January Newsletter - 2019

Estimated reading time: 12 minutes 6 seconds


Symptoms - The tendency to attribute favourable outcomes or successes to one's own skill/internal factors and attribute unfavourable outcomes to bad luck/external factors. Many times, outcomes can be bad because of our own wrong reasoning and not due to lack of luck. This is dangerous in the investment world because it stops us from improving our skills and creates overconfidence in our abilities to generate positive outcomes.

Example - A Mutual Fund-Card always blames the market when its funds are going down but never credits the market when the same funds go up.

Steps to correcting the bias - Mapping the past outcomes to the past decisions based on the reasoning behind those decisions. Identifying based on experience and wisdom, instances of reasonings in the past as good or bad reasoning, then identify the corresponding outcomes as good or bad. Wherever there was a case of bad reasoning and a bad outcome, one should acknowledge the mistake and take the feedback. Also, when wrong reasoning leads to the right outcome one needs to acknowledge good luck in the same vein as one acknowledges bad luck when right reasoning leads to a wrong outcome.


Union commerce minister Suresh Prabhu assured the Start-up community that the government will soon come up with a solution to address the problems being faced by startups with regard to "angel tax" under Section 56 of the Income Tax Act, which provides for taxation on investment in an unlisted entity, in excess of the fair market value. In April, the government declared relief to startups by allowing them to avail tax concession if total investment, including funding from angel investors, does not exceed Rs.10 crore. Besides the issue of harassment by the assessing officer, companies also face the problem of raising actually 150% of the required investment due to the taxation aspect.

SEBI is likely to allow the mutual funds to invest in the commodity derivatives segment. So far, Indian mutual fund houses are not allowed to invest in commodities other than gold. However, a few fund houses have thematic funds, which invest indirectly through investing in companies engaged in the commodities business. This form of investment is highly volatile. Commodity funds will be able to invest in a broader spectrum of agricultural, metal and mining commodities such as food crops, spices, fibres, copper, aluminium, oil, gold, silver and platinum.

SEBI is taking a closer look at two areas of the valuation norms for debt securities held by debt funds. They are 1. How to value debt securities that mature in less than 60 days and 2. Securities that have been downgraded to 'below investment grade'. At present, debt securities that mature in less than 60 days are not marked to market. Currently, securities that mature within 60 days are valued on an amortised basis, a method where daily interest is added to ensure the security's price goes up in a linear fashion.

The interim budget to be presented on Feb 1st is likely to provide further relief to the taxpayers. As per the Confederation of Indian Industry (CII), it has recommended doubling the tax exemption threshold from 2.5 lakhs to 5 lakhs, and an increase in the deduction under Section 80 C to 2.5 Lakhs from the current 1.5 lakhs. Another proposal that, however, looks unlikely to be implemented is the lowering in the highest tax slab to 25% from the current 30%.FICCI has suggested a variant of applying the highest slab level of 30% to annual income above 20 Lakhs instead of 10 Lakhs.


Accrual Fund - An accrual fund does not try to generate returns by timing the exit and entry in debt securities as per the expectations on the interest rate cycle. At any point in time, an accrual fund will try to load its portfolio with instruments that optimise the yield. If interest rates are likely to trend downwards then they hold higher maturity bonds for a longer duration if not till maturity. If rates are likely to go higher, then they hold accrual bonds with low maturity so that the reinvestment risk is minimised.

Duration Fund - A duration fund, on the contrary, will try to take benefit by estimating the direction of the movement of the interest rates and adjust the duration of the portfolio to maximise the gain in case of a fall in rates and minimise the loss in case of a rise in interest rates.

How to identify which is what? If a Debt Fund has a heavy allocation to government bonds (Sovereign Bonds or G-Sec's), then the fund is most likely a duration fund. G-Sec's primarily are sensitive to the interest rate risk, unlike corporate bonds which may have credit risk and default risk along with the interest rate risk. Besides, G-Sec's are the most liquid debt instruments and no other class can match the G-Sec maturity period as they have the longest maturity. All this makes G-Sec's most sensitive to interest rate movements/expectations. A high proportion of G-Sec's and a high average maturity of 6 plus years in a debt fund is a clear confirmation that the fund is trying to play on the duration of securities.

