The Diamond – A Timeless Asset in Portfolio

 

The Diamond – A Timeless Asset in Portfolio

The sentiment of diamonds being considered "investment pieces"; seldom echoes through occasions like engagement rings, Van Cleef necklaces, or milestone gifts such as a Cartier Love bracelet. While these acquisitions may seem exclusive to the privileged, their allure extends to all as timeless, cross-generational, family heirlooms that endure the test of time. Beyond sentimental value, investing in diamonds deserves recognition as a crucial element in marking life's significant milestones.

A seemingly modest 2 or 3-gram high-quality diamond can hold a value equivalent to 100 kilos of gold. This remarkable combination of value and portability positions diamonds as a potential form of emergency funding. Throughout history, populations displaced by war or extreme upheavals have successfully utilized diamonds as a portable and reliable asset in times of crisis.

Diamond Producers:

Diamonds are distributed across more than 35 countries globally. The primary contributors to diamond production are Africa and Russia, which collectively account for a significant share of the world's diamond output. Africa, in particular, is home to numerous diamond mines and plays a central role in the global diamond industry.

Canada and Australia are also significant players in the diamond production landscape. Both countries have made substantial contributions to the global diamond market, with mining operations that yield high-quality diamonds. Canada, in particular, has become renowned for its ethically sourced diamonds and is a key player in the industry. Regions in the Americas are also actively involved in diamond production. Brazil, in particular, has emerged as a smaller but noteworthy source of diamonds.

Diamond Characteristics:

Diamond, a solid form of carbon, exhibits a crystal structure known as diamond cubic, endowing it with the highest hardness and thermal conductivity among natural materials. The extreme rigidity of the diamond's atomic arrangement  exposes it to contamination by few types of impurities, with exceptions like boron and nitrogen. Infrequent defects or impurities, occurring at about one per million lattice atoms, impart colors such as Blue (Boron), Yellow (Nitrogen), Brown (Defects), Green (radiation exposure), Purple, Pink, Orange, or Red. Additionally, diamond boasts a remarkably high refractive index and relatively high optical dispersion, contributing to its unique and captivating visual properties.

Classification of Diamonds:

Diamonds can be broadly classified into two main categories: (1) Natural Diamonds and (2) Synthetic Diamonds.

Natural diamonds are those formed through natural processes or events. The majority of natural diamonds boast ages ranging from 1 billion to 3.5 billion years, originating at depths between 150 and 250 kilometers (93 and 155 miles) within the Earth's mantle.

On the other hand, Synthetic diamonds can be cultivated either from high-purity carbon under high pressures and temperatures or from hydrocarbon gases through chemical vapor deposition (CVD).

Additionally, Imitation diamonds can be crafted from materials such as cubic zirconia and silicon carbide.

Distinguishing between natural, synthetic, and imitation diamonds is commonly achieved through optical techniques or measurements of thermal conductivity. This classification not only highlights the diverse origins of diamonds but also underscores the importance of accurate identification in the diamond market.

The 4Cs of Diamonds:

Diamonds are assessed based on four key criteria, commonly known as the 4Cs, which play a pivotal role in determining their quality and price: Carat, Color, Clarity, and Cut.

Carat: Carat measures the weight of the diamond, with one carat equivalent to 0.2 grams. This metric is integral to the overall value of the diamond, influencing its price and highlighting its rarity. It's crucial to note that carat weight is distinct from diamond size, as different gem materials can have varying densities.

Color: The color of a diamond indicates whether it is naturally clear or exhibits a different color. Generally, the rarer the color, the higher the diamond's value.

Clarity: Clarity refers to any imperfections that may detract from the visual appeal of the diamond. Blemishes and inclusions are factors that reduce a diamond's clarity score.

Cut: Cut refers to the style or design used in shaping a diamond and encompasses symmetry, proportioning, and polish. Each diamond is unique, making them exceptional investment assets. The cut, with its unique facets, influences how much the diamond sparkles or reflects light, consequently impacting its price. To assess quality, diamonds are evaluated based on symmetry, polish, brilliance, and fire, categorized as poor, fair, good, very good, and excellent. Poorly cut diamonds may appear dull, significantly decreasing their value.

Diamonds possess high value density, allowing for easy transportation at a fraction of the cost of precious metals. The diamonds within a Diamond Standard Bar and Coin, for instance, are valued at around $1 million per ounce. However, value density varies among diamonds; for instance, a 1-carat Red diamond may be more value-dense than a 1-carat White diamond due to the rarity of Red diamonds. Diamond Standard's efforts to standardize diamond commodities enable investors to bridge the value gap by acquiring fungible Coins and Bars. This standardization helps eliminate disparities in diamond value, providing a more equitable investment platform.

An Underallocated Investment with Pent-Up Demand:

Investors currently maintain a significant presence in various precious metal markets, with substantial allocations of approximately 30% in the gold market, 19% in the silver market, 17% in the platinum market, and 15% in the palladium market. In stark contrast, the diamond market remains notably underallocated to investors, constituting only around 1% of their portfolios.

