THE YELLOW METAL IN PORTFOLIO

By Koshica Oberoi

The demand for the yellow metal- gold is not just for consumption but it is also driven by investment. So, now let’s look at how price including various other factors affect the investment demand for gold. The gold prices have stopped rallying, unlike 2012, when gold prices were racing up due to growing consumer demand in India along with expected demand from investors pushed up the prices to spectacular heights.

The surge in price of gold halted by the end of 2015, considered to be the base for many years. Although gold prices have delivered gains of 30% since 2015, there are today many factors exerting compelling pressures on gold prices- some propelling them further and others dampening them. The highest consumers of gold, India and China, witness a decline in the demand because of which it is expected that the consumer demand will remain flat. Therefore, it is investment demand for gold that will support the gold prices. The recent scenario of increasing geopolitical tensions, inflation and unceasing rally made by stocks in India and US, makes gold a safe haven and an attractive diversifier for the investors. The demand for gold can be classified as follows:

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Total Returns Index (TRI) – an appropriate benchmark to compare fund performance

Financial institutions have come a long way since the aftermath of Global Financial Crisis in 2008. As asset management companies and fund houses battle to grab a larger share of corpus from increasingly knowledgeable investor cohort, more and more emphasis has been laid on building customer confidence and trust, financial transparency and ethics. In a recent survey by CFA, ‘From Trust to Loyalty: A Global Survey of What Investors Want’, majority (~38%) of the retail customers chose ‘Trust on asset managers/firm’ as their primary reason while picking an asset management firm.

More recently, one such step in achieving financial transparency is a decision by DSP Blackrock Mutual Fund & Edelweiss Mutual Fund to opt for Total Returns Index (TRI) as the benchmark to measure the performance of their funds. Prior to DSP Blackrock & Edelweiss Mutual Fund, Quantum mutual fund adopted the TRI benchmarks to compare the returns of their funds. Such a move by fund houses is in the right direction towards global convergence on usage of fair and transparent benchmarks – to gauge performances of assets under management.

 

What is Total Returns Index (TRI)?

There are two sources of returns on equity investments: capital gains and cash dividends. The cash dividends received are typically reinvested by mutual funds to generate further returns on net assets. For instance, The PRI (Price Returns Index) version of NIFTY 50 for the year 2016 delivered a return of 3.01% and the 50 underlying stocks paid an aggregate dividend of 1.47%, thus the TRI version of the index delivered 4.48% return during the year. Historically, most of the domestic funds have used PRI, to compare their funds’ performances, which considers only capital gains (price appreciation) thus ignoring dividend returns. Total Returns Index (TRI) captures both – price appreciation and cash dividends to reflect all sources of returns in equity portfolio. The Net Asset Value (NAV) calculated by mutual funds also reflects both these sources of returns. Using TRI for fund performance comparison is thus a more appropriate, fair and prudent benchmarking practice.

 

Global emphasis on usage of total return index benchmarks for performance comparison

Globally, the emphasis on transparency has been on a rise as indicated by the guidelines issued by various capital market regulators. In the United States, Securities and Exchange Commission (SEC) regulations published in 1998 mandates that all funds report performances using appropriate benchmarks which consider reinvestment of dividends for index computation (read TRI). Most of the asset managers in the United States claiming a large part of the industry AUM use Total Returns (TR) indices as benchmarks to measure the performances of their funds. Below is the summary of 5 such asset managers and few of their top funds and corresponding benchmarks.

 

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#Fincabulary 27 – Calamity Call

Meaning – A call feature of a Collateralized Mortgage Obligation (CMO) designed primarily to reduce the issuer’s reinvestment risk. If the cash flow generated by the underlying collateral is not enough to support the scheduled principal and interest payments, then the issuer is required to retire a portion of the CMO issue. It is also known as a “clean-up call.”

A Calamity Call is only one type of protection used in CMOs. Other types of protection include overcollateralization and pool insurance. In addition to protecting against reinvestment risk, Calamity Calls can be used to protect against default losses. They can be used in CMOs structured from second lien mortgages, where there is more limited protection against default losses. This is in contrast to overcollateralization which may be enough to provide sufficient protection to underlying pools of conventional fixed-rate mortgages.

#Fincabulary 12- Aunt Millie

Meaning – A slang term for an uneducated or unsophisticated investor.

The term is considered a derogatory remark in the financial sector, often used to refer to poor investment choices. Financial professionals might recommend an “Aunt Millie” investment to clients who are unfamiliar with investing. Analysts may use the term to berate a stock or other security. For example, one may say that investing in a certain stock is so foolish, only Aunt Millie would buy it.