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Re-fueling Volatility Wealth Edge, May 2018

In the March edition of our newsletter, we shed light on the multiple signs of the potential dangerous curves ahead in the equity markets, and in April about the breather in the form of a market rally which would probably be ‘The First Pit Stop’. Accordingly, post the correction seen in March, markets recovered in April. We believe that the factors such as a strong dollar, impending global trade wars, hardening of the US bond yields and a resilient Oil will ‘Re-fuel volatility’ in the days to come.

Globally, Oil prices gained, and may continue to do so as the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC countries are likely to continue with output cuts until inventories return to their normal levels. Oil supply disruption in an increasingly hostile environment in Venezuela also contributed to the price movement. Higher commodity prices had elevated concerns on inflation while the 10-year US treasury rate is hovering near 3%. Further, trade friction and sanctions by the US could lead to higher prices not only for oil and metals, but at some stage other goods that are hit with tariffs too. This has led to a cautious stance from the FIIs towards Emerging markets and therefore EM currencies in general have witnessed increasing pressure.

On the domestic front, India’s Trade deficit widened to a 5 year high. For a net oil importing county like India, a sustained rise in crude oil price would have adverse macroeconomic implications. Higher oil prices will weaken the economic growth, push up inflation and deteriorate the twin deficits (current account deficit and fiscal deficit). This may have an adverse impact on the Indian G-Sec yields. Rising commodity prices and cost of capital will add pressure on margins of Indian corporates.

The Q4 FY17-18 result season hasn’t been encouraging so far. We will have to wait and watch for the entire earnings season to unfold to have a concrete conclusion. However, we believe there is scope for valuations to rationalise. The current risk-reward ratio seems to be unfavourable for equities from a shorter-term perspective, while the earnings in the medium term are expected to be good. The outcome of the Karnataka elections is another key event which will have to be closely observed and its impact assessed.

To know more about our contrarian views and how it can benefit you, Please click here to read the report.

The first pit stop! Wealth Edge, April 2018

Earlier in March, we brought your attention to the multiple signs of the dangerous curves ahead in Equity markets. March turned to be just that. An action-packed month that started with Mr. Trump’s Trade war announcement followed by CBI taking noticeable action against fraudulent banks. We also the U.S. Fed raising interest rates while the Bank of Japan's chief hinted at a possible exit from its ‘ultra-easy’ policies. These events have led to an increase in volatility and have caused the markets to continue their downtrend after the swift fall in February.

We presently believe that the current breather is probably a first pit “The First pit stop” to further lower levels during the year ahead. This pause will help participants to evaluate the changing trade dynamics and likely perception of investors, domestically and globally.

Globally, US-China trade war needs to be closely watched as China has hit back, though mildly, through a US $ 3 bn tariff. The move may not look significant prima facie, but is effective as it aims to hit The President’s voter base, namely the farmers. If the tensions between these two giants escalate, we surely can see a lot of collateral damage globally. But that is a big if, considering that all Governments know the fragile states of their economies.

Its likely that global trade has slowed down in the last quarter, which can be interpreted by Baltic Dry Index that has dropped more than 40% since mid-December. This index is reported around the world as a proxy for general shipping trade which symbolizes the epicenter of global trade, that of movement of basic raw materials.

On the domestic front, apart from the global worries, asset quality issues for Public sector banks have only deepened, coinciding with political uncertainty from impending elections, deteriorating trade balance due to higher oil prices and deteriorating fiscal policy environment. These key concerns need to be meticulously observed.

We have seen a reasonable correction in the last two months, but the valuations are still high and are some distance away from being called as fairly valued. The recovery in earnings is very critical for such rich valuations to sustain. Hence, we continue toretain our cautious stance on Equities and suggest measured exposure towards them if at all.

Happy navigating the many pit stops that lie ahead this year. Strict adherence to asset allocation is the only way out.

To know more about our contrarian views and how it can benefit you, Please click here to read the report.

Investment Alternatives to Savings Account

 In today’s world, financial security for an individual is a must. Which means that at any point of time, that person should have a contingency fund to take care of expenses that are unexpected in nature. Unforeseen expenses such as medical emergencies can seriously dent one’s savings.

Usually, a majority of the people prefer to leave the money in their savings account due to the ease of availability of their money. Many, however, fail to realise that the interest received through savings account is less than that of the rate of inflation. This means that the person’s money is actually losing value in comparison to inflation. Here we suggest some effective alternatives to a savings account.

