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| February 14, 2014 |
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| Weekly Facts |
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Close |
Change |
%Change |
| BSE Sensex* |
20,366.82 |
-6.74 |
-0.03% |
| Re/US$ |
62.44 |
0.14 |
0.22% |
| Gold Rs/10g |
30,400.00 |
310 |
1.03% |
| Crude ($/barrel) |
108.44 |
2.36 |
2.22% |
| FD Rates (1-Yr) |
8.00% - 9.00% |
Weekly change as on February 13, 2014
*BSE Sensex as on February 14, 2014
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Impact 
Everything around you is getting expensive and you might feel your income is not rising as fast as you would expect it to rise. If you are saving less these days, you are representing the broader trend. At national level, proportion of gross domestic savings in GDP is falling. From the high of 36.8% in Financial Year (FY) 2007-08; gross domestic savings as a percentage of GDP has fallen to 30.8% in FY 2011-12.
Fall in Savings...
(Source: Central Statistics Office, RBI, PersonalFN Research)
Household savings seem to be affected the most in the recent years. There is another trend that has been witnessed of late. Proportion of financial assets in household savings has fallen substantially since 2007-08. From about 61% in FY2007-08 proportion of financial assets in household savings has reduced to about 43% in FY 2011-12.
What are the reasons for such a steep fall?
- High inflation
- Low penetration of banking services
- Poor credibility of financial entities due to cases of mis-selling and fraud
- Low or negative real rate of returns on fixed deposits
- Rising gold prices
- Rising real estate prices
While higher retail inflation, led by rising food article prices, is the biggest culprit; there are other factors too which are responsible for the shift in the savings pie of households. It is noteworthy that in 2007-08 when gross domestic savings were much higher and financial assets constituted about 3/5th of total household savings; returns from equities were high and retail inflation was lower than what it is today.
In search of higher returns investors moved from financial assets to physical assets such as gold and real estate which generated impressive returns when the return from equity market declined over last 5-6 years. Today, people have lost faith in equity markets as despite staying invested for last 5-6 years, markets have not rewarded them adequately. Many of these investors were the first timers in equity markets. Due to poor first-time experience they are not making repetitive investments in equities.
Is this shift rational?
Well, it might sound all logical to chase asset classes that are generating attractive returns; but unfortunately it is extremely dangerous and illogical. True, all of us want to create wealth but chasing momentum for making quick bucks is not advisable. Many of those who lost money in equity markets during the fall of 2008-09 and never recovered even their principal thereafter; were those who invested in markets following the market momentum without knowing the level of risk in such investments.
Furthermore, many people often misconstrue savings with investments. One must understand the difference between savings and investments. Even at present, many people keep most of their savings in bank accounts or else buy gold. PersonalFN believes that investing only in a particular asset class may not make you rich but would definitely increase concentration risk of your portfolio.
What should you do?
PersonalFN believes you should first identify your financial goals and adopt a personalised asset allocation for fulfilment of each of your goals. For example, if you had invested in gold a year ago thinking that gold is absolutely safe with a time horizon of 1 year; you would probably have made losses on your investment in gold. So does this make gold a risky asset? It depends on your time horizon. Gold definitely has its role to play in your portfolio but its proportion would depend on many factors such as your risk appetite and time horizon you have for achieving your goals being the most important ones. Similarly, your investment in other asset classes too should be based on aforesaid factors.
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Impact
Depositors form long queues outside the branches of a bank in panic to withdraw their money if the bank is in poor financial health and said to be heading towards a closure. In India, or elsewhere, mergers and acquisitions of financial institutions are not new. Be banks or mutual funds, some players exit while others keep entering the business. If you are a mutual fund investor, you might be even more concerned as someone whom you trusted with your money is exiting. But you need not panic. Indian mutual fund industry is well regulated and unlike some fraudulent financial institution, it won’t run away with your money.
Why mutual funds could be shutting shops in India?
