Investments were to be staggered with certain milestones in mind. After the initial investment in the NFO (besides SIP on weekly basis as one of the strategies) next milestone was Budget announcements & the subsequent borrowing calendar (sometimes between mid March to end March). As expected & mentioned in my January mail, borrowing figures were on the higher side and disappointed the market. 10 year benchmark touched a high of 8.57% on March 30 after announcement of the borrowing calendar.

Another milestone, when I once again recommended investment in the scheme was on the date of the first auction announcement in first week of April; benchmark yield touched another new high of 8.70% +.

This way an investor would have created an average of around 8.50% plus.

Since RBI had taken no action on rate cuts even in March policy, expectations were running high on RBI intervention in April policy. RBI surprised the market participants by cutting REPO rate by 50 bps (against market expectation of 25 bps) (my blog note dated April 17’2012: http://www.msjcapital.com/2012/04/17/post-rbi-policy-review/). Benchmark yields retraced to 8.32% levels on the date of rate cut announcement.

This was the cue I was waiting for to exit out of G Sec positions & book profits. Also, RBI gave enough indications that there might not be further rate cuts in the near future. Also, RBI was cautious on inflation numbers inching up going onward (thereby further reducing scope of RBI to cut rates aggressively). This disinvestment call was given immediately post RBI Policy action & announcement of rate cut on April 17’2012.

If an investor would have taken these investment & disinvestment calls (value as on April 17’2012)  as mentioned above, their portfolio returns would have looked as follows:

Also, by exiting at benchmark yield of 8.32% (touched on the date RBI cut REPO rate on April 17’2012); an investor would be sitting on cash to once again take trading position in G Secs on auction dates (which is weekly) & create position at higher levels. Post the rate cut, benchmark yields (as mentioned in my blog note & expected) has once again inched up above 8.60% levels.

Going forward, I expect the benchmark yields to be range bound around 8.60-70 to 8.30-40% levels in-between auction dates. Also, announcement of OMO will help the benchmark yields to ease off below 8.40% levels giving ample opportunity to continue to trade in G Secs. This trading call can be repeated as many times in a year as possible as there will be a clearly defined range which will give enough opportunities to the investors.

One could have invested once again today i.e. April 30’2012 when 10 year benchmark once again breached 8.60% levels & touched a high of 8.67% levels. NAV of the said scheme once again touched a low of Rs.9.9225. One can sit on this trading position & look to exit once benchmark eases off below say 8.40% levels (maybe on OMO announcement or any other event).

DISCLAIMER

 Reason for that was simple :

Getting into April, one would have expected 3 mth/1 yr CD/CPs yields to ease off  ( money coming back into the system & lower borrowing requirements by Banks in April) & with expectations of rate cuts building up in April policy, maximum impact would have been on money market securities like CDs/CPs of duration less than 1 year. Following table amply justifies my call & also shows better liquidity position than the one seen in during the month of March:

 As can be seen from above, liquidity position has improved & maximum compression has happened in 3 mth CDs & 1 yr CDs & CPs. This got translated into very healthy returns in my recommended schemes which were high on accrual & low on duration & following certain strategies . I had recommended some schemes like : a) Religare Credit Opportunities Fund  ( 1 mth view) b) Templeton India Low Duration Fund ( 3 mth view) , c) Pramerica Short Term Plan ( 6 mth view), d) J P Morgan Short Term Income Scheme ( 6 mth view) , e) Templeton India Short Term Income Scheme ( 9 mth view), f) Pramerica Credit Opportunities Scheme ( 12 mth view), g) Reliance Regular Savings Scheme h) Templeton Inida Income Opportunities Scheme ( 18 mth view) & i) Templeton Inida Corporate Bond Opportunities Scheme ( 30 mth view).

All these schemes have generated between 12-18% p.a. returns over last one month. I continue to recommend the same schemes with same investment horizons as mentioned against each scheme over schemes taking either aggressive duration call or being dynamic in nature ( where the Fund Manager will take both interest rate & duration calls).

RBI still is cautious on inflation front & also stated that future rate cuts possibilities are limited in current scenario. Heavy borrowing calendar will also not let RBI take aggressive intervention calls.

Though returns expectations going forward for the same schemes should be scaled down as the captured YTMs post March would be lower than the ones captured during the month of March; all these schemes are capable of generating higher single digit or lower double digit figure returns & even higher based how fast liquidity eases off & RBI action on rate fronts.