What are the type of short-term investment options?

Savings A/c

A savings account is a deposit account which bears a nominal interest rate for individuals to save and earn interest on the cash they hold. Interest rates offered are usually less than that of Certificate of Deposit, a document issued by a bank to a person depositing money for a specified period of time or Commercial Paper, a short-term money market instrument which has a fixed maturity period as savings accounts require no credit check and offer high flexibility on withdrawal of funds.

Liquid Funds

Liquid funds are debt mutual funds that invest in securities whose maturity cannot exceed 91 days. These type of funds do not have any lock-in period and as the name suggests, are quite easily and conveniently redeemable.

Ultra-Short Term Funds

Ultra-Short term funds typically invest in fixed income securities such as certificates of deposits, treasury bills, commercial papers or corporate bonds. The income they earn is from the coupon payments received from its underlying investments.

Historically, both Ultra short-term funds and Liquid funds have given higher returns than a savings account with similar liquidity but savings account still offered more flexibility inaccessibility of money. This, however, is not the case anymore due to the introduction of an instant redemption facility available with certain liquid funds. Through the instant redemption schemes, an investor has access to his corpus 24/7 365 days a year. A daily limit of Rs 50,000 or 90 percent of redeemable value is offered by the fund houses through the IMPS banking platform.

A historical comparison of returns made by Liquid Funds against that made through Savings Account

 

To conclude, if like an online purchase or a chat with your friends, if a habit of “Savings” is also made simpler, would you still want to keep your idle cash in a bank account or under the pillow? The answer to this would most likely be a NO! As we’ve seen here, there are certain funds that provide an effective alternative option that allows you to invest your extra idle cash, earning relatively good returns at great convenience.

*For the purpose of calculations, the returns of all liquid funds existing at that point of time have been considered.

To know more about financial planning click here: Wealthsecure

 

Financial Planning and Online investment - For Women

 

Women are pretty adept at playing many roles at ease. They play a very critical role in every family because they are the ones who plan and control the household budget. However, studies have shown that despite being educated, women aren’t as confident about financial matters as men. They rely either on their father or husband when it comes to financial planning. It is high time women become financially independent and logically plan for contingencies as well.

The need for financial planning for a woman:

Ø   To understand her financial situation: A financial plan displays a correct picture of your cashflows, thus helping in understanding cash surplus/deficit at the end of a particular period. If there is a deficit, you can check and understand the nature of expenses incurred and curb the expenses by prioritising the goals. If there is a surplus, you can systematically invest that money for future consumption.

 

Ø  Tracking her’s and her family’s goals: A financial plan analyses your current and future savings and allocates the money for your goals, based on their priorities. It also considers the liquidity requirement for any contingencies in future. Hence, you get to know what all goals would be achieved in future and to what extent.

 

Ø  To have a proper plan of action: A financial plan does portfolio restructuring, if your financial investments are not performing well. Then based on the suggested restructuring, it shows purchase/redemption at each instrument level.

 

There are certain key strategies that women can use to ensure they find the right support:

Ø  Find a good financial planner, who will explain you the basics of the process, and use sophisticated financial tools for planning your future financial journey.

Ø  List down your goals, along with their priorities, so that your planner can design strategies to help you achieve those goals.

Ø  Help your planner with all the required data to generate an accurate financial plan.

Ø  Make sure that your planner understands your needs as they change over time and updates your plan accordingly.

Financial Plan takes care of asset allocation. This asset allocation can be easily achieved via investing in mutual funds (MFs), since MFs offer exposure to various asset classes.Any woman, even without a proper financial background, can diversify her portfolio by investing in such products. SIPs with long term horizon can help her in wealth creation.

Online platforms like www.wealthsecure.com have made MF investing easy and convenient for women of all ages. They can view all their investments at one place. They can get personalized investment advice and recommendations for their future goals on such platforms. The financial plan generated using such advanced financial tools can be executed online in a very hassle-free manner.

Women have always followed some or the other method of saving money for contingencies. Women are also earning more than before. Rather than simply keeping aside some amount of money every month and randomly investing it anywhere, women should start making use of such smart financial assessment tools and do goal based investments. By this way, they will be able to achieve their goals smartly and intelligently.