The underwhelming investment in diamonds, despite their well-established reputation as one of the most sought-after and valuable precious resources, becomes particularly perplexing when considering the substantial allocations in other precious metals. The lack of awareness regarding standardization issues further complicates this scenario, making it challenging for investors to tap into the diamond market. Each diamond's unique characteristics and individual price tags, in the absence of standardization, create a hazy path to liquidity.

The absence of a streamlined market structure  has hindered diamond price discovery and transparency, deterring potential investors from entering the market. Efforts to establish organized exchanges and market standards could potentially unlock the pent-up demand for diamonds and bring about a more robust and accessible investment avenue.

An Uncorrelated Asset for Portfolio Diversification:

Diversification stands as a cornerstone for risk mitigation within any investor's portfolio. By holding assets with low correlations, investors can effectively reduce portfolio risk. The correlation between two assets directly influences the resulting portfolio volatility, making it essential for savvy investors to maintain a diverse mix of assets with low or negative correlations. This strategic approach maximizes returns for a given level of non-diversifiable or systematic risk.

Diamonds emerge as a unique and uncorrelated asset class, exhibiting low correlations relative to multiple other asset classes. This characteristic suggests that diamond prices are influenced by independent drivers different from those affecting more frequently traded assets. The potential benefits of adding diamonds to a diversified portfolio become evident in the lower volatility they may contribute, given their distinct market dynamics.

However, it is important to note that the correlation of diamonds may experience changes, particularly with an anticipated increase in investor holdings. The advent of standardized and regulated diamond investments, coupled with a growing acceptance of diamonds as an asset class, could lead to an increase in correlation. Investments tied to diamonds, such as commodities, futures, options, private funds, exchange-traded funds, and commodity indices, may link a portion of their market price performance to overall demand for assets and securities. Consequently, heightened periods of market volatility could contribute to an increase in correlations between diamond investments and other assets.

Among the various diamond indices, the 1.0 carat mixed diamond index has shown the most effective risk-reducing performance. The construction of these indices considered different weights (0.3, 0.5, and 1.0 carats) and quality classifications (fine, commercial, and mixed) to reflect the diverse grades and applications of diamonds within each class. Investment-grade diamonds are further categorized into three size groups (0.3, 0.5, and 1.0 carats) and then classified by color and clarity.

Only colorless or near-colorless diamonds (grades E, F, and G) and specific clarity grades (VVS1, VVS2, and VS1) were used for these indices, with the rarity of apex clarity grades (FL and IF) and color grade D warranting a separate grouping. This meticulous categorization ensures a nuanced approach to including diamonds in investment portfolios, recognizing their potential as an uncorrelated asset for effective diversification.

High Price Volatility of Rough Diamonds:

The global financial crisis marked a period where rough diamond prices experienced significant volatility. Despite sustained consumer demand for polished diamonds, rough diamond prices plummeted by 50% as retailers, wholesalers, and manufacturers opted to sell down existing inventory rather than risk replenishment in an uncertain market.

Interestingly, 18 months later, rough diamond prices more than doubled, surpassing pre-crisis levels, driven by the industry's rush to restock in response to continued consumer demand. The expectation is that such pronounced volatility will persist, offering attractive trading opportunities for qualified investors who can navigate the market's fluctuations.

Single Stone Investment:

In a broader analysis, Low, Yao, and Faff (2015) identified 1.0 carat flawless diamonds as a strong hedge and a safe-haven asset. Notably, during the 2008 global financial crisis, these diamonds experienced the least volatility, with 1.0 carat flawless diamonds even rising in price when financial markets collapsed. The authors concluded that physical diamonds demonstrated satisfactory performance during periods of market volatility and should be included in a portfolio for their downside hedging potential. Top-quality flawless diamonds exhibited a strong negative correlation with international equity markets, making them an attractive store of value that can provide price stability and potential appreciation during market turmoil.

Larger and rare stones, resembling the high-end art market, carry characteristics of infrequent trades and unique pricing determinants, resulting in greater variability in outcomes and risks. Despite this, larger stones offer store-of-value characteristics and diversification benefits. The introduction of standardized exchange trading methodology on the SDiX platform enhances the recognition of diamonds as a rising asset class.

Industrial Applications of Diamonds:

Diamonds, renowned for their beauty, are equally valued for their exceptional hardness, making them indispensable in various industrial applications. The abrasive industry extensively utilizes diamonds for cutting, drilling, and grinding rigid materials. The growth of the construction industry has further intensified the demand for industrial diamonds, playing a crucial role in cutting, drilling, polishing, and grinding materials like glass, concrete, and ceramics.

Challenges of Cost and Price Volatility:

Despite the growing demand, the diamond market grapples with challenges related to cost and price volatility. The high cost associated with diamond extraction and the inherent uncertainty in natural diamond prices have left a notable impact. However, the market has seen a surge in lab-grown synthetic diamonds, offering a more cost-effective alternative. Price fluctuations in the diamond industry are influenced by factors such as consumer perception, rough diamond production, currency fluctuations, and evolving consumer buying patterns.

Cost of Carry:

The cost of carry for diamonds is defined as the expenses associated with storing a physical commodity or holding a financial instrument over time, is notably favorable. Carrying charges include insurance, storage costs, interest charges on borrowed funds, and related expenses.

