AXIS SHORT TERM PLAN – AN UPDATE

I had given an update on AXIS Short Term Plan post their NFO closure on January 28’2010. The fund Manager had created a portfolio of 50% in 2-5 year NCDs & balance in CPs/CDs with less than one year maturity with an average maturity of 1.75 years & gross yield of 6.29%.

Inspite of the corporate bond yields having shot up from around 8.25/8.30% to close to 8.50-8.75%; the said scheme has generated positive returns of 3.62% p.a. since inception i.e. January 20’2010 due to their strategy of 50:50 of long & short bonds with higher carry.

Since then, the Fund Manager has taken advantage of tightness in the short end of the yield curve by increasing their exposure to 1 year CDs to approx.70% & reducing their exposure in 2-5 year bonds to 30%. This has helped in reducing the average maturity to 1.30 years & enhanced gross yields to more than 6.50% plus.

Even before going into April, there is already some gains which has accrued (but not entirely reflecting in the NAVs) as the one year CDs which were invested at 6.65% are already quoting at 6.40/45% & likely to go as low as 6% by April 2010 before the Credit Policy Review. Even 5 year corporate bonds will quote at least 20-25 bps lower than the current levels.

Returns for past 26 days from February 19 to March 17’2010  is as high as 7.85 % p.a.

Fund Manager is likely to book some profits ahead of the Credit Policy Review; as there is expectation of rate hikes due to inflation concerns. However, market expects a very gradual process of increasing the benchmark rates as Government borrowing cycle will start in the month of April onwards.  Also by booking some profits in April-pre policy and creating cash in the portfolio, the Fund Manager will be in a comfortable  position to capture any spikes in the yields post the policy (if RBI increases the benchmark rates).

Hence, to conclude, if one invests in the said scheme currently & for those who have invested in NFO would stand to benefit once the compression story unfolds in the month of April & simultaneously the Fund Manager will also book some profits on one year CDs portfolio.

DEBT MARKETS JOURNEY POST BUDGET

I have not written on debt markets since almost January 2010 post the Credit Policy Review. One of the reasons was that I was waiting for the announcement of Budget and subsequent borrowing calendar. I had hoped that we will have a clear path in debt markets based on the Budget announcements and borrowing calendar announcements.

However, this event (read Budget) has had an effect of creating more ripples in an otherwise calm market. There have been many announcements (like petrol price hike, excise duty hike, etc) which will impact inflation & debt markets in the short run but will go a long way in improving fiscal deficit numbers in the long run.

Let us analyse the debt market situation of last couple of years v/s what is likely to be going forward:

As against the above, going forward debt markets will have to weather following hurdles:

Taking into account the above factors one would be best advised to stay away from taking any long term investment calls in the debt markets at current levels. Interest rates have started hardening both at the shorter end (more so in this segment of the yield curve) as well as on the longer end. 1 year CDs which were quoting at 5.75% in January 2010 have already hardened to 7% plus in a very short span. 5 year AAA Corporate Bonds’ yield has hardened to 8.75% from a low of 8.40% pre Budget & 10 year benchmark has marginally gone up from 7.80% to 7.90-7.95%.

With imminent hike in inflation numbers, there will be an imminent rate hike in the near future. Add to this the liquidity woes & huge weekly borrowing calendar; benchmark rates in such a scenario can breach 8% mark soon & may hover between 8.25% to 8.50% levels in the near future. Hence, instead of trying to outguess RBI moves or debt markets, one can safely invest in say 3 month FMPs at or around 6% levels, go beyond March 2010 & let inflation peak off somewhere at 10% levels between April & June 2010 before taking a long term call on debt markets at those levels.

Both for technical (good opportunity to invest at higher yields as well as lower borrowing programme in second half) & fundamental reasons (base effect on inflation bringing the inflation numbers to around 5% in August/September 2010) it will make an immense sense to invest in long term Income/GILT schemes at that point in time.

 

 

 

 

ARTICLE IN ECONOMIC TIMES DELHI

 

 

 

SWP from MIP-A Powerful Investment Strategy

Every year combination of rising inflation, volatile debt & equity markets & lower/ higher interest yields is creating havoc in portfolios of an individual. An investor who wishes to have regular flow of income; be it a retail, HNI, Pensioner or a Senior Citizen is at a loss  as to how to plan their day to day expenditure with a matching or higher yielding investment portfolio. Either they have to keep on reshuffling their asset classes to make their ends meet or take unnecessary risk in their portfolio (with no guarantee of it giving positive returns at the end of the year) to earn that extra bit of money.

