Role of fixed income and gold in a portfolio

Dear All,

Please find below a good article as appeared in Morning Star for your reading:

Role of fixed income and gold in a portfolio

This column was written by Ritesh Jain, CIO at Tata Mutual Fund, for the India Markets Observer. 

The importance of holding equity has always been extolled, but investing in gold and debt is as crucial. At this juncture, both offer investors opportunities for growth through appreciation.

Gold was one of the most rewarding asset classes for the better part of the last decade as its price climbed more than six times during 2001-11. This period was followed by three years of a price correction when gold lost about 40% of its shine. The sharp price drop in the second quarter of 2013 led to fears of a prolonged trough, but 2014 saw the arrest of gold’s free fall albeit in a subdued price environment.

Gold neither pays dividend/interest (unless lent for ‘yield’ in return) nor does it carry a guarantee to repay principal over a period of time – as there is no maturity date. It has little productive use apart from a tiny fraction which is used because of its non-reactive properties.

Nevertheless, its financial importance stems from being an effective hedge against currency devaluation and a safeguard against inflation. The threat of default on gold investments is zero. Being virtually indestructible, it requires minimal upkeep.

During times of despair and runaway inflation, gold is a safe refuge. Steep declines in the value of equities or high volatility of other assets, lead to a demand for a stable store of value with a low correlation to other asset classes – Gold is the solution! It also provides liquidity during extreme economic environments where it may be difficult to realize the value of other assets. Gold has proved to be a hedge against flawed political and economic policy which has an adverse economic impact on most asset classes. The recent Ruble crisis is a testament to this fact.

Here’s why you should buy gold now.

Gold prices are nearing the cost of ‘mined gold’ after having come down to $1,200/ounce from highs of $1,900/ounce.

After having been through the Federal Reserve’s oft-referenced $85bn/month QE, QE failed to achieve its object of supporting inflation levels and led to an asset price boom instead. With every subsequent QE failing to achieve its objective, increasing amounts of ‘loose’ money entered the system and speculative forces came into play, thereby distorting asset prices. As things stand, the perception that central banks have been unable to induce inflation through expansionary monetary policy will reduce investors’ confidence in central banks and they will turn to gold.

The opportunity cost of holding gold is captured by the real interest rate. The prevalence of relatively high real interest rates in India for a while has translated into higher opportunity costs and this has put a downward pressure on gold prices. Against the backdrop of a softening real estate market and positive real rates, a higher allocation within incremental physical savings is likely to come to gold.

The returns from gold as an asset class for the rupee investor in dollar denominated gold is marked by two distinct phases – one leading to 2011 and 2011 onwards. The dollar denominated price of gold ensured healthy returns for the Indian investor till 2011.

The three years after that were characterized by a rapidly depreciating rupee against softening gold prices. Hence, the MCX gold spot lost only 5% during this period while the London Gold Market Fixing (PM) index lost 38% from its 2011 highs.

Here onwards, I believe global prices will be influenced by global factors – rising risk will drive investors (and central banks too) closer to gold. For rupee denominated gold, the steep depreciation of the rupee has partially offset the global gold price decline. RBI Governor Rajan wants to uphold the purchasing power of the domestic currency, which could keep the rupee in a relatively tighter band against the dollar compared to the recent past. For the Indian investor, the returns hereon will be increasingly determined by movements in dollar denominated gold prices rather than rupee exchange rate movement, which was the case in the recent past.

This is where we come to debt instruments.

During the past five years, household savings have been disproportionately skewed towards physical assets. As real interest rates have been positive after a fairly long time, households have been incentivized into parking a higher proportion of incremental savings in financial assets.

Debt as an asset class has given approximately 8% compounded return over the last decade. Fiscal prudence in the medium to long term will augur well for bonds as an asset class as it will pave the way for a sustainable reduction in interest rates.

The decision to cut rates between policies was triggered by a sharp fall in inflationary expectations by households. The RBI has stated its intention of keeping real rates in the 1.5-2% band that will pave the way for further loosening of monetary policy and lower rates in the medium term.