Unlike traditional commodities such as oil and metals, diamonds have a fraction of the cost of carry due to their size and handling process. This advantageous cost structure, coupled with ease of storage and transport, distinguishes diamonds from bulkier commodities and adds to their appeal as an investment.

Future of Diamond Industry:

Continuing the trend of the past decade, the future demand for gem diamonds is anticipated to surpass global supply, leading to potential price increases. Existing mines, having surpassed their peak capacity levels, are facing increased production costs as they transition from open-pit to underground mining, and navigate stricter environmental regulations. The industry consensus is that no major new mines will be developed and operational in the medium term, given the considerable lead time of 7 to 10 years required to open a new diamond mine.

On the demand side, the United States maintains its position as the largest retail market for polished diamonds. Notably, China and India have surpassed Japan in recent years, with China emerging as the second-largest market for polished wholesale diamonds. The rapid expansion of retail jewelry stores in China underscores its growing significance in the global diamond market.

In the context of broader market dynamics, investors have witnessed volatility not only in listed stocks but also, in tradable forms of precious metals and commodities traditionally considered safe havens, especially following the last recession. In response to this, investors are increasingly seeking attractive, tangible assets characterized by low volatility and low correlation to other major asset classes, offering potential inflation hedging benefits. The heightened investor sensitivity to valuation characteristics has fueled a growing appetite for assets such as physical diamonds, where prices are fundamentally driven by real supply and demand dynamics. This shift reflects a strategic move towards assets perceived as more stable and grounded in tangible market fundamentals.

Conclusion:

The diamond market has witnessed significant developments, including the introduction of blockchain-backed diamond source platforms by major players like the De Beers Group. This technology ensures tamper-proof source assurance, enhancing transparency and traceability in the diamond supply chain.

Looking ahead, the diamond market is poised for steady growth. Factors such as increasing demand from millennials, expanding industrial applications, and technological advancements are expected to drive market growth. However, challenges related to cost and price volatility persist.

In the realm of investments, the polished diamond industry continues to evolve with a focus on increasing transparency, particularly as wealth accumulates in emerging markets. Diamonds, as precious commodities, serve as a store of value and a hedge against inflation. Currently representing only 3% of annual production, diamonds as investments have substantial upside potential in comparison to gold (40%) and silver (20%). The inherent rarity of diamonds further enhances their attractiveness as investments and valuable additions to diversified portfolios.

Author

Thakur Ajit Singh
Founder - Quick Turtle | Graded Financial Services | AskCred
Financial Expert | Trainer | Management & Placement Consultant
Cell: 8169810833

 

Investor Caution Amidst Geopolitical Tensions

Investors in the Indian Stock Market are treading cautiously as uncertainty looms due to the ongoing Israel-Hamas conflict. The potential for a full-fledged war in West Asia, with the involvement of multiple countries, has created unease in the market. Worries about a deepening crisis in the Middle East have driven oil benchmark Brent to remain above $88, offsetting concerns about the economic outlook in Europe.

Additionally, global investors are apprehensive about the possibility of higher interest rates worldwide. The recent rise in S&P Global's flash US Composite Purchasing Managers Index, the highest since July, may provide the US Federal Reserve with more leeway to maintain high interest rates; this could potentially impede future economic growth.

Mid and small-cap stocks have not been immune to the market's fluctuations, suffering significant losses. The overall market capitalization (mcap) of BSE-listed firms dropped to approximately ₹309.2 lakh crore from ₹323.8 lakh crore on October 17, resulting in investors' wealth diminishing by about ₹14.6 lakh crore over the course of five sessions.

However, in a surprising turn of events, the NSE Nifty and Sensex rebounded after a bearish streak lasting six days. BSE Sensex gained 1.01% (634.65 points) to close at 63,782.80 points, while Nifty surged 1.07% (202.45 points) to close above the benchmark 19,000 points level at 19,059.70 points. The rebound was led by sectors such as auto, IT, financial, and energy, primarily driven by better-than-expected Q2 financial results. Despite uncertain geopolitical situations in the Middle East, investor sentiment was boosted by these positive earnings reports. Notably, Asian Paints, Ultratech Cement, and ITC were the laggards, while HCL Tech, Coal India, and SBI emerged as the top gainers.

Author

Thakur Ajit Singh

Founder - Graded Financial Services | Quick Turtle | AskCred

Financial Expert | Trainer | Management & Placement Consultant

Cell: 8169810833

 

The White Metal: PLATINUM

 

The White Metal: PLATINUM

Investors are well-acquainted with the allure of gold as a store of value, but there's another precious metal that often goes overlooked—platinum. Often described as "The White Metal," platinum is an extraordinary asset with unique investment potential. It's not only thirty times rarer than gold but also boasts compelling supply and demand dynamics that set it apart as a lucrative investment option.

Investment Merits of Platinum:-

Historically, precious metals have been an essential component of diversified portfolios, serving as both safe-haven assets and hedges against inflation. While gold is the traditional favorite in this category, platinum presents a compelling alternative. It has been proven to enhance the effectiveness of precious metal allocations in portfolios by offering long-term diversification benefits.

Remarkably, even a modest inclusion of platinum, as low as 5%, in a gold-focused portfolio over the three decades would yield superior risk-adjusted returns. The unique characteristics of platinum make it an invaluable addition to an investment portfolio.