An accrual fund will primarily have Corporate Bonds or Debentures, Commercial Papers and Certificate of Deposits. It will have a negligible holding in gilts with maturity less than 3 years if any. The average maturity of the portfolio ranges from a few weeks to a few months to 1-3 years as well. Compared to duration funds, the yield to maturity will be higher because non government bonds tend to have higher coupon rates. What wins when?

When rates are falling, duration funds typically deliver more than accrual funds because of the higher duration. In a falling rate scenario, Accrual funds too use duration strategy by trading in corporate bonds they hold in an effort to increase returns. When interest rates are rising, a duration strategy will not work as bond prices will fall. In these times, an accrual fund with higher yields will deliver more. Higher the YTM, higher the returns delivered on an accrual period for the same maturity.


The duration of a bond is a concept used to measure the sensitivity of a bond or a debt fund to movement of interest rate. Mathematically, it is the weighted- average time-period for all the individual cash flows (all interest payments and the final repayment) received by the investor. The weights assigned to each period of payment is arrived by dividing the present value of that period's payment by the total present value of all the payments. If an "n" year bond has no interest payments and only final repayment, then the duration of the bond is "n" years because the weight of the final cash flow is 100%. If there are interest payments before the maturity, then the duration becomes lower than the maturity depending upon the weight of the interest payments in the total present value of all payments. It matters for investors because it provides a thumb rule that for every 1% increase in interest rate for a period similar to the bond's maturity, the bond will see depreciation in price by approximately 1% multiplied by the duration of the bond. The modified duration of a bond is a more accurate representation of the sensitivity to the % change in yield. Conversely, if there is a 1% decrease in interest rates then there is an appreciation in price by approximately 1% multiplied by the duration. At a fund level, one can get the weighted average duration by assigning weight-age to the duration of the individual bonds according to the individual weight-age of the bond in the fund holdings.

Compared to duration, the modified duration more accurately conveys the price sensitivity of a bond when there is a change in the yield to maturity. Modified duration is calculated by dividing the duration by 1, plus the yield to maturity. The modified duration can also be interpreted in another way, which is, if the yield increases by 1%, the bond would need to be held for approximately that many years as the modified duration before the decrease in price gets offset by the gain in reinvested coupons.


India's April-November fiscal deficit breached 115% of 2018-19 Budget target. The government is widely expected to miss its fiscal deficit target in FY18-19 and is also likely to announce spending cuts in 4Q FY19. It has already cut its fiscal deficit target to 3.3% of the GDP from 3.5% in FY18. The overall expenses on major subsidies came up to Rs.2.19 lakh crore by April-November period, which is 83% of the budgetary estimates as the significant rise was recorded in subsidies given for petroleum products and urea, reaching 93% and 74% of the annual estimate, respectively.

Contrary to market expectations, the Consumer Price Inflation for Nov-18 stood at a 17 month low of 2.33% vis-à-vis Oct-18 reading at a revised 3.38%. The low inflation data was aided by a strong favourable base and continued moderation in food inflation. At the same time, core CPI (excluding energy and food) edged lower to 5.80% from 6.81% in the previous month.

Wholesale Price Inflation for Nov-18 came in at 4.64%, lower than 5.28% registered in Oct-18. Despite inflationary pressures from food items, lower fuel prices and a favourable base effect led to this downtick in inflation. Consequently, core WPI inched down to 4.88%, as compared to 5.15% in Oct 18.

With global crude oil prices at their 17-month low as of December end and continuous fall in headline Consumer Price Index (CPI) readings for the last four months till November 2018, the chances of a rate cut in 2019 by the Monetary Policy Committee under RBI Governor Shaktikanta Das has become stronger. Most debt market participants expect the RBI to change its policy stance to neutral from calibrated tightening in the February Policy Meeting.

For the first time in the last 20 years, India got more foreign investment than China. In 2018, India saw more than $38 billion of inbound deals compared with China's $32 billion mainly as a result of the stable and deregulated market, bankruptcy code and opportunities in sunrise sectors.

The government has stopped printing Rs.2,000 currency notes. The decision has been taken as the government suspects that the currency note was being used for hoarding, tax evasion and money laundering.