Lower bond market yields are here to stay. If we ensure fiscal discipline, we could emerge as an Asian tiger and portfolio flows will follow thereon. India is among the pockets of strong fundamentals in the global universe.

I recommend locking into a fixed income portfolio at current rates to earn higher coupons and capital gains resulting from a structural softening in interest rates. When compared to equity, debt instruments offer little secondary market liquidity. This will improve as more companies turn towards the capital markets to raise debt funds, which in turn, will increase the vibrancy of the debt capital markets and thereby, provide liquidity to bond holders. Investors can look at corporate and government securities and debt oriented schemes of mutual funds available across tenures and credit risk profiles.

As for gold, Gold ETFs are the most convenient.

The views expressed in this article are personal in nature and for information purpose only and do not construe to be any investment, legal or taxation advice.

http://www.morningstar.in/posts/31448/31448.aspx

regards

FALLING COMMODITY PRICES IS THIS ALONE ENOUGH

Dear All,

Please find below a good article as appeared in Morning Star for your reading:

 

Putting serendipity to work

Amay and Swanand of Morgan Stanley Investment Management mull over India’s fiscal good fortune from falling commodity prices and the most appropriate way of spending it.

One glaring difference in the current cycle of growth in India versus that which began in 2003 is the absence of pick-up in investment outlays. The reasons are not difficult to fathom.

State-owned banks that comprise over 75% of the banking system’s outstanding loans are constrained in their ability to lend. Neither has the formation of bad assets ebbed, as is being evidenced in their latest quarterly reports nor have they been able to raise adequate capital to accelerate lending.

On the other hand, entities involved in undertaking large capital expenditures in the previous cycle are still shedding assets from previous excesses or do not find the demand environment viable enough to commit new money especially in commodity related areas. India’s investment ratio (Gross Fixed Capital Formation- GFCF as a share of GDP) soared from 23.7% in F2003 to almost 33% in F2008 but has since declined to 28.5%. Average nominal GFCF growth for the past two years has been a paltry 6% and barely positive in real terms.

Hence the question that we have often grappled with is who will lead and who will lend to the next investment cycle in India.

We recently watched the movie The Imitation Game, based on the life of famous British cryptographer Alan Turing. Turing cracks the almost-unsolvable German Enigma machine’s code based on a chance conversation that makes him realise that a few letters in the coded messages always correspond to the words “Heil Hitler”.

Sometimes, solutions to most vexing problems are born out of a totally unconnected happenstance. Towards the end of 2014, crude oil prices started declining materially. From $115 per barrel in the middle of June, they are at around $55 per barrel now. The salutary effect of this on India’s external deficit as well as inflation dynamics is quite well known. What this has also done is created headroom within the fiscal mathematics for additional spending.

This fact seems to be underappreciated due to tightness thus far in F2015 as almost the entire budgeted fiscal deficit has been used up with three months to go in the financial year. Moreover, popular perception is that if fiscal targets as laid out in the Fiscal Responsibility and Budget Management Act (FRBM) are to be met, there would be limited elbow-room for fiscal spending.

However a combination of lower net subsidies from fuel and fertilizers along with rationalisation of some welfare schemes could create a meaningful space for additional expenditure, even while remaining within the FRBM limits. The two heads that contribute to this are expectedly, higher excise collection from recently hiked excise duties on petrol and diesel and lower subsidy burden from fuel and fertilizers. Both put together, in our opinion create fiscal maneuverability to the tune of about 0.9% of GDP. For these calculations, we assume oil at $75 per barrel and importantly, stay within the fiscal deficit of 3.6% of GDP as originally envisaged for F2016.

It is natural that whenever there is a windfall gain, claimants who profess to be the most deserving start crawling out of the woodwork. The government would be hard pressed to allocate the gains between competing demands of corporates and / or individuals for lower taxes, sops for various sections of the economy or even higher subsidies and welfare spending.

