Niveshak Dec17

NIVESHAK December 2017

Volume X Issue XII

A Look Back At The Year That Was W h a t ’s i n s i d e :

Default Rates: predicting the future from the past Portfolio strategies & the expected returns Juxtapose: Bitcoin v/s Equity

Adios * Au revoir * Sayōnara

Dear Niveshaks,

Another Calendar year comes to an end & it ends a wonderful year of association with you. The year had lot many intriguing events pertaining to the financial world, that could have given goose-bumps to any sane finance enthusiast. In this edition of Niveshak we try to relive some the eventful happenings of the past &

throw a light on what the tried to uncover what year 2018 has in store for 2018 will look like & have us. tried to give you a glimpse of the upcoming year. The The cover story brings first half of the month that to you a concise went by was embroiled version of how the year in political turmoil owing 2017 unfolded on the to the elections in PM’s policy front & how the home turf & bitterly uncertainty surrounding fought civic elections in the decisions of South Uttar Pradesh. While may Block impacted the see the Gujarat election performance of the victory as a referendum economy. We have also on PM’s economic reforms

agenda, most believe that the margin of victory was a concern & would unleash a series of populist schemes in run up-to 2019 elections. The Fed raised the interest rate which was followed by a similar move from China & the Chinese eventually managed to establish their control on Hambantota port.

“Historical events occur twice — the first time as tragedy, the second as farce,” said Karl Marx. The AOM tries to uncover the farce behind the Credit Default by large cap companies & how AMC’s can tackle this kind of situation. It shows how the AMCs can reduce the risk on their investments in speculative grade instruments, and make more money on their investment grade instruments. In the FinGyan segment we have a critical analysis of Impact of dividend policies on share-holder’s wealth.

Fund raising for start-ups has always been a major concern & lack of funds or improper funding has been a reason for failure of many ventures. The classroom explains the ICO(Initial Coin Offerings) as an effective fund raising tool. Finally, in the fourth edition of Juxtapose we try to contrast the Bitcoin frenzy with equity markets & have tried to highlight the underlying differences between the two.

Hope you have as much fun in reading the magazine as we had in making it!

Stay invested, Team Niveshak

THE TEAM Akshay Kaushal Anand Mittal Arjun Bhargava Dhruvika Chawalla Girraj Goyal Pratibha Sapra Sankeerth Bondugula Saurabh Gupta Vinay Gundecha Aayushi Garg Abhishek Soni Arpit Murarka Bhushan Bavishkar Mahesh M Priyanshu Gupta Samprit Shah Sheahav Dosi Sriya Gupta

All images, design and artwork are copyright of IIM Shillong Finance Club

©

Finance Club Indian Institute of Management Shillong Disclaimer: The views presented are the opinion/ work of the individual author and the Finance Club of IIM Shillong bears no responsibility

Contents NIVESHAK: DECEMBER 2017

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The Month That Was

Niveshak Investment Fund

Article of The Month: Mutual Funds Absorbing Credit Losses on Investments

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Cover Story: A Look back & a Look Ahead

FinGyaan: Impact of Dividend Policies on Shareholder’s Wealth

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Clasroom: Initial Coin Offerings [ICO]

JuXtapose: Bitcoin v/s Equity

Niveshak Dec’17

The Month That Was GST on Petrol

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he parliament session on 19th December, the union finance minister indicated that the government is looking forward to including petrol and diesel under the purview of Goods and Services Tax (GST). This was made clear when Arun Jaitley said that BJP government is in favour of bringing petroleum under GST. Also, he made clear that the government will wait for consensus of states with centre on this topic before imposing any duty on petroleum.

Until now, the biggest problem in the way of bringing fuel products under the purview of GST was the disagreement of revenue sharing between the state and the centre. The main reason for the same was that after rolling out of GST, petroleum and liquor are the only independent sources of taxes for the states. To compensate for the loss in revenue for the states, there is a proposal for using both VAT and GST in a dual structure and steadily moving towards GST. The major benefit of bringing petrol under the GST regime is to enable oil companies to reduce their costs as they are currently not able to utilise the benefit of input tax credit, available under GST

Fed rate hike followed by China rate hike On 13th of December, the Federal Reserve hiked its interest rate by 25 basis points at its December Federal Open Market Committee. They set the new target range between 1.25%-1.5%. This hike was as per the expectations of the market. This decision was taken owing to increasing inflation, GDP and decreasing unemployment in the US in the past 3 quarters. Within hours of Fed Rate hike, China hiked the market rates on reverse repurchase agreements/reverse repos by 5 basis points to avoid any adverse effects on the economy. We believe that the rate hike will have a limited effect on the Indian market in short run. However, in the long run, it could affect the inflow of foreign investments which is an important input in the growth rate of India’s GDP. Also, this move can further weaken the value of INR against the US Dollar which will affect the bottom line and EPS of Indian companies as the cost of borrowing fund from external markets rise due to weakened INR. Also, the risk premium offered

by India will go down, resulting in negative impacts in investments in the Indian stock market.

