| 24th August, 2012 |
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| Weekly Facts |
| ||Close ||Change ||%Change |
|BSE Sensex* ||17,783.21 ||92.1 ||0.52% |
|Re/US$ ||55.26 ||0.5 ||0.93% |
|Gold Rs/10g ||30,515.00 ||610.0 ||2.04% |
|Crude ($/barrel) ||116.09 ||(0.3) ||-0.29% |
|FD Rates (1-Yr) ||7.25% - 9.25% |
Weekly change as on August 24, 2012
*BSE Sensex as on August 25, 2012
With an aim to channelize domestic savings into the stock market and deepen the corporate debt market, the Finance Ministry is considering relaxing investment norms for pension funds and insurance companies to allow them to increase their exposure to equities and corporate debt. The Finance Ministry-appointed investment committee on insurance and pension funds has recommended that retirement funds should be allowed to invest up to 25% of their corpus in equities (up from the current level of 15%), and likewise raise the investment cap on corporate debt from 40% to 45%. Moreover, the panel has also recommended that the exposure of these funds to Government debt be reduced from 55% to 40%. The investment guidelines too, governing life insurers may be relaxed, whereby the life insurance companies could get an option to invest upto 50% of their debt investments in AA-rated paper.
Apart from this, on a separate footing, the Finance Ministry is also considering a proposal to allow an insurance company to hold up to 25% stake in a company. The committee on insurance and pension funds is also expected to provide a road map for India's transition from the present quota-based allocation for pension and insurance funds to a system driven by what economists call a 'prudent person' rule. Under such a regime, there are no investment limits of any sort for investors, thereby enjoying complete freedom.
We are of the view that, though equity investments provide luring returns over a long term period it is important to manage equity investments in a systematic and prudent manner due to the risks involved. And since it involves investors' retirement corpus it becomes all the more important to check whether the equity investments are being managed in a prudent manner. Furthermore, in order to provide some assurance to the investors, there should be some minimum guaranteed returns from such funds as a security measure, because at the end these initiatives are intended to take care of pension and insurance needs of several individuals.
And as far as the 'prudent person' rule is concerned, if investment savvy investors are ready to bear that extra risks by having more exposure to equity asset class, then that segment should be treated separately or there should be an option to determine the risk appetite of the investor at the onset of such investments.
According to the World Gold Council (WGC), demand for gold is likely to fall by a fifth in the second half of 2012 in India from a year ago due to higher prices. In the recent past, the volatility in the rupee (depreciation of the rupee against the dollar) has attributed to the up-move in the prices of the precious yellow metal, along with the gloomy global economic scenario (which typically makes the asset class look bold as smart investors' prefer to take refuge under gold). The average price of gold in India now stands at around Rs 29,600 per 10 gm as against Rs 17,000 (approximately) per 10 gm two years back.
India's Gold Demand
(Source: World Gold Council, PersonalFN Research)
Although monsoons have been deficient and uneven in the country, it may not cast a shadow on the demand of the precious yellow metal from rural areas (which contribute about 60% of India's gold demand). This is because, there are festive seasons in the year ahead which may help spur up the demand for gold, and keep prices elevated. Gold purchases in the form of jewellery, coins or bars have always been driven by sentiments of the people of India especially during festive months.
We believe that, with deficient and uneven monsoon risk of food inflation would persist, but on the other hand the impact food inflation could actually benefit the farmers as the food grains will fetch them higher prices on account limited production. Moreover, with the festive season starting next month, we may witness higher demand for gold - especially physical gold. Anticipating high demand for gold during the festive season, the stockists too have increased their positions in the bullion market to meet festive demand ahead of the marriage and festive season. However, gold ETFs still remain the smart way to invest in gold due to the benefits it provides to its investors as compared to physical gold.
Most of us are desirous of buying a dream home, but the rising property prices are making this dream rather far-fetched and for some, even impossible. Although home loans are available in today's times, the stiff interest cost has been a deterrent for many property buyers - be it in the residential segment or commercial segment. Moreover, the situation of sky high reality prices at present has been heightened by real estate developers by sitting on huge inventories (unsold flats), and as a consequence there has been a slack in the realty sector.
In order to address to this situation, the Finance Minister - Mr P. Chidambaram has urged the Government owned banks to put pressure on real estate developers to lower property prices in order to get the economy moving. The FM told bankers to make builders realise the need to complete projects according to schedule and lower the prices of apartments that are ready for possession but which are left unsold. According to the FM around 5 lakh flats are lying vacant. Moreover, banks have lent close to Rs 1.2 lakh crore to builders while their home loan portfolio came to Rs 2.5 lakh crore in the last week of March 2012, according to the RBI data. To know whether the property prices will mellow down on FM's aggression, please click here.
In the last few days there has been a big hula boo about the so-called 'deftly' crafted changes brought about by the capital market regulator - Securities and Exchange Board of India (SEBI), attempting to 'revitalise' the mutual fund industry. Mutual Fund industry as we know, has been reeling under pressure to encourage more participation in various mutual fund schemes and expand its reach beyond the major cities since the 'entry load' ban in August 2009.
Thus going by its intent to revitalise the mutual fund industry, the SEBI has now permitted Asset Management Companies (AMCs) that have managed to bag 30% of their total annual inflows from places beyond top-15 Indian cities to charge an additional 30 basis points (bps) expense ratio. The 30 bps would be charged on the entire fund, in a way, making existing investors and investors residing in top cities to pay for new investors from the hinterlands. This, in effect, would jack up the expense ratio by 30 bps to 2.80% in the case of equity funds with assets over Rs 100 crore. To know what mutual fund investors should do, please click here.
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- As a value added service to its savings bank account customers Canara Bank has launched “Canara Freedom Suraksha”, a life insurance cover of Rs 1 lakh at a very nominal premium. The cover is extended without any medical test and merely on a declaration of good health by customers and covers both natural and accidental death. The annual premium rates (inclusive of service tax) are Rs 177, Rs 366 and Rs 988 for age groups of 18-35, 36-50 and 51-59, respectively.
We are of the view that, the customers of the bank opting for such insurance should do a thorough check of the life insurance policy offered. Though premium rates may be nominal it is better to have known exclusions implied under the policy since the policy does not require any medical tests.
Floating interest rate: An interest rate that is allowed to move up and down with the rest of the market or along with an index. This contrasts with a fixed interest rate, in which the interest rate of a debt obligation stays constant for the duration of the agreement. A floating interest rate can also be referred to as a variable interest rate because it can vary over the duration of the debt obligation.
|Quote : "In all realms of life it takes courage to stretch your limits, express your power, and fulfil your potential... it's no different in the financial realm." - Suze Orman |