To know more about financial planning click here: Wealthsecure

The pendulum has swung! - Wealth Edge, March 2018

You know the street signs that grab your attention on the road and appropriately lead you to take caution? Multiple signs, similar to the ones mentioned above, have been reminding us of the dangerous curves ahead in the equity markets. We experienced an eventful February full of critical announcements and news flows ensuring the return of volatility as global markets, including India, retreated.

In the month of January we released our Alpha Edge report titled ‘Remember the pendulum’, where we highlighted the prospects of change in market direction and correlated it to the movement of a pendulum. Our view still remains the same, that we are likely to see sustained periods of volatility ahead. Now, the pendulum seems to have swung.

Globally, markets were broadly weaker in February. Higher-than-expected US wage data, initially put the bond markets under pressure - as investors priced in the potential for a more proactive Federal Reserve - before worries spread to equity markets. Rising rates, inflation and talks of trade wars have caused market participants to re-evaluate their views on the overall state of markets.

Indian equity markets under performed their emerging market peers in February. Domestically, markets have become increasingly reactive to news flows, which were probably ignored earlier. Another major development has come from the banking sector where an alleged fraud at state-controlled Punjab National Bank has raised concern over the wider sector. Over the last year, even though India has been a part of the global markets rally, it has not really been a part of the global economic recovery. This has led to valuations stretching to near historic levels. The latest earnings season and high frequency indicators are suggesting some bit of recovery finally being underway. However, the higher expectations built around the recovery over the last three years pushed the valuations to the extent that has left little or no room for further price appreciation.

Higher inflation, domestic rate hike fears, fiscal slippage, political uncertainty and the upward movement of global bond yields, will continue to act as an overhang on multiples. Hence, we continue to retain our cautious stance on equities from a short term point of view.

To know more about our contrarian views and how it can benefit you, Please click here to read the report.

Role of a Financial advisor in Tax Planning

 

If you are a salaried person or self-employed or are recently retired from the job, the filing of your taxes would be a very stressful time for you. Most of you must be taking professional support for doing this and thus managing to save some tax in the process. However, have you ever thought of the role, a Financial advisor can play in the tax planning?

While an accountant’s job is to file your taxes with the maximum benefit to you, a financial advisor will make sure that your taxes fit with your short and long-term financial strategy throughout the year. His task is to help you identify the sources and types of income you have, how these will change over time, and how the tax will evolve with them.

Life events such as retirement or career change come with a change in income and other benefits. Your advisor can help you optimize your current situation through effective tax planning. He knows exactly what kind of products are suitable for you based on your tax status and also after considering your life goals.

Advantages of seeking the help of a Financial advisor while tax planning:

Ø  After considering your financial goals, your Advisor does your asset allocation based on your risk profile.

Ø  Since he has a complete picture of your financial situation, he is in a better position to recommend you products for tax planning.

Ø  He will not just try to minimize tax for the year, but would help you plan your taxes in advance.

Ø  He also maintains a record of trading gains and losses, which can be easily shared with the accountant at the time of filing taxes.

Almost all financial decisions have a tax impact. If the impact of taxes is not taken into consideration while making financial decisions throughout the year, you could be paying more in taxes than you would otherwise.  It is important that tax planning is not seen as separate from financial planning and instead, done simultaneously while making financial decisions and incorporated into your overall financial plan. 

By having a financial advisor helping you in choosing the right investment strategies to minimize the taxes you pay throughout the lifetime, you will be able to plan your current and future cash flows as well.

Most of us handle our taxes in a reactive manner versus a proactive approach. We just share our yearly transaction statements with our accountant and hope for the best. Understanding the impact taxes will have on our financial well-being is very essential. There are always new laws and changing provisions in the tax code, which, again illustrate the importance of planning.

Tax planning and financial planning are closely linked, because taxes are such a large expense item as you go through life. So planning to reduce taxes is a critically important piece of the overall financial planning process.

If you want to minimize the anxiety generally associated with the time of tax filing and avoid surprises, consider adding a financial advisor to your tax team. 

To know more about financial planning click here: Wealthsecure

Free lunches... No more! - Wealth Edge, February 2018

The time has come for the earnings to stand up to expectations. As there is probably no room for sentiments led PE expansion. The quarterly results of the top 50 companies seem to indicate that the coast could be clear on the earnings front and indeed they have been better than expected. All that we now need to await is whether this was on a low base of post demon dip in Q1, 2017. The next quarter will, therefore, be the all critical quarter that proves that the tide has really turned on the earnings front.

