Reliance Capital Asset Management Plans to Launch Islamic Funds in Malaysia

Recently, a subsidiary of Reliance Capital Asset Management has announced to launch two Islamic funds in Malaysia by July. It will roll out products for retail investors in two years.

About the Reliance Capital Islamic Funds, economictimes.indiatimes.com writes, “Reliance, India's largest asset management company, will launch a fund investing in Indian stocks next week and a quantitative global equity fund investing in the US, Europe and Asia in July. Both funds would be managed out of Malaysia.”

Vikrant Gugnani who is the Reliance Capital's international businesses CEO said to ET, “The long-term objective is to target the retail sharia market in the region. We believe the retail story in Malaysia has yet to unfold and we want to be positioned well before to take advantage of (it).”

Reliance Capital Asset Management is the part of financial services firm Reliance Capital. It manages more than $33 billion of Reliance Capital.

About the new funds of Reliance Capital, online.wsj.com writes, “The Malaysian unit of Reliance Capital Asset Management, India's largest asset management firm, plans to launch its two maiden Shariah-compliant funds as it seeks to tap into Malaysia's importance as a Shariah-compliant financial hub and the growing demand for Islamic funds from the region.”

The news portal quotes a statement of Vikrant Gugnani who is the Reliance Capital's international business chief executive, “We are targeting institutional investors for these funds but eventually we will broaden our reach to include the retail market. Our Malaysian company will be the flagship venture in the Islamic asset management business and a global hub for Shariah-complaint products. The total net asset value of Islamic funds in Malaysia currently exceeds MYR22 billion.”

According to the Ian Lancaster who is the Reliance Asset Management Malaysia's chief executive, “The Global Equity fund is a 24-country developed market fund that will invest across 2,500 stocks.”

Islamic Funds in Malaysia by Reliance Capital has gotten the biggest buzz after ICICI Prudential Nifty Junior Index Fund. Now, Reliance is the global leader in market funds.

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ICICI Prudential Nifty Junior Index Fund Launched

Recently, ICICI Prudential AMC announced the launch of Nifty Junior Index Fund. It is an open-ended index fund that allows users to invest in companies whose securities are included in Nifty Junior Index.

The New Fund Offer opens from June 10. It will end on June 21. It is declared in a statement by the company.

The fund is being considered as the country's first open-ended index fund to track CNX Nifty Junior.

About the ICICI Prudential Nifty Junior Index Fund economictimes.indiatimes.com, an online news portal about news and economy says, “Mutual fund major, ICICI Prudential AMC launched its ICICI Prudential Nifty Junior Index Fund, an open-ended index fund that will invest in companies whose securities are included in Nifty Junior Index.”

So, it is an open-ended index fund. You are able to invest in companies whose securities are included in Nifty Junior Index.

Further the news portal quotes a statement of the company about the ICICI Prudential Nifty Junior Index Fund, “Its New Fund Offer (NFO) opens from June 10 and will close on June 21.”

The news portal says, “The Company claimed it to be the country's first open-ended index fund to track CNX Nifty Junior. The fund aims to track 90-95 per cent of the index, maintaining cash balance between 5-10 per cent of the net assets to meet redemptions and other liquidity requirements.”

The news portal gives a conclusion about the fund, “The fund will also track upto 100 per cent of the index as and when the liquidity in the index improves.”

Overall, the new fund - ICICI Prudential Nifty Junior Index Fund has introduced a great investment plan for the consumers. It has great flexibility and it aims to track 90-95 % of the index. There is no doubt that it is a new fund. The new fund has been launched by ICICI Prudential as Nifty Junior Index Fund. The fund will be able to release business cycle.

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Monetary Policy in Depression and in Inflation from Business Cycle

Monetary Policy in Depression:

In the atmosphere of depression, there is a need to encourage investment and so the loans are made cheaper to stimulate investment and increase the demand by increasing income and employment because a cheap money policy will discourage saving and promote investment.

It is said that the Monetary Policy has less scope in depression and fails to bring the economy out of depression, as the MEC is low and so the businessmen are scared to invest, even though the rate of interest is low. Rate of interest is the factor but not the only factor for investment.

