Saturday, September 20, 2014


There is a strong linkage between foreign direct investment and economic growth. Large capital of foreign investment aid the country to achieve a sustainable high trajectory of economic growth. Unlike FII Portfolio investment that flows into the secondary market, FDI is strategic; increases production, employment opportunities and revenue for the government by means of taxes. It helps narrow current account deficit and strengthen the domestic currency, which is the need of the hour.

For the FY 2014 excluding oil, the biggest hole in CAD was due to net import in electronics and heavy engineering amounting $37.5 billion. India’s consumption of engineering goods will only increase over the coming years. Recent measures taken by the Centre to increase the FDI limit for Insurance and Defense sector to 49% and attracting investments from  Japan & China totaling 55 billion$ are expected to lessen considerable FX outgo and accentuate economic growth.

In the last 100 days, the BJP led government has cleared 240 of 325 projects worth Rs 2 lakh crore that was on the back burner under the previous government. The clearances are expected to bring in fresh investment and give infrastructure boost to sectors like roads, power plants and oil exploration.  The Brent crude has fallen from a high of US$114/bbl in Jun'14 to ~US$100/bbl in the last two weeks. A US$1/bbl fall in the oil prices will reduce subsidy bill by ~1% translating to 7bn INR and a sustained softening would help reduce inflation too.
NIFTY corrected by 100 – 140 points during the first half of the week due to expected policy announcement by US FED and later bounced back significantly. Since QE began in Dec-08, US GDP has grown at a snail’s pace of 2%. M3 (money supply) hasn’t grown by a dollar in four years despite the Fed injecting 3.5 trillion$. Most of the funds never went to the economy and was lying in the FED reserves as banks preferred to earn risk free 25 bps per annum as against lending it to a weak credit. If the US FED increases the interest rate, banks will be more than happy to get paid more for leaving their reserves sitting in the Fed’s basement, where they’ve been for the past five years. The problems for US are deep rooted and revival is a long drawn process.

India growth story is gaining higher momentum and most of the economic indicators are pointing towards a secular bull run. Investors not wanting to take high equity risk should consider balanced fund. By design, they invest a minimum of 65% - 75% in equities and the remaining goes into debt instruments providing fixed return and stability to the portfolio; qualifies as an equity fund from taxation standpoint. Dividends are tax free and do not attract dividend distribution tax unlike a debt fund. Long term capital gains are NIL if held for more than one year from the date of investment/allotment.

Ironically, the average return differential between the TOP10 (as per valueresearch online dated 19th September 2014) ‘large & mid cap equity’ and balanced funds over a 3 & 5 year period is negligible and the risk return tradeoff favors Balanced fund category.

Balanced Funds
Large & Mid cap funds
3 Year
21.61% CAGR
23.76% CAGR
5 Year
17.08% CAGR
17.19% CAGR

Safe investing.

Disclaimer: Views are personal. 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.