In India, in the aftermath of financial crisis of 2008, many fund houses struggled to run their businesses profitably. Moreover, entry load ban further affected the fund houses negatively. Mutual fund industry has been struggling since then as expanding asset base has become a tough job for them. This shows that mutual funds are still a "push" product in India. If you think, only smaller and less known fund houses might be quitting, it may not be a right notion, Fidelity, which had a decent asset base and consistent track record which had earned it a name in the industry, also quit. On the other hand, newer and much smaller fund house, Diawa also sold off its business. The most recent one to quit was the Morgan Stanley; which had entered India with its much hyped "10-rupee NFO". The fund house exited India after doing business for 20 years and without achieving much of success. There are few more fund houses which may want to sell their businesses but are not finding buyers.
What should you do?
Analysis of mergers and acquisitions of mutual funds so far suggests that, you should hold onto your investments if your mutual fund house is selling its business to a stable fund houses. Let’s not forget, HDFC Mutual Fund, Birla Sun Life Mutual Fund and Franklin Templeton Mutual Fund initially bough the then existing fund houses. All of them have some of the most stable and consistently performing schemes under their product portfolio. PersonalFN believes that, you should identify the winning mutual fund. Unless, there is any change in the fundamental attribute of a scheme or a significant shift in the investment strategy you need not exit. Yes, performance remains the important milestone and you should regularly monitor it post acquisition.
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Impact
India is the second largest consumer of gold and ranks only next to China. Traditionally, gold jewellery has been popular with Indians and almost no Indian wedding is complete without gold jewellery. However, in the recent years, investment demand for gold has been rising. New modes of buying gold have emerged. Today, one can buy gold without holding it in physical form. With emergence of gold Exchange Traded Funds (ETFs) and gold fund of fund schemes, people are looking beyond buying gold in physical form. To generate more buying interest, many banks and Non-Banking Financial Companies (NBFCs) launched gold deposit schemes. These schemes are regulated by RBI. But it has been observed that there are hundreds of schemes in circulation which are launched by non-bank or non-NBFC promoters. Securities and Exchange Board of India (SEBI) is all set to clamp down on such schemes.
To read more about this news and the view of PersonalFN over it, please click here.
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Impact
Retail investors are shying away from equity markets and that's not good news. Apart from poor returns generated by equities over last 5-6 years, quality of corporate governance in many Indian companies has been putting off retail investors. When you buy a stock, you are bullish on the underlying business; so indirectly you also trust the ability of people running the business. If something separates good companies from the poorly managed ones, it is quality of corporate governance. In simple words, corporate governance means, set of rules, systems and processes governing a company. Any corporate decision is affected by corporate governance practices and almost all business decisions may reflect quality of corporate governance. Securities and Exchange Board of India (SEBI) is soon expected to come out with new corporate governance code and also brush up insider trading norms.
To read more about this news and the view of PersonalFN over it, please click here.
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- Hop-skip and jump from one company to the other was the fashion until few years ago and hardly anybody bother about it. But collapse of Lehman Brothers in 2008 might have changed the mind-set of employees as well as employers. These days, even big Multi-National Corporations (MNCs) are lay offing people and employee attrition too has reduced from its peak. A survey by the Associated Chambers of Commerce and Industry of India (Assocham) revealed that there has been a rise of 39% in number of contract workers last year. People working in contract do not perform any lesser than the regular employees but are not entitled for benefits available to employees of the company who are on the payroll. As per the survey, 60% of the staff working in the telecom sector is in contract while 56% of the workforce in automobiles is the contract labour. Other sectors with higher proportion of staff working in contract are Education, Manufacturing and FMCG. Pharmaceuticals and Hospitality and Travel have albeit lower number of people working in contract.
Taking a view from the findings of Assocham, PersonalFN believe, it is imperative for individuals to plan their finances well while they may be earning a fancy sum irrespective of nature of employment as in case of unfortunate event such as one being out of job; building a high contingency reserve is imperative to take care of your daily expenses until you find a suitable job. As you may be aware, those working in contract usually don’t have any job security and therefore the planning is required.
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Real Assets: "Physical or tangible assets that have value, due to their substance and properties. Real assets include precious metals, commodities, real estate, agricultural land and oil. They are appropriate for inclusion in most diversified portfolios - with their proportion dependent on the investor's risk tolerance and preferences - because of their relatively low correlation with financial assets, such as stocks and bonds. They are particularly well-suited for inflationary times, because of their tendency to outperform financial assets during such periods."
(Source: Investopedia)
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Quote : "As long as the bias is self-reinforcing, expectations rise even faster than stock prices." - George Soros
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