Gain Analysis 8 months holding....

SCRIP	PURCHASE PRICE	PRICE as on 17 Jun 2015	GAIN	%AGE gain
ENTERTAINMENT NETWORK	410	603.80	193.8	47
EVEREADY IND	110	303.10	193.1	176
FEDDERS LLOYD	85	71.05	-13.95	-16
GRANULES	76	85.15	9.15	12
LLOYD ELECTRIC	180	191.70	11.7	6
NUCLEUS SOFTWARE	223	250.95	27.95	13
R S SOFTWARE	283	155.75	-127.25	-45
SUVEN LIFE SCIENCES	122	249.35	127.35	104
T V TODAY NETWORK	170	176.40	6.4	4
Infinite Computer Solutions	200	153.25	-46.75	-23
Zicom Security Systems	173	142.15	-30.85	-18
Bajaj Finserve	1450	1500.3	50.3	3
	IN ONLY 244 DAYS			21.91%

The healing and not hurting cut by RBI

That was a predictable 'Monetary Policy Tuesday'. Raghuram Rajan maintained his reputation as a hard-headed inflation fighter. The stock markets nose-dived while punters and other stock market types, along with sundry list of business executives lamented that Rajan was killing growth. Obviously, executive branch of the government did not officially complain but there were plenty of media persons who claimed that someone or the other from the government had whispered into their frustration with Rajan into the ears of some chosen ones. All in all, just another no-surprises day.

The only thing that is actually frustrating here is this extraordinary focus that we have on the immediate impact of the current rate cut, the reduced expectation of future rate cuts and its impact on the fate of people's equity investments. Sensible, steady investors, like those who might be running equity fund SIPs over the long-term, would look at the RBI's actions, see the 400 point crash of the Sensex in a matter of hours, and conclude that the RBI Governor has done something terrible to the future of their investments.

Yet, nothing could be further from the truth. The markets' reaction to the rate cut delivered by the RBI Governor--and his comments--was short-termist to the extreme. It was the starkest example of a situation where the interests of the short-term traders and long-term investors were not just divergent, but were completely opposed to each other. The punters wanted a stream of sharp rate cuts because they had all convinced themselves that uninterrupted sharper cuts were coming and anything less would result in dropping stock prices.

In sharp contrast, the interests of the long-term equity investor is best served by an environment where the RBI is focussed on delivering a low-inflation environment while giving a balanced set of rate reductions whenever possible and necessary. Unlike what the stock markets seem to imagine, the RBI's role is not to be a steady supplier of inputs that can be used to talk up stocks. It is, instead, the default supplier of confidence that no matter what, we will have a sensible monetary policy that will peg away relentlessly at inflation but still be responsive to poor growth.

And as for the government and businesses, they want lower rates because they are the big borrowers in the system. Asking them about interest rates is like asking a buyer of any product about what the price of that product should be. It goes without saying that buyers want lower prices. In fact, a large chunk of Indian financial system boils down to the government borrowing from small savers and depositors. This ranges from direct borrowing (post office deposits, for instance) to banks buying treasuries out of the SLR. The immediate and certain effect of lower interest rates will be that effectively, the government will pay households less for these borrowings. The higher growth that is supposed to come from lower rates may or may not come because of other factors, but lower real returns for households' deposits will definitely arrive.

One of the lines of argument that the commentariat often takes against the RBI is that Indian inflation is largely structural and doesn't respond to high interest rates. The argument is that high rates won't easily control inflation so you might as well lower them and look after growth. This may or may not have any truth in it but from the point of the view of the small saver (which is not well-represented in the media) this is a poisonous argument. Deposit rates must offer a real rate of return and thus must remain higher than inflation. Otherwise, the depositor's wealth is being robbed by lenders like businesses and the government.

It thus follows that no matter what happens to growth in the economy, rates drops must follow inflation drops, and not precede them. Clearly, unlike many others, Governor Rajan understands this very well.

DK

Some mutual funds schemes still missing?

          Every bull market seems to compel the mutual fund industry to go into a NFO overdrive and this one has been no exception. But going by the over 50 NFOs launched in 2014, the industry is running out of new ideas. Most of the new schemes with vague labels like 'equity oriented fund' and 'equity focussed fund', were mere clones of established open end schemes, with a close ended twist.

          Instead of resurrecting long-dead categories of schemes, why don't fund houses reach out to their two crore investors to find out what types of funds they would really like to have? From my chats with investors, here are three kinds of funds that investors want. Can the industry oblige?

An inflation hedge fund

          One basic objective that most Indian investors would like to meet, but fail miserably in meeting, is to hedge against inflation.

          Equity gurus will tell you that if you hold equity oriented funds for the really long term, they will certainly beat inflation. But the flat equity markets between 2008 and 2013 showed us that equity funds can lag inflation or 'shorter terms' like 5 years. Options like bank deposits and post office schemes, once you account for taxes, regularly fall two steps behind inflation. So, if I want my investments to beat inflation from year to year, where do I go?

            The fund industry must devise a solution for this. Maybe such a fund can construct a portfolio of high yielding bonds and bluechip equities to meet this objective. Or it can use a mix of gilts and high dividend yielding stocks (which are available aplenty during market lows). Or it can be fashioned out of commodity stocks or even commodities that make up big weights in the inflation index.

          Generating inflation beating returns isn't a tall order. The maximum CPI inflation rate recorded in India in the last ten years was about 15 per cent, the minimum was about 3 per cent. Given that mutual funds have access to a far wider basket of investment options than the retail investor - gilts, wholesale bank deposits, corporate bonds, commodities, derivatives - they are surely better placed than us to devise an inflation-beating portfolio.

A fixed dividend fund

           It's quite surprising isn't it, that despite the stunning variety of debt, hybrid and monthly income funds that the industry has devised for us, we don't have a fund that can deliver predictable annual income?

           Yes, monthly income plans have this mandate. But given their equity component, they are liable to skip dividends for a month or two if equity markets misbehave. Equity funds do declare dividends, but they are hardly the ideal products for predictability.

          Of all the scheme categories, debt mutual funds alone have portfolios that are designed to generate regular accrual income. But with the category going in for 'active management' and all kinds for specialisations - short term/long term, corporate/gilt, fixed/floating- fund houses seem to be trying too hard to deliver capital appreciation to debt investors.

           Instead of frenetically churning the portfolio to make the most of gyrations in interest rates, investors would probably appreciate it, if the debt fund industry came up with a debt scheme that simply declared fixed dividends every year, like clockwork. The dividends need not be double digit, but need to be predictable. Investors may be quite willing to accept a close end fund with this mandate.

A capital gain REIT

          Most Indian investors would like a real estate component to their portfolio. And investing in real-life property is no joke requiring huge commitments, leverage and dealing with interminable delays and risks that a builder may foist upon you. REITs were supposed to solve this problem.

           But Indian REIT regulations, in their current form, are a clone of the global model. They are mandated to invest mainly in commercial property, rely on meagre rental 'income' for returns and pay out a chunk of their 'gains' as dividends. Instead, how about desi REITs which can focus on residential property and land and deliver, not dividend income, but hefty NAV- based capital gains to investors if held for 8-10 years? This can deliver decent property linked returns to investors without the concentration risks and hassles of actually managing pieces of property.