  | | May 17, 2013 | | | | | | | Weekly Facts | | | Close | Change | %Change | | BSE Sensex* | 20,286.12 | 203.5 | 1.01% | | Re/US$ | 54.79 | (0.5) | -1.00% | | Gold Rs/10g | 26,210.00 | (1,100.0) | -4.03% | | Crude ($/barrel) | 103.53 | (1.0) | -0.91% | | FD Rates (1-Yr) | 7.50% - 9.00% | Weekly change as on May 16, 2013
*BSE Sensex as on May 17, 2013 | |
Impact 
The rising cost of living - commonly known as inflation eats into our hard earned savings and thus we often look for investment avenues which can provide luring inflation-adjusted returns along with them being tax efficient as well. The precious yellow therefore amid an uncertain economic and political environment, has caught the attention of many. But the insatiable appetite to own precious yellow metal has put pressure on country's Current Account Deficit (CAD). Hence to moderate gold imports, the Reserve Bank of India (RBI) had proposed for monetisation of gold whereby they are of the view that "inflation indexed bonds (IIBs)" be designed as an instrument to help provide real returns to investors and reduce physical gold buying spree. And now finally IIBs are here. The RBI has said it will issue IIBs of Rs 12,000 - 15,000 crore in various tranches this financial year. The first issue comes on June 4, 2013 of Rs 1,000 - 2,000 crore with a maturity of 10 years.
But would IIBs provide luring returns?
Well, the IIBs will be linked by the central bank to the Wholesale Price Index (WPI) inflation, which has mellowed down (with descending trend formed) after plateauing over 7.00%+ mark for over a year. As many of you may be aware WPI inflation data for April 2013 came in at 4.89% - a 41-month low (with food inflation, manufacturing inflation and fuel and power inflation descending). Even if one goes by central banks expected figure of 5.5% on WPI inflation and assuming forecast is steady; a 150 basis points (bps) assumed premium over the expected forecast (of 5.5% on WPI inflation) could only yield 7.0% returns.
Now when one compares the aforesaid returns against those clocked by gold over a span of 10 years, they would appear rather stunted and disheartening. So while the objective of IIBs as per the central bank is to protect savings of poor and middle classes from inflation and incentivize household sector to save in financial instruments rather than buying gold, it may not appeal many investors.
PersonalFN is of the view that the time of the launch of IIBs seems inappropriate with WPI inflation now below the comfort level (of 5.0%) of RBI. Likewise the complex structure of these bonds may desist many and may also find it difficult to compete with other debt instruments. Thus those who are more risk averse may also continue to invest in fixed deposits and public provident fund if IIBs indeed yield low returns. Likewise smart investors would continue to take refuge under gold for both emotional and financial reasons, by assuming a little more risk.
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Impact
With the India's Current Account Deficit (CAD) for Q3FY13 having widened to a record high of 6.7%, the RBI in the week issued a circular to curb gold imports. The central bank's circular said, "to moderate the demand for gold for domestic use, it has been decided to restrict the import of gold on consignment basis by banks, only to meet the genuine needs of exporters of gold jewellery." You see, the fall in price of gold which has occurred since the last month, have attracted many from a relative valuation perspective. Thus accordance to the commerce ministry, gold imports went up 138% to U.S. $7 billion in April 2013, while for the fiscal year 2012-13 gold imports stood at 1,015 tonnes (according to RBI data) and 65% - 70% of this is believed to be imported on consignment basis.
But such a circular from the central bank could impact gold Exchange Traded Funds (ETFs). It is likely that growth of Assets Under Management (AUM) of gold ETFs in quantity terms may be impeded and so would the liquidity. This is because as per RBI's new rule, Authorised Participants (APs) - who create and redeem units backed by gold will have to pay the bank funds in advance before taking delivery of gold, which could result in delays in creating new units and eventually reduce liquidity of gold ETFs as well. It would be very much unlike the recent past practice, where an AP could take delivery of gold from banks and fix the price within 11 days during which it would sell the gold to fund houses and get units in return which were traded on stock exchanges.
