  | | July 05, 2013 | | | | | | | Weekly Facts | | | Close | Change | %Change | | BSE Sensex* | 19,495.82 | 100.0 | 0.52% | | Re/US$ | 60.13 | 0.1 | 0.12% | | Gold Rs/10g | 26,270.00 | 260.0 | 1.00% | | Crude ($/barrel) | 105.72 | 3.8 | 3.78% | | FD Rates (1-Yr) | 7.00% - 8.75% | Weekly change as on July 04, 2013
*BSE Sensex as on July 05, 2013 | |
Impact 
All of us want to borrow at a cheap rate but borrowers have been burdened with higher Equated Monthly Instalments (EMIs) for past 3-4 years since the Reserve Bank of India (RBI) started tightening the interest rates. Although, now that policy rates have descended with RBI's stance in its monetary policy; banks still appear to be reluctant to cut their base rates. But here's good news for borrowers. Finance Ministry has nudged public sector banks to lower "base rates".
What is a "base rate"?
Well, it is used a reference point for pricing all categories of loans. In simple words, it acts as a minimum rate of lending.
And how are banks placing them...
Being concerned over asset quality and profitability, banks have so far reduced borrowing rates in selective categories. This has kept cost of borrowing still high despite the reduction in policy rates. Higher interest rates are often blamed for the slowdown in economy.
The good news...
Addressing public sector banks recently, the Finance Minister (FM) urged them to cut base rates and pass on the benefit of recent rate cuts to borrowers. Although banks are free to decide their base rates independently using methods prescribed by RBI; FM pressed banks to lower minimum lending rates.
But would banks indeed lower rates?
PersonalFN is of the view that this move is aimed at spurring the economic growth in the country, which has tanked nearly to 5% for the last fiscal. Finance ministry is trying to revive the investment cycle which, as always argued, is being delayed for the want of cheap funds. However, public sector banks have been facing a problem of bad asset quality. Earlier this fiscal, Finance Ministry had asked public sector banks to reduce their Non-Performing Asset (NPA) substantially.
PersonalFN is of the view that; genuine borrowers with strong proposals would benefit from reduction in base rate. However, banks may still be reluctant to go aggressive on lending given that their asset quality is still poor. Nonetheless, existing borrowers who have opted for floating interest rate options stand to benefit. Under current scenario where deposit growth is lagging the credit growth, there is a limit to which base rates can be lowered. Banks may try to maintain both, asset quality and profitability.
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Impact
Many of us have been hearing about the phrase most harped, that gold is a safe heaven. But does this hold true for the precious yellow metal even today? A many have you may have witnessed, the last couple-and-a -half months have seemed to be perilous for gold as it has depicted a descending trend, giving rise to the question, is it worthy of inclusion or holding in your portfolio.
Since the beginning of this calendar year, equities which generally show an inverse relationship with gold haven't created wealth for investors either. And this inverse correlation between the two asset classes, seems to have been broken at least for time being.
Gold vs. Indian Equities: Would the inverse correlation continue?
Data as on July 03, 2013
(Source: ACE MF, PersonalFN Research)
As depicted in the chart above, while gold has generated -14.9% returns since the beginning of 2013, S&P BSE Sensex has yielded -0.9% returns. Although, negative returns in equity have been lower than that generated by gold; the inverse core-relation which otherwise should have held true seems to have been broken.
Let's find out why...
Tracking weaker prices at international markets; gold prices in India too have fallen. The statement from U.S. Federal Reserve over winding down of bond buying programme, led to investors dumping gold. This is because the statement from Mr Ben Bernanke, Chairman of U.S. Federal Reserve was against the backdrop of signs of economic vigour depicted by the U.S., which encouraged investors to look at U.S. equities and dump gold. Sluggish demand in the domestic market due to off marriage and festive season also had an influence on gold prices. However, fall in the value of Indian currency has somewhat arrested the further slide in gold. You see, the easy monetary policy adopted by U.S. Federal Reserve has been pushing asset prices up, has brought signs of economic vigour in the U.S. and that in turn has strengthened the U.S. dollar. But the recent statement from U.S. Federal Reserve about policy reversal has spooked global markets and gold drifted down.
As far as Indian equity markets go, aggressive buying from Foreign Institutional Investors (FIIs) was the major factor in markets going up so far. But now that FIIs have been selling relentlessly, markets have been witnessing turbulent times. Indian economy has its domestic negatives too which keeps market sentiment low.
