Impact 
For the first time in 60 years the Provident Fund (PF) office may miss its deadline for presenting its accounts to the Parliament. This predicament is due to violation of accounting standards by the EPFO’s book-keeping system and thereby not conforming to the format specified by the Government which in turn has delayed clearing of PF office’s accounts by the Comptroller and Auditor General (CAG) of India.
In the recent past the PF office discovered a surplus of  1,733 crore and recommended a 9.5% PF rate. The Finance Ministry agreed to the 9.5% rate on the condition that the PF office updates all the member accounts within six months and ensure there is no shortfall in income. On both the counts, the EPFO has failed to deliver.
Moreover, nearly 4.85 crore accounts were still to be updated on November 22, 2011, as per EPFO's submissions to its board's finance committee last week. More critical is the admission that it had made a huge 5.7% error in its income estimates for 2010-11 that led to an eventual income shortfall of 854 crore. Given that it now manages a corpus of 4,66,000 crore, an error of this magnitude is alarming. With interest payments promised at 9.5%, the PF office ended up with a 510 crore deficit on its 2010-11 operations - which it will now be forced to fund from its income for 2011-12.
This accounting fiasco may have forced EPFO to recommend a 1.25% cut in the EPF rate so that it doesn't end up with more contingent liabilities. But there are other pressure points which will make it hard to explain when the Finance Minister reviews its state of affairs and the minutes of the EPFO board's finance committee. EPFO officials had hoped to boost income for 2011-12 with a decision to stop interest credits from April 2011 on old inoperative accounts, where no fresh contributions have come for three years or more. They had hoped to use the savings from these accounts to fund a higher EPF rate for the year.
In our opinion the EPFO should be strictly held accountable in mis-handling employees provident fund accounts. There needs to be more governance and untimely rate hikes should not be allowed as they turn out to be just a gimmick, and when interest rates are reduced have a detrimental impact on retirement savings. Management of such crucial funds should be done with utmost care take into account the interests’ of several people, and Government should step-in in such dire times.
| | Impact
The Insurance Regulatory and Development Authority (IRDA) is contemplating to allow insurers to invest in the classic asset class – "gold". The decision by the IRDA board last week to review investment guidelines for insurers comes in after a commodity exchange and the industry lobby group World Gold Council (WGC) presented its case to the regulator on the benefits of gold investments. However, there is no certainty that the committee will accept the proposal as investing gold carries price risk (like any other asset), due to its cyclical and dynamic behaviour.
This year, gold has been one of the best-performing asset classes as it delivered a return of about 16% in U.S. dollar terms amid turbulence in the financial markets triggered by the European sovereign debt crisis. But gold has also been a bad investment for some periods. In the 1990s, it lost value in eight out of 10 years. Prior to that, gold touched a high of about $835 an ounce in 1980 before collapsing. It took a 28-year wait for the yellow metal to reach that price again in 2008.
It is noteworthy that at present insurers are mandated to invest 50% of the funds in Government securities, 15% in AAA-rated infrastructure securities which are few and far between and the rest in equities.
We believe that gold as an asset class has been considered as a refuge for investors in turbulent times. Investing in gold with a longer time horizon (of say 10 to 20 years) enables one to shield investors against the downbeat moods in the economy as well as equity as an asset class. However, we think that before allowing insurers to make investments in gold, IRDA should put in place proper checks and balances in order to prevent over exposure in the precious yellow metal.
| | Impact
The year 2011 was an eventful year. The year is all set to be the second worst calendar year in at least the last 14 years for equity investors, being second only to the disastrous 2008. High inflation and borrowing cost, GDP growth slowdown, corruption scandals, policy paralysis and a sharp depreciation of the Indian rupee have attributed to erosion of investors’ wealth – especially the ones having dominant exposure to equity as an asset class. Investors’ wealth, as measured in terms of market capitalisation of all the companies listed on the Bombay Stock Exchange (BSE), has been eroded by 19,11,122 crore in 2011 until December 28, 2011.
Base: 10,000
Data as on December 28, 2011
(Source: World Gold Council, PersonalFN Research)
Interestingly during the same time the precious yellow metal, has displayed an inverse relationship with equities, as downbeat mood in the global and domestic economy prevailed during the year. Hence in such a scenario smart investors who preferred to take refuge under the precious yellow metal have been rewarded well in gold by gaining a whopping return of +33% (on an absolute basis). However, the bulls in equities have disappointed as they have lost by -24% as revealed by the chart above.
In our opinion investors can benefit from both the asset classes gold as well as equity. Yes, investing in stocks is a risky venture and so investors should adopt a safer route to this asset class by investing through diversified equity mutual funds. However, while selecting a mutual fund scheme for investing, invest only in those mutual fund schemes which have a consistent track record and which are from a fund house following strong investment processes and systems. Also, your time horizon should be atleast 3 to 5 years in order to benefit from the equity asset class.
The present downbeat global economic scenario makes a case in our view for investing in the precious yellow metal. We believe investors can allocate 5% to 10% of their investible assets in gold and stay invested for a period of 10 to 20 years. | | | | Weekly Facts |
| Close | Change | %Change | | BSE Sensex* | 15,454.92 | (283.8)  | -1.80% | | Re/US$ | 53.07 | (0.3) | -0.64% | Gold /10g | 26,570.00 | (945.0) | -3.43% | | Crude ($/barrel) | 108.27 | (0.7) | -0.61% | | FD Rates (1-Yr) | 7.25% - 9.40% | Weekly change as on December 29, 2011
*BSE Sensex as on December 30, 2011 | | This Week's Poll !!!
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In an interview with the Mint, Mr. Raamdeo Agarwal, Managing Director and Co-Founder of Motilal Oswal Financial Services Ltd shared his expectations and views as to how the stock markets will fair in the year 2012.
According to Mr. Agarwal the year 2011 was very challenging. He said that a lot of the time the markets were actually going down and news flows were not very positive. Also, GDP (Gross Domestic Product) growth kept on slowing and for earnings also, quarter after quarter there was a downward revision rather than an upward revision, he added. "I think 2011 for investing type of guys was a little challenging. 2012 is going to start with the worst kind of situation right now. Could it become better? I am always optimistic and we think on a 12-month basis we are going to see a lot of things changing and hopefully it is for the better", he said.
Commenting on the headwinds the stock market may face in the year 2012, Mr. Agarwal said, "The markets are a big leveller. Whatever pessimistic news keeps coming up whether it is state elections or euro problem or whatever is the problem, markets keep pricing it in. They keep getting depressed and they start ignoring their positives and they start discounting the negatives. So, at this juncture neither is there a very big positive, being awaited nor a very big negative. As a result, the market, as we have seen in the recent past in terms of negative news flow, euro and domestic corruption-related issues, is slow. So all those things are there in the price and if you look at the overall valuation from the peak of about 72 trillion, which was in the peak of 2008 January-February, we are at about 55 trillion right now. So, my sense is that the 55 trillion clearly represents all the pessimism but not the potential of the Indian economy. Now we have to see, how the future will unfold, whether inflation will be killed, whether interest rates will go down and how the rest of the world- American recovery, euro, its own future. So, a lot of these things are going to happen next year. Hopefully, the overall bundle is going to be good than that of 2011."
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Bond: A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate.
(Source: Investopedia) | | | QUOTE OF THE WEEK
"I'ts not what happens to you that determines how far you will go in life; it is how you handle what happens to you."
- Zig Ziglar | |  | |