PersonalFN is of the view that since supply is restrained gold ETFs volumes could be hurt and Net Asset Value (NAV) calculation may also be a problem with delay in creation of new units as explained above.
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Impact
In the last fiscal year amid a slowdown in economic growth rate, the Reserve Bank of India (RBI) as many of you may have observed has taken a rather calibrated stance on reducing policy rates. This is because while handling the growth-inflation dynamic in the monetary policy, Wholesale Price Index (WPI) inflation was plateauing above the 7.0% plus mark for quite some time causing discomfort to the central bank. But now that WPI inflation has mellowed down and moderation seen, it has brought in some sigh of relief which has induced central bank to address to growth risks, although again in a very gradual manner.
AUM of income funds on a rise
Data as on April 30, 2013
(Source: AMFI, PersonalFN Research)
The Indian debt markets too amid this scenario have kept rational expectations and with gradual steps taken by RBI to reduce policy rates along with liquidity situation being addressed to (via cut in Cash Reserve Ratio (CRR) and / or Open Market Operations) at appropriate point in times; "income funds" have attracted debt mutual fund investors. As on April 30, 2013 the Assets Under Management (AUM) of income funds is at Rs 4,22,300 crore - it being a three-year high; and from last April too there's been an increase of 36%. To know the reasons for income funds to witness rise in AUM and a strategy which debt mutual fund investors can follow, please click here.
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Impact
We recognise that many of you may be rushing to your nearest jeweller to buy physical gold in the form of gold coins, bars or jewellery on the auspicious occasion of Akshaya Tritiya; but hold on. Are you making a right investment decision by investing in gold in physical form? Do you know the perils of buying and holding physical gold? While many of you may be shocked, but yes indeed there are perils of holding gold in physical form.
You see, we recognise that many of you prefer to hold in physical form as you get to touch, feel and see your gold holdings - and feel contended about it; but let us apprise you that there are major demerits of buying and holding gold in a physical form. To read the demerits and to know the smart way of investing in gold, please click here.
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- After stocks and mutual funds, now you can also hold your insurance policy in an electronic form - demat form. The Insurance Regulatory and Development Authority (IRDA) is mulling over a proposal that will facilitate policyholders to hold their policies in paperless form. "We are thinking of having an insurance depository like the one in the stock (market). It is still in a formative stage," said Mr Sudhin Roy Chowdhury, IRDA member (life) on sidelines of the Insurance Summit.
It is also said that a separate autonomous body would be formed which would operate the depository, and the regulations thereto would be laid down by IRDA. But it is noteworthy that unlike equity shares, it would not be mandatory for policyholders to switch over to paperless form.
PersonalFN is of the view that, the aforesaid initiative from the IRDA would infuse efficiency, transparency and help in holding insurance policies in a convenient way. But to encourage policyholder to switch to paperless mode of holding insurance, it is imperative for IRDA to showcase the benefits of doing the same.
- ICICI Lombard General Insurance along with ICICI Securities recently launched a unique general insurance policy named, "Secure Mind" for mutual fund investors who have enrolled for the Systematic Investment Plan (SIP) mode of investing in mutual funds.
Under this policy, one obtains an insurance coverage which is equal to cumulative value of investment through SIPs, but subject to a maximum limit of Rs 15 lakh and minimum Rs 60,000. The said policy offers multiple covers such as accidental death, permanent total disability, critical illness and even loss of job. In case of occurrence of any of these unfortunate events, the entire amount of sum insured will be paid upon diagnosis as covered under the policy.
PersonalFN is of the view that that "secure mind" is an innovative idea as it enables investors to use their hard earned savings invested in SIPs of mutual funds in times of uncertainty. Having said that, one must have a separate general insurance policy and not merely hinge on such a product. It is vital to insure oneself adequately.
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Inflation-Indexed Security: A security that guarantees a return higher than the rate of inflation if it is held to maturity. Inflation-indexed securities link their capital appreciation, or coupon payments, to inflation rates. Investors seeking safe returns with little to no risk will often hold inflation-indexed securities.
Also known as "real return" securities.
Source: Investopedia
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Quote : "Planning is bringing the future into the present so that you can do something about it now" - Alan Lakein
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