Platinum's Unique Qualities:-

Platinum's distinctive physical properties set it apart from other precious metals. This dense, malleable, and ductile metal can be fashioned into intricate shapes without losing its durability. To put its remarkable malleability in perspective, one gram of platinum can be stretched into a wire over a mile long. At the same time, it weighs much heavier; a six-inch cube of platinum weighs as much as an average human being.

Platinum Demand:-

Approximately 75% of the world's platinum is mined in South Africa, with Russia being the second-largest producer. Canada, the U.S., and Zimbabwe also contribute to global platinum production, albeit in smaller quantities. Interestingly, platinum is often a by-product of nickel mining, making its supply even scarcer in comparison to gold.

Platinum's demand emanates from four key sectors:

1. Automotive: Platinum plays a crucial role in controlling harmful vehicle emissions through catalytic converters. Emerging market demand for automobiles, coupled with stricter global emission standards, ensures robust growth potential in this sector.
2.  Industrial: Platinum has a broad spectrum of industrial applications, from biomedical devices to glass fiber and jet engine blade manufacturing. Its growth is intrinsically tied to global economic development.
3. Jewelry: Platinum has firmly established itself as the premier jewelry metal, with significant demand in regions like India and China.
4. Investment: Investment avenues for platinum include ETFs, accumulation plans, and physical bullion like bars and coins. Notably, the World Platinum Investment Council (WPIC) actively promotes platinum as an investment asset, enhancing market efficiency and expanding distribution channels.

 

Factors Affecting Platinum Prices:-

Several factors influence platinum prices, including:

1. Diesel: The decline in diesel car demand impacts platinum due to its use in catalytic converters for diesel engines.
2. Trade Wars: Trade disputes can disrupt industrial demand for platinum, affecting its price.
3. Hydrogen Technology: Growing investments in hydrogen fuel cells, which require platinum, can boost demand.
4.  South African Issues: The precarious state of South African platinum mines can reduce supply, potentially raising prices.
5. Scarcity: Platinum's rarity, even compared to gold, suggests a long-term upward price trend.

 

How to Invest in Platinum:-

There are various ways to invest in platinum globally:

1. Physical Bullion and Coins: Investors can purchase platinum bullion and coins through banks and authorized dealers, ensuring high purity and quality.
2.  Futures Trading: Platinum futures contracts are available on commodity exchanges for more active traders, but they entail higher risk.

The Future of Platinum:-

Given its current price, investment potential, and diverse industrial applications, platinum presents an attractive opportunity. Recent years have witnessed platinum becoming more affordable relative to other precious metals, making it increasingly popular. The emerging trend of platinum jewelry in the West is likely to drive its demand even higher, including in India.

As platinum's price remains below historical averages, many investors are recognizing its value. With its scarcity and versatile utility, platinum could potentially shine even brighter in the world of investments.

Author

Ajit Singh

Founder

Graded Financial Services | Quick Turtle | AskCred

Management Consultant | Trainer

 

 

Gold: A Timeless Treasure

 

Gold: A Timeless Treasure

Few elements have captivated the human imagination as gold has. In ancient Egypt, it was revered as divine and indestructible, believed to be a physical embodiment of the Sun itself.

Long before the advent of modern currencies like the dollar, euro, yen, or peso, gold reigned supreme as the world's de facto currency. The first gold coins were minted in 550 B.C.E., and well into the 20th century, modern paper currencies were backed by the "gold standard."

Even today, gold retains its allure as the ultimate "safe haven" commodity. It is tangible and resilient, retaining its value when compared to "paper" investments like cash, stocks, and bonds.

How Much Gold Remains?

According to the US Geological Survey, underground gold reserves are currently estimated at around 50,000 tons. While this figure is subject to variation, it suggests that approximately 20% of the world's gold remains to be mined, a process that could take up to two decades.

Nonetheless, the depletion of easily accessible gold reserves doesn't necessarily spell the end of gold mining. Ongoing research and the introduction of new technologies may open up previously untapped resources, although mining costs may rise significantly. Should gold become scarcer, its market price could skyrocket.

The following countries boast significant gold reserves:

Australia: 10,000 tonnes (19% of the total)

Russia: 7,500 tonnes (14%)

U.S.: 3,000 tonnes (6%)

Peru: 2,700 tonnes (5%)

South Africa: 2,700 tonnes (5%)

Rest of the World: 27,100 tonnes (51%)

These reserves not only dictate current production but also hint at future potential mining locations.

 

Prospects for Future Gold Mining:

Surprisingly, the sea contains approximately 20 million tonnes of gold. However, the challenge lies in the fact that gold is incredibly dilute in seawater, with just billionths of a gram in an average liter. Extracting this gold from the sea remains a formidable task.

On land, experts estimate that the top four kilometers of Earth's crust contain as much as 122 billion metric tons of gold, not accounting for what lies beneath the oceans. If new technologies allow for the profitable extraction of gold at lower concentrations, the world may possess more gold than initially thought.

Beyond Earth, asteroids in the Asteroid Belt could potentially contain substantial amounts of gold in their cores, though the feasibility and cost-effectiveness of extracting this gold remain distant prospects.

 

Who Holds Gold?

