring that all investors are treated fairly.
Less operational risk– When clients are allowed to withdraw their money if a brokerage fails, the latter will be encouraged to keep more funds in safe investments. This will reduce some of the risks associated with investing in stocks.
In conclusion, SEBI’s new rule requiring brokerages to transfer unused funds back to clients’ bank accounts on the first Friday of every quarter is a positive step for investors. This will help ensure that investors’ funds are not being used unnecessarily by brokerages and will give them more control over their own finances.
Consequences of disobeying the SEBI rulesÂ
First of all, the brokerage will be fined. The amount of the fine will depend on the severity of the infraction. If it is a minor infraction, it may only be fined a few thousand rupees. However, if it is a major infraction, you could be fined up to Rs 1 crore. In addition to being fined, they may also have their license revoked. This means that the firm would no longer be able to operate as a brokerage firm in India.
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Let us see the meaning of repo rate, reverse repo and bank rate.
The Reserve Bank of India serves as a lender of last resort to commercial banks, offering short-term loans during fund shortages. It also helps to maintain liquidity. The repo rate is the interest rate charged by the central bank when lending short-term funds to commercial banks.
In Repo Rate, Repo stands for Repurchasing option, or you may even say Repurchase Agreement.
But why does the RBI charge interest from commercial banks? Since RBI itself is a bank and needs funds to sustain itself, it charges interest from banks. Moreover, it is an instrument to control money supply in the economy.
But RBI does not provide unsecured loans to commercial banks. Banks need to give RBI some collateral security such as government bonds or treasury bills against such loans.
When inflation is rising above expectations, RBI increases the repo rate. An increase in repo rate makes it expensive for commercial banks to take loans from RBI and forces them to use funds judiciously. This refrains banks from taking loans due to high charges. Further, it reduces the supply of money in the economy by soaking liquidity. Less money supply assists in controlling inflation crises in the economy.
In alternate situations, when the money supply needs to be increased in the economy, the repo rate is reduced by RBI.
Who is responsible for deciding the repo rate?
The decisions regarding repo rate are administered by Monetary Policy Council (MPC), which the RBI governor heads. Depending upon the market situation, the rates are finalised and modified from time to time.
What is the reverse repo rate? How is it different from the repo rate?
Repo rate and reverse repo rate are two tools to control the money supply in an economy. The reverse repo rate is the rate at which RBI borrows or arranges funds from commercial banks to reduce the money supply in the economy.
During inflation, when the supply of money is to be reduced in an economy, reverse repo rates are increased. It means RBI offers attractive interest rates to banks for borrowing money from them. Commercial banks, for high-interest rates, get ready to lend funds to RBI instead of disbursing loans to the public. In this case, the liquidity in the market gets soaked, and the money supply is reduced.
Repo rate vs reverse repo rate
The Repo rate is the rate at which RBI lends funds to commercial banks, while the reverse repo rate is the rate at which RBI borrows funds from commercial banks.
The main focus of the repo rate is to control inflation, while the major objective of the reverse repo rate is to control the money supply in the economy.
The reverse repo rate will always be lower than the repo rate.
Difference between Repo rate vs bank rate
Repo rate and bank rate are rates at which banks borrow from the RBI. However, there is a difference. The repo rate is the rate at which the RBI lends to commercial banks by buying securities, whereas the bank rate is the rate at which commercial banks can borrow money from the RBI without putting up any collateral.
Here are the similarities between repo rate and bank rate:
Fixed and altered by the central bank
Used to monitor cash flow in the economy
Offered by the central bank to commercial banks in times of lending funds
Let us look at their comparison below:
1. Time: The key difference between bank rate and repo rate is the duration of funds. A bank rate is a rate of interest charged by the central bank for long-term financial requirements of banks. However, the Repo rate is charged for short-term funds requirements of banks.
2. Collateral security: Bank rate does not involve any collateral security. Repo rate requires collateral security such as bonds, agreements etc., for lending loans.
3. Purpose: Central bank charges bank rates while offering loans to commercial banks. The central bank sets a Repo rate to repurchase securities sold by commercial banks of the country.
