Your gold jewellery to come at a discount   May 11, 2012

  
11th May, 2012

In this issue


Weekly Facts
  Close Change %Change
BSE Sensex* 16,292.98 (538.1) -3.20%
Re/US$ 53.83 (0.4) -0.77%
Gold Rs/10g 28,550.00 (760.0) -2.59%
Crude ($/barrel) 113.06 (5.1) -4.32%
FD Rates (1-Yr) 7.25% - 9.25%
Weekly change as on May 10, 2012
BSE Sensex as on May 11, 2012
Impact

While announcing the Finance Bill 2012, the Finance Minister - Mr Pranab Mukherjee completely rolled back the 1% excise duty levied on both, branded and unbranded jewellery, proposed in the Union Budget 2012-13. Also, the threshold limit for cash purchase of jewellery was extended to Rs 5 lakh (from the proposal of Rs 2 lakh made in the Union Budget 2012-13).

Thus encouraged by this move from the Government, domestic retailers of gold and diamond ornaments are now considering to offer a discount of upto 25%, on "making charges" of all jewellery. It is noteworthy that the discount will be nationwide (i.e. from all jewellers across India), and is set to begin next week. The discount offer will be valid for 10 days, and it will be the first of its kind uniform discount offer.

Gold Price movement in INR

(Source: ACE MF, PersonalFN Research)

It is noteworthy that in the Budget 2012-13, the 1% excise duty proposal on branded jewellery and unbranded jewellery, led to a widespread protest and a 21-day strike of jewellers which led to an estimated business loss to them of Rs 20,000 crore. Moreover, it also led to an Rs 700 crore tax collection losses to the exchequer.

We believe that the domestic retailers of gold and diamond ornaments are offering discounts in order to make-up for the loss they suffered during the 21-day strike period which was also the peak of the marriage season in the country.

In our opinion investors in gold should adopt the ETF route as there are many advantages attached to it rather than investing in gold in the physical form. As a prudent portfolio diversification strategy, remember to have 5% to 10% of your portfolio assets in gold for a period of 10 to 20 years.



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Impact

The Securities and Exchange Board of India (SEBI) Chairman - Mr U. K. Sinha expressed concern over the low penetration of the mutual fund industry in India. According to the latest industry folio numbers, penetration continues to be poor at less than 4%. Moreover, close to three-fourth of the fund industry's assets come only from the country's top five cities - Mumbai, Delhi, Bangalore, Chennai and Kolkata. According to the SEBI Chairman, people are trying to book profits as a result of which folios are declining.

According to many in the mutual fund industry, the ban on entry load enforced in the year 2009, is playing havoc in the industry and has reduced distributors' interest in selling mutual fund schemes. Moreover in their view, the bad market condition is also responsible for reduction in folios.

We believe that the mutual fund industry needs to deepen its penetration in order to revive the industry under adverse market conditions. But to be able to penetrate meaningfully beyond the top 5 cities, the industry along with the regulator needs to work on an appropriate cost structure to motivate distributors to expand their reach and at the same time not hurt the investors' sentiments. Also a continuous endeavour to educate investors can help to tackle the issue of low penetration in the Indian mutual fund industry. While the volatility would always remain an integral part of the capital markets, the long-term benefits of investing in bad market conditions need to be explained to investors' and enough emphasis should be placed on long-term investing,

Moreover, investors in mutual funds should understand that there are ups and downs on the markets and therefore they (investors) should stay invested from a long term point of view rather than reacting to short-term market movements.


Impact

Most of you change jobs for better prospects - be it pay packages, better work culture - the reasons could be many. But do you make it point to transfer your existing Employees Provident Account (EPF) to your new employer. Majority of you would say a 'No', as the efforts required to transfer the EPF account from one employer to the other are far greater than that required for a premature withdrawal of the EPF account. Sometimes the employer himself asks you to go in for a withdrawal of the old EPF account and create a new one.

But there is some good news for you.

To know our views, please click here..

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Impact

There is no doubt that the Indian mutual fund industry is reeling under pressures of redemption and loss of folios. According to the mutual fund industry body - the Association of Mutual Funds in India (AMFI) the mutual fund industry lost 7.8 lakh folios or 1.7% for the year ended March 2012. Some of the factors responsible for this, were the lacklustre performance of the Indian equity markets (markets corrected by a good 10% for the year 2011-12), coupled with low distributor support and abundance of high-yield debt instruments which in turn prompted the retail investors to redeem their money from mutual funds. Even SIPs were withdrawn by the retail investors due to the shoddy performance of the equity markets.

However, the above events and the subsequent downtrend in the mutual fund industry gave a platform to the AMFI and Independent Financial Advisors (IFAs) to raise their concerns and urge SEBI to tweak some regulations pertaining to the Indian mutual fund industry.

To know our views, please click here..


In an interview with the Economic Times, Mr Jerome Booth - Global Research Head of Ashmore Group (a London-based investment manager with over $1 billion investments in India) shared his views on India's willingness to open up to foreign investments and infrastructure in India.

