What best should be done

Pull yourself out of the confusion

With inflation slipping down to 0.44% which is a scenario of negative inflation or deflation, the investors are sweating and pulling their pants up inorder to foresee the effects of the same on the economic activities.Inflation drops because of increase in productivity but this is not the situation now.It is because of the fall in demand that prices are falling.But yes if deflation grounds in the economy, the repercussions will be low demand, lower production and weak economic growth.These prevailing conditions will discourage investments.The real interest rate difference between nominal interest rate and inflation becomes very high, making funds costlier. As demand goes down, capacity utilization of manufacturing units declines. This discourages investment in capacity expansion.

With a strong hit, the performances of the companies are surely going to be worsen so the investors need to pre plan while making investment decisions in the deflationary environment.The rule of the thumb suggest that invest in those companies whose products or services are not much affected by fall in demand. So, companies operating in health care, telecommunication and utilities like electricity distribution could be good bet to invest. Services of these companies will remain in demand even if the economy slows down.

Companies operating in sectors like snacks and beverages, health care, utilities and telecommunications can be included in the portfolio as the decline in prices lead to increase in demand in such sectors.Companies with strong balance sheets, which do not have much debt on their books, can also be considered for investment.One has to be cautious and avoid investing in companies that operate in capital goods as the performance of such firms is definitely going to dip further.The real estate companies should also be avoided. In deflation, the general perception is that the prices will further fall resulting in postponement in the purchasing decisions.This will lead to a cash starved situation for the real estate.

Read the report by ET here..

Debt funds--Bonds a respite to investors!!

The bond investors have never seen such good times like the last year. But no one knows how long the good times will last. Income funds—those that invest in long-term securities i.e., bonds—have offered solace in times when people are asking for no more than preservation of the capital invested . Most of these funds have delivered more than 20% returns last year. The corpuses of bond funds of the major fund houses have gone up by at least ten times in last few months. There is a feeling that soft interest rates would be here for a while and this is one thing that bonds love.

Inflation is off its peak, thanks to a fall in prices of crude oil and commodities. Interest rates may fall further.GDP growth that was around 9% last year has fallen to 7.6% in second quarter of the current financial year. Add to this the lull that has engulfed the equity markets which is showing no signs of receding. A money manager has to invest somewhere, right? So, after the fall in stock prices, bonds are his next best bet.

When yields fall, bond prices rise. Most fund mangers feel that with interest rates in America nearing zero, global investors would make a beeline for higher yielding securities like Indian bonds. This could lead to a fall in yields, enabling bond funds to post good returns. But it is only a matter of time, before the focus comes back on equities.

Inflation slides to 5.91%--

Inflation fell for the ninth consecutive week on Friday to a 10-month low of 5.91% for the week ended December 27, owing to cheaper food and manufactured items. It stood at 3.83% a year ago. The index of food articles group declined by 0.7% as prices of jowar fell by 5%, fruits and vegetables by 3%, eggs and bajra by 1% each. In case of manufactured goods, imported edible oil became cheaper by 1%, polyester fibre by 2% and newsprint by 1%. The index of fuel remained unchanged and also there was no movement in the prices of cement and iron and steel during the week. The inflation has been declining after it touched a peak of 12.91 per cent in August last year.(Sorce:TOI)

RBI was compelled to raise the repo rate to a seven-year high of 9 per cent. The RBI now expects the inflation rate to be significantly lower than its March-end target of 7 per cent, while most analysts expect it to be close to 2 per cent. The wholesale price index is more closely watched than the consumer price index, which is published monthly, because it covers a higher number of products and is released weekly.