However, given the hamstrung capital investment cycle the most prudent way to allocate this windfall would be towards fixed capital formation, primarily in the infrastructure space. It is interesting to note that public spending as a share of GDP has remained in the 14-15% range for last few years. However, the share of capital expenditure within that has shrunk from 2.4% in F2008 to 1.6% in F2014.

Data from HSBC shows that within our peer set of Asian economies this is one of the lowest. In other words, over the past few years, the skew of government expenditure has moved towards revenue spending with lesser amounts being allocated for capacity creation or augmentation. This has been part of the reason for chronic, high inflation that the economy had to withstand in the past few years. It is time to correct this mismatch.

While the current government has stated its desire to rein in some of the welfare and subsidy spend, there is need to reallocate that money towards capital expenditure that can be implemented quickly and will have a high multiplier on growth and job creation. Even if the mix is re-adjusted to the average of last decade, it could make additional 0.4% of GDP available for capital spending. Coupled with the gains from lower subsidy and higher excise, it could lead to a meaningful push worth about 1.3% of GDP in a single year.

To be sure, this is not a Keynesian policy recommendation of people being paid to dig holes and then fill them up. This is more about judiciously using the windfall, re-orienting the budget spends and kick-starting a part of economy that is tied up in a gridlock.

Skeptics worry that a fiscal push of this kind may be inflationary in the near term and reverse the gains that Reserve Bank of India has achieved in quelling inflation, causing the hopes of a monetary easing cycle to be still born. However, we think downward pressure on prices from slowing global demand would counter-act the near term inflationary pressures, if any. If all the pieces of the jigsaw were to fall into place, we could have that rare confluence of pro-growth fiscal and monetary policy for some time to come.

http://www.morningstar.in/posts/31413/putting-serendipity-to-work.aspx?utm_campaign=bulletin&utm_medium=email&utm_source=morningstar

Dear All,

Please find below a good article where Rahul Dravid can teach about invest:

4 Lessons Rahul Dravid Can Teach You About Investing

In early October of 2013, one of India’s go-to cricketer and last classic test match batsman – Rahul Dravid, played his last match in international cricket. As a classic test batsman with phenomenal technique, Dravid is one of the few batsmen who have been able to score over 10,000 runs. The aspect that drove Dravid’s performance and style was technical excellence coupled with his mental toughness and emotional restraint especially during troubled times.

There are many similarities between Dravid’s approach to cricket, and the approach taken by smart investors who build long term wealth.  

#1: It pays to remain patient

During the 4th ODI of West Indies tour of India in the year 2002, Rahul Dravid chased down a high target of 325 set by West Indies by scoring an unbeaten century. A composed knock which included just 8 boundaries and no sixes and rarely a shot misplaced or a mishit which would have cost him his wicket.

Another element of Dravid’s skilful play was that of tiring out the opponent; several bowlers have remarked that Dravid frustrates the best of the bowlers by not doing anything entertaining and skilfully defending ball after ball after ball.

For investors, our opponents are largely volatility in the equity markets and time. Both of them put together are like a perfect mix of pace bowlers and spinners rarely giving loose balls in the beginning of the game. As the game progresses, we need to tire out their arms and let the heat of the pitch get to them. The only way to beat them is to use Dravid’s strategy of being patient and stomach the volatility over the longer term. With patience, Dravid was able to establish himself in the team as a ‘must-have’ in both formats of the game. Similarly, with patience, time becomes the friend of the investor and returns start kicking in.

#2: Be consistent

At the start of Dravid’s ODI career, his batting average did not cross single digits for quite a while. If the selectors had written him off from the shorter version of the game, India would have lost a world class middle order batsman.

Dravid took almost 10 matches to score his first half-century and 33 matches to score his first ever century. In fact Dravid has scored only 12 centuries in a career spanning over a decade in the ODIs but what mattered most was the consistency in which he scored his runs that saw him retire with a batting average of 39.16.

