Can Equity Investments act as your Fixed Deposits?

Equity Markets are known for their volatile nature in the world economy. The general perception of the investments into the stock markets is slightly negative in India. I have generally seen people investing into safe havens like fixed or recurring deposits. In this article, I am going to unfold the secret of how one can have a fixed deposit in the stock markets. We will discuss the overall benefits of the investments in to equities (direct and indirect), followed by tax benefits and liquidity and finally returns on equity investments in the long-term which will be based on the movement of nifty from its inception in 1996.

If you wish to invest into equity markets, there are broadly two ways of doing it, namely, direct equity and indirect equity investments. Naturally both are subjected to market risk but there are slight differences in the risk measures in managing the investments.

equity-investing

Following are the points of comparison between Equities and FDs:

  1. Liquidity: Fixed deposits have a lock-in of 5 years for them to reap you tax-free returns. If you liquidate FDs before 5 years, you lose the interest part for the remaining tenor as well as the taxes as per the individual tax slabs, will be applicable. On the other hand, equity investments are no less liquid than the FDs. The investor would not even lose out on the returns on the same. Investor gets the funds within two days post the sell off. The only difference is that equity investments do need some level of planning in investment and redemption part of the portfolio.
  2. Taxation: FDs give you a tax benefit over the gains after you have been invested for 5 years, while the equities provide you the same over a period as short as 1 year.
  3. Returns: The post tax returns on a FD over a horizon of 1 year is as low as 6.5%, which will only reduce your purchasing power or keep it almost the same as last year. But the requirement is to increase your purchasing power, which only medium or high risk assets can provide. Equity, over the long-term, has been giving an averaging return of 14-15% each year. That means, you are beating the persisting inflation by almost 7-8% every year.

I have analysed that the fear persists in the minds about the equity markets because of speculative mindset. A speculative mindset always looks for the opportunity to gain in short-term. That leads to many losses by the end of his/her consecutive trading sessions. Many people think about intra-day gains as well where they play on a certain stock on the daily price movement. Another mistake the investor makes is they think “markets are falling or rising because of what happened”. But the truth is “markets fall or rise because of what is going to happen rather than the past”. In this process, the investors (who wish to make long-term gains) turn into traders in the hope of short-term gains. The markets are always going to be volatile in the short-term. The Volatility Index in short-term ranges from 22-28%. A long-term investor should never try to time the markets.

It is not about timing the markets, it is about the time spent in the markets that matters – Warren Buffett

In India, we can categorize people as investors, speculators and safe haven lovers. Investors always look for long-term gains, speculators play on day-to-day pricing and safe haven lovers are just simply risk averse. Although, I am not a great fan of speculators, they have their own ways of dealing with markets. Whats creates the other two categories of people? Any guesses? There is that one aspect that bifurcates the two. That aspect is PATIENCE. Do we really check our Fixed deposits values everyday? I guess no. But if we invest even 5% of our savings into markets, we tend to check the values everyday without fail. I will not suggest not to check because its ones hard-earned money, but the frequency should be much lesser.

Which side of the device would you like to be?
                            Which side of the device would you like to be?

The image below will show you what PATIENCE can do. But the concept of patience applies to the top companies with extremely good fundamentals. Small caps and mid caps are generally not recommendable for long-term investors. An investor should always diversify. In equities as well, the diversification would be in terms of direct (stocks) and indirect(mutual funds).

THE POWER OF PATIENCE
                                                      THE POWER OF PATIENCE (Returns in %)

The image above is the returns on nifty in the past 20 years. The green areas indicate positive returns while the red ones indicate negatives. The power of long-term investing is evident here. As the horizon of investment increases, the red areas have vanished and the investments have grown exponentially.

To sum up, put your investments into equity markets. The point to remember is to invest into the right stocks (preferably companies with strong fundamentals). It is important to have your portfolio more into markets to beat the inflation. If you are not able to pick the right stocks, then invest into the equity oriented mutual funds. With increasing age, slowly start diversifying into debt funds and balance out the portfolio to give you optimum returns in the long-term. Have patience, think of the equity investments as fixed deposits and get the best experience of wealth creation. Plan your goals, keep your liquidity stable and invest the surplus in the right assets. Hope this helps you have an insight to the brand new “Equity FDs”. The key is invest in the right assets and forget and always focus on the long- term perspective.

ALWAYS INVEST WITH A LONG TERM PERSPECTIVE
          ALWAYS INVEST WITH A LONG TERM PERSPECTIVE
INVEST IN THE RIGHT STOCKS
                                                             INVEST IN THE RIGHT STOCKS

Last but not the least, views expressed are my personal opinions. Investments are subject to market risks. Happy investing.

