THE YELLOW METAL IN PORTFOLIO

By Koshica Oberoi

The demand for the yellow metal- gold is not just for consumption but it is also driven by investment. So, now let’s look at how price including various other factors affect the investment demand for gold. The gold prices have stopped rallying, unlike 2012, when gold prices were racing up due to growing consumer demand in India along with expected demand from investors pushed up the prices to spectacular heights.

The surge in price of gold halted by the end of 2015, considered to be the base for many years. Although gold prices have delivered gains of 30% since 2015, there are today many factors exerting compelling pressures on gold prices- some propelling them further and others dampening them. The highest consumers of gold, India and China, witness a decline in the demand because of which it is expected that the consumer demand will remain flat. Therefore, it is investment demand for gold that will support the gold prices. The recent scenario of increasing geopolitical tensions, inflation and unceasing rally made by stocks in India and US, makes gold a safe haven and an attractive diversifier for the investors. The demand for gold can be classified as follows:

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Total Returns Index (TRI) – an appropriate benchmark to compare fund performance

Financial institutions have come a long way since the aftermath of Global Financial Crisis in 2008. As asset management companies and fund houses battle to grab a larger share of corpus from increasingly knowledgeable investor cohort, more and more emphasis has been laid on building customer confidence and trust, financial transparency and ethics. In a recent survey by CFA, ‘From Trust to Loyalty: A Global Survey of What Investors Want’, majority (~38%) of the retail customers chose ‘Trust on asset managers/firm’ as their primary reason while picking an asset management firm.

More recently, one such step in achieving financial transparency is a decision by DSP Blackrock Mutual Fund & Edelweiss Mutual Fund to opt for Total Returns Index (TRI) as the benchmark to measure the performance of their funds. Prior to DSP Blackrock & Edelweiss Mutual Fund, Quantum mutual fund adopted the TRI benchmarks to compare the returns of their funds. Such a move by fund houses is in the right direction towards global convergence on usage of fair and transparent benchmarks – to gauge performances of assets under management.

 

What is Total Returns Index (TRI)?

There are two sources of returns on equity investments: capital gains and cash dividends. The cash dividends received are typically reinvested by mutual funds to generate further returns on net assets. For instance, The PRI (Price Returns Index) version of NIFTY 50 for the year 2016 delivered a return of 3.01% and the 50 underlying stocks paid an aggregate dividend of 1.47%, thus the TRI version of the index delivered 4.48% return during the year. Historically, most of the domestic funds have used PRI, to compare their funds’ performances, which considers only capital gains (price appreciation) thus ignoring dividend returns. Total Returns Index (TRI) captures both – price appreciation and cash dividends to reflect all sources of returns in equity portfolio. The Net Asset Value (NAV) calculated by mutual funds also reflects both these sources of returns. Using TRI for fund performance comparison is thus a more appropriate, fair and prudent benchmarking practice.

 

Global emphasis on usage of total return index benchmarks for performance comparison

Globally, the emphasis on transparency has been on a rise as indicated by the guidelines issued by various capital market regulators. In the United States, Securities and Exchange Commission (SEC) regulations published in 1998 mandates that all funds report performances using appropriate benchmarks which consider reinvestment of dividends for index computation (read TRI). Most of the asset managers in the United States claiming a large part of the industry AUM use Total Returns (TR) indices as benchmarks to measure the performances of their funds. Below is the summary of 5 such asset managers and few of their top funds and corresponding benchmarks.

 

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#Fincabulary 27 – Calamity Call

Meaning – A call feature of a Collateralized Mortgage Obligation (CMO) designed primarily to reduce the issuer’s reinvestment risk. If the cash flow generated by the underlying collateral is not enough to support the scheduled principal and interest payments, then the issuer is required to retire a portion of the CMO issue. It is also known as a “clean-up call.”

A Calamity Call is only one type of protection used in CMOs. Other types of protection include overcollateralization and pool insurance. In addition to protecting against reinvestment risk, Calamity Calls can be used to protect against default losses. They can be used in CMOs structured from second lien mortgages, where there is more limited protection against default losses. This is in contrast to overcollateralization which may be enough to provide sufficient protection to underlying pools of conventional fixed-rate mortgages.

#Fincabulary 12- Aunt Millie

Meaning – A slang term for an uneducated or unsophisticated investor.

