Debashis Basu
Stay Calm

Curb your excitement. This rally is for momentum chasers

All these months, I had two medium-term scenarios in mind. One, after a 2,500 points rally in the Sensex over three months from the end of May, I felt we are about to give up some of the gains. A smaller possibility, which I have mentioned for several fortnights now, was that since institutional investors are ready to buy the dips and markets are trending up in the rest of the world, especially the troubled US market, the Sensex may go up further—all the way to 19,000 which would be followed by a violent downward move.

In leaning towards the first possibility, I was wrong about the market direction this time. The low-probability scenario has actually played out, even though fundamental and technical evidence were expected to weigh heavily on the market. For the record, corporate growth is slowing down; speculative positions in the market are huge; volatility has been low; and the recent move has been unusually long—stretched from late May to early September.

As I had said, it was a long rally and unusual at this stage of a bull market. We have had three months of rally without any meaningful correction, preceded by 15 months of rise. The market usually goes through a violent and substantial correction towards the end of such a long and continuous rally. We had said that “While there is every possibility of the market running away, thanks to the force of liquidity from foreign investors, there is no need to get tempted, certainly not by the large-cap, blue-chip stocks that are not cheap.” 

Instead, what we got was a resounding upmove. At the time of writing, the Sensex is at 19,600. A 1,400-point move has come from nowhere, in just eight days of continuous rally. Does this change anything? We are in the camp that takes price signals seriously. While we don’t see fundamentals improving dramatically, and we don’t see how the Indian market can remain divorced from the slow growth in the rest of the world, we also recognise that an overvalued market can get even more overvalued. Haven’t we seen it in 2000, 2006 and again in 2008? As usual, foreign institutional investors cannot get enough of Indian stocks to buy. They have been pumping in thousands of crores of fresh money into India with the same anxiety as that of a passenger lunging at a train leaving the station.

There are two ways to play the situation. One, now that virtually everyone has turned bullish, there will be sharp rallies in highly volatile mid-cap stocks. They will yield quick gains if you can buy them before they make a big move, backed by a concocted story. As you can guess, we don’t advocate this. It is best played by hardcore professionals who have seen many such euphoric cycles and know very well how these end. The second strategy is to stay calm and wait for a sharp drop in prices and step in and buy stocks that are still cheap and growing. There are many such stocks. Since these are not what institutional investors buy, they are still available at reasonable valuations. Keep reading our Street Beat section and Cover Stories from time to time.
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NPS: The system is broken; they are trying to fix it

Pension committee considers changing stipulation of minimum four annual contributions to pension scheme; is also looking at maximising gains for subscribers by reducing the time lag in the investment of funds and reducing record-keeping charges

The New Pension System (NPS), which was thrown open to all citizens 16 months ago, is in the process of being revamped to make it more attractive. A committee appointed to overhaul the structure of NPS is considering giving pension subscribers the option to make the annual payment in one single instalment instead of a minimum of four instalments currently.

"That is something which is under consideration. This was done to give PoPs (point of presence service providers) a revenue model, but we are looking at making it a single contribution so a person can just contribute once," said Rani Nair, executive director, Pension Fund Regulatory and Development Authority (PFRDA). She said that allowing investors to make a single contribution would help generate volumes and this would ultimately benefit the PoPs.

Under the NPS, subscribers are required to make a minimum payment of Rs6,000 annually and the money is to be paid in at least four instalments a year. No instalment can be less than Rs500. There is no upper limit on either the total money that a subscriber can deposit in the scheme or the number of instalments. However, subscribers have to pay a fee of Rs20 to the PoPs each time they make a contribution. Therefore, a minimum of four instalments amounts to a fee of Rs80 every year.

In August, PFRDA set up a committee headed by GN Bajpai, former chairman of the Securities and Exchange Board of India (SEBI), to find out the causes why NPS had received a lukewarm response and to suggest remedial steps required to make it a viable pension system. Mrs Nair said the committee would take a few months to study the matter and submit its report.

The government launched the National Pension Scheme for central government employees joining service from 1 January 2004, but this was extended to all citizens from 1 May 2009. However, the scheme received little response with only about 8,000 subscribers joining in 14 months.

Subscribers have the option of investing their contribution under either of three categories - equity, government securities & corporate bonds and mutual funds. A maximum of 50% of the contribution can be invested in equities and this investment is made only through index funds. These investments are made through seven fund managers who have been designated by PFRDA. Beneficiaries can exit the scheme after reaching the age of 60, but they cannot continue beyond the age of 70.

Other members of the pension committee are Deepak Satwalekar, former managing director of HDFC Standard Life, Abhinandan Jain, IIM Ahmedabad Professor and Nachiket Mor, ICICI Foundation president. Praveen Kumar Tiwari, executive director, PFRDA, is the member secretary of the committee.

The National Securities Depository Ltd (NSDL), which is the record-keeping agency, charges Rs6 per transaction and these charges add up to the cost for subscribers. PFRDA is also in talks with NSDL to try and reduce the record-keeping charges that would significantly bring down the cost of maintaining an NPS account.

