  | | April 12, 2013 | | | | | | | Weekly Facts | | | Close | Change | %Change | | BSE Sensex* | 18,242.56 | (207.7) | -1.13% | | Re/US$ | 54.53
| 0.4 | 0.66%
| | Gold Rs/10g | 29,390.00
| 405.0 | 1.40%
| | Crude ($/barrel) | 105.15
| (1.3) | -1.25%
| | FD Rates (1-Yr) | 7.50% - 9.00% | Weekly change as on April 11, 2013
*BSE Sensex as on April 12, 2013 | |
Impact 
Many of you may be aware that in the Union Budget 2013, it is proposed to reduce the Securities Transaction Tax (STT) as under (and the revised rates be applicable from June 01, 2013):
- On Equity futures: from 0.017% to 0.01%
- On Mutual Fund/ETF redemptions at fund counters: from 0.25% to 0.001%
- On Mutual Fund/ETF purchase/sale on exchanges: from 0.1% to 0.001%, only on the seller
Thus at present until May 31, 2013, if you transact in the aforesaid securities the old rate of STT applies - which is higher than the one proposed.
Ascertaining this fact, even mutual fund houses are awaiting the reduction in STT rate to merge their schemes in the current financial year. Thus far in the present financial year (i.e. FY14) two mutual fund houses are looking at merging schemes. LIC Nomura Mutual Fund has already announced the merger of four of its schemes - LIC Nomura MF Top 100 Fund, LIC Nomura MF Systematic Asset Allocation Fund, LIC Nomura MF Vision Fund and LIC Nomura MF Opportunities Fund (merging schemes) with LIC Nomura MF Equity Fund (merged scheme), an open ended growth scheme. Likewise IDFC Mutual Fund is looking at merging a couple of its equity schemes, but is waiting for STT to reduce with effect from June 01, 2013.
It is noteworthy that every time a scheme is merged, the mutual fund house bears the STT and is not passed onto to you investors in the process of sale of units by "merging scheme" and purchase of the same by the "merged scheme". At present some mutual fund houses are waiting to merge some of their schemes, since reduced STT (with effect from June 01, 2013) would help reduce their cost of merging the schemes considerably with the aforementioned proposal.
We are of the view that, mutual fund houses are once again looking at this strategic move of scheme mergers to trim down their product portfolio size, seemingly being discomfited by the uncertainty in the Indian equity markets (led by global headwinds, downbeat domestic economic data, and uncertain political environment). Moreover, the capital market regulator - the Securities and Exchange Board of India (SEBI) too has expressed concerns over the numerous equity oriented funds with similar themes, leading to confusion among investors, and therefore to this effect the regular laid down a circular in 2010 laying down rules for the merger or consolidation of mutual fund schemes, and since then there have been numerous scheme mergers. But this good bye greeted is after causing much damage to the returns of most mutual fund schemes.
We believe that in a scenario where there's already a huge plethora of mutual fund schemes (making it difficult for investors to select winning mutual funds), what is required is simple and easy to understand products. The objective of garnering more Asset Under Management (AUM) should be set aside by the mutual fund houses and they should introduce only easy to understand products which are not overlapping with the existing ones in terms of their mandate, and which are capable of creating wealth for investors.
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Impact
The Indian equity markets began the year 2013 on a positive note with reform measure taken by the Government in the winter session of the Parliament. But in little over a last the last couple of months due to following factors in play, the Indian equity markets have fallen by nearly 8%.
- Downbeat domestic economic data;
- Non-populist Union Budget 2013 (aimed at walking tight on the path of fiscal consolidation);
- Global headwinds; and
- Uncertain political environment;
For gold, while at the start of the year 2013 it trailed Indian equities; with catalyst for gold again getting evident due to the aforementioned gloomy factors the divergences have reduced in the last couple of months and the precious yellow metal is now showing its lustre, by popping ahead of Indian equities on a year-to-date (YTD) basis - although the returns are thus far negative.
S&P BSE Sensex vs. Gold
Base: Rs 10,000
Data as on April 09, 2013
(Source: ACE MF, PersonalFN Research)
And going forward how will both these asset classes pave their path...
We are of the view that for the Indian equity markets, concerns of early elections are overshadowing the reform measures taken by the Government and are dragging the markets down. The recently released Q3FY13 Current Account Deficit (CAD) data at 6.7% of GDP is worrisome as it is driven by heavy oil and gold imports and muted exports. Fortunately the Balance of Payment (BoP) figure has turned in surplus of $781 million, compared with a deficit of $158 million in the previous quarter (according to the RBI data). Likewise, the Index of Industrial Production data is exhibiting a 'see-saw' trend with a meek data thereto, and overall the economic growth rate has slowed down and therefore the economic growth estimates for the current fiscal year have also been revised downwards assessing the economic scenario. In order to provide impetus to growth, the RBI has reduced policy rates twice (by 25 bps each) thus far in the calendar year 2013, but now with intermediate inflationary pressures yet evident due to hike in price of diesel and freight charges and WPI inflation yet remaining high over the Reserve Bank of India's (RBI's) perceived comfort level of 5.0%, the central bank has warned that prospects of further monetary policy easing is limited and has now put the onus on the Government to reinvigorate growth. Global cues too would be a driving force for the markets, and they would be wary of the debt-overhang situation in the Euro zone. In such a scenario, it could be possible that Foreign Institutional Investors (FIIs) could look at other Emerging Market Economies (EMEs) for host fundamental reasons, which could thus lead to reduction of India's share of foreign flows.
