The biggest worry for global financial markets is China

China is the 2nd largest economy in the whole world and carries substantial economic hit with its trading partners. However, the slight fall in China’s equity market on 23rd November 2017 has set a fret in financial markets of China.

China Blue-chip stock index, CSI 300 had experienced its worst downfall in 17 months on 23rd of November. CSI 300 index fell by 2.93% as the market became worried about rising bond yields and PBoC deleveraging campaign.

CHINA

The current year, China’s bond yields have risen by 93 bps and are trading at 3-year highs. The sharp rise in China bond yields specifies the government’s determination to control corporate debt, which involves them in a talk that Chinese economy could fall in the coming future.

                                                        China CSI 300 Index

CSIThe top stock on Hang Seng was WH Group Ltd which stood up 1.69% and the stock which suffered loss was AAC Technologies Holdings Inc which sustained a downfall of 4.24%.

The 3 biggest H-shares percentage decliners were China Pacific Insurance Group Corporation Ltd which had a downfall of 4.73%, New China Life Insurance Corporation Ltd which has 4.7% and China Merchants Bank Corporation Ltd down by 4.1% while the biggest stocks which perform well were China Minsheng Banking Corporation Ltd which stood up 2.41%, Great Wall Motor Corporation Ltd which gained 0.98% and China railway Construction Corporation Ltd who stood up 0.77% in the Chinese financial market.

                                                China 10 Years Bond Yields

BONDSThe CSI 300 index is moving smoothly by 3.3% and closed down at 3% which is its biggest loss since June 2016 i.e., within 17 months. The ChiNext Index stood down by 3.2% which is its highest downfall in 4 months. The other two stocks, i.e., Shanghai Composite Index and Shenzhen Composite Index fell more than 2% that day.

Three finance lessons for your child

According to the report, China’s five years corporate bond yields had risen by 33 bps in November 2017, which has hit a three year high of 5.3%. In China, there is more than 1 trillion dollar of local bonds which are going to get matured in the coming year 2018-2019, therefore, it is going to be expensive for these firms to roll over financing.

 

Know the Portions of Your Rs.100 Bank Deposit.

In all the noise about rising bad loans, a deposit deluge in the aftermath of demonetization and the collapse of credit growth, it’s time to take stock of where public funds are lying right now in the economy.

In a report from the Reserve Bank of India, the credit-deposit ratio as of the month of May was 72%, which means that out of Rs.100 deposited in the bank, Rs.72 used for lending and the rest Rs.28 was used to buy government bonds. In the same time of the previous year, banks have used Rs.76 out of Rs.100 deposit for lending and had left the rest Rs.24 in bonds. This is as per the stock of deposits on the 30th of the month.

1001Source : Centre for Monitoring Indian Economy

Taking a look at the additional credit-deposit ratio, which shows what portion of the new flow of deposits, is getting placed in the credit. And this reflects the slump in credit growth in 2016-17.

By the time of March-end the additional credit-deposit ratio was 42%, this shows that more than half of the deposits that came in were placed in government bonds. These are low-yielding and very safe assets. This could be easily understood by the fact that the deposit stream following the demonetization of Rs.500 and Rs.1000 currency bills left a little choice to the banks to buy nothing but the government bonds as the loan demand is very less. Moreover, during the demonetization period, this was even lesser in the month of November, it was 1% only which aroused to nearly 13% in the month of December.

Trouble in India’s Credit System of banks having foremost NPAs

Now, if we talk about the month of May where the credit-deposit ratio was 72%, the large amount of share is still placed with industry through the loans accompanied by credit to services as well as individuals.

Share/Portion of Rs.100 Deposited

Out of every Rs.72 lent, nearly Rs.17 only went to personal loans and services each, and approximately Rs.28 or 29 went to build or run the factories. A share of Rs.10 went to agriculture. The share of personal loans has aroused in one year to approximately 25% of total non-food credit from 21%. On the other side, the industry has dropped to 38% from 41% while farming maintained its portion of nearly 14%. Basically, only Rs.25 of every Rs.100 deposited in a bank comes back to the people in the form of loans like home loans, car loans and other credits.