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The Month That Was Disney acquires fox Disney officially acquired the film and television division of 21st Century Fox for $52.4 billion. It is marked as the second biggest merger ever after AOL-time Warner. The value of acquisition is based on the price of Fox business share which is $29.54. The deal is, however, still under observation by US federal antitrust laws, which have caused previous hinderances for Fox to sell off its business to Comcast. Apart from the acquisition, Disney has also decided to retain its chairman and CEO till 2021 to handle the acquisition smoothly.

The deal is likely to cause problems to Netflix who had already decided to spend over $8 billion in the coming year to build its own content and the company might lose a lot of its already existing content.

plicitly stated that the recapitalisation of public banks with Rs. 2.11 lakh crore was a plan to further strengthen banks against the misconception of protecting the banks from failing. Further, going ahead, the bill also faced some resistance from the bankers, mainly the All India Bank Employees Association (AIBEA), which is one of the biggest union of bankers in the country, owing to the risk of costs due of deposit insurance. If the reports are to be believed, the government aims to hike the current insured limit above Rs 1 lakh, which will result in additional cost to the banking industry to insure the deposits with DICGC. This entire reform will take place under the body called ‘Resolution Corporation’, which will include members from SEBI, RBI, IRDAI and PERDA. These steps have been taken considering the Financial Stability Report issued by RBI in June 2017, which mentioned serious concerns about rising GNPAs to total assets of the banks.

Hambantota port officially leased to Gujarat elections’ impact on market China for 99 years China’s stakes in Sri Lanka were consolidated when Sri Lanka handed over the strategic Hambantota port to China on lease for 99 years. This event of handling over is termed as Concession Agreement. The port which is located on southern coast of Sri Lanka, holds access to important Indian Ocean sea lanes. This initiative is placed under China’s Belt and Road Economic Corridor. This investment is expected to cost around $20bn to the Chinese government. This news has come after a series of unsuccessful transactions by China in Pakistan, Nepal and Myanmar. These countries have recently cancelled or delayed the hydroelectricity projects powered by Chinese companies. This port signifies China’s ever-growing status as a regional and global power. This rise has disconcerted neighbouring countries, including India, who have raised security concerns. To mollify these concerns, both Sri Lanka and China have ruled out the possibility of using the port as a security base.

FRDI bill The government has clarified its stand on the controversial clauses of Financial Resolution and Deposit Insurance (FRDI) Bill, which was considered as a threat, by many, to the deposits of the common public. It ex-

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It was already believed that Gujarat, the home state of current prime minister Narendra Modi, will cause a huge movement in stock market during its election period. The results also did not disappoint this belief as the market showed a lot of movement owing to this very factor for 45 days surrounding the elections. The exit poll prediction of BJP win was followed by rise in the key indices of Indian market with the Nifty50 trading 0.92% higher at 10346 points. In the opening trade on the day of results, the benchmark indices fell as much as 2.6% as the early count showed neck-toneck contest between Congress and BJP. The indices however ended 0.5% up as the entire story unfolded and BJP was seen winning with a majority. It is also predicted that the result of Gujarat and HP elections will affect the states of Karnataka, Rajasthan, MP and Chhattisgarh, which will elect its governing bodies before Lok Sabha elections of 2019.