Gold is coveted by investors worldwide for its ability to preserve value, particularly during times of high inflation. Investment accounts for a significant portion of gold's use, with over 44,000 tonnes held as bars, coins, or bullion in gold-backed exchange-traded funds (ETFs).

Central banks are also major gold holders. Unlike other assets like foreign currencies or equities, gold's value depends on supply and demand dynamics. Therefore, central banks often use gold to diversify their assets and safeguard against fiat currency depreciation. As of 2021, central banks held more than 35,000 tonnes of gold, accounting for nearly one-fifth of all above-ground gold.

Gold isn't just a financial asset; it plays a crucial role in various industries, including electronics, dentistry, and space exploration. For example, a typical iPhone contains around 0.034 grams of gold, along with other precious metals. These industrial applications make up approximately 15% of all above-ground gold.

A Golden Future

Gold has stood the test of time, and it's likely to do so in the future due to its indestructible nature. This enduring quality, coupled with its rarity and inability to be artificially produced in large quantities, makes gold a valuable and essential investment.

With growing concerns about money supply expansion and inflation, gold will continue to deliver value and offer a safe haven for investors during times of volatility. It remains a reliable means of preserving wealth for the long term.

 

Author:

Thakur Ajit Singh
Founder - Quick Turtle | Graded Financial Services | AskCred
Financial Expert | Trainer | Management & Placement Consultant
Cell: 8169810833

Outlook of Debt Market for 2nd half of the Year 2022

 

Outlook of Debt Market for 2nd half of the Year 2022

We would begin the topic by covering basic concepts relevant to the readers for a better understanding of this article.

Sometimes, banks may need liquidity to take care of an unprecedented spurt in the withdrawal of funds by their account holders, or to maintain the prescribed limit of the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). In such situations, banks may have to take loans from RBI by keeping Government Securities (G-Secs) as collateral. At the end of the loan term i.e. either overnight or 7 days, the bank repurchases the Government Securities from RBI by repaying the loan amount along with a pre-decided interest rate called Repo Rate – which is the interest rate at which the RBI lends money to the banks. In case, the bank defaults in paying the borrowed money back to the RBI, the latter sells the G-Secs that were kept as collateral.

Regulating the Repo rate is one of the tools available with RBI to regulate inflation (called Hawkish monitory policy) and growth in the economy (called Dovish monitory policy).

Consider a situation where the economy is facing high inflation; the RBI will keep increasing the Repo rate with an objective to curtail part of available liquidity in the hands of consumers. 

With the increase in the Repo rate; banks have to pay more interest to borrow money from RBI. Banks in turn would raise the lending rate on the loans given to their borrowers. This move, leaves consumers with less money thus, reducing their purchasing power, leading to a decrease in the demand for goods and services - making them cheaper; eventually cooling down the inflation.

The rationale behind RBI’s decision to increase Repo Rate: Based on the assessment of the economic situation, the Monetary Policy Committee (MPC) of the RBI, decided to increase the policy repo rate under the Liquidity Adjustment Facility (LAF). The decision to tame the inflation was made in light of growing inflation, the ongoing war between Ukraine and Russia, high crude prices, and global commodity shortages. Besides, US Federal Reserve increased interest rates by 50 basis points to 0.75%-1% in the May 2022 meeting, thus impacting the markets across the globe.

The RBI wants to keep inflation under control, which is already close to 7%, as well as manage and monitor money flow into the banking sector. Therefore, RBI may continue to further hike Repo rates to reach the level of 6 to 6.50% by March 2023.

 

Effect of rising Repo Rate on Fixed Deposit:  The rate hike is welcomed by the deposit holders of banks and corporates, as fixed deposits have become an attractive option to invest with surges in interest rates.

 

Effect of rising Repo Rate on Debt Mutual Funds: Assume that a 10-year Government bond was issued at a face value of Rs. 100 at 8% interest (coupon) rate, which implies the yield in this bond is Rs. 8/-

If the Repo rate increases and the lending rate is increased to for example 10%, that would mean that the yield for the new bond issued will be Rs. 10 /-. This will reduce the demand for the 8% bond since the 10% coupon rate promises better returns.

Therefore, to make the former more attractive, the face value of the bond will be decreased to, say, Rs. 90/-. So, the yield for this bond now becomes 8.89% (8/90*100), which is higher than the original- making it more attractive.

Hence, an increase in interest rate is directly proportional to the yield and inversely proportional to the face value. This means that the Bond prices are inversely correlated to yield.  When interest rates and the yield goes up, bond prices decline (and vice-versa) resulting in mark-to-market losses for debt mutual funds.

After the RBI's announcement, the 10-year bond yield, which had been steadily rising in recent months, inched up to 7.40%. As a result, the net asset value (NAV) of debt mutual funds has fallen sharply, particularly for medium and long-duration funds. An increase in interest rates will have a negative impact on debt funds with a longer duration.

Conversely, a decrease in the Repo rate may make the debt schemes more attractive as it may increase the NAV of the debt schemes. The margin of gain will depend on the average maturity and the securities the scheme holds.