Thank you 🙂

Advertisements

Nasty Correction Amidst Rate Cut

Generally a rate cut by monetary authorities of India, the RBI, is seen as a sign of growth in the future and the markets show bullish trends. But this time something completely opposite happened. A simple logic can be there was a rate cut leading to reduced arbitrage for the FIIs and thus FIIs pulling out funds and thus markets fall. Although, all of that I said is true but there is a lot more to that.

RBI in its second monetary policy decided to reduce its key policy rate, the repo rate, by 25 bps to 7.25. This decision was implemented in the view of reduced inflation and weak corporate earnings numbers. It just took the amount of scope it got to cut based on inflation and Equilibrium interest rates as well.

07fii

There are various reasons to the 350 -400 points fall in the broader index, nifty, most important being the FIIs selling out. The sell off has also caused some volatility in the rupee movement making rupee weaker and less of a denomination to invest in. Although India has been a favorite avenue for investment, the fundamentals do not signal the same. Nifty tanked by around 350-400 points over the week from Tuesday post RBI action to reduce the repo rate.

Fullscreen capture 662015 124323 PM.bmp

Fullscreen capture 662015 124329 PM.bmp

Markets have been really skeptical about the controversy between the corporate earnings numbers and the GDP rate, the two being significantly negatively correlated at the moment. It is actually important to note that GDP is calculated as the cumulative value addition by about 5,00,000 companies in the new method of calculation, which constitutes both the organised and the unorganised sector. Unfortunately, the numbers of the unorganized sector, which has contributed to most part of the GDP, are not published on the MCA21 website (Ministry of Corporate affairs). This results into a negative sentiment if the country is really growing at the so-called fastest rate.

On the other hand, the MAT issues have been settled on the equity part of it but the treatment of interest and royalties from debt investments by FIIs is still an unresolved one. It has created a barrier for debt investments in the coming months.

GST, India biggest tax reform post independence, is still facing problems from the states regarding the compensation against the losses. It was proposed in the Constitutional Amendment Bill that the states will be compensated 100% of their losses for the first three years, 75% in the fourth and 50% in the fifth. States on the contrary are demanding for a 100 % loss compensation for the entire period of 5 years. Lets hope that the GST issue gets resolved soon to pump up the Indian markets soon.

Another signal that RBI gave on the 2nd of June, which led to a sell off in the markets, was the reduction in chances of further monetary easing in the near future. RBI has cautioned the markets with three important key points which it will consider before further monetary easing. Those are the effects of increasing crude oil prices, the likely El Nino effect and the upward pressure on the inflation due to the reduced forecast by IMD.

Going forward, the GOI will have to take some serious steps in the areas of PDS and be accommodative to help RBI contain its inflation target of 6% by Jan 2016. But so far the fear of crude oil prices rising seems to be subdued atleast till Dec 2015. OPEC on friday in its meet decided to keep pumping oil at least till its next meet in Dec. This is a good sign for the Indian economy since oil prices might witness some downward pressure.

Considering the given conditions, further the markets might show some mid term bullishness looking at the oil prices and US slowdown persisting. EL Nino will be a factor to look for in the coming months. Growth for the corporate sector will start picking up in the next two quarters. Banking sector remains in a shaky position amidst rising NPAs and lower profitability and especially no CRR cut is going to hurt the commercial business.

Thank you. 🙂

“Bears” in action..”Bulls” seem far-fetched..

bullbear

Bulls and bears are the trends when we speak about the stock markets. Indian stocks markets these days are witnessing a bearish (downward) trend amid various issues. Stock markets have tumbled in the past two weeks because of the weak sentiments and rather weak implementation of reforms. Modi Govt has so far failed to maintain the sentiments of the bulls. Experts and investors are of the view that the Modi Govt has just been words till date. So why are we witnessing this bearish trends?

Indian markets are fairly dependent upon investments by FIIs( Foreign Institutional Investors) and FPIs( Foreign Portfolio Investors), also termed as “Hot Money”, which makes the Indian markets vulnerable to any uncertainties.

Presently, the MAT (Minimum Alternative Tax) issue seems to have reversed the bull run. (Here is a brief idea of what MAT is: It is a minimum tax to be paid by companies making substantial profits but which seem to have no significant income on paper due to deductions and exemptions)

” The hardest thing for a human being to understand is tax laws” – Albert Einstein

MAT as such is only applicable to the companies where the income tax calculated under the IT Act is less than 18.5% of the book profit. Companies coming under the exemption of DTAA(Double taxation Avoidance Agreement), 89 countries out of which 87 treaties are active, continue to enjoy the tax-free income from the capital gains. Roughly, a week ago, the IT Dept sent out notices to around 68 FII and FPIs demanding a tax liability of Rs. 602 Cr. This step created a havoc in the markets regarding the tax reforms in India. Post this, FPIs started pulling out money from Indian markets and thus putting downward pressure on the index. Although the MAT issue has now been resolved for the future years, MAT is still going to be applicable to FY 2014-15 capital gains and we might see a further bearish trend in the coming weeks.