NIF

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Niveshak Dec’17

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Niveshak Dec’17

Article Of the Month MUTUAL FUNDS ABSORBING CREDIT LOSSES ON INVESTMENTS Akash Verma & Santosh Pudasaini Jamnalal Bajaj Institute Of Management Studies

EXECUTIVE SUMMARY

sons for the default by companies.

istorical events occur twice — the first time as tragedy, the second as farce,” said Karl Marx. Recent credit defaults in the debt mutual fund industry have made this quote little more serious than just a wisecrack. The past few years serve plenty of examples of companies, defaulting on their payments, with Texas Competitive Electric Holdings Co. LLC, Arch Coal Inc. being the prominent ones. The global default rate for all rated corporate issuers of debt has reached a post financial crisis high. General slowdown in the economy, highly leveraged capital structure of companies, falling oil prices, delay in raising equity, delay in asset monetization, and slowdown in receipt of payments from clients/ build-up of inventory are identified as the major rea-

While few beleaguered sectors such as retail and media experienced lower incidences of defaults, the defaults in sectors like energy and natural resources have plunged to higher levels. The rating transition studies show that the stability of ratings has decreased, and amount of ratings downgrade is more than of ratings upgrade. Hence there is a dire need for the asset management companies (AMCs) who invest in these companies, to find a way out incase these companies default.

This paper is predominantly divided into two parts.

The first part highlights the present global default scenario and the second part identifies an approach on how credit defaults in debt mutual funds should be dealt with, keeping the current scenario in mind.

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Article of the Month Global Scenario

Industry analysys

The global scenario looks very weak at this moment.

The IMF is about to downgrade global growth again.

Oil prices continue to slide, volatility in emerging market financial sectors has picked up, and the Federal Reserve raised the interest rate for the first time in almost 10 years. $13 trillion in global bonds trade are having negative yields, and the shape of the US yield curve is where it was the last time the US entered a recession. The default rate for all rated corporate issuers is expected to rise to 2.1%, a post-financial crisis high, from 1.7% in 2015 according to Moody’s Investor Service.

2.1. Default Distribution by Industry/Sector The below table shows that default rates in eight sectors have increased from 2014 to 2015. The falling oil prices led to maximum defaults in energy and natural resources sector. No defaults were reported in the telecommunication sector last year while default rate in high-tech and media decreased considerably.

1.1.

Default Distribution by Credit Rating

The following bar graph shows that none of the companies falling in investment grade, (Rating BBB and above) defaulted in last four years while the total number of speculative grade (Rating BB and below) defaults have increased significantly during the last year. 2.2. Annual Corporate Rating Changes From the below pie chart we can figure out the inverse The table below shows that rating stability dropped relationship between credit rating and no. of defaults. somewhat. The downgrade/upgrade ratio for last year is greater than 1 which shows that more ratings are being downgraded indicating the default vulnerability 1.2. Default Distribution by Region for companies is increasing.

The following bar graphs show that US leads the list

of global defaulters. By count, the U.S. and associated tax havens (Bermuda and the Cayman Islands) accounted for 66 of defaults in 2015, Emerging markets had 26 defaults, Europe produced 16, and the other developed nations had the fewest, at five.

HOW SHOULD ASSET MANAGEMENT COMPANIES TACKLE CREDIT DEFAULTS? Debt mutual funds have many plans that invest in both investment grade as well as speculative grade debt in-

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Niveshak Dec’17 struments. As the risk profile of both categories of in- opt out, would have to bear the loss of default. struments is different it is essential that AMCs have a • For CDS, the required premium can be partly different approach of handling credit defaults in both or entirely collected from the investors. the classes.

3.2 An approach for investment grade debt instru3.1 An approach for speculative grade debt in- ments Investment grade debt instruments are included in the struments portfolio for getting regular returns at lesser risk.

Speculative grade debt instruments are included in the portfolio because they offer higher yields to compensate for their higher risks.

• As the credit risk for these instruments is high, fund managers can purchase credit default swaps (CDSs) to reduce fund’s risk exposure. In this case, AMCs can give a choice to their investors, of paying a premium for CDS along with their SIP amount to insure themselves against credit defaults. Investors, who From the above graph we can conclude that the de-

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Article of the Month faults in investment grade are very rare (85 defaults in 35 years). Most of the defaults in investment grade instruments happened during the financial crisis. • For investment grade instruments, AMCs can issue CDSs for those investors having pessimistic view towards the instruments that the fund has invested in. • The premium for CDS will depend upon the rating of the bond; it’s time to maturity and industry/ sector of the issuing company.

CONCLUSION The global default and transition study indicates that companies are increasingly becoming vulnerable to defaults. The number of defaults is reaching at the level it was, during the time of financial crisis.

