US Markets - Downbeat economic data thrashes US Market

Downbeat economic data thrashes US Market

In spite of opening modestly higher in the morning, US Market ended the day with considerable losses today, Thursday, 21 February, 2008. The day started on an optimistic note with the help of technology stocks but market swiftly made a reverse course after poor economic data re-ignited the fears of economic slowdown in the US. Each of the major economic sectors ended trading in the red with the energy sector posting the largest decline.

The Dow Jones industrial Average ended the day with a loss of 143 points at 12,284. The Nasdaq Composite Index, finished lower by 27 points at 2,299. S&P 500 finished lower by 17.5 points at 1,342.

Twenty-eight of thirty Dow stocks ended in the red today. GM was the main Dow laggard today. Microsoft and Intel were the only two Dow winners today.

The day started off on a positive note after Cisco was upgraded by Citigroup to buy from hold. This gave the overall technology sector a good boost. Dow was up by more than 70 points at one time. Research In Motion was also a standout, after reaffirming its fourth quarter earnings and revenue guidance, and raising its net subscription guidance.

But the downward spiral came when the Federal Reserve Bank of Philadelphia reported manufacturing in the region weakened further in February. The February Philadelphia Fed, a regional manufacturing survey, came in at -24. Economists expected a reading of -10. Since the reading is below 0, it reflects a retraction in manufacturing in the region. After this report, indices lingered in the red for the rest of the day.

Separately, January leading indicators fell 0.1%, in-line with expectations.

Among other economic reports, new unemployment claims for the week ended 16 February fell to 349,000 from the prior reading of 358,000. This was nearly in-line with expectations, so the market did not have much of a response.

Crude prices fell from their record highs today. Prices fell after an Energy Department report showed that U.S. inventories rose almost twice as much as forecast, as refineries slowed processing to perform seasonal maintenance. Crude-oil futures for light sweet crude for April delivery today closed at $98.23/barrel (lower by $1.47/barrel or 1.45%) on the New York Mercantile Exchange. Earlier in the session, the April contract it a low of $96.27 a barrel.

EIA reported today that crude inventories rose 4.2 million barrels in the week ended 15 February outstripping the increase of 3.2 million barrels that market expected. On the demand side, EIA reported motor gasoline demand has averaged 9.0 million barrels per day, or 0.5% above the same period last year. Distillate fuel demand has averaged 4.3 million barrels per day over the last four weeks, down 1.9% compared to the same period last year.

Volume on the New York Stock Exchange neared 1.4 billion with more than three stocks declining on the exchange for every one that rose. On the Nasdaq, volume topped 1 billion, and decliners ran ahead of advancing stocks more than 2 to 1.

Tomorrow there are no major economic reports on the dock. A couple of earning reports are expected.

Source- HDFC

Read More

Reliance Power to give 3 bonus shares for every 5 shares held

Reliance Power to give 3 bonus shares for every 5 held

Anil Ambani-promoted Reliance Power on Sunday said it will give three bonus shares for every five shares held by its shareholders.

The board of directors at its meeting today considered and approved a bonus issue excluding promoters, as per which three shares would be allotted for every five held.

This issue would benefit over four million investors in the company and the cost would be borne by the promoter group by way of diluting its stake.

Post bonus issue, the cost of acquisition of Reliance Power shares would come down to Rs 269 for retail shareholders and Rs 281 for institutional investors.

Saying that retail investors are the bedrock and foundation of Reliance Power, its Chairman Anil Ambani said: "In these two weeks, the number of retail shareholders have actually increased. In these 10 trading days, retail investors have acquired 2.5 crore shares."

The approval of bonus issue is an unprecedented step in the history of capital market in India and abroad, he added.

Shares of Reliance Power closed down by 1.21 per cent on Friday at Rs 416.85 on the Bombay Stock Exchange.

 

Rel Power bonus issue cuts shareholders' losses by 40%

Anil Ambani-promoted Reliance Power shareholders, who were battered on the listing day of the scrip, effectively reduced their losses by as much as 40% over the IPO price after the company announced the bonus issue on Sunday.

The board of directors at its meeting considered and approved a bonus issue, excluding promoters, wherein three shares would be allotted for every five held by the non-promoter shareholders.

"This move would effectively reduce the cost of Reliance Power shares from the IPO price," Reliance Power Chairman Anil Ambani said. Retail investors were allotted the shares at Rs 430 while institutional investors got it at Rs 450.