Effect of rising Repo Rate on Equity Market:  The Equity market typically goes down with the RBI's policy rate hike.  When there is plenty of liquidity, the equity market does well. If the RBI tightens the interest rates, the stock market is adversely impacted. Following the RBI's action, banks tend to raise their lending rates, thus making loans more expensive. As a result, companies will have to pay a higher interest rate to borrow money, indirectly impacting their liquidity position, and leading to a decrease in equity fund returns.

What should an investor do?

 

Looking at the inflation of 7%, the terminal Repo rate should stand somewhere at 6-6.5%. Therefore, investing in Corporate Fixed Deposits (choose only AAA-rated CFDs) would offer a better interest rate over the bank fixed deposit.

Invest in debt mutual funds if you have a large investment portfolio. Debt mutual funds are taxed at 20% with indexation if you hold the money for more than three years. If you are investing for less than three years, they don’t have any tax advantages and are taxed like bank deposits at applicable income tax rates.

If you decide to invest for three years or more, look at investing in the Corporate bond funds, and Banking & PSU funds. Also, investing in the Target Maturity Funds (TMFs) is a good option, as you need not worry if held until maturity, as are locked in at the yield at the time of investing.

 

Note on TMFs: These are passive debt funds that track an underlying bond index. Thus, the portfolio of such funds comprises bonds that are part of the underlying bond index, and these bonds have maturities in-line with the fund’s stated maturity. The bonds in the portfolio are held to maturity and all interest payments received during the holding period are reinvested in the fund. Thus, Target Maturity bond funds operate in an accrual mode like FMPs. However, unlike FMPs, TMFs are open-ended in nature and are offered either as target maturity debt index funds or target maturity bond ETFs. Thus, TMFs offer greater liquidity than FMPs.

TMFs are currently mandated to invest in government securities, PSU bonds, and SDLs (State Development Loans), thus, carrying lower default risk compared to other debt funds.

 

Author

Ajit Singh

Founder

Graded Financial Services | Quick Turtle | AskCred

Email: ajit@gradedfinancialservices.com

Shimmering Gold

 

Shimmering Gold 

After China, India is the second-biggest gold consumer in the world. However, India fulfills most of its gold demand through imports, and it is largely driven by the jewelry industry. India imported the highest quantity of gold in the last 10 years in 2021. The imports of gold in May 2022 jumped by almost nine times to $7.7 billion compared to a year ago.

However, the year 2022 has brought uncertainty to market players who are trying to assess the implication of higher interest rates on economic growth, in the backdrop of the Russia-Ukraine fight and the China- Taiwan conflict taking shape for war.

The gold price had a disappointing performance so far considering the strong uptrend in most commodities. Gold witnessed mixed trade in the first half of the year and has registered near 1% decline.

The central government decided to curb the import of the precious metal by hiking the import duty on bullion from 7.5% to 12.5% on 1^st July 2022 this year, amid the widening trade deficit, and the rupee taking nose-diving to Rs.80 to US$.  Gold also attracts a 2.5% Agriculture Infrastructure Development Cess (AIDC), adding up total duty of 15%. However, one may recall that last year the government cut the import tax to 7.5% to strengthen the domestic market. So, a hike of 7.5% on import duty can be termed as a reversal to maintain the balance. 

Considering that we meet domestic demand by way of gold import; such a step may lead to a proportionate rise in the price of domestic gold by around Rs.2000/10gm, factoring in international gold prices which are trading with a slightly negative bias. With domestic prices surging, demand is likely to take a hit at a time when the country is already grappling with high inflation.

Impact on Gold consumers of India:

Since the onset of the Coronavirus pandemic, gold prices escalated significantly in India. In March 2020, the gold rate was between Rs. 41,000 and Rs. 43,000 per 10 grams, making a historic high of Rs. 56,000 in August 2020. Currently, it is around Rs 53,300 at the time of writing this blog.

Higher prices due to duty hikes, slower economic activity, and tightening liquidity conditions due to interest rate hikes may impact gold demand significantly. The import duty hike will lead to a rise in the prices of gold jewelry in the country. With the GST rate hike on cut and polished diamonds from 0.25% to 1.5% from July 18, jewelry will most likely get dearer.
The move may affect exports too, which in May 2022  witnessed a year-on-year growth of 20% (Source: Gem and Jewelry Export Promotion Council).

Consumers consider gold as a hedge against inflation. However, this may not be the right time to invest in gold (SIP through gold ETF continues to be an exception), but, move the funds to be invested to sector-specific equities, Mutual Funds (via SIP route), and Corporate fixed deposits of AAA-rated companies which are giving attractive interest upto 7.40% p.a for 36month tenure.

 

Author

Thakur Ajit Singh

Co-Founder

Graded Financial Services | Quick Turtle | AskCred

Email: gradedfinserv@gmail.com

 

A Leap of Faith – In the Test of Time

‘Covid.19,’ has triggered a crisis of mammoth proportion. It has given a smashing impact on the lives and livelihoods, with economies around the globe reeling under turmoil, facing collateral damages of every nature, much worse and fearful than that of financial crisis of 2008. Lurking danger of global recession is looming large.

The prices of even ‘True Blue’ stocks across industries, around the world have been battered black and blue. Global markets have shed around US $15 trillion of wealth. Stock indices of prominence have faced up to 30% fall; situation of Indian Indices have been no different- Dalal Street witnessed the blood bath more than once since March 2020, upcoming Burger King India- withdrawing their Initial Public Offerings and SBI Cards -saw listless listings.

