"The last quarter may see an increase in volatility giving an attractive opportunity to equity investors"
The economy has entered a structurally low-interest rate regime, thanks to falling inflation and fiscal prudence
Sanjiv Bajaj, managing director, Bajaj Capital, talks to Teena Jain Kaushal in an e-mail interview, about investment opportunities, NCDs, Debt funds, IPOs, FDs and their performance this festive season.
1) What are the investment opportunities now?
In about three months, we shall be moving to the year 2017 and do so with a much improved macro-economic scenario as compared to the eve of 2016, even though some asset quality concerns still remain in the PSU Banking space. Today, the Indian Economy is at the cusp of a cyclical upswing and principal asset classes such as Equity and Debt are in a multi-year bull run.
The economy has entered a structurally low-interest rate regime, thanks to falling inflation and fiscal prudence. Bond fund investors should gain in such an environment.
For Equity Investors, the expected recovery in demand (Consumption demand in near term and Investment demand at a later stage) should drive a sharp recovery in corporate earnings, thanks to high operating and financial leverage. Though prices seem to have discounted some amount of this expected recovery, more is yet to come. We believe both equity and debt provide attractive investment opportunities for a medium to long term investor.
The last quarter of the year may see an increase in volatility and hence give an attractive opportunity to Equity Investors (those who feel left out), due to a couple of factors. The upcoming $ 26 billion FCNR redemption's and the Telecom Spectrum Auctions in the next 3 months are likely to put pressure on domestic liquidity and may lead to a healthy correction in stock markets.
Diversified Equity funds investing in a mix of large and midcap stocks are ideal for a moderate equity investor. An Aggressive investor can invest partly in NFOs of close-ended thematic Equity Funds that seek to benefit from the ongoing reforms and/or revival in the rural economy.
In the Fixed Income or bonds space, there are attractive opportunities both in the Duration as well as Accrual space. Duration looks good in the longer run as the structural downtrend in interest rates continues. In Accrual, the risk reward is very attractive in the near term as corporate bond spreads are likely to narrow due to improving balance sheets of businesses and lower lending rates. Many NCD issues are being launched by highly rated NBFCs and other reputed companies in the markets. These are attractive both for conservative (looking for relatively high coupons) as well as aggressive investors (looking for MTM gains from narrowing bond spreads). The quality of debt is a very important consideration in this current scenario so would rate debt mutual funds much higher over direct FD/NCD etc as they diversify your risk as well as in this environment if is important to invest through an entity with a good in-house research team which can ensure that you are recommended funds only with the best quality of debt.
2.) NCDs are the flavor of the season. Should one invest in them?NCDs offered by high rated NBFCs are well accepted in the market among all categories of investors. Most of these offerings are Highly Rated by renowned Rating agencies and are secured in nature. Customization of schemes with a mix of multiple tenures and interest rates serves to requirements of the fixed income investors. Apart from rating these instruments offer comparatively higher interest rates than bank FDs and carry liquidity feature attached to it in term of trading at the stock exchange. So will recommend only secured NCD's and would overall recommend an investor to choose debt mutual funds over direct equity as it diversifies their risk.
3) How efficient are NCDs compared with debt funds and fixed deposits?
Ans: In a scenario where the Bank deposit rates are continuously falling; these NCDs offer an opportunity to investors to lock-in their investment in medium to long terms schemes and enjoy fairly higher interest rates in comparison. Also, these are listed securities; hence an investor can sell the NCDs on respective stock exchange to liquidate their investment in case of any fund requirement before maturity. With multiple issues in recent times and with the expectations of more public issues in the coming season; the investors have choices to go with one or more issuers to invest with and diversify. Since Debt funds come with the variable return in contrast to the assured rate of return in the NCDs and also indexation benefit can be availed only after three years; thus Debt Funds may be more suitable to the investors with higher tax bracket.
4) Several IPOs are expected to hit the market this year. Should one invest in IPOs? What is your take on it?
Historical trends suggest that very few IPOs make money for investors. Most IPOs come after the markets have risen significantly and are generally over-priced. They leave very less on the table for the retail investor. In fact, buying the share from the secondary markets post listing is a better strategy in many cases, if one is convinced with the fundamentals of the company. Investing in IPOs also requires a deeper analysis of the company's finances and business model which is difficult, since not much public information is available on the company due to it being hitherto unlisted. Having said that, some IPOs have gone on to turn into great investments. The trick is to develop the ability to analyze the company's business model and finances deeply so that one can unearth a gem. Generally, it is better to look at IPOs after a significant downside in markets as only very confident promoters with strong business models and financials will come to the markets at such time and pricing is likely to be reasonable too, though one will not find many IPOs at such times.
Specifically Speaking for IPO's lined up in Life Insurance Industry. In Life Insurance, it is very less known about company's financial way of working, specifically due to guidelines of IRDAI in terms of Declaring Profits, as major share has to be released out to policyholders as Bonus. Thus advisable to wait for some time to analyze the business model and finances of the company after IPO gets released
Earlier Major IPO's in India were primarily in Energy & Real Estate in last half a decade, thus Finance-related IPOs are also getting a second look from investors because of their scarcity value. The insurance market is dominated by state-run Life Insurance Corp. If listed, LIC would be the largest publicly traded company in India. But the government can't afford to weaken its control over the firm, That makes private-sector companies like HDFC Standard Life and ICICI Prudential all that more enticing.