Businessmen borrow when the business is expanding not when it is declining. However, we cannot say it is totally useless because it can stimulate demand for durable goods and private investment. But open market operation can increase the liquidity overall in the economy. Even if credit policy cannot turn the business cycle, it can create the necessary atmosphere for the other policies to be successful.

Monetary Policy in Inflation:

Inflation is faced at the prosperity phase when MEC is high, rising prices, output and employment. The condition in the economy is very optimistic and business activities are rapidly increasing. Though his condition cannot go on continuously, with the increase in consumer spending and investment spending, the credit condition in the economy becomes tight.

The banks start feeling difficult to cope with demand for credit. In such a situation, the rate of interest is raised by the banks to control the liquidity in the economy. The cash Reserve Ratio, Statutory Liquidity Ratio are raised and a tight money policy is in effect to control the boom from turning into inflation. The effect of Monetary Policy in inflation is much greater than in depression.

Now, we will try to understand how fiscal policy controls the business cycle in the next chapter of the blog.

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Multiplier-Acceleration Interaction Principle of Business Cycle

Samuelson’s model is regarded as the first step in the direction of integrating theory of Multiplier and the principle of Acceleration. His model shows how the multiplier and acceleration interact with each other to generate income, to increase consumption and investment, demand more than expected and how this causes economic fluctuations.

To understand Samuelson’s model, let us first understand derived investment. Derived demand is the investment in capital equipment, which is undertaken due to increase in consumption making new investment necessary. We will try to understand this interaction briefly. When autonomous investment takes place in a society, income of the people rises and the process of Multiplier start increasing the income, which leads to the increase in demand for consumer goods depending on the marginal propensity to consume.

If there is excess production capacity, the existing stock of capital would prove inadequate to produce consumer goods to meet the rising demand. Producers trying to meet the growing demand undertake new investments. Thus, increase in consumption creates demand for investment. This is derived investment.

This marks the beginning of Acceleration process, when derived investment takes place income increases further, in the same manner as it happens when the autonomous investment takes place. With increase in income, demand for consumer goods rises. This is how the Multiplier and the Accelerator interact with each other and make the income grow at a rate much faster than expected. With the help of both the Multiplier and Acceleration principle, Samuelson tried to relate the upswings and downswings of business cycle. There are some criticisms regarding the assumptions, they are as follows –

There is no government activity and no foreign trade

No excess capacity

One year lag in increase in consumption and investment demand

Though many economists had different approaches, some attribute business cycle to expansion and contraction of money supply some say it is due to the interaction of Multiplier & Acceleration which changes the aggregate demand and leads to fluctuations but some attribute it to the innovations in one sector which spreads to the rest of the economy that causes recession and boom.

There are other economists, who attribute fluctuation of business cycle to the politicians manipulating economic policies and some say supply shocks for e.g., 1970’s sharp increase in oil prices, increased inflation. All these theories have elements of truth. But they are not valid in all the places and time. The key is to understand them and combine these theories and use the knowledge of macro economics to decide when and where to apply it.

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Pure Monetary Theory of Business Cycle from Managerial Economics

According to Prof. R. G. Hawtrey, a British economist, there is direct relationship between volume of money supply and the economic activity. Wherever there is change in the flow of money or money supply changes, there will be business fluctuations. Here, he means the credit creation by the banking system i.e., expansion in bank credit leads to demand and so the upswing of business cycle starts. On the other hand, when there is decrease in money supply through contraction of bank credit, it leads to down swing and thus leads to depression.

Expansion of bank credit happens when interest rates are reduced, which means, the loans are cheaper. Due to liberal loans, the profit margins change as they are very sensitive to the change in interest rate.

Thus, investment increases and so the employment, which in turn increase the income and demand. This increase in demand leads to increase in price and profit margins. Therefore, the upward trends start i.e., the upswing starts. But as each phase has the germs of other phase, the turning point starts. When bank changes its policy of credit expansion, the cash reserve with the bank reduces.