4. Degree: Bank rate is always lower than the repo rate. The Repo rate is always greater than the bank rate.
Impact of a repo rate hike on the country
On May 4, 2022, RBI announced a hike in the repo rate by 40 basis points. This led to an increase in the repo rate from 4% to the current rate of 4.4%.
To control rising inflation in the country, RBI had to take this move. The strategy is expected to control the rate and volume of liquidity in the country.
A hike in repo rate means banks will now have to use their funds sensibly. They will refrain from taking loans from the RBI due to high acquisition costs. In a video speech, the RBI’s governor, Shaktikanta Das, says that a jump in repo rate would drain around 87,000 crores of liquidity out of the banking sector of the economy.
“Inflation must be brought under control for the Indian economy to remain steadfast on its path to sustainable and inclusive development,” Mr Das added.
Final thoughts
The Repo rate is a tool used by the RBI to control inflation in the country. A rise in the repo rate helps control the money supply by soaking liquidity from the economy. While it may protect an economy from high inflation, it does not positively impact all the different sectors in an economy. Hence, volatility in the market has gone up, and it might persist for some time due to changes in the repo rate.
Here are the things you should keep in mind before investing in the LIC IPO.
It will be the first time that the insurance giant Life Insurance Corporation (LIC) of India has gone public. LIC IPO opened today on 4th May 2022. The Government of India has set the LIC IPO price range at 902 to 949 for every equity share. LIC IPO for policyholders is available at an Rs.60 discount, and LIC employees will get a 45 discount on the LIC IPO share price if they apply for the public sale. LIC IPO date in 2022 will be open until 9th May 2022
This article will help you decide whether you should invest in the LIC IPO.
Few pointers on LIC
On 1st September 1956, LIC was formed by the merger of 245 private life insurance firms.
It is a government-owned insurance firm that was India’s only life insurance company until the government allowed private insurance companies to enter the market in 2000.
It is the world’s fifth-largest life insurance business by Gross Written Premium (GWP) and the tenth-largest life insurance company by total assets.
It has 2,048 branches, 113 divisional offices, 8 zonal offices, and 1,554 satellite offices in 14 countries throughout the world.
Fiji, Mauritius, Bangladesh, Nepal, Singapore, Sri Lanka, the United Arab Emirates, Bahrain, Qatar, Kuwait, and the United Kingdom are among the countries where it operates.
It accounts for 74.6 percent of all individual life insurance policies written in India each year, with over 290 million active life insurance policies.
LIC IPO details
LIC IPO date 2022:
The public offering will begin on 4th May 2022 and will be up for bidding until 9th May 2022.
LIC IPO share price:
The Government of India has set the LIC IPO price range at 902 to 949 rupees per share.
LIC IPO size:
The Government of India expects to raise Rs 21,008.48 crore from the LIC IPO.
LIC IPO lot size:
Applicants will be able to apply in lots, with each lot consisting of 15 shares of LIC.
IPO application limit:
A single buyer can apply for a minimum of one lot and a maximum of fourteen lots.
Factors that impact the LIC IPO
Here are some factors you need to look at before investing in LIC IPO.
Growth potential
In India, life insurance is primarily promoted as a savings product with a significant investment component built into the premium. As a result, the actual growth opportunity for insurers may be in selling attractive pure term and annuity policies to investors while encouraging those who already have life insurance to increase their coverage.
Over the next five years, growth projections for the sector may be as high as 14-15% and for LIC as high as 9-10%.
When Covid struck, Indian life insurers saw rapid expansion. From FY16 to FY20, total premium grew at a 12% CAGR, while New Business Premium (NBP) grew at a 17% CAGR. However, once Covid began selling operations, growth rates slowed to 7-7.5% in FY21.
As LIC gets two times the premium collected by all private players combined, its growth rates have typically been lower than those of the private companies. Its NBP increased by 13.5% from FY16 to FY21, compared to 18% for other insurance companies.
Market share
In the five years from FY16 to FY21, LIC has slowly lost market share to private firms. The table below shows that LIC has lost more market share in the individual business than in the group business, which it still controls.
Individual business is acquired through a mix of channels, including individual agents, banks (bancassurance), brokers, and so on, while group insurance is sold directly by companies.
