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| February 08, 2013 |
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| Weekly Facts |
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Change |
%Change |
| BSE Sensex* |
19,484.77 |
(296.4) |
-1.50% |
| Re/US$ |
53.22 |
0.0 |
0.02% |
| Gold Rs/10g |
30,410.00 |
75.0 |
75.0 |
| Crude ($/barrel) |
116.70 |
0.8 |
0.66% |
| FD Rates (1-Yr) |
7.40% - 9.00% |
Weekly change as on February 07, 2013
*BSE Sensex as on February 08, 2013
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Impact 
Sometime in November 2012, our country's Finance Minister - Mr P. Chidambaram made a statement turning focus towards the issue of accumulation of wealth in the hands of few. While addressing a National Institute for Public Finance and Policy (NIPFP) function, he had said, "Sometimes I doubt whether we have taken moderation (in tax rates) too far. Have we paid little attention to accumulation of wealth in few hands? I am still hesitant to talk about inter-generational equity and, therefore, inheritance tax. I think these are the questions we should debate." The statement seemed the finance ministry finding ways to narrow down the fiscal deficit in the coming years.
Although now we are a couple of weeks ahead of Union Budget 2013, there's yet speculation whether inheritance or estate tax would be indeed reintroduced (in the Government's attempt boost revenues), and insurance companies are saying that if such duty is indeed levied, they will start covering the "estate duty clause" in their policies offered.
So, how will such insurance policies be structured?
Primarily, such a clause would be a part of whole life policies and you as policyholder will pay an insurance premium which will be depend on the value of the estate, which could include house, land, and jewellery amongst host of other inclusions. As far as the ticket size of these policies is concerned, it would depend upon the sum assured.
In 70's, Life Insurance Corporation of India (LIC) used to cover estate duty under the whole-life policies. Claim was paid only after the death of both the parents, when the estate is passed on to the successor.
Estate Duty Act, 1953
It is noteworthy that earlier, estate duty was payable by the executors of the estate of a deceased under the Estate Duty Act, 1953, till June 16, 1985, after which it was abolished due to complex tax structure. The levy started at a threshold of Rs 1 lakh with a rate of 7.5% and the maximum rate was 40% of the principal value of the estate in excess of Rs20 lakh.
We are of the view that, with the rising income levels the number of ultra-high net worth individuals too have gone up. Such demographic we think is encouraging the finance ministry to rethink on inheritance tax in times when the Government seems committed on its path of fiscal consolidation. While in India, we have Wealth Tax too, the restrictive ambit has garnered meagre collection therefrom.
Insurance policies covering the "estate duty clause" could provide a relief to such policyholders if inheritance tax indeed comes into effect. But one should be watchful over the premium which they may have to dole out for the coverage.
We also think, instead of getting inheritance tax the Government should think of introducing a "luxury tax" which will do more good, if the Government indeed wants to reduce inequalities. The present tax regime is stable (along with fair dispute settlement machinery) and is conducive enough to promote economic growth.
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Impact
The year 2013 thus far has begun on a positive note for the Indian equity markets. In the month of January 2013 the Indian equity markets (i.e. the BSE Sensex) ascended by +1.6% (or 314 points) aided by tone of reformism set in by the Government during the winter session of the Parliament. Moreover, several statements issued by the Government on its commitment to achieve the fiscal deficit target also imbued confidence in the Indian equity markets. With the U.S. fiscal deal struck, bailout package doled out for Greece and Spanish bank loan restructuring permitted; the global macroeconomic worries too seemed to recede, thus providing relief to the equity markets.
For the precious yellow metal - gold, the lack of right catalyst led to its corrective (with price falling -1.2%). But it is noteworthy that, the downward move was rather restricted as smart investors are yet looking at every corrective to buy into the precious yellow, resulting in plateauing of gold prices at some points.
BSE Sensex vs. Gold
Base: Rs 10,000
Data as on February 06, 2013
(Source: ACE MF, PersonalFN Research)
So, going forward can Indian equities perform positively, and can gold glitter?
Well at present in the month of February 2013, thus far the Indian equity markets are depicting a descending move, although the fall is petite -0.7%. The markets seem to be quite cautious and concerned over how the Government would address to the twin deficit problem (occurred by ballooning fiscal deficit and widening Current Account Deficit (CAD)), and how will they (Government) tread over the path of fiscal consolidation. Also the Union Budget 2013 (to be presented on February 28, 2013), would now be an event for the markets. Ahead of general election next year, if the budget is a populist one in the Government's attempt to win on vote banks, it may further put pressure on the fiscal deficit problem. On the other hand, if the Government raises taxes - especially the indirect ones, it may impede economic growth as consumption too may get affected. So it's going to be tight rope for the Finance Minister to walk on.