It is known that the banks are burdened with a big heap of bad loans. Approximately Rs.14 of every Rs.72 lent is now classified as stressed portion, which means it neither originate any income for the banks or due to the late payments by the borrowers to lenders.

What are the Long-Term Debt Funds and How to use It?

The long-term bond fund is the simplest type of debt and is varied across various kinds of fixed income tools and is usually meant for long-term investments only. Perhaps, it has a common structure but making money out of it is a bit tricky.

What is it about?

A long-term bond fund is meant for investors who wish to make money over the long term, typically over a period of 3-5 years. Like we have always said, debt funds are to be chosen based on your investment tenure.

The average maturity of these funds is in excess of 3 years most of the times.

bonds1

A long-term bond fund invests in a mix of corporate bonds and government securities (g-secs).

There are two types of long-term funds. One type of funds stay invested in long-tenured bonds and G-secs. The other type of funds are dynamic funds.

In a falling-interest-rate scenario, their average maturities go up to around 7-10 years. When interest rates rise, they stock up lower-tenured instruments and keep the portfolio’s average maturity low.long term bonds

Long-term bond funds are meant to provide you more return than the bank fixed deposits. And if held for longer time period, say more than 3 years, the returns are also tax efficient. These funds can give 8 to 10% returns over a 5 year time period.

But it’s not always as easy as it seems. Due to holding for long time period, these funds can get volatile when there are ups and downs in the interest rates of the economy. Also, in an assisted rising interest rate rule, long-term bond funds give moderate results as they can’t sell long-holding bonds and change to shorter holding bonds.

Amtek auto MF Holdings

According to a research analysis of a chain of 5 year returns over the previous 10 years, debt funds have returned 2 to 12% returns. That’s a broad range, but a lot also depends on your fund manager.

Dynamic bond funds are more volatile. Here, your fund manager may extend or minimize the fund’s average maturity extremely depending on his perspective of the interest rates.

For example, as per Crisil, RDBF (Reliance Dynamic Bond Fund) raised its average maturity period from 12.86 years to 13.49 years in 2016 as to set a standard security, 10 year g-secs’ production went down to 6.24% from 7.78%. When the 10 year production rose to 6.96% in April 2017 from 6.51% in December 2016 then in the same time RDBF’s average maturity fell to 9.69% from 12.22%.

Moreover, long-term bond funds were one of the few authentic debt funds when there were very few debt funds available in the market. There were great chances for the long-term investors to originate long-term income with minimal instability. But changing with the time, there are short-term funds and corporate bond funds that have proliferated providing similar income originating chances but with much less instability. Although, If one wants to stay invested with long-term bond funds for about 5 years or more to get better results, then substitutes like balanced funds and large-cap funds could give better results to you.

DISCLAIMER

No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment decisions, based on information published here.

Is your MF holding an Adani power Debenture ?

The Indian Rating agency Crisil specified and accused Adani Power Ltd. of not proving the details of operations of the company for the rating action while conforming again its stable stance towards the company and BB- rating (3 scores below the investment point). Crisil said the bank loan facilities of Rs.6559 Crores are specified as non-cooperative. Also, it said that it is based on the ultimate information which is available as the Adani Power Ltd. has not provided the required information essentially needed to perform the rating action.

adani power

Crisil said that ‘the lenders, investors and all other market entrants should practice due caution while making use of the rating evaluated with the suffix ‘issuer not cooperating’. These ratings lack a progressive element as it is showed at without any management interaction and is based on the ultimate available or limited or dated facts and figures of the company.’

adani

Why Tata Group stocks are not attracting Mutual Funds anymore?