Source: PrimeInvestor
LIC will need to establish itself in the bancassurance and digital channels to attract new consumers in the long run. It has taken some moves in this approach by partnering with Policybazaar, but the benefits may take some time to materialise.
To grow in the insurance industry, it needs a lot of money. With just a small amount of stock from its promoter and a lot of help from policyholder funds, LIC has developed its franchise to its current massive scale. This is not a path those private players may follow. As a result, LIC’s scale advantage is expected to last long, while obtaining funding for future expansion will be more difficult.
Investment performance
LIC’s investment decisions are frequently in the headlines for all the wrong reasons.
However, given the large magnitude of LIC’s accumulated float, these inefficient investing actions don’t substantially impact the company’s overall investment performance.
With Rs 40.1 lakh crore in assets, LIC controlled 3.2 times the assets of all private life insurers combined in December 2021 and had more than 15 times the assets of the second-largest company. Problem sectors, including poor loans and ‘other investments’, account for a minor percentage of LIC’s portfolio.
Valuations
Overall, LIC is expected to continue to benefit from its dominating and impregnable market position, difficult-to-replicate distribution reach, strong brand recall and confidence (because of sovereign support for its policies), and the stability that comes with a significant asset base. However, in terms of growth and profits, it is likely to fall behind private players.
Here’s what the brokerage houses have to say about the LIC IPO:
Reliance Securities
The advice from Reliance Securities is to “subscribe.” According to the report, the IPO was priced at a fraction of the price of private life insurance companies. LIC is well-positioned due to its multichannel distribution network, which comprises 1.33 million agents, partners, and alternate channels. In addition, the corporation has a solid financial track record.
Angel One
The IPO has received a ‘subscribe’ rating from Angel One. LIC’s market share loss in the individual insurance industry and historically lower earnings are worries, but the brokerage believes that valuations explain most of the problems.
Profits are expected to climb from current low levels in the coming years as the product mix improves and excess is transferred to shareholders’ accounts, which gives investors confidence when paired with cheap valuations.
Furthermore, a 45% discount for retail investors and a 60 percent discount for LIC policyholders make the IPO more tempting to them.
Geojit Financial Services
Geojit Financial has given it a ‘short to medium term subscribe rating.’ Despite downside risks such as declining market share, lower short-term persistency ratios, and sub-par margins that demand a discount to private players, the current valuation is appealing due to its strong market position and enhanced earnings per share due to changes in surplus distribution norms, and strong sector growth outlook.
Choice Broking
The IPO has been granted a ‘subscribe’ recommendation by Choice Broking. LIC has 13.3 lakh individual agents, accounting for 55% of the total agent network in India.
Ventura Securities
The issue gets a ‘subscribe’ rating from Ventura Securities. LIC operates internationally and has 2,048 branches, 113 divisional offices, and 1,554 satellite offices around the country. The business offers both insurance and investing services. At this premium level, life insurance as a proportion of GDP is predicted to reach 3.8% by FY26, up from 3.2 percent in FY21.#lic #ipo
The twin moves, which shocked markets, will have implications for fixed income products
On a day the LIC IPO opened to collect a record Rs 21,000 crore for the government, the central bank’s monetary policy committee (MPC) threw a surprise and raised the key lending rate by 40 basis points citing persistent inflationary pressures. This is the first rate hike since 2018. To add salt to wounded stock markets, MPC also raised cash reserve ratio by 50 basis points to 4.5 per cent. Together, the rate as well as CRR hike, translate to a massive anti-inflation fight by the country’s banking regulator, but the moves will mean higher interest rates for the economy, which was coming to normalcy after the crippling effects of Covid pandemic for more than two years. Do note the RBI rate hike moves comes ahead of anticipated moves by the US Fed to hike rates there.
Monetary impact The surprise rate hike by the RBI comes at a time when there was a feeling that the India central bank is falling behind the curve. Today’s rate hike makes the effective rate higher by 80 bps. The simultaneous 50 bps CRR hike would tighten liquidity by an estimated Rs 90,000 crore immediately. This would improve the transmission of rate hike in credit and debt market.
One can expect immediate increase in money market rate, some transmission in the long-term bond market and also credit market.
Debt funds impact With the formal initiation of monetary policy tightening, there could be more rate hikes in the offing, alongside durable absorption of systemic liquidity.
