Look at fixed income in a choppy market – a guest post

Many investment experts, who regularly appear on business TV channels, suffer from herd mentality. When the stock market rallies, they jump on to the bull bandwagon and start predicting higher and higher index levels.

When the market corrects, the same experts suddenly turn gloom and doom mongers and predict ever lower levels. Since the stock market’s nature is to fluctuate, opposing views from the same set of experts tend to confuse small investors – who end up sitting on their hands.

In this month’s guest post, Nishit takes a look at some fixed income options that small investors can look at, without taking undue risks in a choppy stock market.

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Stock Markets are going crazy with wild swings. Government Securities funds, which trade mainly in Government 10 year paper, are swinging too. So, what are fixed income instruments one can invest in?

There are a slew of investment opportunities in fixed deposits from second tier companies like India Infoline and Muthoot. These are medium risk and high return investments. I would advise people to stay away from these, especially those who depend on fixed income for livelihood. In case of default they can lose the entire amount. For those who can afford to take the loss, a small amount can be invested.

Options are also available for Non Convertible Debenture (NCD) side of the market, which are not given much prominence but are lucrative. Older series L&T Finance NCDs are traded on the BSE. They are giving a yield of 10-10.5% (taxable) and pay interest twice a year. If one digs deeper one can find out other such investment opportunities.

There is one more lucrative option started by Government called Tax-Free bonds. These are bonds issued by PSU undertakings with tenures of 10 to 20 years. They give returns of 8.5-8.75% or so. The Interest earned from these bonds is tax free. Rs 1 lakh invested in say Hudco bonds - currently on offer - will yield you Rs 8760 tax-free every year. Now, if a bank FD at 10% gives you Rs 10000 for the same principal of Rs 1 lakh, then at highest tax bracket ( approx. tax of 30.9%), you would be left with only Rs 6910 after tax.

Effectively, if you are in the highest tax bracket, you are getting safe return equivalent to that of a 12.5% bank FD. So, what is the catch? None on the face of it. Since, the bonds are listed on the stock exchanges, one can get out whenever one wants to.

If all this doesn’t appeal to you, then you have the good old bank Fixed Deposits. Interest rates are attractive for tenures of just over a year. If one wants to invest in the market after the current volatility gets over that is another option.

Also, if one looks at Gilt funds, the 10 year yield is now at about 8.45%. If the new RBI Governor walks his talk, one can see a cooling off of interest rates after some time – which will increase 10 year yields. However, this option is only for patient investors.

Thus, even amongst market turbulence, there are investment options which are safe and low profile. Investing is all about being smart not flashy.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

RBI’s liquidity squeezing – a guest post

Vote-bank politics with schemes like NREGA, food securities bill, and hugely hiking the pay of government employees – not to speak of fertiliser subsidy, oil subsidy – has led to a bloated fiscal deficit in India.

Slowdown in global economies – including in India – and rising oil prices have added to the Current Account deficit. Instead of taking pro-active steps to curtail the twin deficits and put GDP growth back on track, the government tried to coerce RBI into reducing monetary controls to re-energise growth.

Instead of succumbing to pressure, the RBI Governor stuck to his hawkish stance against inflation. He is paying the price by not getting an extension of his term in office. His latest step to stem the fall in value of the Rupee by tightening liquidity has not been well-received by the stock market.

In this month’s guest post, Nishit discusses the likely effect of RBI’s action on Gilt Fund yields.

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Recently, the RBI indirectly raised Interest Rates by squeezing liquidity to curb the pressure on the Rupee. This led to a spike in bond yields from 7.5% to 8.1%. Many of the debt funds lost 3-4% of their NAVs. Many must have panicked, as this had never happened before and can almost be called a ‘Black Swan’ event.

So what does it mean for Gilt funds going ahead? The basic objective of Gilt funds is that they are meant for long term investors when the interest rates are coming down, to capitalize on the increase in Bond Prices when yields come down. One is supposed to exit when the trend has changed and the bond yields are going up.

Was RBI’s intervention a signal that Interest Rates may be going up? I do not think so. The economy is in shambles and to simulate the economy, rates have to come down. RBI’s action was just a one-off blip as a desperate government tried to stop the Rupee from devaluing further.

Bond Yields, which had spiked to 8.1% towards the end of the week, came down to 7.9%. If there are no more unpleasant surprises, then the yields could touch the record low of 7.1% by December. The spike in yield was a buying opportunity for the long term investor.

The very fact that the yield rose from 7.56% to 8.10% and back to 7.94% means that the market had over-reacted and yields are coming down.

The RBI policy on the 30^th of July ‘13 will give further guidance on what the RBI intends to do. As I see it, they will maintain a status quo and will neither raise nor cut Interest Rates.

In real terms, home loan rates will not come down. The Auto or the Realty sectors’ hopes of a stimulus will have to keep waiting.

Long-term investors do not need to worry. Only short-term traders, and Banks who conduct treasury operations, will take a hit. Till the economy turns around, I do not see Interest rates rising.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Bank the dividends from PSU banks

There is bad news all around. High inflation, negative IIP number, sliding GDP, increasing fiscal deficit, scams and corruption. Anything that can go wrong seems to be going wrong in India.

Add to that the uncertainty caused by debt problems in the Eurozone, which is not helping exports. No wonder the stock market is in a tailspin with no bottom in sight.

Where can one invest without losing sleep? In this month’s guest post, Nishit suggests that tax-free dividend yields of PSU banks is a good place to park your investible surplus.

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The stock market is on a downward spiral. What should investors do? Where does one park one’s cash? The classic dilemma is between safety and preservation of capital and increasing wealth. There is an unexciting part of the stock market which is often unexplored since it is not very glamorous.

These are the PSU banks. They provide steady dividend yields in excess of 5%. Dividends are not taxable in the hands of investors. So, a dividend yield of 5% is equivalent to a return of 7.2% per annum on a bank Fixed Deposit (provided one falls in the highest tax bracket).

To prove this theory I have taken two case studies of Andhra Bank and Corporation Bank. Andhra Bank has declared a dividend of Rs 5.50 per share and it is currently trading at Rs 106. This gives a dividend yield of about 5.2%.

Now, people may argue whether such a dividend will continue in the future? The answer is ‘Yes’ because Andhra Bank has been a steady dividend payer. The dividend for last year also was Rs 5.50. Before that, it was Rs 5 and before that Rs 4.50.

If the stock price goes up and one finds that one has made enough profit, the stock could be sold. The stock had hit highs of Rs 189 and Rs 159 in the previous years.

The second stock is Corporation Bank. It has declared a dividend of Rs 20.50 per share (last year it declared a dividend of Rs 20). The stock trades around Rs 400, giving a dividend yield of 5.1%.

Now, if the stock price declines due to adverse market conditions, one can always add more. Andhra Bank had hit a low of Rs 77 last December giving a dividend yield of 7.14%. Almost similar was the case with Corporation Bank.

The Government is in need of money and keeps pushing the PSUs to pay liberal dividends. The downside to this strategy is if the bank does not declare dividends at all. For this one needs to keep a cursory glance at the Quarterly results and go in for mid-sized PSU banks. The dividend may decline at the most but it is unlikely to get stopped completely.

In times of uncertainty and with questions of where to park the money, this is a low risk strategy. One could always trade in and trade out of these stocks to reduce the cost of acquisition. In 2001, I had bought Andhra Bank shares for Rs 12 in the IPO. If I had held on to them all these years, the dividend yield would have been almost 50% every year for me now.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)