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Posted On Wednesday, Dec 14, 2016
Demonetisation has a direct impact on the banking sector, liquidity, interest rates and, obviously, on everyone's wallet. Banks are loaded with cash but the common man is deprived of it. As an investor, you must understand the impact of this scenario on your investments, especially when you are on the verge of submitting proof of investments for tax computation. In our view, demonetisation could have long term benefits to the economy, but in the short term, since the execution was somewhat botched it could have an adverse impact on liquidity, interest rates and on investment returns.
Real estate and Gold have Suffered
Traditionally gold and real estate investment are the most preferred investment avenues for the average Indian investor. Demonetisation has negatively impacted these sectors, since most transactions in gold and real estate are made in cash. Naturally, then, restrictions on cash withdrawal will adversely impact these businesses. A Crisil analysis says demonetisation is highly negative for theReal estate sector, and they expect land prices to fall.
The gems and jewellery sectors also attract a lot of cash. "The industry is bound to feel the pinch in the near term as around 80% of the gems & jewellery purchases in India are made in cash. Nevertheless, the demand for gold is likely to pick up in the long term. The organised jewellery retailers are benefitting from this structural change in the market," says the CRISIL report.
Since 9 November, the rush for gold has petered down to a trickle. Demand is down by almost 90 percent now, according to some jewellers. "The fall can be mainly attributed to the limited availability of cash at ATMs and the banks in the country," said Sreedhar GV, Chairman, All India Gems and Jewellery Trade Federation*. Gold has always been purchased largely in cash, so it is not surprising that demand has dried up since the cash supply has dried up. What is surprising is the extent of the fall.
Weaker outlook for the Economy and Equity Markets
Demonetisation could have long run benefits, but it has undoubtedly had a negative impact on economic growth and the stock market in the near term. The outlook for the economic growth in short-term is negative due to the liquidity crunch. Though it is a short-term concern, it does have the potential to curtail economic growth, and by extension earnings for corporates. The 30-share Sensex has slipped -3.6% to 26,602 on 14 December 2016 from 27,591 on 8 November (the day the demonetisation announcement was made), while the 50-share Nifty index has plummeted almost 500 points, or -4.2%, from 8,543 to 8,182 in the same period.
Foreign brokerage houses like Bank of America-Merrill Lynch see the demonetisation exercise impacting the country's growth in the next two quarters, and estimate India's GDP to fall by around 50 basis points. Moreover, the Reserve Bank of India has trimmed its GDP growth forecast for the current fiscal year to 7.1 percent from the 7.6 percent target earlier, citing demonetisation as the main reason. This is notably lighter than the 200-300 basis points fall that many economists and brokerages have been predicting.
Then Where Should One Invest?
Debt markets are poised to reap some benefits here, as we could be in store for a continued drop in interest rates. Bond prices and yields are inversely proportional. With a drop in yields, debt funds benefit as the prices of the bonds they hold rise, so investors could invest in debt funds to take advantage of such a rate fall.
The outlook for the global financial markets is likely to remain volatile. The political and economic policies of the newly elected US President should give some indication as to where global markets could head next; until some amount of clarity emerges from that side of the world, uncertainty will remain.
On a slightly more positive economic note, debt markets are also dependent on domestic factors which despite the near term disruptions are relatively vibrant. Inflation is likely to remain low near term as people have less cash in hands, so the side effect of that unfortunate demand constraint is that upward pressure on prices should be weak. In the short-term then, the RBI has scope for a further reduction in rates which should keep investment in debt funds attractive. Investors looking to park their surplus money can consider these funds. With that in mind, investors are advised to speak to their financial advisors before taking any investment decisions on debt funds.
Please refer to the links for the performance of Quantum Liquid Fund and Quantum Dynamic Bond Fund
|Name of the Scheme & Primary Benchmark||This product is suitable for investors who are seeking*||Risk-o-meter of Scheme|
|Quantum Liquid Fund |
An Open Ended Liquid Scheme
|• Income over the short term |
• Investments in debt / money market instruments.
Investors understand that their principal will be at Low Risk
|Quantum Dynamic Bond Fund |
An Open Ended Dynamic Debt Scheme Investing Across Duration
|• Regular income over short to medium term and capital appreciation |
• Investment in Debt / Money Market Instruments / Government Securities.
Investors understand that their principal will be at Moderate Risk
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The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.
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Please visit – www.QuantumMF.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.
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