 Pursuant to this bonus issue, retail shareholders would receive the shares at Rs 269 each while for institutional shareholders, it would be Rs 281 per share.

"Compared to the IPO price, for the retail investors it represents a reduction of 40 per cent and for institutional 37 per cent," Ambani added.

The bonus issue follows the dismal opening of Reliance Power at the stock exchanges. The scrip, after listing at Rs 547.8, slid within a minute and closed at Rs 372.5, a level much below the issue price.

Reliance Power scrip closed at Rs 416.85, down 1.21 per cent on Friday at the BSE.

On February 20, the company said it had asked its shareholders to make balance payment by February 26 on shares allotted to them in the IPO to be eligible for bonus shares.

Reliance Power's IPO had offered a discount to retail investors, and an option of staggered payment to all segments.

The record date for the bonus shares would be fixed in consultation with stock exchanges and in compliance with provisions of the listing agreement, the firm added.

 

Read More

Mutual Funds - Gold exchange-traded funds

Gold exchange-traded funds

Buy Online            Buy Offline

What are exchange-traded funds?

Exchange-traded funds (ETFs) are mutual fund schemes that are listed and traded on exchanges like stocks. ETFs trading value is based on the net asset value (NAV) of the assets it represents. Generally, ETFs invest in a basket of stocks and try to replicate a stock market index such as the S&P CNX Nifty or BSE Sensex, a market sector such as energy or technology, or a commodity such as gold or petroleum.  

Recently, the Securities and Exchange Board of India (Sebi) amended its regulations and allowed mutual funds launch gold exchange-traded funds (GETFs) in India. Two mutual funds, UTI mutual fund and Benchmark Mutual Fund, are set to launch GETEs in a few days. These funds would be listed on the National Stock Exchange (NSE).  

What are gold exchange-traded funds?

A gold-exchange traded fund unit is like a mutual fund unit backed by gold as the underlying asset and would be held mostly in demat form. An investor would get a securities certificate issued by the mutual fund running the Gold-ETF defining the ownership of a particular amount of gold. GETFs are designed to offer investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell through trading of a security on a stock exchange.  

With gold being one of the important asset classes, GETFs will provide a better, simpler and affordable method of investing as compared to other investment methods like bullion, gold coins, gold futures, or jewellery.  

Advantages of GETFs

·          No risk of holding physical stock: As GETFs are issued in demat form, the risk associated with holding physical gold is reduced considerably.

·          Affordable: GETFs are ideal for small retain investors as they can buy a just one unit from the exchange. The minimum amount of investment during the NFO period for Cash is Rs 10,000 and in multiples of Rs 1,000 thereafter. One unit of the fund will represent one gram of gold.

·          High Liquidity: GETFs can be easily bought / sold like any other stock on the exchange during market hours at real-time prices as opposed to end of day prices.

·          Lower cost:  GETFs enjoy the benefits of lower cost and higher transparency. As they are listed on the exchange, costs of distribution are much lower. Further, exchange traded mechanism helps reduce minimal collection, disbursement and other processing charges. Gold futures include the cost of carry that will be absent on a GETF.

·          Low tracking error: Tracking Error of GETFs is likely to be low as compared to a normal fund. Due to the creation / redemption of units only through in-kind mechanism the fund can keep lesser funds in cash. Also, time lag between buying / selling units and the underlying physical gold is much lower.  

Conclusion  

India is the world's biggest consumer of gold, consuming 700-800 tonnes annually, the majority of which is used for jewellery. Gold ETFs are expected to be popular as investment-led buying for gold has pushed aside some of the demand for gold jewellery. Buying jewellery as an investment in gold can be expensive as charges in the form of making, storage and other services tend to increase the cost, while gold-ETFs can be an effective invest tool to help one build significant wealth over time.

 

Read More

Mutual Funds - Fixed Maturity Plans (FMPs) - Safe, predictable and better post-tax returns than bank FDs

Fixed Maturity Plans (FMPs)

Safe, predictable and better post-tax returns than bank FDs  

Rising interest rates not only mean rising EMIs but also offer an opportunity to earn higher returns. Debt schemes are now offering attractive returns with short-term rates in the region of 8-10%. Call money rates have been moving higher to about 7.5-8% due to tight liquidity conditions. With the RBI deciding to raise the cash reserve ratio (CRR), liquidity conditions have worsened. Tightness in the money markets is expected to continue till the end of the current financial year and investors can consider investing in short term options like FMPs or floating rate schemes.  