Another important issue that has been raised is maximising gains for subscribers by reducing the time lag in the investment of funds of subscribers. Currently, the clearing is done on a T+3 basis, that is the contributions from subscribers is to be invested within three days of the receipt of the money. The maximum prescribed limit for the clearing cycle is one week.

This is quite unlike the process in mutual funds where investors can participate in the market on the same day. In the case of mutual funds, investments are time-stamped and sent to asset management companies (AMCs) before the market closes, so the investor is allotted the NAV of that day. While the physical delivery of the forms can delay the actual investment even in the case of mutual funds, most intermediaries now use a software (called FinNet, launched by CAMS and Karvy Mutual Funds Services) which reduces the time and cost involved in submission of forms.

"As mutual funds are collecting the money and investing it themselves, it's possible to give the net asset value (NAV) of that day. But ours is an unbundled architecture, so it's not possible to invest on the same day," Mrs Nair explained.

Prabu Anand K, a Pondicherry based independent financial advisor has suggested that there should be a cut-off time for investment of the money, as is the case with mutual funds. "All contributions must be time-stamped and tracked. This will ensure that neither PoPs nor the record keeping agency can play about with the funds of subscribers, and that the investments would be updated in the account of the subscriber immediately," he said.

An official with a fund manager of the NPS pointed out that there is a penalty for PoPs, if the subscriber's account is not credited within a week. "If it is cash then it should happen on the same day. It depends on the clearing cycle of a city. Normally outstation cheques should not be submitted for subscription," the official said.

Contributions to the NPS are accepted through Allahabad Bank, Axis Bank, Central Bank of India, Citibank, Computer Age Management Services (CAMS), ICICI Bank, IDBI Bank, IL&FS Securities Services, Kotak Mahindra Bank, LIC, Oriental Bank of Commerce, Reliance Capital, State Bank of India, South Indian Bank, Union Bank of India, all of which have been designated as PoPs by PFRDA.

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COMMENTS

Chandra

6 years ago

Srini: NPS funds are too young to come to any conclusion of which is better. Everybody started with Rs.10 per unit, at the same time. So whoever has the highest NAV today is the best performing fund

Atul

6 years ago

One major MUST for NPS is ECS facility. Also, I would have subscribed long back if there was provision to do same online. For example, all required details could be fetched from my salary account with one of the banks like ICICI/SBI etc. and if i could opt to contribute monthly through ECS. It will surely be a big PLUS.

REPLY

Sanjay

In Reply to Atul 6 years ago

Hi Atul
You can opt for ECS now. It costs an addl Rs 6 per contribution + other charges.
In fact, the multiple charges to each intermediary put me off to opening NPS.

Abhisheik

In Reply to Sanjay 6 years ago

Which POP provides this service ???

Srini

6 years ago

I found NPS interesting but there is no way currently to see how the various fund options have performed over a period of time. I could find current NAVs but there is no easy way to find historical data, which is scary for a retail investor like me. Anyone aware of how to evaluate these fund options before putting our hard earned money into NPS?

Cities in emerging markets to offer vast biz opportunity: BCG

New Delhi: Cities in emerging markets like India are likely to offer the biggest commercial opportunity for businesses worldwide in the coming decades, reports PTI quoting a study by the Boston Consulting Group (BCG).

According to the report, the surge in the number and size of emerging market cities, alongside the burgeoning middle class households within them, is creating both new opportunities and challenges for companies.

"The 717 emerging market cities that currently have populations of more than five lakh people, and additional 371 cities that will reach this size by 2030, will constitute the biggest commercial opportunity in the world in the coming decades," the report said.

With dramatic improvements in lives of emerging-market urban residents, the spending power in such cities is increasing rapidly, opening up new avenues for companies.

Emerging market cities may account for 30% of the global private consumption by 2015, creating vast opportunity for businesses to sell their products, it stated.

"Executives tend to focus on 'megacities' of emerging markets, when they need to be shifting their attention to the 'many cities' - the large number of smaller cities that constitute the bulk of future urban-market demand across the emerging markets," BCG senior partner David Michael said.

The massive growth in size and number of emerging market cities would fundamentally change the competitive landscape in many industries, it added.

One-third of the world's population - 2.6 billion people - live in emerging-market cities and by 2030 the number is likely to increase by an additional 1.3 billion.

In contrast, cities in developed markets would add only 100 million new residents in the next 20 years. "Companies need to track and manage the number of cities in which they have a strong presence, not simply the number of countries," Mr Michael added.

Moreover, emerging market cities would need better housing and infrastructure - most urgently, transportation, water, sanitation and electricity.

Driven by huge portion of the demand from Brazil, China, India and Mexico, emerging markets would require an estimated $13.8 trillion in housing investment from 2010-2030.

"The massive infrastructure development needs across so many emerging market cities dwarf anything that the world has seen before," the report stated.
 

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