We are in the firm grip of bears; for next 12 month for sure! New York Stock Exchange opened without its trading floor for the first time in 228 years on March 23^rd, after two people tested positive for Covid-19 on the trading floor. The fierce pace and extremity of correction has panicked investors, leading to the loss of confidence in the markets that could not be revived despite multiple rate cuts by the Federal Reserve. Countries are staring at sharp cuts in their GDP growth forecasts, with loss of millions of jobs in vogue.

However, times like these offer investors a rare opportunity to invest in assets at very attractive prices. As for the economies, they would defy all precedents and emerge stronger to deal with such ‘black swan’ events in the future.

The market volatility can be worrisome in the short term, but long-term investors need not develop cold feet. Global and Indian equity markets had rallied out of proportion, which is now getting corrected due to Covid-19 pandemic. However, going by the experiences of past out-break of viruses like Swine Flu and Zika, we have seen that such epidemics are temporary phenomena and when they are over, markets see unprecedented rise. Expect markets to gain traction once COVID.19 crisis is over.

Markets are cyclic; one should use this slump as an opportunity to invest for 36 month, in front-line stocks, which are fundamentally strong. We know for the fact that, quality companies will create wealth, as they have enough resilience to bounce back after a sharp decline.

However, it would be good to stay away from direct stock investing; if you don’t have grip on the subject and access to high grade research reports. Instead one can take Mutual Fund route for investing. Certain AAA rated Corporate FDs can also offer good options if one is comfortable with fixed rate of returns. Besides, get your selves sufficiently covered with adequate health and life insurance.

Market volatility helps build wealth over a period of time. Therefore, investors should continue disciplined investing through systematic investment plans (SIPs) and stick to their asset allocation. Those who have surplus money should invest more.  However, do not make the mistake of buying low priced stocks or cyclical stocks.

The major impact is expected to be on Hardware business, the Software and Services businesses are also expected to slow down. However, adoption of collaborative applications, security solutions, Big Data and AI are set to increase in the times ahead. IT solution providers should test run some concepts like enabling –‘work from any place, any time’, as they may have embedded business opportunities for the future.

In the long run, when things are under control, markets would recover and the same businesses would be fairly priced again. If we consider everyday utilities, despite a slowdown we would continue to consume toothpaste, soaps, tea and other grocery items. This is exactly where companies like Hindustan Unilever, D’Mart and Colgate come into the picture since, they would continue to create wealth as they have been in the past.  So, investing in the stocks of good I.T, FMCG, Pharma, Insurance companies can be a sensible decision.

India’s already decelerating economy is now staring at disruption as the country is locked down, though government of India and the RBI have taken slew of measures to combat COVID-19 impact.

India’s services sector comprising of retail, aviation and entertainment, have been severely hit. The manufacturing sector is also suffering, casting serious concerns about the medium term viability of many businesses, including the MSMEs. The infrastructure sector is also in turmoil. Fear is that these developments may lead leveraged companies to default and create non-performing assets. The current situation has also led to significant volatility in asset prices, especially for financial assets including publicly traded debt and equity.

In the current situation companies should assess cash balances to meet operational expenses, reassess business strategies in light of post-COVID scenario, necessary adjustments to the capital structure factoring in lower earnings, and diversify funding sources.

The current situation would leave deep impact on the economy due to it’s high intensity and long duration. It may alter the business landscape through changing trade flows, asset prices and consumption patterns, impacting all stake holders. The need of the hour is to put in place a robust action plan that addresses potential impact, from short-term cash flow concerns to longer term adjustments of financial statements. 

At the level of nation, the void created by disruption in global supplies can be filled by India. Global supply chain network has totally collapsed. The worst-hit sectors include technology and auto. China is a major exporter, creating significant reliance on them, is hurting the global economy and manufacturing of many companies have almost halted.

The movement of companies from China to other nations should be lapped up by India – which is in quest of FDI. The expansion of the manufacturing hub linked with global supply chains would create large-scale employment.

The outbreak of corona virus provides a sizeable opportunity for India to follow an export-driven model. However, necessary tools, pool of skilled labor, network of suppliers, easing the logistics process, better business environment, doing away with administrative bottlenecks, more incentives, robust infrastructure-power, efficient port and roads would be the ask to redeem the opportunities.

Time is the best healer. We don't know if this crisis is going to get worse, and we never know whether the panic is going to be the once-in-a-generation kind, but if we were to take a leap of faith looking at how China has recovered; we know that, we shall stand test of the time to emerge as winner.

HEDGE FUNDS

1)  "Hedging" is the practice to reduce risk, but the objective of majority of hedge funds is to maximize return on investment. The name is historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market.

2)  Hedge funds use dozens of different strategies, so it isn't accurate to say that they just "hedge risk." In fact, since hedge fund managers make speculative investments, these funds may carry more risk than the overall market.

3)   However, there are mechanisms in place to protect those who invest in hedge funds. Often fee limitations such as high-water marks are employed to prevent portfolio managers from getting paid on the same returns twice. Fee caps may also be in place to dissuade managers from taking on excess risk.