The investors must not take it at a face value. Including short-term and long-term loans Adani Power Ltd. has a total debt of approximately Rs.54000 Crores.

Following the Supreme Court judgment, Adani Power had to overturn Rs.3650 Crores of CT (compensatory tariff) in FY17 booked on the Mundra power plant of the company, on pass through of hike in Indonesian coal prices.

Amtek auto MF Holdings

Adani Power which could not be in the position to do any comment recorded company’s profit of Rs.1,012.19 Crores in the comparison of a net loss of Rs.4960.53 Crores.

In the recent past weeks, it is like downgrades are becoming a basic part of debt mutual funds’ investments and this is making the investors with low-risk appetites to take care of their selection of investments. Recently, the rating companies have issued the downgraded ratings to IDBI Bank BSE 0.33% and Reliance Communications and the Oriental Bank of Commerce and the latest one that includes in this list is Adani Power Ltd.

Interest rate on small savings deposits, PPF cut by 0.1%; effective from tomorrow

The government has lowered interest rates on small saving schemes like PPF, Kisan Vikas Patra and Sukanya Samriddhi scheme by 0.1 percent for the April-June quarter, a move that would prompt banks to cut their deposit rates.

For April-June, these have been lowered by 0.1 percent across the board compared to January-March. However, interest on savings deposits has been retained at 4 percent annually.

interest-rate-drop

Since April last year, interest rates of all small saving schemes have been recalibrated on a quarterly basis. For the January-March quarter, these have been kept unchanged compared with the October-December quarter.

A finance ministry notification said investments in the public provident fund (PPF) scheme will fetch lower annual rate of 7.9 percent, the same as 5-year National Savings Certificate. The existing rate for these two schemes is 8 percent.

Kisan Vikas Patra (KVP) investments will yield 7.6 percent and mature in 112 months.

WHY TO SELL YOUR FUNDS ?

The one for girl child savings, Sukanya Samriddhi Account Scheme, will offer 8.4 percent annually, from 8.5 percent at present, while it will be the same at 8.4 percent for the 5-year Senior Citizens Savings Scheme. The interest rate on the senior citizens scheme is paid quarterly.

Term deposits of 1-5 years will fetch a lower 6.9-7.7 percent that will be paid quarterly while the 5-year recurring deposit has been pegged lower at 7.2 percent.

Taurus Debt Mutual Fund fell by 7-12 percent in a day

The downgrading of the troubled Ballarpur Industries Ltd (Bilt) by India Ratings and Research (Ind-Ra) yesterday has adversely affected the schemes of Taurus Mutual Fund. The debt funds and liquid scheme of Taurus Mutual Fund fell by 7-12 per cent within a day preceding the IRR ratings.

Debt funds are generally categorized as low-risk investments except for the interest rate risk and default risk. Interest rate variations can deeply impact returns, especially in the case of long-term bonds.

The default risk is when the issuer of the bonds held by them is unable to repay, the prices of bonds can change surprisingly.

An amount worth Rs 110 crore was invested in commercial paper issued by Bilt in four debt schemes of Taurus mutual funds. Bilt had the top holdings in two severely devalued schemes namely, Taurus Dynamic Income Fund and Taurus Ultra Short Term Bond Fund.

Taurus funds lost due to revised BILT Ratings

TaurasThough SEBI has placed a 10 percent cap on the exposure to a single issuer, there is a leeway of up to 12 percent with the approval of the trustee. It looks as if the Taurus Mutual Fund has done this to increase exposure (to Bilt beyond the maximum 10 percent).

Recently, there have been some instances of drastic declines in debt funds due to the downgrading of the bonds and issuers. For instance, in February 2016, debt funds holding bonds issued by the Jindal Steel & Power Ltd (JSPL) went down after CRISIL lowered the company’s credit rating. JSPL bonds worth Rs. 3,000 crore were held in Mutual funds.

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Similarly, In August 2015, debt schemes of JP Morgan were demoted when Amtek Auto defaulted on repayment.