Globally, January month was dominated by good news such as better than expected job market report, which showed unemployment shrinking and wages rising. However, this good news of higher wages compounds the pressure on the US Federal Reserve to raise interest rates, so as to tame inflation and prevent the economy from overheating. As things stand at least 2 to 3 hikes seem to be on the cards.

Given a decade of ultra-low interest rates, any quickening of pace in rate hikes or expectations about it, trigger the kind of fear that comes with a paradigm shift. A shift that makes fixed income look attractive incrementally, calling for a possible reallocation from risk assets to ‘safer assets’. A distinct possibility given how far valuations have reached across the world. If this narrative gains ground, what was witnessed during the first week of February, may be a trailer of things to come. Perhaps, the time for “Free lunches” may have gone and an increasing earnings momentum alone can support the markets from here on. Especially in India

Domestically, India certainly participated in the global equity market rally but not completely in the global growth momentum. The expectations from the Union Budget was that it will focus on growth initiatives and less on structural reforms which were the focus of previous versions of the Union budget. The budget clearly did not disappoint, as it gave due importance to all sections of the economy and tried to enhance the ease of-doing business while keeping its focus on infrastructure development. However, the imposition of LTCG on equity shares and units of equity oriented mutual fundshas triggered a short term perception disruption in the equity markets coinciding with volatility from a global sell-off.

Even though we have seen around 6% correction from recent peak, the valuations are still high and do not look reasonable post this correction. The recovery in earnings is very critical for such rich valuations to sustain. The Q3 FY18 results have been in-line, however, fag end of the result season needs to be watched closely. The way to go about it is to stagger fresh investments, as markets could give enough opportunities to invest throughout the year.

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Investment Combo (Debt and Equity)

 

Equity markets have been experiencing a bullish phase recently. However, the market pendulum is one that swings forever between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them relatively cheap).

During unpredictable phases of the market, you try to read as many articles possible and take every bet to reap maximum gains out of the markets. At such a point, wouldn’t it be ideal if your principal was fully protected while your portfolio also had an exposure to the equity markets? Safety of principal may be achieved through investing in the debt asset class through fixed income securities like FDs, NCDs or ESS. However, they will not guarantee maximum returns. In case of such investment options, there are assured fixed returns.

Such debt products are selected due to the following advantages over other riskier products:

1.    Principal protection

2.    Payout not influenced by market risks and hence fixed

3.    Option of choosing Monthly/Quarterly Payout

4.    More liquid investment 

Individuals earn assured monthly payouts on such instruments. This interest earned can be invested into equity mutual funds through the SIP route to capture the upside of the markets without risking your principal invested. The opportunity to predict fixed return from less-risky debt product and using its returns to invest in an equity SIP is illustrated below.

For the purpose of calculations, we’ve analyzed the returns made by an equity mutual fund and a debt option such as Non-convertible debentures (NCD) for the last 10 years (NCDs are long term debt instrument issued by the companies which offer equal to or more than 200 basis points than bank fixed deposits. They also earn fixed returns through coupon interest that is promised to be paid by the companies with an option to choose the frequency of payments.Company pays back the principal amount on the date of maturity.

Assumptions made for illustration purpose:

1.     Similar returns in NCDs were available 10 years back

2.     Bank savings interest rate: 4% p.a.

3.   Interest on NCDs is credited in bank and left untouched, hence earning 4% returns for 10 years

Illustration:

A sum of Rs.1,30,000 is invested into NCD in open issue which offers coupon return @ 9.50% p.a., payment being made monthly. The said investment fetches monthly payout of Rs.1029.16 which is then parked as an SIP in Equity MF (Rs. 1000pm).

The above practice is continued for 10 years till the NCDs mature.

On the maturity of such NCDs, the principal is received fully.

The above chart clearly shows the reward for making your money work for you.

 

It’s evident from the above that investments in equity holdings will provide better returns in long-term as against money left idle in Savings A/c. Risk-averse investors should consider this option of investing in debt instruments with a regular payout to ensure principal safety and the yield generated by them into equity markets through mutual funds to get the maximum exposure.

To know more about financial planning click here: Wealthsecure

Financial advice for Sandwich Generation

 

Do you have to juggle with your own financial needs and are also responsible for the care of your young children and aging parents? If yes, you are a part of ‘Sandwich generation’. Sandwich generation is the group of people who are bread earners to their young children as well as to their parents. Usually, these people are in their 40s. The biggest problem of your group is the risk of neglecting your own self-care while trying to help everyone else in the family.