DISCLAIMER

However, notwithstanding today’s rate cut, RBI still is cautious on various fronts which was evident from RBI Guv’s speech post the announcement of Policy Review:

• Though inflation has declined to below 7% , upside risks to inflation continues
• It is imperative to increase petroleum prices to achieve fiscal consolidation
• Suppressed inflation numbers due to coal & electricity
• Several upside risks to Budgeted Fiscal Deficit numbers
• Very limited scope for further reduction in rate cuts
• Crude oil prices to impact growth prospects for FY 2013
• Pass thru of crude prices not complete

However, RBI did mention that systemic liquidity in the system is within the comfort zone & will step in to infuse more liquidity as & when it goes out of the comfort zone.

I had given disinvestment call out of my strategy of Systematic Investment in G Secs from July 2011 to December 2011 on December 12’2011 (when industry players had started giving investment call) wherein I had mentioned that there would be upward pressure on benchmark yields post Budget & auction calendar announcement (refer to my blog note dated December 12’2011 – Profit Booking from G Secs: http://www.msjcapital.com/2011/12/12/profit-booking-in-g-secs/)

Also, when AXIS CONSTANT MATURITY SCHEME was launched in January 2012 (my blog note dated January 17’2012: http://www.msjcapital.com/2012/01/17/axis-constant-maturity-fund/), I had once again mentioned (post my profit booking call) to start reinvesting in G Secs post Budget announcements with clear indication that yields will come under pressure due to haywire Fiscal numbers that were going to be announced in the Budget.

As can be seen in hindsight, both my calls for profit booking from G Secs between December 2011 & January 2012 (between 8.47% to 8.20% levels) & start reinvesting post Budget (between 8.50% to 8.70%) has panned out very well as a trading call.

Hence, based on today’s RBI move of cutting REPO rate by 50 bps, RBI’s statement mentioning that there is limited scope for further rate cuts & with huge borrowing calendar on week on week basis (with current 10 year benchmark at 8.34-8.37% levels), I would once again recommend investors to book profit out of G Secs schemes & wait for an opportunity to reinvest on auction dates when we expect benchmark yields to start inching up higher & maybe breaching 8.50% levels soon.

DISCLAIMER

Time & again investors have struggled to manage a healthy monthly cash flow from their investments due to rising interest rate scenario/falling interest scenario or volatile equity markets giving rise to irregular returns pattern in various asset classes.

In rising interest scenario, debt schemes start underperforming due to creation of capital loss, in falling interest rate scenario your accrual returns start dwindling. In falling equity markets MIPs start underperforming (like current phase) where some monthly dividends get skipped due to underperformance. All these scenarios create uncertainty in investors’ cash flows. Investment in Fixed Deposits with banks (though gives regular cash flows); your principal sum starts declining in value over a period of time due to inflationary pressures.

Most of us would like to reach a stage where we wish to invest in a strategy/asset class/scheme which can besides giving regular cash flows; should give an opportunity of appreciation of your principal sum.

I had given one such strategy of Systematic Withdrawal Plan from MIP (read my blog note dated: February 02’2010 on www.msjcapital.com) . Said strategy over longer periods of time is capable of giving regular cash flow & some capital appreciation. However, since the said scheme is debt oriented, there are chances of dipping into principal (MORE OFTEN THAN NOT) if either interest rate goes up and/or if equity markets start underperforming.

However, there is one scheme FT INDIA DYNAMIC PE RATIO FUND OF FUNDS, which has a strategy of rebalancing every month between debt & equity based on market PE ratio. This scheme works on the principal of booking profits when markets are up & vice versa & re allocating the same between debt & equity (for details on the said scheme please read my blog note dated: October 12’2011 titled PARTICIPATE IN EQUITY WITHOUT LOSING SLEEP). Over longer periods of time, said scheme is capable of delivering equity equivalent returns. Hence, SWP from the said scheme (even assuming SWP @10%) can a) generate very healthy regular & consistent cash flows & b) over longer period of time create wealth due to generation of equity linked returns. This way an investor does not lose out due to inflation impact on their original investments (unlike FDs).