5.) Currently, every company seems keen on growing their online process? How do you plan to grow digitally?
Answer: This is a very important question. For us we believe that in investment advisory technology will never replace an advisor as we are dealing with a person's most precious asset and he would not like to leave the same to an also computer program where a difficult market situation may wipe out his entire savings. Our belief is that we should use technology to better enable our advisors to deliver better service and experience to our clients as well as enable the clients to have direct access to their portfolio's yet remain under the watch full eyes of their advisors. This is very important as over past 10 years market may have given great returns to all but as per studies only 20% or so people would have gained as others would have bought when the market was going up and would have sold when the market falls. The role of an advisor is to prevent you from taking these rash decisions and this is the main reason I don't feel the algo advisory setups will help their client create wealth.
We have recently launched our MF online and our insurance integration is also through so our advisors can offer much better service quality to our investors. We are investing heavily in mobile app's as well as other related software like data analytics to bring better solutions to our clients.
6.) How is gold expected to perform this festive season?
The Short Term Trend in Gold is bullish. Gold in US Dollar terms is likely to test the supply zone at $1390 to $1430 in the short term (presently near $1335) on a weaker US Dollar after the US Fed held rates in their last FOMC meet on Sep 21, 2016. Gold in INR terms is likely to gain by 6-8% and test previous all-time highs, on festive season demand. Incremental demand for gold is likely to come from Rural India, after a good monsoon and higher farm sector output, which should drive domestic prices higher.
7.) Should one invest in sovereign gold bonds or ETFs?
Ans: Both Sovereign Gold Bonds, as well as Gold ETFs, are linked to the price of physical gold. Anyone investing in either of these is likely to get the benefit of a rise in Gold price as also bear the losses from a fall in Gold price. However, Sovereign Gold Bonds have a plethora of significant additional benefits that are not available with Gold ETFs, which make them more attractive vis-à-vis Gold ETFs -
- Fixed Coupon of 2.75% p.a. payable half yearly on the initial investment
- Exemption from Capital Gains Tax on Redemption
- Sovereign Guarantee both on capital invested and interest
- Usage as collateral for loans
8.) Why is persistency ratio so low for the life insurance sector?
Persistency is and has been a huge challenge for the insurance sector and refers to the ability to keep renewing customers' policy till it reaches maturity. The higher the persistency rate, the higher the renewal premiums for the company as well full benefits from the policy for the investors.
When a policyholder chooses not to renew his policy he loses quite a substantial portion of his premium's paid especially in the first three years. The low persistency is a very complicated matter and the answer to the low persistency rate is not easy. In fact, all the three parties involved in the chain - insurer, the policyholder, and the broker/agent are to a certain level to blame for the same.
The sad part of the matter is that most of the policies being sold now are not bad after the spate of regulations starting in 2010. The ULIP policies charges now are amongst the lowest in the work and the lapsation charges are also minimum. Even the traditional and other policies are put through a rigorous test before being approved by IRDA to ensure client centricity.
One of the biggest reasons for high lapsation are the fraud call centers that have sprung up that call customers at the time of the renewal and confuse them. This creates a level of mistrust between the policyholder and insurer and that leads to low renewals. It is very important for a policyholder to take further information on the policy he has bought from his broker or agent only so that he does not end up being a victim of these frauds and also before taking any decision talk to the insurer or his broker as the case may me.
The second thing is only to buy your insurance policy through a reputable institutional broker as you need an intermediary who is a long-term institution to be able to service you over the term of your policy which may even be 30 years or more. Insurance is a protection, think - who will help my family get a claim if something happens to me??? In our case 70% of the claims are initiated by us for our policyholders as a lot of people won't even share their insurance details with their family members. Insurance is for the purpose of a protection so you must buy the same through an institution that can get you that protection.
Lapsing your policy should be the last choice as it will mean a loss for you. A lot of agents and even insurance companies will recommend you to lapse your policy so they can sell you a new one to meet their targets as the commission on the new policy is much higher. Even some financial planners who do not understand a policy will say blanket life insurance as in investment is bad, that is not true as in every industry there are good products and some average products and insurance industry has more than 1000 products. Let a person prove to you why it is bad and then you must reverify with your broker/agent and insurer.
A classic example for us at Bajaj Capital is we had sold a pension plan Jeevan Suraksha very aggressively earlier. It is one of the best products in the industry as it used to offer a guaranteed 10% to 12% growth and a pension at similar rates which is fantastic given the fact that it is a debt product but every year we get hundreds of call from policyholders as to why they should renew the same as some agent or investment advisor who is trying to make a fresh sale to them has told them it's a bad product without even knowing the product. So please be very wary of such people and take a time to understand why you have bought a product and write the same down to as a reminder.