Even in this extraordinarily complicated environment, the challenge of ensuring long-standing financial security, freedom and prosperity is determined by two invariable fundamentals??optimal savings? and ?prudent investments?.
For long, Indian saving habits have been predisposed towards non-financial assets, like gold and real estate. Within the ambit of financial savings, the preference has largely been towards deposits, insurance, currency holdings, pension & provident funds, government claims and share/debentures. This is in significant contrast to the trend in the US, or in China, where the preponderance is towards shares, mutual funds and bonds.
Much of the Indian retail investments still tend to be arbitrary; inadequately researched; and/or, unappreciative of the actual investment horizon and expectations. So it is essential for Indian investors and financial professionals to appreciate a methodical approach to investments.
The basic idea of investments is to deploy a saved corpus into a medium that enables reasonable income and/or accumulation with minimal intervention or effort from the investor. This, while also ensuring that such an investment factors in the risk appetite of the investor. Most importantly, such an investment approach must also build in the restrictions (or, opportunities) placed by the investment horizon of the investor.
Mutual funds play a significant role in addressing these requirements. Amongst the key benefits of investment in a mutual fund is the potential of risk-adjusted return, objective-driven investment, professional portfolio management service, competitive investment costs, and potential tax benefits.
More crucially, through mutual funds, an investor can invest in asset class portfolios comprising domestic equities, gilt, corporate bonds, money market instruments, gold, overseas equities, etc. These asset classes may be part of a mutual fund portfolio in varying ratios. The choice of portfolio depends on the investment objective, time horizon and the overall risk profile of the investor. The asset allocation reduces the overall risk of the portfolio.
In the present market context, the bond market sentiment has changed radically from the first quarter of 2013. The moderation in WPI since mid-2012 had opened the window for a gradual recalibration of the monetary policy towards growth orientation. As a result, RBI was able to deliver nearly 75 bps of repo rate cut since January ?13. This gave rise to a possibility of an era of low-interest rate and low-inflation environment.
This circumstance, however, changed in recent days over the evident improvement in the US economy, which raised the spectre of QE3 tapering by the US Fed. This anticipated tapering would have implied lesser dollar supply. Due to this reason the greenback began to rise against other global currencies, including the rupee. This decline was further aggravated by the FII selloff in the Indian bond market (leading to a rise in yields), who were seeking to protect their dollar value against rupee depreciation. The resultant RBI measures to ward off speculative trading, by tightening liquidity and increasing the marginal standing facility(MSF) penal rate; led to a further increase in bond market yields.
Having said that, we continue to believe that a moderating economy and a contracting industrial sector make repo rate cut a policy imperative. Thus, this disruption in the bond market rally due to rupee volatility seems transient. As the rupee finds a new equilibrium the against the dollar, and to the satisfaction of the central banker, the present impasse may be reversed. For this reason, we believe that those investors (with a one-year investment horizon) who missed out in participating in the bond market rally, have been handed a second chance. Moreover, the high yields available currently in the money market also provide lucrative investment opportunities for near- and short-term investors.
The author is head of fixed income & product at Kotak Mutual Fund
