Tuesday, March 31, 2009

High Net Investors become High Loss Investors

Newspapers and moronic channels like CNBC TV18 have always led the common people to believe that High Net Investors (HNI) know what they are doing since they have access to the best and the brightest financial advisors. The more apt term for these HNI folks should be speculators and short term traders who run in the direction where the wind is blowing. With one rash decision after these others, these folks are losing their shirts in every investment they make. First they crashed with the stock market, their property investments are going bust and now their supposed safe investments in Gilts are losing sheen as well. Soon these folks will join the ranks of the middle class, a casualty of the following the pied pipers of Dalal Street.
Economic times reports

HNIs stuck with gilt funds as yields rise
MUMBAI: 'Out of the frying pan, into the fire' — that best describes the plight of high net worth investors (HNIs), who shifted their investments
from shares to gilt schemes at the start of 2009. Yields on government bonds have risen sharply in the past couple of months and are expected to stay that way for some time. Consequently, investors in these schemes are staring at sizeable losses, should they decide to redeem their investments anytime soon. Yields and bond prices move in opposite direction. So higher bond yields means lower bond prices, and vice-versa. As yields rise and prices fall, the value of government securities declines. As gilt schemes trade in government bonds to benefit from the price appreciation, a decline in bond prices impacts their performance. Gilt schemes of domestic mutual funds attracted money worth Rs 39,000 crore and Rs 20,000 crore in January and February, respectively. From roughly 9.55% in July last year, the yield on government bonds fell to around 5.5% in December, and slipped further to a historic low of 4.86% early January. Many HNIs flocked to gilt schemes, expecting that interest rates would fall further and settle between 4% and 4.5%, thanks to the downward bias in inflation and policy rates. But that assumption turned out to be a costly mistake. Contrary to expectations, 10-year bond yields have risen sharply to over 7% last week from lows in January, partly triggered by news of the government's huge borrowing programme. Fund managers and money market participants do not see the yields falling soon, as higher government borrowing increases the supply of bonds, which negatively impacts prices and pushes up yields. Even though RBI has consistently maintained its stance to reduce policy rates, some of its responses in the bond buybacks have left market participants confused. It announced that it would buy back bonds from traders to pump in liquidity into the system. But market participants feel that the move has been largely half hearted, with the central bank only buying back illiquid papers. This affected its "signalling" ability, they suggested. Now with RBI once again announcing details of its borrowing and buyback plan for the next fiscal, opinion is split on whether it will succeed in reigning in yields. Ritesh Jain, head of fixed income at Canara Robeco AMC, said bonds could do well in the next two quarters. "But the real skill would be to exit when the situation changes again towards worse. With government pumping in money the way it is, inflationary pressures are sure to resurface by the end of the year," he added.