What are FMPs?

Fixed maturity plans, or FMPs as they are popularly called, are close-ended funds with a fixed tenure and invest in a portfolio of debt products whose maturity coincides with the maturity of the product. The primary objective of a FMP is to generate income while protecting the capital by investing in a portfolio of debt and money market securities. The tenure can be of different maturities, ranging from one month to five years.

FMPs can be compared to fixed deposits of a bank. While a fixed deposit offers a 'guaranteed' return, returns in FMPs are only 'indicative'. Typically, the fund house fixes a 'target amount' for a scheme, which it ties up informally with borrowers before the scheme opens. That way it knows the interest rate it will earn on its investments, providing the 'indicative return' to investors.

Benefits of FMPs

FMPs offer many benefits like tax efficiency, fixed tenure and low sensitivity to interest rates. The minimum investment amount is usually Rs 5,000, which a retail investor can easily invest.

Capital protection: FMPs have less risk of capital loss than equity funds due to their investment in debt and money market instruments.

Low interest rate sensitivity: As the securities are held till maturity, FMPs are not affected by interest rate volatility. The actual returns are more or less close to the indicative returns declared at the scheme's launch

Lower cost: FMPs involve minimum expenditure on fund management, as there is no requirement for a time-to-time review by fund managers to buy/sell the instruments constituting the fund. Since these instruments are held till maturity, there is a cost saving in respect of buying and selling of instruments

Tax benefits: FMPs score over fixed deposits because of their tax efficiencies both in the short-term as well in the long-term.

Short-term tax advantage – Dividend option  
Mutual fund dividends are tax-free in the hands of the investor (subject to a dividend distribution tax @14.03% for retail investors and 22.44% for corporate investments), whereas the interest on a bank deposit (except where special 80C approved) is added to the income of the investor and taxed as per his/her slab.

The table below provides an illustration of the tax advantage offered by an FMP – Dividend plan. The illustration is based on a 90-day plan and assumes a 90-day FD yielding 8%, compared with an FMP yielding 8% for an individual investor in the highest tax bracket.

	Bank FD	FMP – dividend option	FMP – growth option
Net yield before tax	8.00%	8.00%	8.00%
Tax	33.66%	-	33.66%
DDT	-	14.03%
Net yield	5.30%	6.87%	5.30%

Source: ICICIdirect Research  
Based on 90-day plan, assuming that the entire gain is distributed. The above example is purely illustrative and yield given above is indicative only.

Long-term tax advantage – Growth option  
Long-term capital gains (investment of more than a year) enjoy indexation benefit. So if the investment is for more than a year, in the growth option one has to pay long-term capital gains tax of 20% with indexation, or 10% without indexation on debt products.

Further, with the help of FMPs investors can get 'double indexation' benefit, which is not available in case of fixed deposits and bonds. This advantage can be availed by investing in an FMP just prior to the end of a financial year and withdrawing it after the end of the next financial year. An investor can invest in an FMP before March 31 and withdraw it after April 1 the next year.

Thus, the amount remains invested for a period slightly greater than a year. This ensures the applicability of indexation benefits for inflationary changes in two years, which can help investors, reduce the tax.

Double indexation, in some cases, can even lead to a net loss figure, even though there is a profit, and thus expunges the tax obligation of the investors.

The taxable amount is calculated using the following formula:

Taxable Gains = Amount Returned – (Amount Invested x Inflation Index for Redemption Year/ Inflation Index for Investment Year)

The following example explains this concept:

We take an example of a 400-day FMP, which, if launched on March 1, 2007, will mature on April 4, 2008. It will pass through two financial years and thus has the benefit of double-cost indexation for the purpose of calculating post-tax yield.

Note: Cost inflation index (CII) for FY06-07 is 519. The assumption is that the CII for FY07-08 is 545 and for FY08-09 is 572, at an inflation of 5% annually. Tax rate includes a surcharge of 10% and cess of 2%. The workings are indicative only and are based on current taxation laws.  