An immediate hike in June probably may materialise and it is challenging to call out the final rate against the current uncertain global macro backdrop. Many foresee an additional 35-60 bps of rate hikes in the remainder of H1 FY2023.
The 10 Year G-sec shot by ~20bps to 7.40 per cent in an immediate response to the policy announcement.
Debt investors will lose out when interest rates go up, as the net asset value (NAV) of debt funds decline. When interest rates rise, prices of fixed income securities fall. This leads to a decline in the NAV of fixed income funds that hold these securities in their portfolio.
Interest rates are expected to go up but gradually. In such a scenario, investing in roll down funds up to 3-year maturity make sense.
The higher the average maturity of the fund, the higher is the impact of rising rate. So, one should avoid locking their investment in long term debt funds at this moment.
Effect on equity markets Equity markets went into bloodbath post hikes since it’s a double whammy for companies. First, increasing costs across inputs and two, rising interest rates.
The impact of rate hikes on the equity market is likely to be negative in the short-term. The Sensex fell by 1200 points or over 2.2 per cent to 55,710.38 on Wednesday. Higher interest rates will be particularly negative for leveraged firms, whose interest costs will rise, thus impacting their bottom line. For equities, oil price and inflation are key monitorables now. Any rise in these two can further upset the interest rate situation, and mark a top for equity markets that have rallied for most of the years since 2014.
Cheap home loan era ends Inflation has been edging higher in the aftermath of the Russia-Ukraine war and the surging oil prices. The only way to fight rising prices is by hiking interest rates. This is precisely what the RBI under Governor Shaktikanta Das has now done.
Unfortunately, for home buyers, this rate hike signals an imminent end to the all-time low interest regime, which has been one of the major drivers behind home sales across the country since the pandemic began.
This rise in interest rates will ultimately impact overall acquisition cost for homebuyers – and may dampen residential sales to some extent.
We had already started seeing transmission of interest rates but since most of the loans are linked to repo we may see impact on corporate and retail credit soon.
Evergrande development has been called as China’s Lehman moment by some. Stock markets have been worried and this ensured there was a broad sell-off in US stocks post the Evergrande news. What is Evergrande? Why should you care? Evergrande is a troubled Chinese property developer Evergrande. It has been hit with multiple ratings downgrade in as many days. But fortunately, Indian stocks have successfully shrugged off the Evergrande concerns so far. But anything can happen in future. Thus, it is important to understand the issue at hand for equity investors, irrespective of whether they have exposure to Chinese stocks or not. World’s most indebted company Evergrande is China’s second largest real estate company by sales. All was going fine, until Covid hit. As the company now struggles to repay creditors, global markets have responded with selloffs. To put things in perspective, Evergrande debt is now over $305 billion. And, it borrowed from everyone! Contagion fears have intensified as 128 banking institutions and 121 non-banking institutions are exposed to Evergrande. Questions loom about a government bailout and whether Evergrande is in fact too big to fail. With the company warning investors that it could default on its debts, ratings agency Fitch has said that default ‘appears probable’ while Moody’s has said ‘Evergrande is out of cash and time’. Apart from Covid and slowing real estate sales, do bear in mind that Evergrande fall-out is a result of growing government regulation in China’s property sector. The government there has been increasingly working to control surging home prices and excessive borrowing. Fall, rebound Evergrande is likely to default unless it successfully negotiates a restructuring plan with banks. The company has also been unable to repay investors in the wealth management business. This is why many have called Evergrande as China’s Lehman moment. After a crash on Monday, most stock markets in the world such as Sensex and Nifty rebounded slightly on Tuesday. But worries remain about the impact the default would have on the global economy. Recall how IL&FS defaults shook the core of BFSI industry in India in 2018. Hence, stock markets around the world continue to keep a close watch on the Evergrande crisis, because such developments can spiral out of control at any time. Play safe The truth is nobody really knows how the Evergrande and it’s 300 billion dollar debt mountain will play out. In the event of a collapse, the Chinese economy and financial system will suffer a huge blow. Along with this, there will be a domino effect on several other domestic sectors and a spill-over effect on the global economy, especially financial institutions and businesses that are directly and indirectly linked to real estate and housing. If you are wary of a risk-off situation, you should play it safe for a while. This means use asset allocation principles to decide exit and entries in equity, debt, gold, cash and mutual funds. Don’t try to venture out on adventures during the period when the Evergrande situation has no clarity.Â
The Reserve Bank of India (RBI) has kept the benchmark rates unchanged. The central bank has kept the repo rates – the key interest rates at which it lends money to commercial banks – steady at four per cent and the reverse repo rate – the rate at which RBI borrows money from banks, unchanged at 3.35 per cent, the RBI Governor Shaktikanta Das said at the end of the three-day Monetary Policy Committee (MPC) meeting that started on Wednesday. In this article, we tell debt mutual fund investors what experts are saying about this key development.
