challenging times!

This is one of the most testing times for the Indian economy. Investors’ confidence in the capital market is dwindling with each passing day. Sentiments are getting further accentuated due to downward revision of GDP and earnings forecast. The broad market Index Nifty  delivered a meagre absolute return of 3.42%, 5.91%, 1.47% and 22% for the past one, two, three and five year periods respectively,  much lesser than Bank FDs, liquid funds and ultra- short term funds.
 
Some of the recent RBI’s measures to tighten liquidity have made borrowings costlier in a stagnating economy and increased the risk of rising NPA’s. The combined gross non-performing assets and restructured loans for the banking industry is around 10% of the total loan outstanding, and most of the bad loans are from PSU banks. Mirroring the same, banking index fell by 23% on an YTD basis.

Yesterday’s announcement by the RBI to suck out liquidity through the weekly issuance of Cash Management Bills amounting Rs 22,000 Crore would exert additional pressure on the shorter end of the maturities. Liquid fund investors as a matter of caution should invest in portfolios having higher weightage to CBLO to avoid any potential mark to market losses.

Long duration income funds got impacted adversely due to rising yields. Ironically, this is one of the rare instances where investors have been on the wrong side of the markets, both on the debt and equity front. Investors are constantly grappled with thoughts of moving to cash which reminds me one of the famous quotes by warren buffet.

“Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value”

While there is no quick fix solution, favourable market environment  will prevail once  the central bank moves its stance towards supporting growth,  warranting monetary interventions like liquidity infusion, rate cuts etc.  Investors should stay disciplined and adhere to their respective asset allocation pattern. In case you have missed out, this is the time to consider allocating some funds to principal protected nifty linked product as part of asset allocation.

NLD’s (Nifty linked debenture) as they are popularly known, enables you to participate in the upside of the equity market with the principal being protected. The underlying instrument is generally a non- convertible debenture with the coupon/interest linked to the stock market (Nifty). It is advisable to stick to issuers with high/highest credit ratings because of the increasing credit risks.

Depending on the factors like tenor, interest rate and the volatility, one could get a decent participation rate of the equity market without worrying about the risk of losing capital.

For instance, every Rs.100 invested in a cap protected product; approximately Rs 75 – 80 is allocated to debt providing safety of the principal. The balance Rs 25 is used for buying call options for participation in the upside of the equity market. The Participation rate might typically range between 100 – 150% depending on the price of the option.  If nifty generates a return of 30%, the call options will give a return of 30 – 45%. If the nifty falls below the level at which the investment was made, the investor gets back his principal.

Happy investing!

Disclaimer: No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.