Sovereign Bond Announcement in Budget 2019 a Boon or Bane?

These bonds are fixed debt instruments issued by the government — either in domestic or foreign currencies — and it’s as good as raising a loan in the international market. 

One of the most debated topics of the 2019 Union Budget presented by Finance Minister Nirmala Sitharaman was India’s proposal to issue Sovereign Bonds in the global market in external currencies. 

As these bonds are fixed debt instruments issued by the government — either in domestic or foreign currencies — which is like raising a loan in the international market. Sovereign Bonds have an interest outlay in the form of coupon payments where the principle amount is paid at maturity. 

Although the step would integrate the Indian economy in global markets, it is debated that there is high risk involved. The coupon interest is decided by three factors, India’s credit profile’– which at present is Baa2 stable as per Moody’s — the country’s internal and external risk factors like sudden shooting up of fiscal deficit, and volatility of exchange rates between rupees and the foreign currency.

Sovereign Bond Announcement in Budget 2019 a Boon or Bane?
Credit : freepik.com


National wealth or national debt

The world’s overall debt is estimated at $63 trillion as of 2017. This is because; more countries are borrowing to raise funds by issuing similar bonds. 

In 1921, one of America’s greatest inventors, Thomas Edison, had written in a New York Times article, “Any time we wish to add to the national wealth, we are compelled to add to the national debt.”

Sovereign Bond Announcement in Budget 2019 a Boon or Bane?

Coming back to India’s move, the rational for the decision presented in the budget speech is India’s lowest sovereign external debt-to-GDP ratio. 

“India’s sovereign external debt to GDP is 5 percent. The Government would start raising a part of its gross borrowing programme in external markets in external currencies. This will also have beneficial impact on demand situation for the government securities in domestic market.”

Risk

Investors who subscribe to these bonds include large banks, and several countries have been part of this “original sin”. Meaning, a country cannot raise funds in its own currency in a foreign market, but has to borrow in dollars or Euros. Hence, smaller developing countries lack the capacity to issue these bonds on their own and seek aid from institutions like the World Bank which would have its own set of rules for borrowing. Moreover, as the US dollar is the resolve currency, it affects the market with greater implications.

What Experts Say

Other points of disagreement include uncertainty of sovereign rating, rupee depreciation, expansion of current account deficit etc. On the other hand, India could wait a little longer to issue domestic bonds instead of borrowing via sovereign bonds.

C Rangarajan, Former RBI governor raised concerns on the rationality of sovereign debt in foreign currency. He said that by-and-large, it is not a welcome move and must be based on a country’s ability to repay the borrowed amount. He added that borrowing in foreign currencies may expose the economy to risks as the rupee’s depreciation or current account deficit cannot be contained in the long run. 

On the other hand, this method will not be able to help the country meet its obligations by simply printing more domestic currency.

ProsCons
Rate of interest is low outsideRupee depreciation pose additional risk
Foreign market will discipline the governmentMajor economies were unable to meet its obligations in the past
India will be included in the global bond market attracting more funds and easing domestic markets for private playersSovereign Rating is uncertain in the long term
FRBM in place : macro atmosphere healthy for foreign scrutinyWhy go overseas when we can raise via rupee denominate bonds
Debt to GDP ratio is low : long term foreign borrowing will benefit when attached to investmentsStill current ac deficit country ; high future vulnerability if it shoots up; roll over becomes difficult
Dollar will be small part of total borrowingTemptation of cheap money attached to revenue

Rising fiscal costs

According to a recently article, “The bureaucrats pushing the idea right now to make up for tax revenue shortfalls would have retired by then, leaving it to the rest of the economy, especially future generations of taxpayers, to cope with the rising fiscal costs.” The intention of a long term borrowing is associated with growth led by investment and not short term needs. Therefore, a long time horizon cannot ensure or hedge against exchange rate risks, which increase the burden in repayment at the time of maturity.

It could further reduce the efficiency of various monetary policies. Moreover, low inflation rate will have to be maintained consistently as per experts.

The impact of Foreign Exchange

Borrowing in international markets can reduce interest rates, but any change in foreign exchange (forex) can turn expensive. Countries like Mexico, Indonesia, Brazil and Russia have experienced massive pressure from international investors to repay debt. In one instance, Elliott Capital went on to seize Argentina’s naval vessel to recover its dues.

