Is this a new investment destination or just a fad?

Jun 6, 2011

In this issue:
» Can India afford poor factory output growth?
» Dubai a threat to Indian aviation industry?
» Highway expansion to cost India US$ 12 bn
» Bank credit grows but not in the right place
» ...and more!
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Imagine an investment product that guarantees your capital. It offers minimum assured returns as well. And the cherry on the icing is that it also offers a chance for further appreciation. Such a product is bound to be the apple of the investors' eyes. Well, there are indeed products that do promise these. Such products called Capital Protection Oriented Funds or CPOFs are offered by mutual funds and insurance companies.

So how does the CPOF work? Most CPOFs invest majority part of their funds in debt markets. This way they are able to guarantee the capital as it works pretty much the same way as it does in the debt market. The assured return is nothing but the interest rate that the debt instruments pay. The over and above return is earned through the limited exposure to equity markets. As a result, the best returns that most CPOFs offer are in the range of 7 to 9%. So why are these funds not popular?

Well the reason is that a retail investor can earn pretty much the same returns from a fixed deposit scheme. And in that the investor does not need to pay the mutual fund fees either. So why would one invest in a CPOF? Some may say for the exposure to the equity markets. But the CPOFs do not invest more than 20% of their funds in the stock markets. As a result the returns remain limited. A retail investor can earn better returns by simply investing in fundamentally sound companies that are available at cheap valuations. Of course, the price movement may prove quite erratic in the near term, even going down by 30%-40% at times. But over a long term period, returns from such investments have a very strong chance of outperforming those from CPOFs by quite a distance.

Therefore, the CPOF maybe a new investment destination advertised by fund houses and insurance companies. But we feel that they are nothing more than a new fad that will fade away due to lack of investor interest.

Do you think Capital Protection Oriented Funds are the new investment destination for retail investors? Share your comments with us or post your views on facebook page.

 Chart of the day
Indian power sector has been an attractive investment destination for Foreign Direct Investments (FDI). There has been an increase in FDI inflow into the sector since 2005. However, in the fiscal year ended March 2011, FDI into power sector declined for the first time. The decline is indicative of the loss of investor confidence in the sector. Shortage in fuel supply as well as ridiculously long delays in clearing projects has led to lack of long term visibility. The environment ministry has termed the government's power 12th Plan's power capacity target of 100,000 MW as 'ecologically unsustainable'. In addition to this, coal shortage has already led the power ministry to demand for stopping the e-auction of coal. With such problems crippling the sector, it is no wonder that investors both domestic as well as global have begun to lose their interest in it.

Data source: Department of Industrial Policy & Promotion (DIPP)

It is no surprise that for India to log in strong growth rates quarter after quarter, its factories will have to hum at full throttle. But sadly, there is very little sign of it on the horizon. Take the case of industrial output in the quarter ended March 2011. The same grew by a disappointing 5.1% YoY and thus pulled the overall GDP (Gross Domestic Product) growth for the quarter down to 7.8% YoY, economy's worst showing in five quarters. Remarkably, this is just one third of China's factory output growth of 15%. In fact, as per the United Nations (UN), even the world average growth of 6.5% was better than India's industrial output growth. Agreed that growth in the agriculture sector is also nothing to write home about. But given the fundamentals and near term potential, agriculture cannot be expected to grow strongly year after year. Manufacturing though is a different story altogether. Here, a lot of potential still exists. Hence, alarm bells start ringing whenever the sector underperforms. To be fair though, we believe that the current decline in growth is just a cyclical aberration and the growth should start looking upwards soon. Whether it reaches the levels attained by say the Chinese will of course depend on policy reforms and massive improvement in the country's infrastructure.

We are, in fact, not surprised by the below average growth in manufacturing output. The fact that it drastically lags the growth in China is also no news. A hard look at the RBI's bank credit growth numbers gives away enough reasons for the disappointing performance. Bank credit growth in excess of 22% YoY in the past financial year may well have been to the RBI's satisfaction. However, the sectors to which bank credit has been channelized are not in the best interests of the economy's long term future. On one hand, commercial real estate and NBFCs have bagged a lion's share of bank credit. On the other hand, credit support to manufacturing has been abysmal. Coupled with problems of high input costs, insufficient power supply and land acquisition problems, the performance of manufacturing sector is understandably badly affected. Probably it is time that the RBI makes banks more accountable about the direction of loan growth as well.