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The approach suggested in this paper suits the current global scenario. It shows how the AMCs can reduce the risk on their investments in speculative grade instruments, and make more money on their investment grade instruments. In addition to this, it helps investors by giving them an option to transfer their credit risk to the AMCs. Although the above approach has many advantages, there are certain challenges that accompany. However the trade-off of the advantages against the challenges is high and thus it is worth to ponder over.

Niveshak Dec’17

Cover Story

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A look back & a look ahead

he year 2017 was like those high voltage magic shows, surrounded by an aura of uncertainity, every time the conjurer lifted his wand your heart would skip a beat in anticipation as to what would come out of the hat : a docile rabbit or a spiteful snake. The year began with a note of uncertainty both at the international as well as the national level. The impact of demonetization was yet to be seen on the Indian economy and the policies of the new president of the world’s most powerful economy were still under a cloud of haze. One won’t be wrong in saying that the whole year of 2017 was the year of uncertainty and the puzzle of how the economy is going to behave in 2018 is giving tough time to both the economists and the investors. With the growing bitcoin bubble, change in policy stance of Prime Minister Modi’s government due to upcoming general elections or increasing oil prices in international market, the year 2018 is expected to be on the same lines as its predecessor.

ic growth with world economy growing at the rate of 3.6% compared to 3.2% of previous year. This has been the highest world economic growth rate since 2011 with advanced economies gaining momentum after 2008 collapse and growing at the rate of 2.2% (highest since 2010).

As per the IMF, the world economy is going to grow at a rate of 3.7% in the year 2018. India is set to get back to its recovery path post the twin shocks of demonetization and GST and is all set to achieve 7.4% growth rate in the year 2018.

2017 The Year That Was for Indian Economy

A year ago, India was on track to become an engine for the growth of the global economy. It was the fastest growing economy in the world surpassing China in the But having said that, however uncertain the year 2017 year 2016 posting 7% plus economic growth in all the was, it was a successful year regarding global econom- quarters of 2016. India was hailed as a bright spot in an otherwise gloomy global economic scenario but the

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Cover Story narrative changed in 2017 when the Indian economy turned sluggish. The slowdown in the economy was so much so that it grew at the rate of 5.7% in one quarter of 2017.

The twin economic shocks had a severe impact on the economy in 2017. The first one was the demonetization, i.e. the withdrawal of 86% of currency in circulation and when the year started currency in circulation was only 5.6% of the GDP - an all-time low. It was believed that severe cash crunch would impact the growth adversely but the policymakers chose to focus on the potential positive outcome of such exchange of currency. The biggest expectation among this was that a huge part of old currency would not return to the system which in turn would lead a huge pile of black money being extinguished and it will lead to RBI declaring a special dividend to the government. But that didn’t pan out that well as in August; RBI declared that 99% of the currency that has been scrapped has returned to the system.

Eight months post demonetization came another huge economic reform which in turn changed the indirect taxation system of India, the jury is still out whether the move will be effective or not. GST along with demonetization, considered as a panecea to formalise the Indian economy, came off as back to back punches to the growth. Though being a great reform, the government never got it right while rolling out the biggest tax overhaul since independence. It severely impacted the manufacturing sector which just started recovering from the cash crunch. By the end of the year, the trend shows that weakness in the economy has bottomed out, but economists pointed out that the level of economic activity is no way near to what it was before the twin shocks. It is being seen that there is a persistent weakness in the agricultural, manufacturing and real estate sectors – the largest employment generator of Indian economy. The government did try to lessen the pain by applying band-aids in the form of brisk payment of 7th pay commission arears & various GST allowances.

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points to 6%. While most of the economists believed that there was room for more rate cuts, the inflation figures failed to impress the six membered MPC, whose decision mattered the most. By the time MPC met for the last meeting of the year inflation had rosed 4.88% which was caused by increasing commodity prices. The minutes of MPC meeting shows the concern for soaring inflation which was mostly caused by an increase in government expenditure.

But 2017 was not in all a bad year for the Indian economy given that a lot was happening on the reform front.

India made the biggest leap by any country in the ease of doing business index by jumping 20 places to join the top 100 countries of the world. This was followed by global rating agency Moody’s upgrading India’s sovereign credit rating to Baa2 for the first time since 2004. On the sharemarket side Indian stock market, which grew by 30%, was among the top performers in the world. This growth in the capital market was highly backed by the DII’s, with DII’s investing almost twice of the FII’s during the year 2017. By the end of 2017 government came up with a bailout plan for the public-sector banks. Recapitalization of Rs. 2.1 trillion was announced which will not only take care of the provisioning requirements of the public sector banks but also provide them with enough growth capital.