	Bank FD	FMP – Growth Option		FMP – Dividend Option
		With Indexation	Without Indexation
Amount of Investment (Rs.)	10,000	10,000	10,000	10,000
Post Expenses Indicative Yield (annualised)	9.50%	9.50%	9.50%	9.50%
Tenor (in days)	400	400	400	400
Maturity Amount (Rs)	11,041	11,041	11,041	10,000
Dividend (Rs)				1,041
Gain (Rs)	1,041	1,041	1,041	1,041
Indexed Cost (Rs)	NA	11,021	NIL	NIL
Indexed Long Term Capital Gain (Rs)	NA	19.9	NA	NA
Tax Rate	33.66%	22.44%	11.22%	14.03%
Tax (Rs)	350.43	4.47	116.81	146.05
Post Tax Gain (Rs)	690.66	1036.63	924.28	894.95
Post Tax Annualised Return	6.30%	9.46%	8.43%	8.17%

Source: ICICIdirect Research
Based on 400-day plan, assuming that the entire gain is distributed. The above example is purely illustrative and yield given above is indicative only.

Conclusion
If the investment horizon is less than a year, the dividend option appears more tax-efficient, where as for investments of over a year one may opt for the growth plan, which provides the benefits of indexation.

Read More

Mutual Funds - Monthly Income Plans- Overview

Monthly Income Plans

Monthly income plans, or MIPs, as they are more popularly known, are a category of mutual funds that invest mainly in debt instruments. Only about 10-20% of the assets are allocated to equity stocks. But the very name – monthly income plan – is a misnomer, as these funds do not guarantee a monthly income. Like any other fund, the returns are market-driven. Though many fund houses strive to declare a monthly dividend, they have no such obligation.  

MIPs are launched with the objective of giving a monthly income to investors, but the periodicity depends upon the option chosen by the investor. These are generally monthly, quarterly, half-yearly and annual options. A growth option is also available, where the investors do not receive regular dividends, but gains in the form of capital appreciation.  

Suitability

MIPs are suitable for conservative investors who want to earn marginally better returns than a debt-only portfolio. Conservative investors generally remain invested in fixed income instruments, but sometimes they need returns that are above the inflation by a few points. Obviously, equity exposure is the best way to provide this meaningful return over the inflation. A MIP typically invests bulk of its assets in debt, while a small equity exposure is maintained to earn something extra.  

The Way Ahead

The market is close to its all-time high of May 2006 after which it witnessed a sharp correction.  It is likely to remain volatile and could also witness some profit-booking. Investors need to re-look and re-balance their investment portfolios. At these times, investors should reconcile with the fact that days for making easy money without compromising stability are over. MIPs can be a good option considering their exposure to debt instruments. These will help investors to maintain a low-risk portfolio and generate regular and stable returns. Stability, rather than flashy returns should be the priority for a typical MIP investor. And the MIPs, which have  shun aggression, cut equity exposure and stick to quality large-caps, are likely to achieve that objective.  

The performance of some MIPs with their exposure to equity in presented in the table below. The schemes cannot be compared only on the basis of their returns as each have a different level of equity in their portfolio. Investors need to choose a scheme with a level of equity they are comfortable with and balances their individual portfolios.  

Scheme	NAV	Fund Size	Equity exposure		Returns % (Absolute)
	( 04-Oct-06 )	(Rs Cr.)	(% of Net Assets)	No. of Scrips	1 Mts	3 Mts	6 Mts	1 Year
Birla MIP II - Savings 5 Plan	11.33	0.72	3.50	6	0.99	2.52	3.47	5.81
FT India Monthly Income Plan	19.97	64.7	19.59	28	1.14	5.09	3.09	7.74
HDFC Monthly Income Plan - STP	12.58	38.54	13.97	19	0.21	2.75	0.59	4.93
HSBC MIP - Regular	11.92	5.61	13.61	15	0.52	3.12	3.42	7.07
ING Vysya MIP Fund - Plan B	11.73	0.62	12.98	25	1.19	3.92	0.44	6.22
Kotak Income Plus	12.71	11.75	11.92	29	0.59	1.77	1	7.64
Prudential ICICI MIP Plan	18.3	55.08	14.35	28	0.97	3.58	2.99	10.29
Reliance Monthly Income Plan	13.31	39.25	18.82	8	0.93	5.43	4.45	12.31
SBI Magnum Monthly Income Plan	16.37	14.18	11.46	21	0.47	2.87	2.93	7.51
Sundaram BNP Paribas Monthly Income Plan	12.42	5.23	14.28	19	0.42	2.51	0.49	6.99

Source: ICICIdirect Research

Read More