Higher returns in the short term

As a result of the current global situation, peculiarities in the Indian domestic financial scenario, tightness in the liquidity, call rates (rates at which banks borrow between each other) closed substantially higher at 14.0-14.5 per cent, against the previous close of 11.5-12.5 per cent. The rates touched an intra-day high of 15-15.5 per cent signalling tight liquidity in the market.

As a result of the same, one should try and put short term money in liquid mutual funds as against fixed deposits as the returns are higher even after considering the taxes that one should pay. This squeeze in liquidity is expected to be prevalent for some time to come and hence my advice is to park your excess short term money in Liquid mutual funds and ride the wave of higher returns.

Can u predict panic/exuberant situations in Stock Markets ?

Last week was an unprecedented week in the Global stock markets where every market open very very weak and looks like there was gloom and doom after the news of Lehman Brothers filing for bankruptcy and Merill Lynch being taken over by the Bank of America. Added to this, there was a possibility of AIG going down under till the US federal government bailed it out by infusing $80 Billion for an 80% stake in the company.

However towards the end of the week many of the central banks infused large sums of money into the money market system to keep the systems up and running and preventing any kind of a global melt down.

While markets recovered, would it have been possible for to one to predict the amazing turnaround prior to the actual event of turnaround ?

My answer is 'Yes'. It is possible if one were observing the the Market Volatility Index (VIX). In the US is a measure of implied volatility in trading of S&P 500 futures on The Chicago Board Options Exchange. The index is calculated using a formula that considers a large number of option strike prices, supposedly in a way based on current financial research and practice. Values for VIX tend to be between 5 and 100.

The VIX is said to to measure market sentiment (or, more interestingly, to indicate the level of anxiety or complacency of the market). It does this by measuring how much people are willing to pay to buy options, typically 'put' options which are a bet that the market will decline. When everything is wonderful in the world, nobody wants to buy put insurance, so VIX has a low value. But when it looks like the sky is falling, everybody wants insurance in spades and VIX heads for the moon. Practically, even in the most idyllic of times, VIX may not get below 12 or 13. And even in the worst of panics, in 1998, VIX did not break much above 60.

Many view the VIX as a contrarian indicator. High VIX values such as 40 (reached when the stock market is way down) can represent irrational fear and can indicate that the market may be getting ready to turn back up. Low VIX values such as 14 (reached when the market is way up) can represent complacency or 'irrational exuberance' and can indicate the the market is at risk of topping out and due for a fair amount of profit taking. There's no guarantee on any of this and VIX is not necessarily by itself a leading indicator of market action, but is certainly an interesting indicator to help you get a sense of where the market is.

The current VIX number from Yahoo Finance
http://finance.yahoo.com/q?s=^VIX&d=1d


The reading of VIX reached almost 45 in 1998 as the LTCM (Long-term Capital Management) crisis exploded. It took a few months for the investor’s fears to abate and the VIX to return to below 20. The World Trade Centre bombing also made the VIX climb above 45, as the investors’ fear level reached the zenith. Similarly last week the value of VIX went as high as 42 thus signalling turnaround which happend in a couple of days.

India VIX
India VIX is a volatility index based on the Nifty 50 Index Option prices. From the best bid/ask prices of Nifty 50 options contracts (which are traded on the F&O segment of the NSE), a volatility figure per centage is calculated, which indicates the expected market volatility over the next 30 calendar days.

Higher the implied volatility, higher the India VIX value and vice versa. The India VIX value has been made available from April 2008 and one can check the value of the India VIX.

Is your investment in Mutual Funds of DSP Merill Lynch safe ?

On Sept 14th 2008, Bank of America’s announced a planned acquisition of $50 billion. According to a Reuters report, this acquisition would combine the largest U.S. consumer bank with one of the largest U.S. investment banks and the leading retail brokerage force.

But as a result of this, the investors in India are worried about the future of their investments in DSP Merill Funds. Is it safe ?. Will it vanish overnight just like Merill Lynch ?. This article focuses on answering the same

The change in ownership of Merill Lynch has a bearing on the ownership of the asset management company. But investors in the DSP Merrill Lynch fund should not worry till their money is managed efficiently by the same set of people who were managing it earlier. The regulatory framework for mutual funds in India ensures safety of your investment managed by any asset management company.

In 2006, the asset management business of Merrill Lynch (Merrill Lynch Investment Managers) was combined with BlackRock. BlackRock is one of the largest listed asset management companies in the world managing assets in excess of $1.4 trillion.
In line with the realignment of Merrill Lynch's asset management business globally, the 40% stake held by DSP Merrill Lynch Limited in DSP Merrill Lynch Fund Managers Limited, would be transferred to BlackRock. The balance 60% will continue to be held by the DSP Group, through its investment companies.