Bank of America Merrill Lynch’s Jayesh Mehta said, “Sovereign bond issuances (overseas) need to be done in a planned manner… The government should do it consistently for the next five years because then it will help create secondary market liquidity around the world.” Supporters who second the proposal are of the view that foreign markets will discipline the government with integration in the global bonds market when Fiscal Responsibility and Budget Management (FRBM) rules are in place. With an advantage of lower interest rates abroad, the domestic market can be left for the private issuers.

Assistant professor at IIM Ranchi, Amarendu Nandy said, “In such a scenario, India’s benchmark yield at around 7 percent and a relatively stable currency should help attract a sizeable amount of inflow into the domestic debt market from a diverse set of investors, and aid Indian sovereign bonds to get into global bond indices. The sovereign foreign currency borrowing rate could serve as a useful benchmark for external commercial borrowings as well.”

Low Risk Debt

There are some who consider that sovereign bonds have evolved over the years. Bank for International Settlements mentioned in a research paper that the risk gaps of these bonds have narrowed. “We document that sovereign risk tends to be less when bonds are issued in local rather than foreign currency, but that the gap has narrowed considerably over time. We find that the gap narrows when foreign exchange reserves are higher, foreign borrowing is lower, banks hold more government debt, and global volatility is less. At the same time, we find no support for the view that debt in local currency is safer because of sovereigns’ willingness to inflate away their local debt.” Nonetheless, Ananth Narayan, Associate Professor of Finance at SP Jain Institute of Management and Research said, “India is among the few major countries globally to have never issued a sovereign bond. These sovereign issuances should be useful. They draw in foreign savings at a good rate for the country. They free up domestic savings to be channeled into productive private investments. They establish a benchmark that helps price discovery for other corporate tapping overseas credit markets.”

On the other hand, Chief Economic Adviser Krishnamurthy Subramanian believes it’s a “once in a generation opportunity” to issue sovereign bonds to help boost national wealth.

While the move is expected to ease the burden on Indian institutions, there are economies that have seen a bitter past in the global bond market.  It remains to be seen whether history will be created or repeated in future.

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Also read: India becomes investment darling for sovereign wealth and pension funds

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7 reasons why you should Invest in Mutual Funds

02 July, 2019

Still on the fence on whether Mutual Funds are the best choice for you? Here are 7 reasons that may help you decide. 

Earn. Save. Spend. This is the cycle of money that we live by every month, if not every day, of our lives. By now, we’re sure you know the importance of saving. Perhaps, you’ve even realized the significance of investing. If not, here’s a quick primer – when you save, your money sits idle. When you invest, your money multiplies. 

Your investment choice can, obviously, significantly impact the rate at which your money compounds. While there are enough opinions on what you should be doing with your money, here are 7 reasons why mutual funds should definitely be a part of your wealth building portfolio.

7 reasons why you should Invest in Mutual Funds
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1. Higher returns:

Isn’t this what all of us seek from our investments? Mutual funds provide the right avenue for investing in a variety of market-linked instruments, which have time and again delivered superior returns compared to other traditional investment options. Debt funds have consistently beaten Fixed Deposit (FD) returns, and with bank interest rates going south, they present a good investment choice for investors with lower risk appetites. For the more adventurous investors, equities (shares) present a great investment avenue, for higher, inflation-beating returns. And investing in equities through mutual funds is an excellent way to enjoy the higher returns, but with much lesser risk, thanks to rupee-cost averaging, portfolio diversification and many other factors. Data reveals that equity funds have delivered around 11-15% returns over the last 10 years. With inflation averaging at 4-6%, you could get a head start on your savings, by identifying and investing in the right mutual funds today.

2. Professionally managed:

Mutual funds are professionally managed by fund managers, whose every day job is to track the markets and manage investments. Fund managers identify the winning stocks to buy, when to buy them, and more importantly, when to sell them. They spend hours analyzing the performance of companies, and if they fit the fund they manage. What’s more, all mutual funds are governed by SEBI, the industry body, and are highly secure and transparent. So, while earning is your job, investing it wisely and delivering high returns is the fund manager’s job.

3. Disciplined investing:

Habits are hard to break. Which is why we are advised to inculcate good habits? And what better habit could there be, than investing for your secure future? When you start a Systematic Investment Plan (SIP) in a mutual fund, you are committing to invest a certain amount on the same day of the month, consistently for a certain number of months/ years. Such a commitment instills in you the discipline to take a productive action towards your future. It becomes a fixed component of your monthly spend, around which all other expenses have to be factored. Your disposable income will be that which is left, after your mandatory expenses and investments are done.

