Impact ![]()
 The Indian economy has sailed well in the past years and has also recovered well from the recession of 2008 and early 2009 as revealed by the resilient GDP number posted. This is largely because main economic activities such as manufacturing, mining & quarrying, trade, hotels, transport and communications, along with finance and insurance, have continued to fuel and manage growth, amongst the other economic activities as they were focal area of the previous budget (Union Budget 2010). Hence, the recovery so far for the Indian economy has been quite robust and broad based.
But these growth estimates in our opinion belie the fears of a slowdown in the economy, caused by factors such as high inflation (8.23% in January 2011) and widening fiscal deficit. We think that WPI inflation would continue to be high, fuelled by food inflation remaining in double-digit terrain and crude-oil prices remaining above the U.S. $ 100 per barrel mark. Moreover, any Egypt or Libya like unrest in countries such as Algeria and Yemen may threaten the oil-rich Gulf region, which would impact oil consuming nations like ours (as Oil prices are sensitive to the supply disruptions) by ballooning the current account deficit.
Also with the Government in power at present being confronted with various scams (especially the 2G spectrum scam and the Adarsh Housing Society Scam), and the opposition parties (especially the NDA - National Democratic Alliance) being opportunistic about such issues, they may pressurise the Congress at every point - in fact the NDA's demand of constituting a JPC (Joint Parliamentary Committee) has already been agreed upon. Moreover, the NDA is doing its best to tarnish the image of the Congress Government by tagging it as "corrupt".
To get a further insight on how Budget 2011 will take its course in the light of the above economic and political scenario please Click here.
We will cover everything from Pre-Budget Analysis to the Analysis of the actual Budget. And we promise there will be N0 Noise, as we say impact view of budget No Jargon! Only easy to understand and actionable views.
To make sense of it in the context of your investments, PersonalFN, in association with Equitymaster, brings you Our View on the Budget. |
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Impact ![]()
The Indian equity markets have reeling under pressure ever since it has entered the New Year 2011. The scams unfolding, QEII announcement, the European crisis and off late the Libyan crisis have all helped the bears to tighten the grip on the BSE Sensex. In just two months of 2011 the BSE Sensex has dipped approximately 11% and if calculate from its last high of 21004.96 (achieved on November 5, 2010), the Indian equity markets are down by good 16%.
This in a way does manifest the nervousness of the Indian equity markets over global factors such as political uncertainty in the Middle East and African region, sovereign debt crisis in the Euro Zone and also over the rising prices of crude oil. On the domestic front too, the markets seem worried about high inflation, policy rate hikes by Reserve Bank of India (RBI), dismaying IIP numbers and corporate earnings being impacted.
But in all this hue and cry on the global economic situation, there's one asset class which has shown its resilience, thereby making it look bold. Yes, that's right it is Gold which is still shining. In fact when the global economy went under a dark cloud in 2008 (with the U.S. sub-prime mortgage crisis and Lehman Brothers going bust), gold continued to look bold as people continued to take refuge in this traditional safe haven. And interestingly this holds true even now (as the global economy is sailing through rough waters).
Base:  10,000
Note: Prices of gold are those of MCX
(Source: ACE MF, PersonalFN Research)
Please recognise that as long as the economic turmoil (across the world) continues, smart prudent investors (individuals and banks) would keep insuring / safeguarding their investment portfolio by buying more gold. Hence be smart and invest in this asset class for mainly three reasons:
- To hedge against inflation
- To add stability to your portfolio
- For smart asset allocation
At Personal FN we believe that one should not sell gold - instead keeping allocating 10 - 15% of their investible amount in gold and invest with a long term horizon of 10 -15 years.
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Impact ![]()
 The Insurance Regulatory and Development Authority (IRDA) is planning to review the guidelines governing Unit-Linked Pension Plans (ULPPs) especially the ones which states that insurers must offer guaranteed maturity benefits under ULPPs. The new guidelines will be made public in a fortnight's time frame and will be in force from April 1, 2011 onwards. The new guidelines for pension products will also address the varying risk appetite of investors.
However, most insurers are reluctant to offer such a guarantee as they, are of the opinion that it may hurt their profitability.
As a reaction to this Mr. R. Kannan - IRDA Member of the Actuary said, "The 4.5% guaranteed return attached to the pension plan is something that deters insurers from launching pension products. Very few companies have launched pension products after the new norms came into force last year. We therefore plan to frame guidelines for pension products, keeping in view the differences in risk appetite for investors. A 4.5% guaranteed return was more reasonable compared with the 7.5% interest on government bonds and 4% interest on savings bank accounts. Insurance companies abroad mostly have only 70-100 bps profit margins in linked products. Compared to this, Indian insurance companies have a wider profit margin."
We believe that though IRDA's decision to review the guidelines governing the ULPPs is a prudent one to increase the awareness of the product, the new guidelines should strive to make ULPPs more beneficial to the investors rather than enticing the insurers to sell more and more of pension products by compromising on the 4.5% of guaranteed returns attached to the pension plans. |
Impact ![]()
 To put an end to years of easy money in the form of commission to institutional brokers or distributors who facilitate banks, corporate and insurance companies' investments in fixed income funds of mutual funds, the Securities and Exchange Board of India (SEBI) has written to mutual funds to differentiate commission payments to brokers who advise with insights and those who just facilitate investment without any fundamental reasoning on why such an investment has to be made.
Interestingly, despite institutional investors such as banks and corporate treasuries who have the financial wisdom to choose the scheme they want to invest in, route their investments through a distributor, which many a times is a subsidiary company, in order to get the distributor commission from the fund house. This in a way affects the funds performance as they (institutional brokers) have a significant share of the funds in the fixed income schemes of mutual funds, though they (institutional brokers) are few in numbers.