4)   Hedge funds are alternative investment funds (AIFs), using pooled capital sourced from accredited investors or institutional investors (like banks, insurance firms, High Net-Worth Individuals (HNIs) & families, endowments and pension funds) and employ different strategies to earn active return or alpha for their investors, often with complicated portfolio-construction and risk management techniques.

5)  They are private investment vehicles that allow wealthy individuals to invest. Hedge funds can pretty much do what they want as long as they disclose the strategy upfront to investors. The minimum ticket size for investing in these funds in India is Rs 1 crore.

6)    A hedge fund can basically invest in anything—land, real estate, stocks, bonds, derivatives, commodities, currencies, convertible securities,  mutual funds, startups, art, rare stamps, collectibles, gold, wine.

7)   They can leverage (often use borrowed money to amplify their returns) in both domestic and international markets in quest of generating high returns (either in an absolute terms or over a specified market benchmark).

8) It is important to note that hedge funds require less SEC (Securities & Exchange Commission) regulations than other funds. One aspect that has set the hedge fund industry apart is that, they face less regulation than mutual funds and other investment vehicles.

9) It is administered by a professional investment management firm, often structured as a limited partnership or limited liability company.

10) Investments in hedge funds are illiquid as they often require investors to keep their money locked in the fund for at least a year.

11) Following the financial crisis of Yr.2007–2008, regulations were passed in the United States and Europe with the intention of increasing government oversight of hedge funds and eliminating certain regulatory gaps.

12) Preqin Global Hedge Fund Report, the Hedge funds have now grown to total assets of approx $3.235 trillion in 2018.

13) A hedge fund typically pays its investment manager annual management fee (for example, 2% of the assets of the fund), and a performance fee (for example, 20% of the increase in the fund's net asset value during the year).

Some of the strategies that hedge fund managers use are:

a)   Sell short: Here, the manager, hoping for the prices to drop, can sell shares to buy-back in future at a lesser price.

b) Invest in an upcoming event: in view of some major market events like mergers, acquisitions, spin-offs, among others can influence manager’s investment decisions.

c) Use arbitrage: Sometimes the securities may have contradictory or inefficient pricing; managers use this to their advantage.

d)  Invest in securities with high discounts: Some companies facing financial stress or even insolvency will sell their securities at an unbelievably low price.

Investors should use following  guidelines for hedge fund selection:

a)    Five-year annualized returns

b)    Standard deviation

c)    Rolling standard deviation

d)  Months to recovery/maximum Drawdown:  A drawdown is a peak-to-trough decline during a specific period for an investment, trading account, or fund. A drawdown is usually quoted as the percentage between the peak and the subsequent trough. If a trading account has $10,000 in it, and the funds drop to $9,000 before moving back above $10,000, then the trading account witnessed a 10% drawdown.

Drawdowns are important for measuring the historical risk of different investments, comparing fund performance, or monitoring personal trading performance.

e)  Downside deviation: Downside is the negative movement in the price of a security, sector or market. Downside can also describe periods when an economy has either stopped growing or is decelerating.

f)    Fund Size/Firm Size: The guideline for size may be a minimum or maximum depending on the investor's preference. For example, institutional investors often invest such large amounts that a fund or firm must have a minimum size to accommodate a large investment. For other investors, a fund that is too big may face future challenges using the same strategy to match past successes. Such might be the case for hedge funds that invest in the small-cap equity space.

g)  Track Record: If an investor wants a fund to have a minimum track record of 24 or 36 months, this guideline will eliminate any new funds.

h)  Minimum Investment: This criterion is very important for smaller investors as many funds have minimums that can make it difficult to diversify properly. Larger minimums may indicate a higher proportion of institutional investors, while low minimums may indicate a larger number of individual investors.

i)   Redemption Terms: These terms have implications for liquidity and become very important when an overall portfolio is highly illiquid. Longer lock-up periods are more difficult to incorporate into a portfolio, and redemption periods longer than a month can present some challenges during the portfolio-management process. A guideline may be implemented to eliminate funds that have lockups when a portfolio is already illiquid, while this guideline may be relaxed when a portfolio has adequate liquidity.

Comparing Hedge Funds & Mutual Funds:

a)   Investment Stance: Hedge funds generally have an aggressive stance on their investments and seek higher returns using speculative positions and trading in derivatives. They can take short positions (Short Sell) in the markets, while mutual funds cannot. Short selling allows these funds to benefit even in the falling markets, which is not so for mutual funds.

b)  Leverage: Mutual funds are safer as they don’t have much leverage, whereas hedge funds have a huge amount of leverage and thus attract higher risk.

c)  Investors: Hedge funds are available only to High net worth investors. Whereas, Mutual funds are accessible to the large group of people. In fact, you can start a SIP with the amount as low as Rs. 500.

d)  In short, hedge funds are comparatively high-risk funds that aim higher returns compared to mutual funds.

Some examples of hedge funds: 

Munoth Hedge Fund, Forefront Alternative Investment Trust, Quant First Alternative Investment Trust, IIFL Opportunities Fund, Singlar India Opportunities Trust, Motilal Oswal’s offshore hedge fund and India Zen Fund.