2018 The Year That Will be for Indian Economy With the slowdown in economic growth being the highlight of 2017, accelerating the growth will be the key focus of the government for 2018. It is expected that the economy will be on the recovery path as the shocks due to demonetization and GST starts fading.

To streamline the impact of GST, the government has made several changes in the last few months including reducing the tax rates on 178 goods.

With IMF and World Bank pegging India’s economic growth rate at around 7.4% for the FY 2018-19, 2018 With a slow growth of the economy in 2017, there was looks to be a great year; there will be a lot of issues to a call for a rate cut throughout the year. This furore be addressed. only became louder when inflation struck the note at 1.5% in June, which was lower than the RBI’s range of First on that list will be job scenario in the country.

4% (+/- 2%). For the most of 2017 RBI kept the rates India, being the second most populous country in the unchanged but in August RBI cut the rates by 25 basis world needs to create 12 million new jobs every year.

Small Sector, which is one of the largest employer in

Niveshak Dec’17 the country, which was still reeling from the cash ban was hit again by GST leading to the closing of many businesses and thus millions of people lost their jobs.

The Economic Survey of India stresses for revival & growth of labour intensive sectors like Textile & Leather, all eyes will be on the finance & Textile ministry as to what changes they make on policy & labour laws front. With general election around the corner, it will be a hell of a task for the Modi led NDA government to create sufficient jobs in the economy.

It is not only the domestic issues India should be wary of but also the international issues and development.

With US Fed planning a number of hikes in 2018, all eyes will be on what the MPC’s stance will be. Also, the tension between the US and North Korea being at all time high and regional imbalance in the middle east, the world economy is set to be on an uncertain path in 2018.

Lastly, in 2018, everyone will be looking onto Prime Minister Modi and his stance on the reforms especially in the Budget 2018. Modi, since coming to power is known for his reforms, but 2018 will be the perfect time for him to focus on the implementation of these reforms rather than bringing new ones. With general election due in 2019, the government would be looking to please the general public, and thus we can see some tax cuts and benefits. But all these things have to be done keeping in mind the growing fiscal deficit troubles of the government.

Next will be a thing not in the hands of the government but will definitely lead to serious cause for concern – the rising oil prices and thus the rising inflation. Amid rising tensions between the North Korea and USA, a bullish trend was seen in the global crude prices pushing Brent Crude to USD 67. India, being the third largest importer of oil in the world, would be impacted by this sudden rise in crude prices. A report suggests that a 10% increase in crude can push the inflation by 25 basis points. With elections around the corner, the government may not be willing to pass 2017 was a bumpy ride, and we doubt 2018 is going to on the entire increase in crude prices to the consumer; be any smoother. But in the end, 2017 turned out to be rather it will look to cut down taxes which will add to a great year and so is expected from 2018 also. the woes of growing fiscal deficit.

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Niveshak Dec’17

FinGyan: Impact of Dividend Policies on Shareholder’s Wealth* Charudutt Sehgal, T A Pai Management Institute Introduction

this theory Lintner and Gordon says that shareholders prefer dividends to capital gains. They believe inveshe primary objective of every firm is to max- tors are risk-averse and thus prefer current dividend imize the profits/wealth of its shareholders. payments rather than capital gains, as it reduces invesDividend policies of a firm plays a pivotal role tors’ uncertainty. in determining the increase/decrease in the shareholder’s wealth as it directly affects the market price of the Research Question stock. Past events in financial markets tells that the “Do dividend policies of the firms affect the wealth of market price of a stock increases when there is smooth shareholder’s? “ payment of dividend. If a company decides to pay returns to its shareholders, it attracts new investors to invest in the company. However, it is still an unresolved Objectives of the Study issue that whether really dividend policies impact • To evaluate the performance of 2 different shareholder’s wealth. styles of investing i.e. growth investing and value investing mainly on the basis of their characteristic of ‘dividend yield’.

Theoretical Background • To identify the impact of dividend on shareDividend decision is an important strategic decision. holder’s wealth for the 2 above stated investing methThere are various theories which positively or nega- ods by re-balancing the portfolio. tively state the impact of dividends on shareholder’s wealth. Some of the theories which applies in our project’s context are described as follows – Limitations of the Study The Dividend Irrelevance Theory – This theory by As all research includes some or the other limitations, Miller and Modigliani states that dividends doesn’t afthus our project also include the limitation of sample fect the share price of a stock. They are of the view that used and the period used for analysis. The methods pf the value of firm is determined by the investment and investing selected are also restricted to 2 only i.e. value financing decisions taken by a firm rather than diviinvesting and growth investing as the main criteria to dend decisions. compare is dividends. Also the study is based on secondary data from Bloomberg.