This teaches us investors the most important lesson in investing. Invest regularly no matter how small the amount. While a few bulk investments,like the 12 centuries of Dravid, will help you raise your numbers, it is the small, regular monthly investmentsthat help you grow your money over the long term.

#3: When it comes to investments, think logical- not emotional

Throughout Dravid’s career, he has displayed immense emotional restraint and mental toughness which has aided him to bat well in tough situations.

Circa 2001, Calcutta. It is one thing to chase a total of 446 that the Aussies set and it is completely another thing to end up winning the match against the Aussies after being all-out for 171 in the first innings. Such was the adversity that VVS Laxman and Dravid faced on that day when the match would have been easily written off favouring the Australians after the first innings collapse. But it wasn’t over for Dravid and VVS; the resilience they displayed on the pitch for the next 2 days took us to a lead of 384 runs which was successfully defended with an excellent bowling performance by Harbhajan singh.

As investors we also see tough situations during which we would also need to display emotional restraint while keeping in mind the eventual goal of investing. For example, in between July and August 2013, we saw India’s benchmark equity index fall from just a shade over 6,000 points to nearly 5,400 points in one month.

While the fundamental story and growth outlook for India had not changed, much of the fall was on account of panic selling due to global factors. In the subsequent months the Nifty bounced back. If investors lacked emotional restraint during turbulent times, they would have participated in the panic selling and eventually lost out on the potential gains that could have been made.

#4: Future is unpredictable; but that’s OK

Back in 1996, when Dravid started his international playing career, no one, including Dravid himself, would have ever imagined that he would end up scoring more than 10,000 runs in both forms of Cricket. Thanks to his unbreakable resilience, patience and determination that Dravid not only passed the 5-digit mark in both Test and ODI cricket, he also gave us a lot of moments to cheer about as fans of Cricket.

Like Dravid, you would never know at the start of investing that how much you are going to make after a long spell of 7 years. But with patience and discipline by your side your investments might turn out into a hugely successful one like Dravid’s career.

https://scripbox.com/blog/4-lessons-rahul-dravid-can-teach-you-about-investing/?utm_source=outbrain&utm_medium=contentmarketing&utm_campaign=outbrain_content_distribution_all_feed

fin freedom

At age 25, I began planning my exit strategy to leave a lucrative career in sales to become an entrepreneur and pursue my passion: empowering people to maximize their potential and make significant improvements to their results.

While still in my sales position, I started my first business -- and my first additional stream of income -- serving as a life and business success coach. In the past nine years, using the exact formula below, I’ve been able to add nine additional streams of income. These have involved authoring books, speaking, private and group coaching and staging live events. 

For anyone who values financial security and ultimately desires financial freedom, creating at least one additional stream of income is no longer a luxury. It has become a necessity.

Diversifying your income stream is crucial to protect yourself and your family against the unavoidable ups and downs of economic and industry cycles. Because of the financial risks that come from relying on one source of income, such as a job or a business, consider creating at least one or more additional streams to generate cash flow.

Your additional income streams can be active, passive or a combination of the two. Some may pay you for doing something that you love (active), while others can provide income for you without your having to do much of anything at all (passive). You can diversify your income streams among different industries to protect you against major losses during downturns in one market and allow you to financially benefit from the upswings in another.

This truly is one of the not-so-obvious secrets of how the wealthy become -- and stay -- wealthy, which unfortunately isn’t taught to the masses. The good news is that it’s not magic. It’s not even complicated. Creating your next stream of income is a simple, step-by-step process, which you can arrange to start bringing you monthly income faster than you might realize is possible. 

Related: The 3 Decisions That Will Change Your Financial Life

1. Establish financial security. 

Now, this idea isn’t sexy, but it’s imperative: Don’t focus your time and energy into building a second stream of income until your primary source is secure. Whether you have a day job or own your own business, focus on establishing and securing a primary monthly income that will support your expenses before you pursue other steps. 