Credit risk is a real risk of loss of capital whereas interest rate risk is a volatility risk.

Investors should not compromise on credit quality for getting higher yields by. They should be aware of certain FMP’s that are lowering down the quality curve for chasing higher yields, and further stay away from such schemes.

Shift to short-term debt funds ?

Investors in debt mutual fund schemes are ending up in few days because of the massive rush in bond yields which has resulted in sharp market-to-market loss. Long-term income funds, gilt funds and dynamic bond funds were slowed their value down between 0.25% and 2.5% on 8th February, 2017 after the benchmark bond yield jumped 31 basis points. Reserve Bank of India indicates that there would be very small cuts in interest rates in the coming days.

The bond yield has grown up 12 basis points on 9th February 2017, which will result in further losses for debt mutual fund investors. Within last 2 working days, yields have raised about 43 basis points to 6.86% on 9th February, which resulted in the downfall of bond prices.

safe and higher returns compared to bank FDs

Yields and prices are independent of each other i.e. when yields grow up, prices slow down and similarly when yields decreases, prices rises up. Long-term debt funds always try to ease themselves from hike in prices as they get gains from bond trading.

Short-term bond funds have less effect of all these. The RBI has changed their position from being accommodative to neutral. This suggests you that there is very less chance of cutting the rates in the coming month. The benchmark yield can reach to 7% in coming 2 months period.

The RBI may have to involve them in the bond market. To reduce supply and support prices to lower the yield, the Central Bank could buy back bonds from the markets. Many investors had started investing in debt mutual funds as bank fixed deposit rates fell and they deposited cash in banks post demonetization.

According to the data received from AMFI, investors have to put in Rs 1, 66,016 crore in income funds from 1st April.

Even after the rush of yields in two-days, there is no profit in their hands. With no further capital appreciation in sight, investors should either bet on 8% GoI Saving’s bonds or simple bank fixed deposits, which will give them safety of capital.

In the same way, investors with a time period of 1-2 years could choose short term debt funds, with a similar maturity profile.

Investing in debt mutual funds is good for your wallet

Debt mutual funds turn out to be a profitable venture due to the drop in fiscal deficit and chances of reduced interest rates in the upcoming RBI monetary Policy.

These two factors will lead to an increase in Net Asset Value (NAV’s) of Debt Mutual Funds.

Decrease in fiscal deficit could lead to a downfall in yields from government bonds and the fall in yield will further be followed by an upward movement in its price.

The RBI policy review is scheduled on Wednesday and  the interest rates are likely to be cut down in the new policy changes. There exists an inverse relationship between interest on bonds and their prices, that is, when interest rates rise, bond prices fall and vice versa.

BEWARE! ANOTHER FINANCIAL CATASTROPHE IS READY TO HIT GLOBAL ECONOMY

The expectations of lower interest rates scenario are also driven by targeting a fiscal deficit equivalent to 3.2% of the GDP by the finance ministry. They further aim to bring it down to 3% in 2018-19.

The lowered fiscal deficit is an outcome of lower government borrowings and to bridge this deficit government is likely to issue fewer bonds. A fall in bond issues will accelerate demand for bonds in circulation and the extra demand would push the bond prices up.

An increase in the prices of both government and corporate bonds would enhance the status of debt mutual funds.

Debt MF

Short term gains are certain

The current changes will have a positive impact on bond funds in the very short term. But the results for the long term are uncertain. The impact is expected to last for around 3 to 6 months.

Reasons affecting the long term forecasts are:

  • Uncertainties related to Foreign Institutional Investors.
  • If the CPI remains sticky, continuity in rate easing may become a challenge.

This situation will be profitable for investors who have held their funds for three long years as it will qualify for long-term capital gains tax of 20 per cent with indexation benefit.

At this point, the retail investors should avoid investing in long term bond funds and existing investors in dynamic bond funds should also lower their expectations for returns.