4. Less/ No lock-in:

Almost all your traditional investing instruments come with long lock-in periods, which make it hard for you to get your money out, in times of emergencies. Mutual funds, on the other hand, broadly come with less, if not no, lock-in periods. Most funds do not have a lock-in period and give you the flexibility to redeem your money when you need it. Even tax-saving Equity Linked Savings Schemes (ELSS) come with a short lock-in of only 3 years. So you are saved the hassle of fixed, long lock-in periods, as seen in other investment options. Having said that, experts recommend that a fund should not be redeemed until the goal for which it was started is fulfilled, as the longer you stay invested, better are your chances for higher returns. 

5. Fund as per your profile and goal:

Within the world of mutual funds there is a wide variety of investment choices to pick from – equity funds, debt funds, liquid funds, tax-saving funds etc. So, depending upon your profile, goal and preference, there are various funds that are ideal for you. Unlike a PPF or an NSC, where the rules are already laid down for you, here you can choose what type of fund you want, how long you want to stay invested, how much you want to invest, and much more. Just like how a tailor-made outfit is often a better fit for you than a ready-made garment, a personalized mutual fund portfolio with the right advisor is the best fit for your goals.

6. Diversification:

We’ve all heard the adage “Don’t put all your eggs in one basket”. This is the premise of diversification. It means spreading your investments across asset classes and stocks, to reduce your risk. With mutual funds, you get the advantage of default diversification, as your fund manager invests across a variety of stocks. Sudden changes in one stock, are likely to be balanced out by the performance of other stocks in the fund. It is an ideal way to get a taste of the equity markets with lesser risk. Of course, it is important to not invest all your money in one mutual fund, and further lessen your risk by diversifying across different types of mutual funds. Consult your financial advisor on how to balance your portfolio by selecting the right mutual funds.

7. Convenience;

And finally, investing in mutual funds is now a piece of cake. The whole process is offered online by many players in the industry. Starting a SIP or making an investment can be done in a matter of few clicks. Even tracking the performance of your investments can be done easily online. You can set up a bank mandate for monthly investments and set your SIPs on auto-pilot mode, so that you are even saved the hassle of manually investing every month. The SIP amount is automatically debited every month from your account. In short, mutual funds today, provide the right ground for investing with the least effort, and with the potential for maximum returns.

Also read: About Systematic Investment Plan {SIP}

For Complete Information About Leading Mutual Fund Advisor Thane, Contact Nidhi Broking Services Pvt. Ltd. On 022 – 2530 3690 / 022 – 2530 1134 Or Email Us At – info@nidhibroking.com

Source: www.indiainfoline.com

India becomes investment darling for sovereign wealth and pension funds

26 June, 2019

Wealth and state pension funds are expanding their horizons to private markets, to complement an existing focus on stocks and bonds. 

Sovereign wealth funds are piling into India, buying stakes in everything from airports to renewable energy, attracted by political stability, a growing middle class and reforms making it more enticing for foreigners to invest. Wealth and state pension funds are expanding their horizons to private markets, to complement an existing focus on stocks and bonds. Almost every jurisdiction in the western world is raising the bar for entry for foreign investors but in India it’s the other way round. There’s also the attraction of the demographics and a lot of assets that sovereign funds like, such as infrastructure, where there’s a huge appetite for foreign funding. 

India becomes investment darling for sovereign wealth and pension funds

Credit : freepik.com

Indian Prime Minister Narendra Modi’s election win last month consolidated his Hindu nationalist party’s power base and is expected to stimulate further foreign investment. Foreign institutional investor flows into Indian equities are $11 billion year-to-date, surpassing the total annual tally in each of the four previous years and setting 2019 on course for the highest annual inflows since 2012. India’s benchmark BSE Sensex has soared nearly 10% year-to-date.  

THE NEW CHINA  

The attention sovereign funds are giving India is like that they have paid to China. Private equity deal activity in India surged to $19 billion in 2018, the highest level in at least a decade, according to PitchBook data. Sovereign wealth funds and pension funds participated in about two-thirds of that amount. Among recent deal, Singapore’s GIC sovereign wealth fund and the Abu Dhabi Investment Authority (ADIA) this month agreed to make a further investment of $495 million in renewable energy firm Greenko Energy Holdings, which has wind, solar and hydro projects. India is widening its use of solar and wind energy to help reduce its reliance on fossil fuels. 