On the domestic side of the economy, Indian steel and tyre industries are in a highly distressed condition. China and Japan who are currently sitting on a huge inventory of steel and tyre produce, are dumping the entire stock in the Indian markets at a price cheaper than persisting indian costs. Frankly, we cannot stop the supply from Japan because of the free trade agreement. China on the other hand can only be restricted by certain import duty changes. MoF needs to take some serious steps in regards to increase import duty on steel. Collectively, it has lead to weak corporate earnings and finally added to the ongoing bearish trend.

On the other side of the globe, Euro Zone has replaced US in investment grades. ECB’s QE(quantitative Easing) seems to have worked in reviving the economy and ending the deflation phase. Although, “Grexit” still remains a key concern in determining the direction of the Euro Zone. US has registered a GDP growth of merely 0.2% in the first quarter thus suggesting a slow progress. Reasons being the abnormally cold weather, cautious consumption and strengthening of the dollar. Fed interest rates hike is thus unlikely till about Sept this year.

In technical analysis jargon,  the index has breached the vital 200 DMA (Day Moving Avg), which indicates further fall from the current levels. The trend can be expected to continue in the same direction if the scenario remains unchanged. In fact, this can be an appropriate opportunity for the aggressive traders to grab the value stocks and gain appreciation of the value in the long run.

Thank you 🙂

Gold’s Bleak Outlook

Gold. The word itself brings a lot of joy in the minds of Indians (especially the ladies out there :P). But, is gold a great investment in the current economic conditions ?? Would it be wise to buy gold right now or later in the coming years?? The answer is doubtlessly later in the coming years. Here’s why.

The equity markets have been doing very well from the past 15 months, since the NDA came into power. Global economies are as well picking up and are expected to revive in the coming years. This clearly indicates that, the global equity markets are also expected to do well in the near future which will probably put downward pressure on commodity prices. Indian gold prices anyways are in disparity because of the duty structure, and if these are reduced then the gold prices will decrease further. The import duty has already been curtailed.

Gold is the last investment you can make right now. Reason being very simple and completely market related. First and foremost being the returns, especially long-term returns, have always been lower than the overall equity returns. Returns on gold and gold funds have been negative as compared to equities in short-term, while in long-term they have generated returns of 8-9% levels against 15-16% of that of the equity markets.

Many would be of the opinion that ” Gold is a hedge against inflation“. But today we are looking at consistent inflation levels of 5-6% for the past 8 months and RBI with its FIT(Flexible Inflation Targeting) Policy intends to keep it at a level beneficial to the economy ( As it is said a certain level of inflation is good for the economy to grow). Gold as a hedge as well fails in this situation since there is hardly any inflation persisting.

Right from olden times, there is a lot of opacity that exists in gold trading. This causes a lot of loss for an investor or a buyer if he is not well-informed about the scheme and its loop holes. But never the less, the sellers make sure they make amazing profits from the same( thanks to ever-increasing Indians’ love for gold)

“Buy gold and keep them as gold deposits if you want returns is another myth”. Now when we say returns, always remember it should be more than the current inflation figures. If those are not exceeding inflation, you are not getting returns, but rather losing your value. And gold deposit schemes ?? Really ?? Interest rates of 0.75% for three years is hardly any return. A return of 0.25% per year, which if compared to current inflation of 6% would get you a return of -5.75%. Thank god, gold has appreciation of its value else with gold deposit schemes investors would have been in depression.

Invest in gold only for reducing risk on your overall investment portfolio, because they truly are a hedge against the highly unpredictable downside of the equities. To all those who already bought gold at the high rates of 27000-28000 levels, it will definitely help you in reducing the downside if at all you have invested in equities. Others, wait for a while, this bull run might not last for more than a year or two ( the Modi effect is already showing sign of fading away). The best use of your money as of now would be investing into equity directly or through a mutual fund route. Avoid investing into gold, until next year, unless you can put it to use immediately (consumption like in a marriage or to make ornaments. If you are a first time investor of gold, one should prefer coins over physical gold because of the lesser transaction costs of coins. Always remember this one guru mantra : When you equities are doing well commodities(gold) will always lose value and vice versa. No need to buy additional physical gold looking at the current levels of holdings of the Indian families  😉

Happy investing. Thank you.