The SEBI letter to mutual funds also mentions that the fund houses should verify the track record of broking firms (referred to as institutional distributors), regulatory penalties, legal suits and customer compensations before hiring their services to sell their funds. SEBI feels that by implementing this additional due diligence, it would help funds deliver better on their obligation of investor protection.
In our opinion, SEBI is doing the right thing in protecting the interest of investors' at large. We believe, that splitting the distribution fees into "advisor" and "execution" will result in less burden of commissions for the fund houses thereby resulting in better profitability of fund houses as well as good performance of the mutual fund schemes (as they would not have to succumb to erratic fund flows from these corporate entities). However, we feel that distinguishing between the institutional broker's "advisory" and mere" execution" role may be a daunting task. |
Impact ![]()
 "Will he get back the entry load?"; "Will he introduce a new system of compensating mutual fund agents and also at the same time safeguard investors' interest?" are some of the questions to which investors and mutual fund distributors are seeking answer for, as Mr. U.K. Sinha, stepped in as the new Chairman of SEBI Chairman.
As soon as Mr. Sinha stepped into the shoes of Mr. Bhave, (the Ex-Chairman of SEBI) he's been occupied with a long list of to-do things which would surely test the skills of the former bureaucrat and a veteran in the financial sector.
At the top of the list (this can be anybody's guess!) will be to get investors back into the mutual fund industry. And interestingly, while being an industry insider Mr. Sinha has a strong understanding of the issues at the ground level, which impact its (industry's) growth (being the Ex-Chairman of UTI Mutual Fund as well as AMFI). But this time around, having occupied the position of SEBI Chief, the challenge for him would be to strike a balance between the interest of investors and that of the industry.
The new SEBI Chief would also have to show his mettle in developing the corporate bond market which still remains a big question mark. Also, there have been various governance issues and insider trading issues which need to be settled and all this depends on how the new Chief craft's his way through the topsy-turvy pitch of the SEBI Chairmanship.
As from any new person who reaches the pedestal of SEBI Chairmanship there are a lot of expectations from a lot of people. In a brief way we would expect that the new SEBI Chief upholds investors' interest at the fore and brings in more transparency and accountability in the functioning of the broad markets.
Dear investor, please provide your expectations from the new SEBI Chief - Mr. U.K. Sinha. Click here... |
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| Weekly Facts |
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Close |
Change |
%Change |
| BSE Sensex* |
17,700.91 |
(510.6) |
-2.80% |
| Re/US$ |
45.48 |
(0.1) |
-0.29% |
| Gold/10g |
20,960.00 |
590.0  |
2.90% |
| Crude ($/barrel) |
111.83 |
8.1 |
7.81% |
| FD Rates (1-Yr) |
7.00% - 8.75% |
Weekly change as on February 24, 2011
*BSE Sensex as on February 25, 2011
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In this issue
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In an interview with the Economic Times, Mr. Jim Walker - Managing Director of Asianomics, shared his views on India's growth story amidst corruption, inflation in India and economic recovery in the United States.
Talking about India's growth story, Mr. Walker is of the opinion that the industrial production data does not actually represent India's real growth. He explains this by saying that, "There is hardly any weightage for software. If we were to consider auto sales and exports, it's hard to believe that industrial production has grown only at 1.6%." He is of the view that there is a slowdown at the investment level rather than the consumer level. He's also confident of the fact that the corporate India is in good shape but cautions that the fiscal position would worsen.
Mr. Walker believes that investors would not stop coming to India because of the corruption and scandals unfolding; as according to him scams happen everywhere, just the extent differs. In comparison with China, Mr. Walker believes that India has a better track record in terms of return on equity. Also in his opinion companies in India are far more careful about the use of cash, especially when interest rates are rising.
However, Mr. Walker cites that inflation is a bigger risk for India than interest rates, as it (inflation) tends to create confusion in any economy. He explains this by saying that, "Companies are in two minds whether to go ahead with investments or not. This can be dealt with tight monetary policy. As far as India's monetary policy goes, the job is almost done; just a few percentage point increases more."
About the recovery in the U.S., Mr. Walker, believes that it is weak and it is based on artificial stimulus. However, he's also of the view that money may still flow from India to the U.S. if risk-aversion rises and also into bonds and gold from equity. He also believes that most central banks are losing their credibility, because of the way they are handling the crisis, by pumping in more and more money. He is also of the view that increasing oil prices are an outcome of the U.S. monetary policy. He further says that the real economy doesn't want the money which is being pumped in (it is spilling into other assets). A lot of commodities are at least 20-30% higher than what they should be, he says. |
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Reliance Gold Savings Fund:
Reliance Gold Savings Fund (RGSF) is not a gold ETF (Exchange Traded Fund) but in fact the first Gold Fund of Fund (GFoF) in the Indian mutual fund industry. As per its offer document, the investment objective of the fund is "to seek to provide returns of that closely correspond to the returns provided by Reliance Gold Exchange Traded Fund." Hence to simply put, RGSF is positioned as a "feeder fund" which invests its corpus into Reliance Gold Exchange Traded Fund (RGETF), (which in turn invests in physical gold) and its (RGSF's) performance would be closely linked to the performance of the underlying fund - RGETF.
To read more please click here. |
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Minority Interest: A significant but non-controlling ownership of less than 50% of a company's voting shares by either an investor or another company.
(Source: Investopedia)
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QUOTE OF THE WEEK
"If you must work for money, find a way to work and be happy. That is financial intelligence."
- Robert Kiyosaki
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This Week's Poll !!!
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Will the Budget 2011 reduce your tax burden?
To Vote Now!
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