Many of you who must have taken long distance international flights must have had a stopover or two at some other country midway. Many such countries become hubs for the global aviation industry. Dubai is a classic example in this case. Dubai's aviation industry creates direct employment for 58,000 people and contributed US$ 6.2 bn to its Gross Domestic Product (GDP). Dubai's stellar growth in the field of aviation is bound to pose a serious threat to Indian airports and airlines. The main problem in our country is a lack of proper infrastructure and incentives to attract international airlines to use our airports.

But we could learn some very important lessons from Dubai. The success of its aviation industry has been due to well-planned strategic decisions taken by the government and the industry together. The country realized the economic importance of the industry and took appropriate steps to emerge as an aviation hub. India, on the other hand, has no long term policy for the aviation sector.

Infrastructure has been a major spoke in the wheel for India's economic growth until now. Bureaucracy, land acquisition problems, delays in execution, corruption are issues that have prevented India from taking its growth to the next level. So much so that in the Global Competitive Index, the country's poor state of infrastructure means that it has been ranked worse that in Sri Lanka and the African country Botswana. The government is looking to remedy this and is looking to award Rs 550 bn (approx. US$ 12 bn) of highway construction projects this year to ramp up infrastructure in the country. The 7,300 kilometer (4,536 miles)-project includes new expressways as well as widening of existing roads through the year ending March 31 according to the National Highways Authority of India (NHAI). Not just that, the agency has highlighted its intention of spending US$ 1 trillion in the five years to 2017 to give a major leg up to infrastructure. These plans are in the right direction indeed. But will the government deliver on the execution front? Sadly, the results so far have not been encouraging. For instance, it has not been able to stick to its target of building 20 kilometers a day in 3 years. Hence, only if the government shows the will to improve upon execution, will the country see some major ramp up in infrastructure.

Meanwhile, Indian stock markets continued to tread in the negative territory, dragged lower by weakness in metal and auto sectors. At the time of writing this, the benchmark BSE Sensex was trading lower by 52 points (down 0.3%). Barring Taiwan and China, all Asian markets were trading weak led by Hong Kong and Japan. The European markets have also opened in the red.

 Today's investing mantra
If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them." - Peter Lynch

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5 Responses to "Is this a new investment destination or just a fad?"

santhosh yadav

Jun 7, 2011

It is true the infrastructure development in india is growing at a snail pace.The reason being the lack of will and stateman ship from our political leaders and contractors.The system has gone rotten and there no zeal for any body to make quality infrastructure at a fast pace.
We do not take pride in beautifying our country , but we relish the beautiful cities of the other countries.That is why our film fraternity take pride in shooting films outside our country in exotic places and cities.
we have not learnt to keep our homes beatiful, but relish and enjoy the homes of other, whose houses were built by teir sheer hard work, planning and dedication.



Jun 7, 2011

There is a huze difference in the airports around the world and that in India. Even small cities like say NAshville, Orlando, have a hundred times better facilities than Mumbai. Brussels is the european hub of Jet airways, it is a small airport, but offers best facilities. Unfortunately our Govts., of the past have never given any importance to the development of this sector. Every govt. has considered Air travel and airpoets as luxury and neglected it. The time taken to approve the Navi Mumbai Airport is another case in point.
Present mumbai airport, particularly Baggage claim are is so congested that to get the baggage it takes almost an hour (particularly during night times when many flights land).
Even infrastucture growth, roads and highways have a very long way to go. Comparing roads and highways of say US to that of India is like comparison between two different centuries. We are way behind the world.
And worst, our politicians are so corrupt that to expect them to do things in the interest of the country, is just expecting too much.



Jun 6, 2011

Hi, reg CPOF's -- maybe better to invest in the previous fad-where Insurance companies like LIC were assuring the highest NAV, at least the scope of capital appreciation is higher than in CPOF's. Ultimately, it makes more sense to invest for the long-term in stocks of financially sound companies with good management and growth prospects--at least you are fully aware of the risks. regds


vinay topa

Jun 6, 2011

one thing you forgot to mention. Even at 7-9% they can be attractive as compared to FDs due to the I.TAX applicable to FD interest - specially if you are in the 30%taxation bracket and would not like to take too much risk or are retired.


R C Desai

Jun 6, 2011

Compared to bank deposits such funds will have a tax benifit.

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