  | | July 19, 2013 | | | | | | | Weekly Facts | | | Close | Change | %Change | | BSE Sensex* | 20,149.85 | 191.4 | 0.96% | | Re/US$ | 59.68 | - | 0.00%
| | Gold Rs/10g | 26,650.00 | 10.0 | 0.04% | | Crude ($/barrel) | 109.31 | 1.4 | 1.28% | | FD Rates (1-Yr) | 7.00% - 8.75% | Weekly change as on July 18, 2013
*BSE Sensex as on July 19, 2013 | |
Impact 
In a battle against falling rupee, Reserve Bank of India (RBI) fired a bazooka which has not only affected the liquidity position in the system but has also impacted various asset classes. Bond prices have taken a beating and banking stocks have been on a free fall. Rupee took a breather though.
What has changed?
In the week gone by, RBI hiked short-term lending rates. The central bank increased the Marginal Standing Facility (MSF) and Bank Rate by 200 basis points (bps) placing them at 10.25% each, thereby resulting in a spread of 300 bps between the aforesaid short-term rates and repo rate (which is 7.25% at present).
What is the impact of RBI's move on the banking sector?
The Banks have got a double whammy in the form of aforesaid move. Spike in the short term lending rates would make their borrowing costlier and hardening of bond yields would affect their treasury income. This in turn may put pressure on profit margins of banks. For these reasons banking stocks witnessed a sharp selloff in last few days.
Would banking crack further?
Data As on July 17, 2013
(Source: ACE MF, PersonalFN Research)
As depicted in the graph above S&P BSE Sensex has outperformed S&P BSE Bankex with a substantial margin over last 1 month. Notably, mutual funds have a huge exposure to banking and finance sector. Exposure of the whole mutual fund industry amounts to about 25% of Assets under Management (AUM).
PersonalFN believes, although the sudden drop in banking stocks has been partially because of the knee-jerk reaction of markets; banking space might have tough times ahead. Steadfast stance of RBI on draining out liquidity and bolstering rupee has almost ruled out any hope of a further rate cut. Banking space will continue to remain under pressure as speculations about a rate hike may soon gather momentum. Furthermore, any action pertaining to interest rates would have a rippling effect on other rate sensitive sectors such as Automobile, Engineering and Construction among others. It would be crucial to see how mutual funds adjust their positions in the wake of rapidly changing environment.
PersonalFN is of the view that investors need not exit equity mutual funds just because the market sentiment has been low. On the contrary, they should manage volatility by opting for Systematic Investment Plans (SIPs).
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Impact 
Given a chance and (money) where would an average person in India invest? A choice could be anything ranging from a fixed deposit to real estate. But don't be surprised if most of people prefer gold and real estate over other investment avenues. Yes, Indians love real assets. At least data published by Central Statistical Organisation (CSO) suggests so. About half of country's gross domestic savings were in physical assets such as gold and real estate in Financial Year (FY) 2011-12. Indian households invested about 2/3rd of their savings in physical assets.
What are the reasons?
Past experience affects your choice. Indians have hardly lost money in gold and real estate over longer term. On the contrary financial assets such as equities have given jitters to investors. Besides, high retail inflation has made bank fixed deposits. Inflation has also dented household savings of investors. So it is quite obvious of them to believe in assets classes which have generated profits for them. As many of know equity markets are still struggling. Gloomy economic conditions have also influenced investment decisions of investors.
PersonalFN is of the view that all asset classes pass through bull and bear phases. However, time taken by different asset classes to shift from one phase to the other varies depending on traits of that asset class and its sensitivity to various factors.
PersonalFN believes that investing in an asset class only based on past experiences may not always help. On the contrary, asset allocation which is in line with your financial plan best suiting your risk tolerance and risk appetite would be ideal while you strive to create wealth. This would be wise investing, which optimise risk-return for your portfolio.
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Impact
Many of us engage in an economic activity and work really hard to make a living. But as we work hard to make a living, it becomes imperative for us to work a little more harder and smarter to save our taxes (the legal way) too.
While today's younger generation are smart, have great jobs, drawing fancy salaries; a recent study by Taxspanner.com revealed that today's younger generation - especially in the age group of 25-30 - aren't showing enough smartness in the tax planning exercise and are paying significantly higher tax than the older taxpayers. The study revealed that average minimum tax paid by 25-year-old taxpayers earning Rs 10-11 lakh a year was 12%. But 34-year-olds with the same income paid only 6%. This is because, according to the study of the tax filing portal nearly 51% of the salaried taxpayers had not fully exhausted the Rs 1 lakh saving limit under Section 80C of the Income-Tax Act, 1961 and only one out of four of these taxpayers had claimed deduction for medical insurance under Section 80D of the said Act. To read more about this news and the view of PersonalFN over it, please click here.
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Impact
It The persistent weakness in the Indian rupee since the last couple of months finally initiated an action from the Reserve Bank of India (RBI) whereby they hiked short-term rates on Monday (July 15, 2013) late evening with immediate effect. The central bank increased the Marginal Standing Facility (MSF) and Bank Rate by 200 basis points (bps) placing them at 10.25% each, thereby resulting in a spread of 300 bps between the aforesaid short-term rates and repo rate (which is 7.25% at present). The central bank also capped the amount which banks can borrow from the overnight markets to Rs 75,000 crore.
The rationale behind the move...
Primarily, such an action has been initiated as a measure to control depreciating rupee. With the rise in interest rates, the RBI intends to make investing in Indian debt markets attractive amid a scenario where even in the U.S. 10-Yr. treasury yields have inched-up (on account of the U.S. economy depicting signs of vigour and after statement from the U.S. Federal Reserve earlier on winding down of bond-buying programme) and attracting many to invest there instead. To read more about this news and the view of PersonalFN over it, please click here.
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- Receiving bonus from your insurer and getting a share in its profits would become rare for new investors in days to come. With implementation of new guidelines, designing participating policies would become increasingly difficult, as voiced by some insurance companies. New guidelines have made it mandatory for insurance companies to offer minimum 90% of surrender value and assured returns of 4% and 8% on maturity value.
PersonalFN is of the view that, endowment policies, even before the introduction of new guidelines, were unattractive investment option. PersonalFN has always believed that one should not mingle insurance with investments. Term insurance is one of the ideal ways to fulfil your insurance needs. Opting for other investment avenues may help you create wealth.
- Thousands of investors lose money by falling for false promises of exaggerated returns. Soon there will be norms to distinguish between genuine and fraudulent investment schemes. Ministry of consumer affairs and corporate affairs ministry are mulling over introducing guidelines which would have a clear distinction between what is legal and what is illegal.
PersonalFN believes it's a welcome move and may help create awareness among people who get captivated by false claims of fraudulent companies. PersonalFN is of the view that any scheme that promises you incredible success and portrays it to be the fortune changer, should be completely avoided. To earn attractive returns on investments one might consider time tested and well-regulated investment avenues.
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Liquidity Adjustment Facility (LAF): A tool used in monetary policy that allows banks to borrow money through repurchase agreements. This arrangement allows banks to respond to liquidity pressures and is used by governments to assure basic stability in the financial markets.
Source: Investopedia
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Quote : "Be Fearful When Others Are Greedy and Greedy When Others Are Fearful." - Warren Buffett
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