The return of the 'Bond'

The retail bond/ debenture market was flourishing in the 90's with several top companies coming out with debentures in the form of Non convertible debentures (NCDs), Fully convertible debentures (FCDs) or Partly convertible debentures (PCDs). The non convertible portion was separately listed on the stock exchanges and there was a fair amount of trading in these debentures. But with the opening up of the economy, the companies had more options to raise debt in overseas market, leading to a virtual stagnation in the retail bond market.

 In Budget 2010, the government introduced a new section 80CCF under the income tax act to provide for income tax deductions for subscription in long-term Infrastructure Bonds. These bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE. Infrastructure bonds help in inter mediating the retail investor's savings into infrastructure sector directly.

Two issues of infrastructure bonds were recently launched to tap the retail segment: IDFC and L&T infrastructure bonds. These bonds offer an attractive option to fixed income investors looking for safety and tax saving. These bonds are expected to generate higher returns as compared to bank deposits and post office schemes. These bonds offer 7.5-8% annual returns, alogwith tax saving. These bonds may not appeal to investors in the lower tax bracket as they would be saving only 10.3% in taxes. However, investors in the highest tax bracket will be saving 30.9% on taxes which amounts to a decent Rs.6,180 savings on an investment of Rs.20,000. those with a long term perspective can choose to invest in these 10 year bonds, which have a lock in period of 5 years.The IDFC issue has closed while the L&T bond issue is open till 2nd November 2010. Even if you miss out on the issue this time there is no need to bother, there will be a spate of such issues towards the close of the financial year.

The salient features of the infrastructure bonds are listed below:

1.The bonds don't attract any TDS, however the interest receivable is subject to tax.

2.The interest accrued on the bonds will be credited to the respective bank registered with the demat account through ECS on the due date for interest payment.

3.The bonds will be listed on NSE and BSE and can be traded after the 5 year lock-in period.

4.Investors can mortgage or pledge these bonds to avail loans after the lock-in period.

5.An investor would need a demat account and pan card to invest in these bonds.(physical form is also allowed).

6.The bonds will be issued only to Resident Indian individuals (major) and HUF.

The Micro Finance Muddle

A spate of suicides in Andhra Pradesh, which accounts for over a third of the micro finance business in India, has seen the state government pass stringent regulations to control these institutions. The micro finance institutions (MFIs) have played an important role in fulfilling the credit requirements of the rural folk, who have limited access to organised bank finance even today. Most MFIs started as service oriented NGOs but have assumed a commercial role over a period of time.

While the Reserve Bank of India is eager to get credit to the poor and encourages banks to lend to microfinance institutions, it has not permitted them to raise deposits. Indian microfinance lenders generally charge between 24 percent and 36 percent annual interest. It is more or less on the lines of the interest rates charged by unorganised money lenders or the more sophisticated credit card companies. Banks have their own interest in extending credit to MFIs, to fulfill their agricultural lending targets.

Questions are now being raised about the functioning of MFIs. Some analysts also compare the MFI story to the sub prime crises in the US. RBI has also started an enquiry into the affairs of MFIs on a selective basis. There is definitely a need to regulate the MFIs, without killing the model that they adopt. The problem area could be multiple financing in certain pockets which could escalate into a bubble. But we must not forget that these institutions by and large enjoy an excellent recovery rate of 95-100%. The regulators will have to segregate the hay from the chef, rather than cast a shadow on the functioning of the entire MFI sector.

Looking at insurance beyond Tax saving

The underlying concept of insurance is "Insurance is a subject matter of the solicitation", which means that the client or the person proposed to be covered by the insurance cover should seek insurance from the insurance company. But the irony is that insurance is not solicited in our country, but it is sold or rather 'mis sold' in the garb of certain benefits which are sometimes beyond the basic purpose of insurance, that is to safe guard the interest of the survivors or in other words the near and dear ones of the person seeking insurance. The advent of ULIPs had unleashed the beast of rampant mis-selling by the insurance advisers. Thankfully, better sense has prevailed of late and the regulators have come out with stringent norms of disclosure for ULIPs effective September 1, 2010.