As far as gold is concerned, after a corrective in January 2013 thus far in February 2013 it has once again depicted gains of +2.0%. With catalyst for gold once again getting evident, due downbeat domestic economic factors (such as slump in economic growth, lull in industrial activity, twin deficit problems, FDI not kick-starting despite reform measures taken) and global economic uncertainties (such as a contraction in U.S. Q4 economic growth rate to -0.1% and debt crisis in the Euro zone and contraction in economic growth there as well); smart investors are once again taking refuge under the precious yellow metal. At present, while the Government has raised the custom duty on import of gold to 6% in an attempt to curb gold imports, we think that would not impede the demand for gold in India and in fact buoy up import of gold through an illegal activity such as smuggling.
In the backdrop of the aforesaid, we are of the view that since situation yet looks volatile, while taking exposure to Indian equities it would be prudent to stagger your investments. For investing in mutual funds, it would be wise to adopt the Systematic Investment Plan (SIP) mode of investing as it can enable you to manage the volatility of the equity markets well (due to rupee-cost averaging advantage) and power your portfolio with the benefit of compounding. However while selecting a mutual fund, prefer diversified equity funds with a good and consistent track record and invest with a long-term investment horizon of at least 3 - 5 years. Also consider fund houses which follow strong investment process and systems.
Taking into account that macro global economic situation yet looks uncertain; we also recommend that you allocate 10% - 15% of investible surplus in gold, for it being a store of value and hedge against inflation. The easy monetary policy adopted by central banks of the developed economies would support the long-term secular uptrend of gold, until global economic uncertainty persists.
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Impact
In the last couple of years, if you have switched your job for better career prospects, and transferred your old Provident Fund (PF) to your present employer you got the read this!
The Employees Provident Fund Organisation (EPFO) is issuing notices seeking refund of interest; from those members who have transferred their PF accounts after April 1, 2011 and whose requests have been settled. The EPFO is reaching out to the present employers of such PF members and thereby seeking refunds from the employees, citing wrongful credits of excess interest on their past PF balances.
It is noteworthy that while some members have received such notices, the others have been denied interest dues for the period after April 2011. To read more about this new and to know our view over it, please click here.
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Impact
With many of us engaged in an economic activity to earn a livelihood, we have bank accounts; and deposits and withdrawals are the core activities which we perform. Today with technological innovation we have various avenues (such as ATMs, internet banking, mobile banking, phone banking) through which we can carry out our banking activity, but yet there are certain banking transactions such as cash deposits, cash withdrawals and cheque deposits, which we yet prefer doing physically by visiting our bank. But now it seems that the Reserve Bank of India (RBI) wants to preclude bank account holders to do such physical banking transactions.
Recently, the RBI floated a discussion paper on 'Disincentivising Issuance and Usage of Cheques' thereby seeking to discourage usage of cheques and cash withdrawal, by levying a charge on such transactions. "In order to avoid increased dependence or slippage to cash-based transactions, high (both in amount and frequency) cash withdrawals and deposits of cash by individuals may also be charged," said the discussion paper. To read the other major suggestions enunciated in the discussion papaer and to know our view over it, please click here.
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- The insurance regulator - the Insurance Regulatory and Development Authority (IRDA) has decided to put an end to high net asset value-guaranteed life insurance products, perturbed by their misleading nature and also by the selling pitch that gives an impression that their returns are linked to market performance.
Mr. J. Hari Narayan has however said, that existing such products can continue to be serviced to give whatever benefits the scheme had promised till the end of the policy tenure.
We are of the view that, the ban on highest NAV products is indeed a good move since they were misleading by nature and communication problems indeed occurred. The ban may result in the insurance industry's volume being impacted. But the decision was expected over this, since past 18-24 months the regulator was discouraging such products.
- In an attempt to tap unbanked investors in the retail mutual fund space, has started the option of cash investment. This initiative is in accordance to SEBI's guidelines of allowing cash investments by investors up to Rs 20,000 per investor, per mutual fund every financial year.
At present, the cash facility for investments will be available at select Allahabad bank branches and thereafter extended to 2,500 branches across the country.
We are of the view that, such a move by the fund house will enable it to garner more Assets Under Management (AUM) from such investors (who more often may be placed in the semi-urban or rural areas).
It is noteworthy that earlier some fund houses had displayed reluctance to launch cash investment route, but now with one providing such facility other may follow suit, in their race of garnering more AUM.
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Hedge: Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.
Source: Investopedia
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Quote : "You just have to be opportunistic, and try to figure out what creates value... where the bottom is, what creates incremental value, and in what combinations." - John Malone
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