Following scenarios depict cash flow thru SWP @10% over various difficult investment horizons with 1-3-5 year data as well as since inception data. As you will notice, even during difficult equity market periods, over 3 year horizons, the said strategy has generated +ve cash flows (withdrawals + current value – original investment) with little dips on their principal amounts (which gets recouped, if held for longer period of 5-10 years):

I would like to believe that strategy which sells high & buys low and does reallocation between two of the most important asset classes viz. Debt & Equity can be used as a parking vehicle to a) earn equity equivalent returns over longer period & b) & to generate regular cash flows thru strategy of SWP.

I would strongly advise those investors who wish to combine the above two strategies can invest in the said scheme & get into SWP (assuming a reasonable return over initial period of investment & gradually increasing SWP as & when required over latter part of your investment). This strategy in all probability will take care of both the objects of higher return with regular & consistent cash flows over longer periods of time without dipping into your principal sum.

Both major events viz. RBI Policy Review and Budget are behind us. Though both the events have not cleared decks for an immediate rate cuts, all the action/inaction of both the events were expected & have already been discounted. As expected RBI did not cut rates & waited for Budget to announce Fiscal Deficit number & then take a cue from there. Budget announced Fiscal Deficit number at 5.1% of GDP (a more realistic & less ambitious number- though on the higher side).

Major concerns of RBI (which were reinforced by Budget announcements) & which will have an impact on monetary policy easing were as follows:

• Fiscal deficit number & slippages in achieving the same a question mark
• Inflation risks linger & are more pronounced post excise rate hikes
•  Rising Global commodity prices & crude oil prices to be major dampeners
• Current inflation figures more suppressed as food, fuel & fertilizer subsidies not totally passed on
• March inflation numbers might be worse than February number due to rise in cement, freight, crude, etc.
• Possibility of fuel price hikes- again increasing inflationary pressures over short term
• Projected subsidy numbers more realistic for FY 2012-13; can surprise on the negative side; especially fuel subsidy numbers (if price hikes not implemented due to current political compulsions)
• Whether revenue raising numbers are realistic: Rs.30,000 Crs for Disinvestment & Rs.40,000 Crs for spectrum auctions. Any slippages in these numbers can increase the Fiscal Deficit numbers

Al in all a more hawkish policy review than expected. This was reflected in the benchmark yield which went up from pre policy levels of 8.26% to 8.35% post Policy on March 15 to 8.42% post Budget announcements.

GOING FORWARD:

• No fresh supplies expected in last two weeks of March 2012
• Borrowing calendar will be announced before end of this FY; which on expected lines will be front loaded
• Expect Rs.15,000 Crs plus weekly auction calendar in first few months starting April 2012
• Current negative liquidity of Rs.1.5 Lac Cr plus
• This liquidity to come below Rs.1 Lac Cr in April due to liquidity coming back into the system by April 2012 due to extra Government spending in last few weeks of March & advance tax outflows
• Hopefully, RBI will support heavy borrowing programme thru announcement of OMO Calendar (which should ease benchmark yields going forward)
• RBI can support growth by either rate cuts or infusing liquidity or a combination of both. So far RBI is trying to support growth thru liquidity infusion (Rs.80,000 Crs thru CRR cut in two tranches, Rs.1,10,000 Crs thru conducting OMOs & Rs.1.2-1.50,000 Lac Crs thru injecting liquidity under LAF under Reverse REPO window)

IMPACT ON VARIOUS ASSET CLASSES:

• CONSERVATIVE SHORT TERM PLANS WITH LOWER AVERAGE MATURITIES & PRE DOMINANTLY CD PORTFOLIOS:

Some of the short term plans like J P Morgan India Short Term Income Scheme & Templeton India Low Duration Scheme with average maturities of less than 90 days & higher captured YTMs ranging from 11-11.50% & having higher exposure of CDs would do well in the current scenario as the same will deliver higher risk adjusted returns over shorter duration between 90-180 days. CD compression story generally unfolds in April & May & combine that with such high YTMs, the said schemes are capable of generating much better returns than liquid plus as an asset class & will be much better placed on risk parameters v/s aggressive short term plans with longer duration in the current uncertain debt market scenario

Hence, as mentioned above, though a little hawkish RBI Policy Review & higher borrowing programme indicated in the Budget announcements, our recommendations of investing in short term plans with certain themes as mentioned above, conservative short term plans & trading call in G Secs continue to hold good even post the Policy review & Budget announcements.

DISCLAIMER