The relevance of Dividend Theory – The pioneer of

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* Modified abridged vesrion

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FinGyan Data Description and Methodology for Analysis

As shown in figure one, total number of stocks after basic filters like active trading status, country domicile the available stock count was 77621. CNX 500 equity index has been used to further narrow down the list along with filter of stocks listed on or before 2006 and finally a list of 15 stocks is created.

Objective 1: Evaluation of 2 portfolios based on stock selection style of value stocks and growth stocks.

Analysis – The steps followed in order to fulfil Objective 1 were as follows: Out of these 15 stocks, the following 9 stocks have been selected for investment: Step 1: Stock selection for both the portfolios i.e. Value Investing and Growth Investing. f 3M India Stock Selection for 10 Year Fund – “Growth Strategy” A growth stock can be defined as a company’s stock whose earnings are expected to grow at a rate higher than the market average. Such stocks don’t pay any dividend, instead the company reinvests its earnings which induces capital gains for the investors. This make such stock a risky since the stock selection is based on the potential for capital gains rather than dividends.

Such companies follow certain characteristics like a loyal customer base or majority market share. Constant improvisation in its product lines to add value and consistent technological advancements to generate higher profits are some of the common traits for such companies. Basically, the primary objective of such features is to reinvest its earnings and generate capital gains.

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f f f f f f f f

Asian Paints Ltd Bannari Amman Sugars Ltd Glaxosmithkline Consumer Health Jubliant Lifesciences Ltd Shanthi Gears Ltd Sterling Biotech Ltd Sun Pharmaceutical Industries Zee entertainment

Step 1: Stock Selection for 10 Year Fund – “Value Strategy” A value stock can be defined as a company’s stock which is undervalued relative to its fundamentals like dividends, retained earnings, sales, etc. Such stocks are traded less than their intrinsic value. Generally, value stocks belong to mature companies with a consistent dividend outflow temporarily undergoing negative

Niveshak Dec’17 events in the market. This makes a value stock risker than a growth stock. Theoretically, it is because of the doubtful mindset the market has towards a value stock. To gain profits, the market must adjust to this mindset which usually takes time. The EQS (Equity Screening) function of Bloomberg terminal has been used to shortlist the stocks based on criteria like- P/E ratio, Quarterly revenue growth YoY, current ratio, dividend yield.

for value fund, we used only the top 2 stocks with highest market capitalization.

• Opinion Confidence – This is assumed for both the portfolios.

• All the other factor like impact of global financial crisis, corporate governance factors etc have been ignored while evaluating the portfolios.

Objective 2: Impact of dividend policies on shareholder’s wealth by re-balancing the portfolios Analysis – The steps followed in order to fulfil Objective 2 were as follows:

The total number of stocks after basic filters like active trading status, country domicile the available stock count was 77621. CNX 500 equity index has been used to further narrow down the list along with filter Step 1: Asset Allocation – On the basis of results of of stocks listed on or before 2006 and finally a list of 11 growth fund and value fund, we selected the weights stocks is created. allocation method with the highest portfolio return and highest Sharpe ratio. For growth fund, the method The shortlisted companies are as follow: selected was Black Litterman without private information. Similarly, the method selected for value fund was Out of these 11 stocks, the following 9 stocks have been Minimum Variance Portfolio without shorting. Thus, selected for investment: on the basis of the weights allocated by these methods we started the rebalancing activity. f HCL Infosytems f Eid Parry Step 2: First Time Investment – The second part of f Hinduja Ventures rebalancing involved investing in the stocks for the f Indian Card Clothing first time. Here, we took the corpus of an investor f Century Enka amounting to Rs. 10, 00,000. The date on which this f UCAL Fuel Systems Ltd investment will be made is 31st 0ctober, 2006. The first f Salora International Ltd investment used the weights allocated as per the best f Shipping Corp Of India methods chosen in the portfolio evaluation.