Other alternative is parking their funds in Fixed Deposits with some assured returns but a very tax in efficient vehicle (as the investor will have to pay full tax on interest). Also, in FDs, funds get stuck for a period of time like 1/2/3/5 years & hence, the investor loses on liquidity as well. Also, the principal amount at the end of the FD tenor does not appreciate & the investor gets back the same amount which he/she would have invested at the beginning of the period. Also, many times these returns do not even beat the inflation.

In such a scenario, the investor who wishes to earn a regular income is at a tremendous loss in terms of options available to him to earn regular income to meet his day to day expenses. However, one strategy that can help an investor overcome all the above viz:

Is SYSTEMATIC WITHDRWAL PLAN from well managed MONTHLY INCOME PLANs. This tool, besides being an extremely tax efficient way of having regular cash flow for the investor also has a capability of enhancing the overall portfolio value (if managed well & withdrawals of the investor on an ongoing basis is less than the overall returns of the scheme i.e. if the scheme has performed say 12% p.a. in one year & the investor has only done SWP of say 8.50% p.a.; then the investor besides withdrawing regular sums through SWP is also enhancing their overall portfolio value).

Following analysis of two of the best managed MIPs viz. Reliance Monthly Income Plan & ICICI Prudential Monthly Income Plan will show case how SWPs score over traditional FDs in terms of returns & tax efficiencies over a period of time. The way the following table are designed are based on an original investment value of Rs.10 lacs at their respective NAVs & SWP @8.50% p.a. i.e. Rs.7100/- p.m.  :

being an exception as equity markets had collapsed in that year)  from the start & the investor has paid very little tax compared to tax implications on FD interest

ANALYSIS OF RELIANCE MIP SINCE  JAN 2001:

As can be seen from above on Y on Y i.e. from Jan 2001 to Jan 2002 value of your MIP after Rs.85,200/- as SWP is worth Rs.11,42,011 with tax implication of only Rs.1,526 v/s tax implication of Rs. 25,560/-  in FDs . On cumulative basis since Jan 2001 till Jan 2010, an investors has don an SWP of Rs.7,66,800/- having total tax implication of Rs.41,161/- (including Short Term & Long Term & again assuming that the investor is redeeming from MIP at CV of Rs.11,42,011/-) v/s same interest of Rs.7,66,800/- on FD  having an a tax implication of Rs.2,30,040/-.

ANALYSIS OF RELIANCE MIP SINCE JAN 2008: YEAR WHEN EQUITY MARKETS CRASHED:

As can be seen from above on Y on Y i.e. from Jan 2008 to Jan 2009 value of your MIP after Rs.85200/- as SWP is lower at Rs.8,96,969/- with no tax implication (due to loss). However, on cumulative basis from Jan 2008 to Jan 2010, value of your MIP has grown to Rs.9,16,047/- with no tax implication (due to losses). Total value of your investment in MIP plus withdrawal is Rs.10,86,447/- v/s total value of FDs plus interest less tax is marginally higher at Rs.11,19,280/-

ANALYSIS OF ICICI PRU MIP SINCE  JAN 2004:

As can be seen from above on Y on Y i.e. from Jan 2004 to Jan 2005 value of your MIP after Rs.85,200/- as SWP is worth Rs.9,56,706/-  with tax implication of only Rs.450/- v/s tax implication of Rs. 25,560 in FDs . On cumulative basis since Jan 2004 till Jan 2010, an investors has done an SWP of Rs.5,11,200/- having total tax implication of Rs.33,762/- (including Short Term & Long Term & again assuming that the investor is redeeming from MIP at CV of Rs.12,15,317/-) v/s same interest of Rs.5,11,200/- on FD  having a tax implication of Rs.1,53,360/-.

ANALYSIS OF ICICI PRU MIP SINCE JAN 2008: YEAR WHEN EQUITY MARKETS CRASHED:

As can be seen from above on Y on Y i.e. from Jan 2008 to Jan 2009 value of your MIP after Rs.85200/- as SWP is  at Rs.10,01,096/- with no tax implication v/s similar interest on FD of Rs.85,200/- having a tax implication of Rs.25,560/-. However, on cumulative basis from Jan 2008 to Jan 2010, value of your MIP has grown to Rs.11,15,173/- with  tax implication of Rs.12,108/- after SWP of Rs.1,70,400/- v/s same interest of Rs.1,70,400/- on FD having tax implication of Rs.51,120/-

CONCLUSION:

Article in Economic Times Delhi