The Rs.2,000 note was introduced in November 2016 immediately after demonetisation to counter the massive cash shortage. As of March 2018, the total value of the currency in circulation was Rs.18.03 Lakh Cr., of which 37% was in Rs.2,000 notes, and approximately 43%, in Rs.500 notes.

The Union cabinet has approved a 10% reservation in jobs and higher education for "economically backward" sections in the general category. This reservation will be over and above the existing 50% reservation enjoyed by the Scheduled Castes, Scheduled Tribes and the Other Backward Classes, taking the total reservation to 60%.


BHEL bagged an order worth Rs.3,500 crore for setting up a 660 MW supercritical thermal power plant in West Bengal. BHEL has an installed base capacity of over 1,83,000 MW of power plant equipment globally.

Religare Enterprises (REL) and Religare Finvest (RFL), filed a complaint against Ex-Fortis promoters, Shivinder and Malvinder Singh, and Sunil Godhwani under the Companies Act provisions with the Ministry of Corporate Affairs. The complaint stated that RFL had sanctioned loans to 19 companies related to the Singh brothers without any repayment. The loans stand at Rs.2397 Crores, with Rs.415 Crores as interest. The complaint has been filed under Sections 210 (Fraud), 212 (non-convening of the annual general meeting), and 447 (filing of profit-and-loss statements for the subsidiaries) of the Companies Act.

Infrastructure Leasing & Financial Services (IL&FS) has initiated process to sell road assets of its subsidiary IL&FS Transportation Networks Ltd (ITNL) inviting expression of interest (EoI) proposals from buyers. The assets put on the block by IL&FS include seven operating annuity based road projects in various parts of India aggregating approximately 1,774 lane kms; eight operating toll-based road projects in various parts of India aggregating approximately 6,572 lane kms, four under-construction road projects aggregating 1,736 lane kms upon completion. Last month, debt-laden IL&FS had revealed that it has initiated the process to sell its renewable energy business. Besides ITNL, IL&FS has received over a dozen EOI towards acquiring its stake in IL&FS Securities Services Ltd (ISSL) and ISSL Settlement and Transaction Services Ltd (ISTSL) and has also initiated the process to sell its renewable energy business.

Tata Power plans to invest Rs.70 Cr to set up nearly 1,000 charging points in the National Capital Region (NCR) region, for electric vehicles (EVs). The Managing Director Praveer Sinha said that the company currently has set up 21 charging points in Mumbai, Delhi, and Hyderabad. Apart from the 1,000 new ones in the NCR, there would 100 in Maharashtra.

The company will partner the three government-owned oil marketing companies (OMCs) Hindustan Petroleum, Bharat Petroleum and Indian Oil by using the three OMCs' infrastructure. As per the Business Standard report, at present, the country has 61,000 petrol/diesel retail outlets, against around 500 EV charging stations. The MD expects that by 2030, Delhi alone could require around 300,000 fast chargers, presuming 30% EV penetration in an estimated car population of 1Cr. This would mean an investment of Rs.7,00,000 to 11,00,000 Cr.


China's December exports fell 4.4% on a Y/Y basis recording its biggest monthly drop in two years. The unexpectedly big decline points to further weakening in the world's second-largest economy.

Singapore's non-oil domestic exports in December fell 8.5% on a Y/Y basis, as per data from the trade agency Enterprise Singapore, slowing further from a revised 2.8% decline in November. Singapore is a big proxy for global trade sentiments as it has the highest trading to GDP ratio at 322% as of 2017 figures.

Closely following US President Mr. Trump's blasting of the US FED as the US economy's "only problem", and reports in the media suggesting that the US President plan to dismiss Mr Powell from the role of Fed Chairman, White Officials confirmed that the US FED head faces no risk of losing his job as Chairman.

November data for Germany showed that the largest economy in Europe has seen a drastic fall in Industrial production at -1.9% month-to-month driving the year-over-year rate down to a decade-low of - 4.6%. November Data from Europe suggests that the continent is dangerously close to a recession as the France, Italy and Spain also recorded negative industrial production growth. However, ECB President Mario Draghi, highlights that the labour market is strong as unemployment has dropped below 8% for the first time since 2008 and wages started to improve. Economists see expansion in GDP by 1.6% in 2019, down from 1.9%.


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