Avoid extreme views
The June Policy had no surprises in terms of focus, which continues to be revival of sustainable growth conditions. Inflation will play second fiddle for now, till it remains within tolerance levels, says Amit Tripathi, CIO- Fixed Income, Nippon India Mutual Fund.
“Any extreme views on market direction need to be avoided. Our overall portfolio allocation would reflect a neutral bias on rates. The core portfolios of most open-ended debt schemes will operate slightly below the mid points of their duration mandates. The huge steepness in the yield curve along with some select exposures to structured high grade assets will sustain and cushion overall returns in this uncertain environment,” says Tripathi.
He recommends continued discipline in investor allocations, driven primarily by their holding period considerations. This will ensure that investors capture the curve steepness without getting negatively impacted by interim market volatility. Moderate duration allocations can form the core for now. Rolldown strategies across the yield curve can be considered, but with a clear understanding on required holding periods, he adds.
Rate hike off the table in FY22
There is growing realisation that the RBI will keep policy rates lower for longer & banking system liquidity in surplus mode until scars of Covid-19’s on the Indian economy are more-or-less healed and the economic growth is on solid footing on sustained basis. Therefore, the Repo Rate is unlikely to be hiked in FY22, according to Dhawal Dalal, CIO-Fixed Income, Edelweiss AMC.
“There is no doubt in our mind that the RBI wishes to see bond yields trending down. The RBI Governor’s comments during the speech that ‘we do expect the market to respond appropriately to this announcement of G-SAP 2.0’ highlights that point. We reiterate that given the current term structure of rates, bond investors should expect low, single digit returns from the bond market in FY22,” says Dhawal.
He foresees four distinct buckets of returns for investors to choose from:
3% bucket: Risk-averse investors focusing on up to 6M average maturity of assets may earn ~3% returns in FY22.
4% bucket: Bond Investors focusing in 6M to 1Y maturity bucket may earn ~4% returns in FY22.
5% bucket: Bond investors seeking ~5% returns in FY22 should focus on high quality bonds with residual maturity of 1 to 3 years.
6% bucket: Bond investors seeking ~6% returns in FY22 will need to increase the average maturity of their fixed income portfolios to 5 to 10 years.
“Based on our expectations of continued RBI support and potential reduction in term premium, we reiterate investors to focus on AAA-rated CPSE bonds maturing 5-10Y segment for investment horizon of at least two years. This will help investors to earn better risk-adjusted returns in FY22 without any compromise in liquidity or credit quality,” adds Dhawal.
Contra view
However, Axis AMC has a contra view on rate hike.
“Today our stance favors caution as RBI is likely to resume rate normalization in the next few months. We continue to anticipate a gradual rise in yields and a calibrated phasing out of the accommodative monetary stance,” Axis AMC said.
Its portfolios endeavor to play this cautious stance through carry and leverage barbell strategies across the yield curve where opportunities present themselves.
“In our short and medium duration strategies we are following barbell strategies – a strategy where we mix long duration assets (8-10 year) with ultra-short assets including credits (Up to 2 years) to build a desired portfolio maturity. The ultra-short assets will help us play the reinvestment trade whilst limiting the impact of MTM as yields rise. Long bonds will likely add value in capturing higher accruals with relatively lower credit risk and lower MTM movement in the current context,” Axis AMC said.
Credits remain an attractive play for investors with a 3-5-year investment horizon as an improving economic cycle and liquidity support assuage credit risk concerns especially in higher quality names, the fund-house said.