In April, ADIA and India’s National Investment & Infrastructure Fund (NIIF) agreed to buy a 49% stake in the airport unit of Indian conglomerate GVK Power & Infrastructure. Another wealth fund is in talks on an infrastructure investment, while Canadian pension funds are seeking similar deals. Canada Pension Plan Investment Board and GIC earlier this year participated in a $145.8 million buyout of Oakridge International School, an operator of schools in India.

ADIA, the world’s third-biggest sovereign wealth fund, which has been investing in Indian equities and fixed income for years, has broadened its focus to include asset classes such as infrastructure, real estate and private equities. Its increased interest in India is driven by the country’s strong growth potential, positive demographics and continued economic development. More than half of India’s 1.3 billion population is aged under 25.The push comes as India and the United Arab Emirates seek to strengthen economic and trade ties.

REFORM PUSH

Regulatory reforms are also bolstering sentiment and drawing in wealth funds. Indian-based fund managers were from this year licensed to manage foreigners’ portfolio holdings in the country, where previously such assets had to be managed outside India.

Bankruptcy resolution rules introduced in 2016 helped pave the way for ADIA’s $500 million investment earlier this year in a distressed debt fund. The investment was seen as an effort to launch a secondary market in India’s mountain of distressed debt and help ease the burden on local banks.

Omprakash Shahi,
Managing Director, 
Nidhi Broking Services Pvt. Ltd.

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Systematic Withdrawal Plan (SWP) in Mutual Fund

25 June, 2019Mutual fund investors are opting for Systematic Withdrawal Plans to meet monthly cash flows and this is emerging as a preferred mode as compared to dividend.

Best Mutual Fund Advisors in Thane

                                                              Credit : freepik.com

1. What is a Systematic Withdrawal Plan (SWP)?

Systematic Withdrawal Plan (SWP) is a facility by which investors can withdraw a fixed amount from a mutual fund scheme. The frequency of withdrawal could be monthly or quarterly, though the monthly option is most popular. Investors can customise cash flows they can withdraw just a fixed amount or even opt to withdraw just the capital gains on his investments.

2. How can an investor start one?

A SWP can be started any time. It can be done while making the first investment. If you are an investor in a scheme. You can just activate the SWP option in the scheme, whenever you feel the need to simply fill out an instruction slip with the AMC stating the folio number, the withdrawal frequency, and date for the first withdrawal and the bank account to credit the proceeds.

3. Why is SWP finding favour with financial advisors now?

Dividend is subject to a dividend distribution tax, while capital gains up to Rs. 1 Lakh in a financial year, are tax free in the hands of an investor. In addition, dividend cannot be guaranteed by a mutual fund and is subject to market movement, distributable surplus and profits made by a scheme. As compared to this, SWP is more reliable than a dividend and is set up by the investor himself.

4. What are the tax implications in a SWP?

SWP is periodic withdrawal, which translates into redemption of units from the scheme. Hence, the tax treatment of each withdrawal will be the same as is applicable to equity and debt funds. Hence, for units where the period of holding has not crossed 120 months for equity-oriented funds, investors will have to pay a short term capital gains tax.

For debt funds, there will be a tax liability (short-term capital gains on holding for less than 36 months and long-term capital gains on longer holding periods). In addition, investors also need to factor in the exit load of the scheme. If it is from an equity fund which has a 1 % exit load before the end of one year, the investor will have to bear the same.

For Complete Information About Systematic Withdrawal Plan (SWP) in Mutual Fund,Contact Nidhi Broking Services Pvt. Ltd. – Best Mutual Fund Advisors in Thane, On 022 – 2530 3690 / 022 – 2530 1134 Or Email Us At – info@nidhibroking.com

About Systematic Investment Plan {SIP}

22 June, 2019

Lately, SIP mutual funds have become the talk of the town. Investors seem excited and are eagerly venturing into this option over the traditional bank fixed deposits. Especially those investors who want to enter stock markets but don’t have the required time are aggressively investing in SIP mutual funds. And why not; after all equity is asset classes which can help you generate wealth over the long term. SIPs are actually an ideal way to invest over a one-time investment. That too when it comes to mutual fund investing, you get multiple advantages from all corners. SIP mutual funds not only help to become rich but also create a win-win situation for the investor.