Step 2: Creation of value stocks and growth Step 3: Rebalancing portfolios – The last part in this is rebalancing of both the portfolios. In real life, in most stocks portfolios and their evaluation of the situations a portfolio is not changed until 3-4 The detailed working of portfolio creation and its eval- years of investing. Thus, to abide by this we adopted uation is explicitly explained in the excel file of the the concept of rebalancing our portfolio in every 4 project. However, we would like to explain various years. Thus, the dates on which rebalancing happens working notes and assumptions used in creation of are 31st October, 2010 and 31st October, 2014. these portfolios.

• The testing period for the portfolios is 1996-06 We first calculated the current value of the portfolio as and training period is 2006-16 for which the evalua- on 31st 0ctober, 2010 and 31st October, 2014 for both the portfolios. This was done by multiplying the curtion is done.

• The benchmark index used for our analysis is rent MPS as on Oct, 2010 and Oct, 2014 with number of shares bought in first investment i.e. on 31st OctoNifty 500 index.

• Analyst Opinion data – For both the funds we ber, 2006. Next, we calculated the current allocation first used the ‘Rand’ function to get unbiased weights by taking the proportion of current value with total for our stocks. After that for growth fund, we selected value of the current portfolio. For desired allocation, first 2 highest market capitalization stocks and 1 lowest we have taken it the same as on 31st October, 2006 as market capitalization stock for our analysis. However, this was allocated by choosing the best method from

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FinGyan portfolio creation. Next, we set a condition to know whether for individual stocks which has the current allocation more or less than desired allocation. Further, we calculated the amount of each stock to be rebalanced by putting formula which states that the current allocation has to be equal to desired allocation because then only we can keep our initial investment amount same i.e. Rs. 10,00,000. Thus, on the basis of the rebalanced amount we got buy or sell recommendation for each stocks.

In the first portfolio, we selected the Black Litterman without private information method for allocating weights. The monthly returns for this portfolio came around 1.88% per month and 22.6% p.a.

Note: Instead of buying new stocks, we reshuffled our portfolio with those stocks only by selling or buying the additional units of them.

This process for conducted twice for both the portfolios i.e. one on 31st October, 2010 and second on 31st, October, 2014. For 2014, the only difference was the number of shares which was the sum/subtraction of In the second portfolio, we selected the MVP without first invested shares with rebalanced shares as on 31st, shorting method for allocating weights. The monthly returns for this portfolio came around 0.16% per October 2010. month and 1.949% p.a.

Here, the rebalancing process gets over.

This clearly depicts that the growth fund has outperformed the value fund in terms of capital appreciation.

Results and Discussion: We calculated the market capitalization/value of the Objective 1: firm for the year 2016. It is assumed that the investor will sell off his complete portfolio on 30th September, 2016. Thus, closing price of 30th September, 2016 is used.

Finally we compared all the 3 funds with their returns over the period of 2006-16. First, value fund’s total value as on 30th September, 2016 stood at Rs. 15, 64,744.

Thus, under this fund the firm value increased by 56 times in 10 years period. Secondly, growth fund’s total value as on 30th September, 2016 stood at Rs. 1, 19, 69,015. Thus, under this fund the firm value increased by 1096 times in 10 years period. Lastly, Franklin open ended equity mutual fund’s total value as on 30th September, 2016 stood at Rs.45, 67,206. Thus, under this fund the firm value increased by 356 times in 10 years period.

Note: We have tried to compare our 2 portfolios with an open ended equity mutual fund, where an investor just invests his entire money as lump sum and waits till the maturity of the fund. For this we selected Franklin India Smaller Companies Fund because of the reason that it gave highest 5 year returns of 22% as compared

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Niveshak Dec’17 to all other equity mutual funds which were opened before October, 2006.

It can be clearly observed that the growth stocks have outperformed all the other portfolios or investing style used in comparison.

Conclusion On the basis of results and findings, we can recommend an investor to go for growth stocks as the capital appreciation is maximum in this portfolio. However, it depends upon the nature and risk taking ability of an

investor to decide what the utmost priority is for him i.e. whether he needs regular income in form of dividends or capital appreciation. Thus, if we go by this research we can say that dividends doesn’t impact much of the shareholder’s wealth as the portfolio value of value stocks has increased by 56 times only. But this can’t be accepted as a universal truth because of the reason that the sample period was only for 10 years and the stock selection criteria can also differ from investor to investor.