The Board of Directors of DSP Merrill Lynch Fund Managers Limited has approved this transfer and only regulatory approvals are being awaited. The AMC anticipates the regulatory process to be completed shortly. Consequent to the transfer, DSP Merrill Lynch Fund Managers Limited will be renamed "DSP BlackRock Investment Managers Limited" while DSP Merrill Lynch Mutual Fund will be renamed "DSP BlackRock Mutual Fund ".

Thus the the asset management business of Merrill Lynch was combined with BlackRock way back in 2006. Even if Bank of America did not take over Merill Lynch worldwide, the change in "DSP Merrill Lynch Mutual Fund" to be renamed "DSP BlackRock Mutual Fund" was a foregone conclusion.

Canara Bank revises FCNR rates

Canara Bank has revised the rate of interest in the foreign currency non-resident (banks), or FCNR (B), segment. A press release issued by the bank said the interest rates have been increased by 0.50% over prevailing rates under all slabs in all deposits in pound, euro, Australian, Canadian and the US dollar on varying maturities from 1-5 years period. Now the rate of interest for a maturity period of 1 -2 years in dollar, pound and euro will be 2.96%, 5.77% and 5.08% respectively. For deposits in Canadian and Australian dollar also, there will be 0.50% increase in the prevailing rates, the release added.

IRDA to review ULIP cost structure

Insurance regulator IRDA has decided to undertake a fresh review of the cost structure of Unit Linked Insurance Plans (ULIPs) to make the product affordable and attractive for retail investors in a choppy market.

In a news item in the Economic Times News paper, it mentioned that one option is to pare the commission charges to make ULIPs attractive for investors. Currently, insurance firms are allowed to pay a maximum commission of 40% of the first year premium, 7.5% in the second and third year and 5% thereafter. The commission structure is hence front-loaded as a bulk of the agents’ commission is paid in the first year.

The regulator has already given an indication to the Life Insurance Council — an association of life insurance companies — that the commissions are too high and opaque.

A few firms have responded by pruning their commissions. Bajaj Allianz, whose commissions were close to the upper limit, has halved commissions and expects average payout to agents to be around 17.5%.

Investors pay a host of charges to the insurer in the beginning of the year including premium allocation charge, policy administration charge, mortality charge and rider charge. The difference between the premium payable each year and total charges is the money that is available for investment. Charges are paid at the end of each policy year. These include fund management and surrender charges.

IRDA is reviewing the entire cost structure now. The move needs to be viewed against the backdrop of a spate of complaints from the mutual fund industry on the hefty commissions being paid to insurance agents selling ULIPs and other traditional products. Sebi, on the other hand, has capped the expenses of the mutual fund industry. Until now, high returns from stock markets made it possible for insurers to generate great returns despite hefty commissions. Recently, the IRDA has indicated that the charge structure in ULIPs should be more transparent by adopting a uniform nomenclature for all charges and the same structure should be followed by all the insurance companies so that there is a level playing field for investors when they compare ULIPs.

Performing Mutual Funds increase asset base

The BSE Sensex is down nearly 14 per cent over one year and the average equity fund has lost 18 per cent of its Net Asset Value. But studies show that mutual fund investors have become savvy and have exited the poorly performing funds and have invested in better performing funds.

In a study done by Business Line Newspaper research, data on assets managed by equity schemes show that equity funds which have handled the market meltdown well over the past year have managed to sharply expand their assets under management.

Twenty four of the 300 open-end equity funds in operation doubled their asset base between August 2007 and August 2008. This includes funds such as Sundaram Select Focus, Kotak Opportunities, Reliance Diversified Power and Reliance Regular Savings Fund, all of which contained declines in their NAV to levels much lower than the Sensex, in a falling stock market. Each of these funds has witnessed substantial fresh inflows over the past one year. It could have been done using SIPs as well other than new subscriptions alone.Even small-sized funds such as DWS Investment Opportunity have seen inflows on the back of a good show.

Expanded base
Some of the already large funds which expanded their asset base were Reliance Diversified Power, which managed Rs 1,790 crore in August 2007 and expanded to Rs 5,080 crore by August 2008, and DSP ML Top 100 Fund, which saw its assets go up from Rs 469 crore to Rs 1,032 crore. Index funds from UTI Mutual Fund and LIC Mutual Fund have also expanded sharply.

In contrast, investors have also been quick to exit equity funds which saw significant NAV erosion during this period. The asset base for funds such as ABN Amro Future Leaders, DBS Chola Contra, Kotak Lifestyle and ICICI Pru Emerging STAR has shrunk by as much as 55-60 per cent, after the funds suffered negative returns of 24 to 38 per cent over the past year. The assets dwindling much more than the funds’ NAV is suggestive of investors pulling out money from these funds.

Thus it is important to invest based on past track record of the fund house, scheme and compare it with the benchmark rather than investing based on advertisements, NFO value of Rs 10 (which is meaningless), poor track record or no track record etc.