Impact 
Gold, the classic asset class once again proved its supremacy over the jittery equity markets worldwide. As the U.S. economy remained on the edge (with their sovereign credit rating being downgraded to AA+ with a negative outlook and bloated debt-to-GDP ratio) along with the Euro zone in situation of debt-overhang, the equity markets across the world bled as the bears tighten their grips over the bulls.
Base:  10,000
(Source :ACE MF, PersonalFN Research)
But amidst all this global turmoil, the investment safe haven of the world, Gold became bold and rose to $1,763 per ounce as on August 12, 2011 (in rupees terms rose to 25,815 per 10 grams). The graph above brings out the divergent trend in gold and equity which in turn brings out the fact that gold remains the best way to hedge against the vagaries in the equity markets.
We believe that gold still remains and will remain in future too, a safe haven for investors in times of economic turmoil. Though the current spurt in the prices of gold been very steep (from 21,683 on July 1, 2011 to 25,815 in August 12, 2011, a gain of 19%) may lead to a minimal correction in the prices of gold (gold prices may correct by 5% to 10%) in the short term.
But fundamentally there is nothing to worry about for long term investors in gold, because as long as economic turmoil in the developed economies continues and Emerging Market Economies (EMEs) facing inflationary pressures the secular uptrend for gold is intact. We believe that one should have 5% to 10% allocation (of your investment portfolio) towards gold, as this would safeguard you against all economic uncertainities and when other asset classes disappoint you.
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Impact
Once again manifesting it pro-investor stance, the Securities and Exchange Board of India (SEBI) has put in place an elaborate framework for regulating large distributors selling mutual funds (MFs) and has thus put in place strict guidelines for Asset Management Companies (AMCs) employing these distributors.
The regulations prescribed by the SEBI direct MFs to ensure that the large distributors do not charge anything over the prescribed charges (which is 100 per subscription of 10,000 and above; and 150 per subscription of 10,000 and above for incentivising distributors to attract new customers to mutual fund industry) in ‘execution only’ transactions. In these, if the distributor feels the product is unsuitable for the buyer, a written communication has to be sent on this along with customer confirmation, that the transaction is ‘execution only’ prior to implementation.
The due diligence process shall initially be applicable for distributors satisfying one or more of the following criteria:
- Multiple point presence (More than 20 locations)
- AUM raised over 100 Crore across industry in the non-institutional category but including high net-worth individuals (HNIs)
- Commission received of over 1 Crore p.a. across industry
- Commission received of over 50 Lakh from a single Mutual Fund
SEBI has also directed MFs to conduct this due diligence on a continuous basis to ascertain whether the distributors are ‘fit and proper’ and must detach their sales and advisory functions.
We believe that such a move brought in by SEBI is in the long-term interest of investors, as this will make mutual fund distributors more accountable and responsible while rendering their service and also preclude mis-selling to a great extent. Also specifically categorising the transaction as "execution only" will enable them to get their legitimate fee, and not overcharge investors for something where there’s no logical advice provided. The separation of their sales and advisory functions would ultimately result in better services for the investors in the long-term.
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Impact
In the recent past, SEBI had asked mutual funds to limit their exposure to derivatives in equity funds. They were also restricted from taking leveraged positions or writing options. Thus in order to have similar rules across the board, SEBI now has plans to apply the same principles to global feeder funds as well.
However, a number of mutual fund houses are said to have asked the regulator to consider slightly more liberal guidelines for international funds. Those with an international alliance or which are completely owned by foreign asset managers have asked the regulator to consider leniency.
In our opinion, SEBI has done the right thing in showing concerns over high derivatives exposure. We believe derivatives exposure should be used only to hedge one’s portfolio risk and not for generating speculative gains / profits. SEBI’s move of applying the same rules for global feeder funds (which have high derivative exposure) ultimately resulting in high risk for domestic investors.
We believe that given the global economic turmoil led by the U.S. sovereign rating being downgraded (to AA+ with negative outlook by S&P) and debt overhang situation in the Euro zone, it would be prudent to invest your hard earned savings in diversified equity oriented mutual funds focusing on the Indian economic attributes. However, while doing so it is vital that you invest an equity mutual fund which has a good track record (across market cycles), and in one from a fund house which follows strong investment processes and systems. Remember while invest in equity oriented mutual funds, it is important that you have investment horizon of atleast 3 to 5 years.
| | | Weekly Facts |
| Close | Change | %Change | | BSE Sensex* | 15848.83 | (292.8) | -1.81% | | Re/US$ | 46.06 | (0.3) | -0.68% | Gold /10g | 25,670.00 | (1,120.0) | -4.18% | | Crude ($/barrel) | 110.59 | 0.1) | -0.05% | | FD Rates (1-Yr) | 7.25% - 9.25% | Weekly change as on August 25, 2011
*BSE Sensex as on August 26, 2011
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In an interview with the Economic Times, Mr. Rana Kapoor, Managing Director and Chief Executive Officer of Yes Bank shared his views on new banking licences in India.
Mr. Kapoor believes that there is no need of granting new banking licences. He thinks that the number one priority for the banking system is financial inclusion and to deliver financial inclusion we should be looking at more consolidation and not necessarily adding new systemic risk to the Indian banking system. He further explains his stance by saying that, "Inclusion as a delivery model could be enhanced through consolidation of existing banks and can be significantly enhanced by revamping existing old private sector banks. We need to improve rural inclusive delivery, and I promise you, for the first five to seven years, there is no way banks can do that. Even if they work 24x7, in the first seven to eight years, they would not be able to follow inclusion. They would just be adding risk, because they have to de-risk the financial and business model before they migrate to inclusion or rural and semi urban models. It will take at least 10 years to build a greenfield bank."
As far as Non-Banking Finance Corporations (NBFCs) are concerned, Mr. Kapoor is of the view that the risk culture of the NBFCs is very high. Explaining further he said, "It is not easy to believe that just because they have a credit delivery mechanism of some sort that NBFCs will migrate equally well in being a bank. Even for any NBFC to convert to a bank, the department of non-banking supervision should be as strong as a department of banking supervision. I also believe that NBFCs should be subjected to CAMELS supervision for the next three to five years on which banks are supervised. Then you can tell which NBFCs have good business character and decide which ones you want to convert into banks."
On whether corporate houses should be permitted to float banks, Mr. Kapoor is of the view that the nowhere in the world, certainly not in the emerging economies, have corporate ownership and sponsorship worked in any short-term or long-term scenario. He believes that ownership in banking needs to be institutionalised. Further explaining his stance he said, "At least in our judgement, the institutional sponsored model has worked. I don't think there have been many successes of individually-sponsored bank. These have to be very seasoned and vintage institutions with good risk management, brand equity, good system of compliance and audit. That's possibly the best way of moving forward and does not create any push and pull in the systems."
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CAMELS rating system: An international bank-rating system where bank supervisory authorities rate institutions according to six factors. The six factors Capital adequacy, Asset quality, Management quality, Earnings, Liquidity and Sensitivity to Market Risk are represented by the acronym "CAMELS."
(Source: Investopedia) | | QUOTE OF THE WEEK
"Your wealth can only grow to the extent that you do!"
-T. Harv Eker |  | |