Many people still buy insurance primarily to take advantage of the tax gains associated with it. There is no harm in saving a little of your taxes, but the primary purpose of insurance should not be missed. The tax breaks available on an insurance product should merely be seen as add-ons or sweeteners. With the application of the new direct Tax code from 01.04.2012, there are going to be some significant changes on the tax implications of insurance products. Here are the important changes proposed:

• Under DTC the deductions applicable to insurance products (currently defined under section 80C) will be over and above the limit of Rs. 1,00,000, to the extent of Rs.50,000. However, the deduction shall be available only to those insurance policies where the premium does not exceed 5% of the capital sum assured in any year.
• Insurance proceeds shall continue to be governed by EEE (Exempt-Exempt-Exempt) system of taxation, as contributions, accretions and withdrawals under a life insurance policy continue to be tax exempt.
• The maturity proceeds of life insurance policies become taxable, other than in case of death of the policy holder, if the premium paid exceeds 5% of the sum assured. In other cases the insurer company will be subject to dividend distribution tax, which will be deducted from the proceeds of the policy.
• Insurance companies will be subject to normal rates of corporate tax stipulated at 30%, instead of the 12.5% concessional tax paid by them currently. this is likely to increase the cost of insurance for the clients.

All said and done, insurance cover should be seen in the context of the need for insurance, which is based on the security and safety of the dependents in the event of pre mature demise of the individual, rather than the tax breaks associated with the insurance policy.

Ganesha Smiles: It's time to bid farewell!

Ganesha is smiling on the equity markets, but sadly it's also the time to bid farewell. The BSE Sensex is on the threshold of Mt.21000 again after a gap of 32 months. Bulls have been on the rampage for the last couple of sessions, but just like all festivities must come to an end one day, the dream run on the markets is also nearing an end for this season. Retail investors are advised to exercise extreme caution at this juncture, and refrain from putting fresh funds in the markets. It may not be a bad idea to book some profits. However, long term investors should continue to invest in Mutual funds through the SIP route.

The question nagging the market pundits is whether we have moved into a bubble zone? Let us try to find an answer to it. A bubble is defined as "Something that lacks firmness, solidity or reality." The bubble isn’t bad at all, that’s when prices inflate and living is good. As most economists will tell you, it’s the bursting of the bubble that markets should worry about. Forming of 'bubble zones' is not new to the markets,  as markets are not expected to trade on fair valuations all the times. “When people start using phrases like ‘this time it’s different, or we have a new paradigm, or I better buy now or I won’t be able to afford it,’ then you know you’re in trouble,” says economist Will Dunning. Investors should be able to see the writing on the wall.

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  There is a clear disconnect with the fundamentals. The PE multiple for the markets at 23-24 has moved into troubled zone. What is worrying about the current rally is that the PE of small cap index has also inched towards the 20 mark.
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  The rally is fuelled by FII money, sometimes called hot money. Unfortunately, there are no means to identify the origin of this money. How much of this is speculative investment by hedge funds, is any body's guess.
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  There is also the derivative bubble which threatens to destroy not only the US economy, but has serious repercussions for the developing world.
  The derivatives market is almost entirely unregulated and in recent years it has ballooned to such enormous proportions that it is almost hard to believe. Today, the worldwide derivatives market is approximately 20 times the size of the entire global economy. 
• "It's always better to be safe rather than sorry".

The intention of this piece is not to scare the investors but make them appreciate the impending scenario. 

Equity markets ripe for profit booking!

Consider the fact that BSE Sensex and Nifty have given a return of around 125% over their March 2009 lows. Would you not like to take some money home? Although, as a Financial planner I am not supposed to advocate timing the market, but then it is prudent to suggest partial profit booking. After all investors take the risk for making money on equity markets, and profit booking is a means to realise those gains.