Just imagine this case:

Ramesh and his wife (now, in their early 40s) have maintained well-paying jobs while raising two kids. They have set aside funds for their children’s education. However, with education costs increasing faster than inflation, they are uncertain whether these funds would be adequate.

Also, in recent months, Ramesh’s father has required extensive medical attention. While some portion of this cost is covered by his father’s own savings, still it doesn’t cover the entire cost. So, this expense has also become part of Ramesh’s expense. Ramesh and his wife are squeezed on one side by the cost of raising and educating their children and on the other side by the financial demands of caring for aging parent. What about their own retirement

What would the scenario have been if Ramesh and his wife had undergone financial planning exercise to consider any contingencies, which might arise in future?

  • The exercise would have helped them plan for their children’s education.
  • It would have recommended for a health insurance for all the family members considered while financial planning. This would have taken care of his father’s illness and the expenses wouldn’t have eaten away Ramesh’s savings.
  • It would have also recommended a life insurance in the name of Ramesh and his wife as they are the bread earners of the family. This would take care of everyday living expenses or any debts which have to be taken care of. The objective of a life insurance is to make sure that the dependent family members do not suffer financially in addition to emotionally at the bread earner’s death.
  • It would have recommended the required liquidity in their portfolio to meet any short-term contingencies.
  • Above all, it would have taken care of their own retirement by calculating a suitable retirement corpus, which would have considered their expenses, inflation and their lifespan.

There would be many such cases like Ramesh. Nearly half of adults in their 40s have a parent of age 65 or older and are either raising a young child or are financially supporting a grown child.

So, either if you are a part of this sandwich generation or are still in the mid-20s to mid-30s, you should consider the following points to avoid any financial stress in future.

Few points to consider:

With your parents:

  • Talk Finances: You need to know where they stand with their finances. Will they only need your physical and emotional support or will they need financial support as well? If they need financial support, can you quantify the shortfall? 
  • Gently push them to take care of their Estate planning documents: No one really likes to talk about plans after they are gone, but it is essential that they have their estate planning documents in order. 
  • Talk to them about Health insurance: If your parents are young enough to get a health insurance plan, it might be wise to investigate those options together.

 

With your children:

  • Teach your children good financial habits from an early stage.
  • If you have adult children that need your support, create a plan for the degree of financial support you can comfortably afford.
  • Educate your children about the benefits of financial planning. 

 

With yourself:

  • Try to cut down on non-essential expenses and try to save as much as possible.
  • Think about ways to decrease your own debts.
  • Have your life and health insurance in place.
  • The most important thing: Work with a financial planner to determine realistic goals and expectations. A good comprehensive financial plan considers your current financial situation, while laying out a map for the future financial journey towards your goals.
  • Execute the financial plan without procrastinating.

 

The best way to cope with the financial obligations is to have a financial plan and regularly reviewing it. Proactive planning will help reduce your financial stress if you are already dealing with the balancing act or you simply have concerns that you may have to deal with this in future.

To know more about financial planning click here: Wealthsecure

Remember the pendulum - Wealth Edge, January 2018

Wish you and your family a happy new year. Hope you had a good time welcoming it.

Readers familiar with Wealthsecure’s approach to markets would have concluded us to be very factual and objective by nature. It was a conscious choice in order to see through the smog of market noise by way of news, its interpretation and the grandstanding that follows in the name of conviction. We look to laws of nature in inspiring us and guiding us. And for now, the object of contemplation is the working of a pendulum. Which also reminds us of a famous quote by Jason Zweig. “The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The Intelligent Investor is a realist who sells to optimists and buys from pessimists.”― Jason Zweig, The Intelligent Investor

Ever noticed how at a certain point to the extreme, the pendulum is in a state of suspended animation. For a moment you can neither be sure whether it is going to go further ahead, pause or retreat. This point is associated with no more kinetic energy that helps it move further and all gravitational energy that makes it retreat. We may be reaching such a point where the sentiment led valuation momentum is approaching zero and earnings become the only gravitational focus. Liquidity has been the length of this pendulum that may have allowed it to swing too far, but then even an elastic rope has a finite length.

We do believe that earnings will improve even if on a low base and we do believe that valuations will revert to mean for sure by a decisive combination of price and time correction. 2018 seems set to be a roller coaster. Be prepared.

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