2. Clarify your unique value.

Every person on this planet has unique gifts, abilities, life experiences and value to offer -- and be highly compensated for. Figure out the knowledge, experience, ability or solution you have that others will value and might pay you for. Remember, what might be common knowledge to you isn’t for other people.

You and your personality differentiate your value from that of every other person on earth. Many people will resonate with you (and your style) better than they will with someone else offering value that's similar or even the same.

Packaging is how you can differentiate your value. When I wrote my book The Miracle Morning, I had to overcome my insecurity that waking up early wasn’t exactly something I invented. Would there really be a market for the book? But readers shared that the book was life-changing in the way the information was presented. It was written focusing on how to significantly improve any area of life by simply altering how a person starts the day.

Knowledge is the one thing you can increase very quickly. As Tony Robbins wrote in Money: Master the Game, "One reason people succeed is that they have knowledge other people don't have. You pay your lawyer or your doctor for the knowledge and skills" you lack.

Increase your knowledge in a specific area, and you'll simultaneously increase the value that others will pay you for, either to teach them what you know or apply your knowledge on their behalf.

Related: Create Side-Hustle Income by Teaching What You Already Know

3. Identify your market.

Determine whom you are best qualified to serve. Based on the value you can add for others or the problems you can help people solve, who will pay you for the value or solution you can provide?

4. Build a community.

A turning point in my financial life came when I heard author and self-made multimillionaire Dan Kennedy say, "The most valuable asset you have is your email list, so focus on growing it."

I don't like to think of my email community as merely a list of names but rather as a group of individuals, each with their own hopes and dreams.

Here's how you can build your community:

Acquire an email-marketing program (good: AWeber, better: Infusionsoft).

Get a program to create an opt-in page (good: LeadPages.com, better:Kajabi).

Create an added-value deliverable such as a free report, an ebook, an audio or a video training so that people will happily provide their email address in exchange for the value you provide.

5. Ask your community about their desires.

You can either guess or assume what people desire and need, invest valuable time in creating it and then hope your guess was correct. But remember: Hope is rarely the best strategy.

Or send an email to members of your community with the link to a survey (using a free service like SurveyMonkey), asking what they want or need help with in your area of value that you've identified. Ask open-ended questions to help you later brainstorm or offer multiple choices if you've already thought about what you can provide.

6. Create a solution.  

After your community members tell you what they need, it's your golden opportunity to get to work and create it. This could be a physical or digital product (a book, an audio, a video, a written training program or software) or a service (dog grooming, babysitting, coaching, consulting, speaking or training).

7. Plan the launch.

Think about how Apple rolls out its products. The company doesn’t just throw a product on the shelf or its website. No, the company makes it into an event. Apple builds anticipation months in advance, so much so that people are willing to camp out in front of stores for weeks to be the first in line.

Do that. To learn how, read the definitive book on the topic, Launch by Jeff Walker. 

7.1. Find a mentor.

The best way to cut your learning curve and achieve a specific result is to find people who’ve already achieved what you want and then model their behavior. Rather than try to figure it all out on your own, find someone who has already achieved what you want, determine how this person did it, model this behavior and make it your own.

While you might seek a relationship with a face-to-face human mentor, you could also hire a coach, read a book or articles by an expert or do web research. After some consideration, you may decide to make this your first step.

Schedule time to begin implementing these 7.1 steps, one at a time, and within months you can be enjoying the benefits, the perks and the financial security and freedom that comes from having multiple streams of income.

Related: Create Momentum When You're S

money tips for young professionals

just made the transition from being a student to an employee? While it is great to be earning, you also need to be responsible with your money. Here are some simple ways to get a head start.

1) Go easy on credit card debt

If you are determined to get your finances in order, the best place to start is by getting rid of credit card debt. It starts off as a convenience, more of a stop-gap arrangement. You pay just the bare minimum amount and walk scot free. But as you well know, or will soon learn, there is no free lunch.