Hence nervous sentiments would persist in the Indian equity markets due to the aforementioned factors, and markets may get volatile with downward bias in the near-term.
Speaking about gold, we think the any corrective move would encourage smart investors to buy more ascertaining the fact that uncertainty yet looms around in the global economy, domestic economic data is downbeat and political environment seems volatile. Moreover the stance over the monetary policy adopted by central banks of the world would also guide the path for the precious yellow metal. Thus far indications that central banks of the developed economies are still maintaining an accommodative monetary policy in backdrop of global headwinds; we think would be supportive for gold in the long-term. In fact central banks themselves heaped-up gold as a move to diversify their foreign exchange reserves. That itself tells us that not all's well with the dominant reserve currencies and many are looking at gold as safe haven. We are of the view that demand for gold would not deter and think that ascending move for gold is intact over the long-term as many would view gold as a monetary asset rather than mere commodity. We recommend that you invest in gold the smart way to safeguard yourself against all the economic and political uncertainty prevailing at present.
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Impact
Today as many of you may be aware, that most banks are no longer in the business of mere lending and acceptance of deposits. With rampant financial innovation, they have explored the fee-based income stream by selling third party financial products such as mutual funds and insurance amongst host of others. In fact many of you may have experienced that while you visit you bank to conduct your banking activity, the sales personnel there often try to push you some of these third party products. They often make tall claims and attempt to sway you. But you ought to be careful and take a prudent decision that's meant for you. Remember relationship managers at banks (or even agents and distributors for that matter) are driven by incentives (which make them wealthy), but it is for you to assess the tall claims made by them, so that you don't fall prey to fraudulent activities and feel betrayed or duped. It is imperative to act responsibly as investors.
After the recent cobrapost sting operation on some of the known banks which many of you trust; regulators are contemplating new measures to regulate incentive for banking staff. To know what these new measures and to read our view over this news, please click here.
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Impact
In turbulent time such as at present, many investors have thus far evinced interest in a safer investment avenue which is Fixed Deposits (FDs) with a bank. And thanks to the high interest rate regime and moderation in WPI inflation that the real rate of returns obtained on most of them has been positive. But have you as investors kept your options open if interest rates fall further? While the RBI has signalled that further monetary easing remains quite limited and believes that Government has to play a key role in reinvigorating growth; recently a few banks (such as Punjab National Bank, Bank of Baroda and Oriental Bank of Commerce) have already slashed interest rates on fixed deposits, as the street expects RBI may cut policy rates further by 25 basis points (bps) in its annual monetary policy 2013-14 (scheduled on May 03, 2013).
Hence in such a scenario where other banks could follow suit, have you as investors thought of an investment strategy or other investment avenues, which could yield you better and tax efficient rate of return. To read about the other investment avenues and to know our view them, please click here.
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- In an attempt to curb the widening Current Account Deficit of the company, while the Government increased the import duty on standard gold bars to 6% (from 4%) it has failed to bring in the desired results of reducing gold imports. In fact it has resurrected smuggling of 'tola' bars or unnumbered bars. Recently the Directorate of Revenue Intelligence (DRI) caught 35.85 kg of tola bars being smuggled into the country from Bangladesh.
It is noteworthy that tola bars are preferred in case of smuggled gold and earlier the DRI had requested had request the Government to raise duties on these bars. The Government started imposing higher import duty on tola bars since 2003, but this move didn't go well with the manufacturing of tola bars globally and yet there is price differential between standard gold bar (which are numbered) and tola bars occurring out of duty differentials which is leading to smuggling of gold.
We are of the view that, smuggling activity in gold has been resurrected recognising the fact that India has an insatiable appetite and flair to own the precious yellow metal, due to various emotional and financial reasons. This year gold-buying occasions being 20% more than last year, gold demand is likely to be high in India. Moreover smart investors would prefer to take refuge the under precious yellow metal during economic and political uncertainties, due to its trait of being a safe haven. This in turn could undermine the Government's attempt to curb CAD, which touched 6.7% in Q3FY13.
- In attempt to curb price rigging in stocks, SEBI is asking for undertaking from brokers and investors, in cases where they observe investor's trading pattern irregular or suspicious and possibly resulting in price manipulation.
In the undertaking an investor would be required to spell out whether her own funds were being used for the investment. The regulator has put in place this policy for trading members after it came across several instances where front entities of promoters were used to carry out transactions to manipulate share prices. But, the capital market regulator found it difficult to prove the nexus between the parties involved.
We are of the view that, such a move could prevent misuse of investor's account by brokers and even preclude misuse of trading system by investors themselves for their own benefit. This move is significant in times to the recent crash in the mid and small cap segment, where they were allegedly dumped by panic-stricken financiers after operators beat down several stocks in a weak market
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Real Rate of Return: The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other external effects. This method expresses the nominal rate of return in real terms, which keeps the purchasing power of a given level of capital constant over time.
Source: Investopedia
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Quote : "In stocks as in romance, ease of divorce is not a sound basis for commitment." - Peter Lynch
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