Let’s know how it is an ideal investment option.

Mutual Fund Consultant and Advisor Thane

Credit : freepik.com

1. Develop the habit of saving

One of the crucial advantages of SIP is that it helps to build the habit of saving and investing simultaneously. It inculcates a feeling of commitment in the investor because you have to keep aside a fixed amount each month for investment purposes. Additionally, as the amount to be set aside is very nominal i.e. as low as Rs 500 to Rs 1000, you don’t feel the burden on your shoulders. SIPs have helped to change the entire perspective towards saving and investing. You don’t postpone your decisions to a future date and are in a better position to start investing as soon as possible.

2. Achieve financial objectives

If you don’t have a plan, then it becomes quite difficult to achieve the things you want in life. A similar situation happens in case of life goals also. You may have thought of buying a house or going on an exotic vacation. But you don’t know how to realise your dreams. In this scenario, SIP mutual funds help in ways more than one. Whether it is a short-term or long-term goal, SIP can make things possible. Since the whole process of SIP is so much goal-oriented and disciplined that it keeps you on the right track. You are able to achieve your goals in the expected time. Moreover, in case of a majority of open-ended funds, you enjoy a lot of liquidity. This allows you to withdraw your investments during emergencies.

3. Lower cost of investment

It is fairly ok to have wealth creation expectations from your investment. Especially, in case of equity investments you got to have a robust strategy to make money. Yet another less complicated way of making money is to lower your overall costs involved in investment. SIP mutual funds enable this in a streamlined fashion through the process of rupee-cost averaging. In this, the fund manager keeps buying units of the said mutual fund scheme with your monthly SIPs irrespective of the state of stock markets. Hence, during slump more units are bought and during rally lesser units will be bought. In this way, your average per unit cost of investing reduces dramatically. Moreover, you are freed from the worries of timing the market.

4. Enjoy power of compounding

Compounding happens when you earn interest on the interest already generated. In this, both of your initial investment and interest earned on it are used to find out the interest for the next periods. When you invest in SIP mutual funds, you enable power of compounding to work on the invested money. Thus, you are able to earn higher returns as you move ahead in your investment journey. Compound interest makes your money grow faster because interest is calculated on the accumulated interest over time as well as on your original principal. Compounding can create a snowball effect, as the original investments plus the income earned from those investments grow together. 

Compounding works well when you stay invested for longer period of time. It is because of this reason that even smaller amounts like Rs 500 invested every month turns into a big corpus after some point of time. That’s why it is always beneficial to start investing as early as possible. Compounding interest is interest calculated on the initial principal, which also includes all of the accumulated interest of previous periods of a deposit or loan. Interest can be compounded on any given frequency schedule, from continuous to daily to annually. When calculating compound interest, the number of compounding periods makes a significant difference. Compound interest is calculated by multiplying the initial principal amount by one plus the annual interest rate raised to the number of compound periods minus one.

Albert Einstein states “Compound interest is the greatest wonder in the world. He who understands it earns it…he who doesn’t pays it.”

5. Advantage of diversification

You should keep all your eggs in the same basket. Same principle applies in investing also. Instead of putting all your money in one asset, you need to assign it in different asset classes. If it’s within same asset class like equity funds, you need to own at least 4-5 different equity funds in your portfolio. This mechanism is known as diversification. It involves spreading your investment amongst multiple securities to reduce the risk of fluctuations in returns. While investing in SIP mutual funds, you get the advantage of diversification. With a nominal amount of Rs 500, you are able to get a wider exposure across asset classes, sectors, industries and market capitalizations. In this way, your firm-related risks are reduced which enhances your chances of wealth creation.

Mutual Fund Consultant and Advisor Thane

For Complete Information About Systematic Investment Plan, Contact Nidhi Broking Services Pvt. Ltd. – Mutual Fund Consultant and Advisor Thane, On 022 – 2530 3690 / 022 – 2530 1134 Or Email Us At – info@nidhibroking.com

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NBS is on a mission to promote Equity investments culture among all sections of the society, across all demographics, age, income, gender.

In the past 20 years Indian Stock market has generated the highest post tax returns compared to other asset classes. (Gold, Real Estate, Government Bonds, PPF, etc)

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