Figure 6: Rebalancing of Growth Funds

Figure 7: Rebalancing of Value Funds

Figure 8: Comparison of all 3 funds

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Niveshak Dec’17

X

ju ta pose Bitcoin

B

V/S

itcoin may refer to two different things; a decentralized financial network or the digital currency created by that network. In general usage, the term bitcoin is used in context with the digital currency. Since its creation in 2009, the history of bitcoin has been rife with speculation and expectation. The recent hike in value was definitely not the first one in the history of this crypto currency, but this hike was unlike any appreciation seen in the past. Apart from bringing windfall gains to long time investors, this hike in value brought the concept of bitcoins into mainstream news. And with this new era has come a wave of new investors waiting to join the ranks. The fear of missing out is now greater than ever. Investors are flocking to join this bandwagon in hopes of tuning their fortunes overnight.

Bitcoins are created through a unique “mining” process. Supercomputers perform complex mathematical operations to find out new bitcoins in the system.

Miners who are able to solve these problems successfully are rewarded with new bitcoins. Bitcoins can be traded in open markets just like any other currency or commodity. The safest way to store bitcoins is through keeping them in “Hardware Wallets” which create a physical barrier between bitcoin wallet and the internet.

Equity

E

quities are a form of traditional asset class which represent a degree of ownership in the company.

It can be in the form of shares of either common stock or preferred stock. Common stock generally carries voting rights that can be exercised in corporate decisions. Preferred stocks are different from common stock in a way that they do not carry voting rights but are legally entitled to receive a fixed percentage of dividend payments before dividends can be distributed to common equity shareholders.

Equities can be traded on notified stock exchanges through brokers by paying them a small commission.

The preferred way of storing equities is in demat account. A demat account stores shares in electronic form safeguarding holders from risks associated with holding equities in physical form.

Equities by nature are considered to be a risky asset class, but more often than not investors are rewarded adequately for the risk they assume. Over a period of twenty years, equities in India have generated returns to the tune of 15-20 % CAGR. As a rule of thumb the returns generated by equities for any market are generally a couple of points higher than the nominal growth rates of the economy.

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Niveshak Dec’17

Classroom : Initial Coin Offerings[ICO]

A

n Initial Coin Offering (ICO) is a method used by the start-ups to raise capital from venture capitalists or banks without getting into the rigorous and regulated capital-raising process. In an ICO process, a percentage of the cryptocurrency is sold to early backer of the projects in exchange for legal tender or other cryptocurrencies (usually for Bitcoin).

referred to as token and are like shares of the company sold to investors in an Initial Public Offering transaction. If the money raised during the campaign does not meet the minimum funds required by firm, the money is returned to the backers making the ICO unsuccessful. If the funds requirements are met within the stipulated timeframe, the money raised is used to either initiate the new scheme or to complete it.

Early speculators in operation are normally propelled Concept of ICO At the point when a cryptocurrency start-up firm to purchase the crypto coins with the expectation that needs to fund-raise through an Initial Coin Offering the arrangement winds up plainly fruitful after it dis(ICO), it often, makes an arrangement on a whitepa- patches which could mean a higher crypto coin an inper which states what the task is about, what need(s) centive than what they bought it for before the task was the project will satisfy upon completion, how much started. cash is expected to undertake the venture, the amount of the virtual tokens the pioneers of the undertaking ICOs and IPOs will keep for themselves, what sort of cash is acknowl- ICOs are like IPOs and crowdfunding. Like IPOs, a edged, and to what extent the ICO crusade will keep stake of the start-up or organization is sold to fundrunning for. raise for the substance’s operations amid an ICO operation. In any case, while IPOs manage financial specialists, ICOs manage supporters that are quick to put ICO Campaign resources into another venture much like a crowdfundDuring the ICO campaign, enthusiasts and supporters ing occasion. But ICOs differ from crowdfunding in of the firm’s initiative buy some of the distributed cryp- that the backers of the former are motivated by a proto coins with fiat or virtual currencies. These coins are spective return in their investments, while the funds

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Classroom raised in the latter campaign are basically donations.

For these reasons, ICOs are referred to as crowd sales.

wary as some ICO or crowd sale campaigns are fraudulent. The main problem with these fund-raising operatives are that they are not regulated by financial authorities such as the Securities Exchange Commission Criticism Although there are successful ICO transactions on re- (SEC), and thus if the funds that are lost due to a fraud, cord and ICOs are poised to be disruptive innovative they may never be recovered. tools in the digital era, investors are cautioned to be

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