The recent signals emanating from global markets do not instill confidence in the sustained bull run, our markets have to take a breather before they gather enough steam to scale new highs. The global recovery based on stimulus packages seems to have run its course. IMF sees growth slowing down in top 3 economies of the world: USA, China and Japan. The strengthening of the US Dollar and the Japanese Yen, considered as safe havens in a crisis situation, is a pointer in this direction. Foreign institutional investors have started booking profits in some frontier markets such as Vietnam, Pakistan and Ireland. India and China could be next on their radar.

In such a scenario investors are better advised to book profits, especially in the momentum stocks/sectors which have run up too fast in the past few weeks. Investments on declines can be considered in the sectors that have lagged behind in the last bull run. They could be the ones that could help you ride the next bull run. I have an inkling for Telecom (Bharti Airtel) and Oil (Reliance Industries). However fresh investments could be staggered over the next 3-4 months. However investments in Mutual funds through SIP route should be continued religiously, with the option of a top up if the markets dip substantially. Investment in Gold, also on declines, could also be considered as it is likely to pay rich dividends as the demand for gold has been going up steadily without any commensurate increase in supply. 

India set to become World's fastest growing economy

The 'Tiger' is set to overtake the 'Dragon' in the next 3-5 years. If the recent Morgan Stanley report on Global growth is to be believed, India is set to overtake China to become the fastest growing economy in the world by 2013. while India's GDP growth is expected to climb steadily towards 9-9.5% in the period 2012-15, China's growth is expected to cool down to 8% levels by then.

As the death rate and the birth rate are expected to fall in India, it can hope to get the largest addition to the working population during this period, leading to a quantum jump in productive capacity. this is likely to push up the net savings rate which is currently around 35% of GDP. The FDI flows to India in terms of percentage of GDP (3%) has already overtaken that of China in 2009.

However, this scenario can be created only if the government is able to pump in the necessary resources to boost infrastructure development. Another issue would be the ability of the Govt. in handling the internal security issues of naxalism and separatism. The instability on the political front can jeopardise the growth projections, as it leads to critical loss of man days, leading to a dent in production capacities. On the other hand, the Govt. will have to improve the productivity of the agricultural sector to be able to feed its burgeoning work force, and control the run away food prices, which could become the nemesis of the govt.

If indeed India is able to catapult itself at the top of GDP tables, investors in equity markets are in for some bonanza. The period from 2012 onwards should, in all probability, be the golden period for Indian stock markets. Investors are advised to start investing selectively, and wait for any dips in the markets to put in their money into Indian stock markets, to ride the next bull run. But remember, there could be a temporary dip in the markets before the markets cross their previous 2007 highs, be prepared for that eventuality. But the long term bullishness in the markets is surely evident, for all investors to cherish.

First quarter results do not present a rosy picture

Stock markets generally reflect the mood of India Incoporated's quarterly results. A euphoria was built by market participants in anticipation of some extra ordinary first quarter results. With a major chun kof results already announced for the first quarterr of Fiscal 2010-11, there is a fit case for valuations to adjust downwards.

An analysis of the 300 leading companies reveals that although sales have grown strongly at an average of 20%, profits have shown a subdued growth figure of 12% (excluding the loss making oil PSU's). The reasons cited for the sluggish profit growth are pressure on margins due to higher than expected commodity prices, which have pushed up raw material costs. Interest rates are likely to resume their upward march, after declining fo the past one year, in the wake of a series of rate hikes by RBI. This phenamenon is likely to continue for next two quarters putting more pressure on the margins.

The results have been a mixed bag. With a few companies showing excellent growth in profits, it is perhaps a time to churn your portfolio, after analysing the first qurter results, and also giving due weightage to the full year guidance given by these companies. IT and Banking sector stocks have, by and large, returned excellent figures, leading to a run up in thier stock prices. It may be prudent to wait for a while to enable these stocks to cool off, before taking a decision to invest.