The term is considered a derogatory remark in the financial sector, often used to refer to poor investment choices. Financial professionals might recommend an “Aunt Millie” investment to clients who are unfamiliar with investing. Analysts may use the term to berate a stock or other security. For example, one may say that investing in a certain stock is so foolish, only Aunt Millie would buy it.

Budget Impact on Construction Sector

By Akshay Chaudhury

Challenges faced by the Industry:

  • Low-cost finance via FDI, ECB, and domestic banking assistance: Both the Centre and state must work together to remove bottlenecks for faster implementation of the reform measures in order to promote FDI in real estate. The ECB route should be opened for developers and FDI must be permitted in limited liability partnership (LLP) realty firms
  • A little clarity on land titles: Cross purchase shouldn’t suffer tax. So if the proceeds from the sale of commercial property are used to buy residential property or vice versa, capital gains tax shouldn’t apply. This exemption should be extended to cases where properties in both categories, residential and commercial, are from the proceeds of a single property.
  • The tedious process of getting project approvals: The red tape and time involved to approve real estate projects has caused the sector much grief. This issue can be addressed by a single-window clearance mechanism that will not only reduce the gestation period of projects but will also insulate them from cost escalations and delays in handing over possession.

Expectations from the Budget:

  • Industry status to the sector which contributes almost 15% to the Indian GDP
  • Clarity on GST and a raise in HRA deduction allowance
  • Single-window clearance mechanism which would ramp up supply and help rationalize prices and ensuring construction quality norms are not compromised
  • Clarity on entry and exit norms of FDI and reduce the lock-in period
  • Digitize all land records
  • Confidence-boosting measures to put more money in people’s hands in order to bring back the sales to pre-demonetisation levels

Budget Announcements:

  • 64,000 crore allocated for highways
  • A total allocation of Rs. 39,61,354 crore has been made for infrastructure
  • ‘Infrastructure’ status for Affordable housing aligned with the government’s agenda of ‘Housing for All by 2022’
  • PM Awas Yojana allocation raised from Rs. 15,000 crore to Rs. 23,000 crore
  • 27,000 crore on to be spent on PMGSY; 1 crore houses to be completed by 2017-18 for homeless
  • PM Kaushal Kendras will be extended to 600 districts; 100 international skill centers to be opened to help people get jobs abroad
  • National Housing Bank will refinance individual loans worth Rs 20,000 crore in 2017-18
  • Dispute resolution in infrastructure projects in PPP mode will be institutionalized
  • Trade Infrastructure Export Scheme to be launched in 2017-18; total allocation for infra at record Rs 3.96 lakh crore
  • Holding period for immovable assets reduced from 3 years to 2 years and indexation to be shifted from 1.4.1981 to 1.4.2001
  • Abolition of Foreign Investment Promotion Board (FIPB)
  • Dairy processing infrastructure fund to be set up

Trends after Announcements:

  • The BSE Realty index gained 4.7%, the highest among sectoral indices for the day.
  • Realty stocks such as Godrej Properties Ltd, Housing Development and Infrastructure Ltd and Prestige Estates Projects Ltd rose by around 6% on easier access to low-cost funds.
  • DLF rose by 6.7%, although it has little exposure to the affordable housing category.
  • Construction firms with a greater exposure to roads, such as IRB Infrastructure Developers Ltd, rose by 2.5%.
  • GMR Infrastructure Ltd gained due to the sops for roads and airports.
  • Larsen and Toubro Ltd gained as it is the largest player in infrastructure.

Conclusion:

Overall, it was a positive budget for the sector and the government has done well to create awareness for the need to increase tax compliance. Demonetisation was a temporary setback and the economy must bounce back. In particular, we look forward to the gains once GST is rolled out later this year.

Finacabulary #9- Casino Finance

Meaning: A slang term for an investment strategy that is considered extremely risky.

Casino finance refers to casinos and gambling, where players may have little to no control over the outcome of their bets. It generally refers to high dollar bets in the markets, either involving high-risk investments, and/or high leveraged accounts. Investors who employ these tactics are usually taking large risks in order to attempt to earn large rewards. While most investors prefer a more conservative approach, some investors are comfortable undertaking a large amount of risk, in order to have the opportunity to secure large returns.