PersonalFN is of the view that, investors should remain unmoved with falling gold prices as well as depressed equity markets. Your asset allocation should be in line with your long term goals. Well-crafted financial plan may be your first step towards prudent management of your finances.
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Impact
Last Securities and Exchange Board of India (SEBI) is playing the old tune again which was once turned down by its own panel. Recently, the market regulator has hinted at raising the minimum net worth requirement for mutual funds. In 2010, mutual fund advisory committee on "Review of Eligibility Norms" headed by Ms Roopa Kudva, MD & CEO, Crisil had recommended to increase the minimum net worth to Rs 50 crore. However, it was later rejected by the panel appointed by SEBI. At present the minimum capital requirement to set up a mutual fund in India is Rs 10 crore. The topic is again up for the discussion.
As observed by SEBI, there are some less-serious players in the industry. The regulator has warned that all those fund houses that have not expanded their operations beyond top 15 cities may lose out incentives which may be offered henceforth. The indicated move comes as a part of initiatives taken by the market regulator to address long term problems faced by the mutual fund industry. SEBI is also of the opinion that mutual funds, in the past, have taken advantage of low capital requirements to enter mutual fund business and make it over crowded by managing meager asset base.
PersonalFN is of the view that, mere increasing minimum capital requirement may not ensure fund houses are committed to doing serious business. To read more about this news and the view of PersonalFN over it, please click here.
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Impact
In the last couple or more number of years, as many of you may be aware - and may have encountered, that there have been horrendous instances of mis-selling of by banks, especially in the segment of Wealth Management Services (WMS) which include:
While there has been vigilant regulation from both the capital market regulator (i.e. the Securities and Exchange Board of India) and the insurance regulator (i.e. Insurance Regulatory and Development Authority) on this, the Reserve Bank of India (RBI) has also issued kept a vigil. But with the expansion of the roles and responsibilities of banks as providers of WMS (which includes the marketing and distribution thereto), the RBI has proposed to fortify norms intended at segregating activities of banks involved in WMS into sales and advisory.
In the draft guidelines on 'wealth management/marketing/distribution services offered by banks', RBI has said, "conflict of interest arises mainly from the juxtaposition of the marketing/distribution function and the advisory or funds management function. To address the issue of conflict of interest arising from the single entity conducting both the activities of advisory/fund management as well as marketing, it is proposed to segregate the two functions." Moreover, the draft guidelines also mention that banks intending to offer WMS need to seek RBI's prior approval and would also need to comply with SEBI's guidelines regarding provision of these services. To read more about this news and the view of PersonalFN over it, please click here.
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- Are you bugged with filling same details over and over again while investing in mutual fund schemes? You would soon be able to save lot of time as Association of Mutual Funds in India (AMFI) is mulling over plans of launching an online transaction portal, MF Utility (MFU). To benefit from the new initiative taken by AMFI, investors are expected to create a Common Account Number (CAN) with their distributor and submit their Know Your Clients (KYC) acknowledgment to MFU. Once MFU platform is launched, separate forms of every individual fund house would be done away with and a common application form would replace them.
The biggest advantage of using this platform is convenience it may give in transacting and managing investments. Now one may through a distributor, buy mutual fund units even at a last minute of the cut off time. Scanned copy of an application form and the cheque uploaded on MFU portal would suffice to invest on that particular day. Although the physical delivery would still be needed, that can be done later. MFUs would have pan India presence to handle physical forms. It is speculated that Registrar and Transfer Agents (RTAs) such as Karvy Computershare Ltd and Computer Age Management Services are likely to be appointed as Point of Sales (PoS) for MFU. Now you may consolidate your holdings across all mutual fund houses which would give you a better view of your portfolio.
PersonalFN is of the view that the new initiative which is likely to be taken by AMFI would help distributors serve their clients better. However, lack of clarity on giving access of the portal to individuals may limit the benefits. Furthermore, speed and efficiency of the portal may decide its success.
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Credit Crunch: It is an economic condition in which investment capital is difficult to obtain. Banks and investors become wary of lending funds to corporations, which drives up the price of debt products for borrowers.
Source: Investopedia
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Quote : "Interest on debts grows without rain." - Yiddish Proverb
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