The leading rates are increased to discourage the demand for fresh loans and they start calling to return loans. The producers start disposing off their stock to repay loans. The restricted policy on credit and high rate of interest discourages a new investment, which leads to downswing. The income falls and cash starts coming back to the bank. But as the cash reserve with the bank improves, again the bank starts using liberal attitude towards credit creation and so the revival starts. This takes the economy to expansion or prosperity. According to R G Hawtrey flow of money supply is the sole cause for business fluctuations. This theory was not unchallenged. Some limitations are –

Business cycle is a very complex phenomenon and we cannot attribute it completely to credit creation by banking system.

Bank plays an important role in the financing of business but it cannot be the only reason for business crisis. It can just aggravate the situation.

Too much of importance is given to bank credit. Many times traders don’t borrow from bank but plough back their profit.

Investment not only depends on interest rates but on the rate of return also. Hawtrey has totally ignored MEC.

This theory has totally ignored the non monetary factors like innovation, climatic conditions, psychological factors etc.

This theory also has been taken from business cycle chapter of Managerial Economics SMU MBA MB0026 book in the continuation of Over-Investment theory and Schumpeter theory.

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Over-Investment Theory of Business Cycle from Managerial Economics

A.F. Hayek assumes economy in equilibrium. Whenever this equilibrium is disturbed then there is expansion or contraction. This theory says that when the economy is in equilibrium, the rate of interest is such that Saving = Investment there is no unemployed resources.

Suppose the bank credit expansion takes place, then the equilibrium rate of interest is disturbed. This low market rate of interest will tempt the businessmen to borrow more and invest in new ventures. This leads to upswing in business cycle; as a result employment, output, profit and demand increases.

But then this phase does not continue indefinitely. Due to scarcity of resources, this expansion phase cannot go on and on. But due to increase in price, the people are forced to decrease consumption and start saving more. This forced saving due to high price makes the bank ease credit and investment starts.

The economy comes out of its downswing as income increases and people revert to earlier consumption and expenditure levels. This helps economy to recover and the upswing starts again. This theory says that the over investment due to forced saving by people in inflation is the cause of fluctuations in economic activities. Hayek says, voluntary saving leads to change in structure of production permanently but forced saving brings changes which are not permanent.

The limitations for this theory are –

Assumption of full employment is unrealistic.

Undue importance is given to bank’s rate of interest. Even if the rates of interest are constant, there will be variation in production when the business stars getting profits.

We already have discussed about Schumpeter theory of business cycle. This theory was also not complete just like Over-Investment theory of business cycle. A.F. Hayek assumes about the Over-Investment theory of business cycle. He sees only one aspect just like Joseph Schumpeter. There are also many disabilities in Hayek’s Over-Investment theory.

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Schumpeter Theory of Business Cycle in Managerial Economics

Joseph Schumpeter has explained the expansion and contraction through industrial innovation. Innovation is an actual application invention; whereas invention is discovery of something new.

Invention converts into innovation. In this theory, the innovation can be introduction of new product, market source of raw material, opening of new market in business. An entrepreneur is an innovator, he has the knowledge to do something new, daring and foresight to go ahead of others and in this process he demands funds from banking system. Now, we will examine how innovation causes business fluctuations. In this theory, Schumpeter says, any innovation causes business fluctuations. In this theory, Schumpeter says, any innovation can move the economy to disequilibrium from equilibrium and this will continue till the new equilibrium position is reached. Let us say the innovation is the introduction of a new product in a full employment economy.

The new industry has to reward heavily the existing factors of production to attract them. The new industry is financed by bank credit. As the factors of new industry get higher rewards, their purchasing power increases and the demand of old industry product increases, as the new product is yet to come in the market.

Therefore the demand and production of old products increases. The old industry will now take credit from bank for expansion. In the mean while, the new product comes to the market. Due to novelty, there is decrease in the demand for old products. The old industry starts cutting down on production, therefore the income to factors of production decreases. As a result, the demand for old and new product decreases. Due to more and more joblessness the vicious circle of deflation starts and the economy gets into down swing. So, this theory says that the economic fluctuations are due to innovation in the industry.

This theory was challenged and limitations are –

The full employment assumption is unrealistic.

Bank is not the only source of finance for every innovation in business.

Many times the profits are ploughed back to finance innovations.

Innovation cannot be the sole cause of business cycle.

The chapter has been introduced in the continuation of phase of business cycle.

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