When you use your card, you pay for an item with money that is not yours. So basically you enjoy life on borrowed money. This instant gratification can put you on a slippery slope. Let’s say you could not pay the last bill. You put up the cash for the minimum payment and revolve the balance. The bank says they will charge you interest at just 2.25% per month. What they fail to tell you is that it works out to an obscene 27% p.a. The longer you take to repay it, the more it eats into your disposable income, the more it hinders your savings potential, and the more money the bank makes.

If you have started revolving credit, it means that you could not afford to clear your monthly bill. And, it will not be just the debt that you are servicing. Every single purchase you make on that card will result in the interest rate being levied. The only way out is to stop using your card till your debt is cleared.

2) Get medically insured

Everyone should get themselves a medical insurance policy. Numerous illnesses and accidents are pretty much age agnostic. Should you unfortunately succumb to it or be a victim, your savings could disintegrate rapidly.

Almost certainly, your employer would offer you a medical insurance cover. That is still no reason to bypass getting medically insured on your own. What if you quit your job or get handed the pink slip? That will leave you vulnerable between jobs. Or, you may decide to become a consultant where medical insurance is not part of the package or even move out on your own.

Get insured. The younger you are, the lesser your premium so you won’t even feel the pinch. Existing illnesses are excluded from the cover, so being young with no pre-existing ailments gives you a complete coverage. The greater the number of years that go by without you making a claim, the greater your claim bonus.

Not to mention the tax benefit. You can claim deduction from total income under Section 80D of the Income Tax Act, 1961, against premium paid towards the policy.

3) Start saving

If you have recently joined the workforce, you will probably enjoy the new spending power. But with money also comes responsibility. Though you may want to spend it all, it is the best time to take control of your own financial future.

Set aside a fixed percentage of your salary. Stick to it. Ensure that you save at least 10% of your income every single month. Over time, it will accumulate substantially.

Let’s say you invest Rs 1 lakh to withdraw when you are 70. While invested, it earns a rate of 12% p.a. By delaying your investment by just a few years, you pay a heavy cost. If you are 30 years old when you make the investment, you will be sitting on Rs 1.18 crore by the time you are 70. Wait for just 5 years, which really does not seem long when you take decades into account, and that money will be worth just Rs 65.30 lakh when you get to 70.

The point is, start saving NOW.

4) Start investing

Saving and investing are two very different efforts. Saving is when you do not spend a part of your income but set it aside for future use. Investing is putting that money to work. You cannot create wealth only by saving. You have to invest the savings wisely to create wealth.

Equity offers great potential to convert your savings into wealth. And you can start with very small amounts too. Cut down on your spending by just Rs 1,000/month and invest that amount in an equity mutual fund. Within the next 10 years, you would be patting yourself on the back.

Let’s say you invest Rs 1,000/month over 10 years in a systematic investment plan, or SIP, that returns 12% p.a. You would have invested Rs 1.20 lakh over 10 years and your corpus would be worth Rs 2.30 lakh within a decade.

Now let’s say you go one step further and increase the SIP amount every year by a very affordable Rs 500. You would have ended up investing Rs 3.90 lakh and your corpus would be worth Rs 6.36 lakh over the same time frame.

5) Be sensible with your tax planning

Tax planning is more than Section 80C. It is more than fixed income instruments such as the Public Provident Fund, or PPF, and the National Savings Certificate, or NSC.

Good tax management can go a long way toward enhancing your return. But the decision needs to be made in conjunction with your overall portfolio and not in an ad-hoc fashion.

Most individuals rarely think about tax planning from an investment point of view. Hence one finds that they do not approach an investment with a perspective of whether or not it fits in with their overall portfolio. The approach is often just grabbing up investments that will give them the tax break, irrespective of whether or not it will help them reach their determined financial goals or fit into an overall investment strategy.

Tax planning investments are no different from conventional investments. Hence, it is imperative to obtain an in-depth understanding of all investment avenues available which offer tax benefits and choose suitable ones that will help save tax and achieve goals. Do read 5 points to note about tax saving to get a better perspective.

regards