Mr Booth believes that foreign investor's view for India is one of a little frustration. He is of the view that India needs to brave much more foreign capital inflow, and to try and use it to address its infrastructure and capital shortfalls so as to create much higher non-inflationary growth. "There's a huge deficit in infrastructure in India. So, there needs to be more willingness to open up to foreign investments of all types - debt and equity and direct investment. I think that's the context here, clearly with the foreign direct investment being encouraged, then not quite so much and then encouraged again - like the retail proposals - it's moving in the right direction, but it could be much faster. The markets, externally, are really optimistic, and my general first reaction is foreign investment should be more welcome in India," he added further.

As far as infrastructure in India is concerned, Mr Booth thinks that the Government in its 5-year plan has an outlay of about half-a-trillion dollars for the infrastructure but reality tends to lag the plans. According to him, the plan is not ambitious in any way and instead infrastructure should be open up to private investment including foreign capital. "The huge potential of entrepreneurial ability in India is being stymied by lack of basic infrastructure and the result is inflationary pressures, which then result obviously in bouts of higher interest rates and inverse stimulus. That, I think, is one of the major structural problems in the Indian economy. If we can see effective control of inflation - and of course, Indian inflation has been higher than much of Asia and earlier, then, I think we could do a lot of that without high interest rates, if we just had more infrastructure. The question is that of getting the structural reforms correct to allow sustainable growth. India is capable of higher than 8% growth without inflation, but not without major investment in infrastructure," he said.

In order to propel India on the above average growth path, we too, believe that infrastructure is the key propeller. Infrastructure development will help the country to access the inaccessible areas and at the same time execution of business plans can be undertaken at a faster pace. However, it is noteworthy that to achieve all this, India requires more of long-term foreign capital in the nature of FDI rather than short-term flows which may do more harm than good. Long-term capital commitment is imperative as infrastructure projects typically have a long gestation period.



  • The Insurance Regulatory and Development Authority (IRDA) has launched an exclusive website for consumer education on insurance products, including what they need to buy and whether they are being offered the right product. To begin with the website - www.policyholders.gov.in - will be in English and then will be enabled in Hindi and so on, according to IRDA. The regulator also sought feedback from general public on the website on or before May 21, 2012.

  • In order to halt the slide in the Indian Rupee (INR), the Reserve Bank of India (RBI) has asked exporters to convert half of their export earners' foreign currency (EEFC) account balance into domestic currency. The changes brought in by RBI for exporters mean half of their balances in the EEFC accounts must be converted within a fortnight to rupee balances. The apex bank also fixed a limit for intra-day trading of foreign currency by banks at five times their overnight limit. The RBI action is also triggered by the fact that its forex balance is about $295 billion while the trade deficit for 2011-12 has reached $185 billion.

  • Infrastructure Development Finance Company (IDFC) has got SEBI's approval to set up an infrastructure debt fund through the mutual fund route. The Reserve Bank of India allowed banks, non-banking finance companies and mutual funds to set up IDF in September 2011. While in the 2010-11 budget, the finance minister had cleared the way for setting up of IDFs to increase find flow into infrastructure sector.

  • The Foreign Direct Investment (FDI) for the month of March 2012 stood at $8.1 billion, the highest ever monthly inflows. Cumulative FDI inflows for the fiscal 2011-12 amounted to $36.50 billion.

  • In order to benefit from high interest rates and a weakening rupee, non-resident Indians (NRIs) sent $11 billion (nearly Rs 60,000 crore) home into bank deposits during 2011-12, three times more than in the previous year. RBI had raised the ceiling on NRE deposits as a step to attract foreign fund flows when the rupee was rapidly losing value against other currencies which prompted the banks to raise interest rates on NRE deposits.

  • According to a circular issued by the National Stock Exchange (NSC), a broker must deposit his own (and not a client's) shares with the Clearing Corporation (CC). Alternately, when a broker funds a client's margin against shares, he can collect interest from the client. However, the brokers criticised the move saying no client would agree to raise his transaction cost by paying interest to a broker. It is noteworthy that, earlier, brokers used to deposit their client shares with the CC which could sell the same if there was a margin default.

    The NSC argued on brokers criticism saying that the directive was issued keeping in mind the clients' interests and safety and that the CC could not be expected to keep track of which client's shares were lying with it and in the event of a margin default, it could sell Client A's shares instead of Client B, who was the defaulting party. Also, the clarification was issued to ensure that errant brokers do not use one client's shares to fund the margin requirements of another client.

  • Greek voters' rejection of pro-bailout political parties in recent election has raised the chances of Greece leaving the euro. But this unprecedented step is seen as manageable rather than catastrophic for the currency bloc. The Greek deadlock, created when voters sick of austerity deprived the two main parties which back the country's international bailout programme of a parliamentary majority, has potentially increased the risk of it having to restructure its debts for a second time.


Clearing Corporation: An organization associated with an exchange to handle the confirmation, settlement and delivery of transactions, fulfilling the main obligation of ensuring transactions are made in a prompt and efficient manner. They are also referred to as "clearing firms" or "clearing houses".
(Source: Investopedia)

QUOTE OF THE WEEK

"Finance is a gun. Politics is knowing when to pull the trigger."       - Mario Puzo

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