Saturday, August 23, 2014

Market Bubble

Nifty rose to an all time high at 7929 on 22nd august 2014. Unlike last year, the Jackson Hole meeting held between 21- 23rd August 2014 proved to be a non-event from India’s stand point. US continues to be plagued with challenges of the aftermath of the 2008 recession. As it appears, interest rate shall remain near zero for the foreseeable future due to myriad macro - economic challenges.

In the recent market rally, quite a number of stocks have run up sharply disproportionate to their earnings/fundamentals. The Q1 earnings result for the FY 2014 – 15 is just a case in point. Let’s look at the sample of few companies, their quarterly year on year profit growth and their appreciation in the stock prices. (Appreciation from 3/3/14 to 31/7/14)

Co_Name
Y_o_Y_PAT_Growth
Sh Price Growth
NHPC Ltd
-14.35
27.30%
JP Associates
-124.1
44.32%
Sesa Sterlite
-188.7
66.38%
Tata Motors
-44.02
8.78%
Reliance Power
-83.77
52.77%
Ashok Leyland
-66.17
119.61%
Adani Power
-80.44
57.88%
H P C L
-103.15
47.86%
Adani Enterp.
-100.76
64.38%
B H E L
-58.43
40.35%
DLF
-51.62
42.47%
IDBI Bank
-65.85
58.63%
I O C L
-181.56
32.16%
Cairn India
-67.63
-3.53%


There are at least a dozen more companies that can be added to this catalogue. The objective is not to put these companies in poor light but, to caution investors against falling prey to the current market euphoria.

Whether you’re a direct equity or a Mutual Fund investor, the focal point should be the quality of the stocks.

Happy investing!




Disclaimer: No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments









Tuesday, August 19, 2014

Arbitrage funds

Arbitrage fund, the lesser known product category has suddenly come to the limelight after the changes in the taxation structure of the debt oriented mutual funds. Recently, a mid-sized mutual fund galloping INR 5400 crores in a span of 2 – 3 weeks in their arbitrage fund has raised the eye brows of the industry players.
By definition, arbitrage is a financial transaction that has no or minimal risk.Arbitrage equity funds employ such strategies to take advantage of the price differential of a security between the exchanges, cash and the derivatives segment.
These funds simultaneously buy shares in the cash segment and sell futures (derivatives segment) of the same company as long as the futures are trading at a reasonable premium. On expiry, the cash and futures price coincide thus leading to positive returns for the investor. Such funds do not take a naked exposure to equities as each buy transaction in the cash market has a corresponding sell transaction in the futures market. Hence, the portfolio is generally neutral unlike a long only equity fund. This strategy helps the scheme generate almost risk free equity return in line with the liquid fund/ money market mutual funds.
The shortcomings in this product are manifold. At the outset, the arbitrage opportunities are far and few. In the absence, the fund would mimic the portfolio of a liquid/money market mutual fund. Here lies the trick; As per the provision of Sec. 10(38),  an equity oriented fund is defined  that which not only invests in equity shares of the domestic companies to the extent of more than 65% and suchpercentage to be computed with reference to the annual average of the monthly averages of the opening and closing figures.  Hence, the tax treatment of an arbitrage fund could vary subject to the fund fulfilling the aforesaid criteria due to market considerations.
1.       In case the allocation to equity is above 65%&above : the tax treatment will be similar to that of Equity Scheme 
2.       In case the allocation to equity is 65% or below:the tax treatment will be similar to that of Debt Scheme.

If you’re investing in these funds to take advantage of the equity taxation,(ieno long-term capital gain tax if held for more than a year and no dividend distribution tax) you need to re think. In addition, some of the arbitrage funds have mandate to invest a small portion of the portfolio in buybacks, open offers, delisting, takeover bids, mergers and IPOs. This could add to the volatility of returns from these funds.As the devil lies in the detail, Investors should read the fine print before investing.




Disclaimer: No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments