Impact 
 You may now earn lower returns on your retirement savings this year, as the Government is considering a reduction of 1.25% in the interest offered on Employees' Provident Fund (EPF) account.
The Employees’ Provident Fund Organisation (EPFO), which manages the PF accounts of most employees, would meet on December 23, 2011 to consider a proposal to reduce the EPF rate from 9.50% (for 2010-11) to 8.25% for 2011-12. It is noteworthy that for several years the EPF rates were kept constant at 8.50% for several years, but were raised last year after the organisation discovered a "hidden reserve" of around  1,700 crore, which had accumulated in provident fund coffers over the years.
The reason for reducing the EPF rate this year is that largesse had now come to bite the Government since these reserves proved to be insufficient to support the 1% rate increase as brought in last year.
We believe that in a scenario where the interest rates are nearing the peak, the reduction in interest rate on EPF account could detrimental to image of the Government which is already besieged with inflation and scam stories unfolding. The proposed reduction of 125 basis points (bps) is rather absurd, and could have been held until interest rates in the country start mellowing once again. Moreover, prudent measures are expected from the Government in power, as such a move may turn to be politically incorrect as well.
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Impact
 Indians may soon start getting schooled in financial literacy, as the Central Board of Secondary Education (CBSE) is readying to integrate it into already taught subjects such as moral science from the next academic year.
Thus now along with understanding complex financial products, school children may also get to learn about the moral hazards associated with them. Hence they make not only learn about investing in stocks, for instance, but also insider trading, which is as much an immoral act as a crime.
At present the board has finalised the broad contours of the programme along with the finance ministry and the financial regulators. The programme will aim at educating school children about such products without overly burdening their syllabi, and would thus be designed in modules that can include projects, quizzes, debated, essays and online tutorial to make it easy and interesting.
It noteworthy that so far the Reserve Bank of India (RBI), the Securities Exchange and Board of India and the Central Board of Direct Taxes (CBDT) had been separately working on a financial literacy programmes targeted at different set of individuals. However now with financial literacy being included in school curriculum, we think that we are on right path of financial inclusion where interesting methods would be adopted to educate children on money matters. Moreover, in the long-run this would also help in curbing the rampant mis-selling which prevails at present.
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Impact
Base:  10,000
Data as on December 7, 2011
(Source :ACE MF, PersonalFN Research)
The year 2011 so far has been quite turbulent for the Indian equity markets steered by factors such as:
- Sticky inflation;
- High interest rate regime (effecting in high borrowing cost);
- Increase in input cost;
- Dwindling IIP growth rate;
- Slumping economic growth rate;
- Depreciation of the Indian rupee
- Scam stories unfolding;
- Impediments in reform measures; and
- Debt-overhang situation in the Euro zone
And a noteworthy point is that thus far (on a year-to-date basis), large caps (as denoted by the BSE-100), have arrested the downfall much better (-23.0%) when compared to mid and small cap which have fallen violently by -36.4% and 58.6% respectively. Hence, say if one were to invest 10,000 each in the BSE-100, BSE Mid cap and BSE Small cap index on January 3, 2011, the same would have yielded a sum of 8,131 7,331 and 6,306 respectively on December 7, 2011.
It is noteworthy that the exuberant phases of the Indian equity markets have encouraged many to participate in the mid and small cap segment in an attempt to reap better growth (in wealth creation). But while one may look for attractive returns in the said segment, the downside risk also have to be assessed well, as mid and small caps tend to plunge more as compared to their large cap counterparts during the downturn of the equity markets.
At present since the economic worries still persist (led by both domestic as well as global economic factors) we believe staggering your investments would be an appropriate approach. We recommend that you invest in diversified equity funds as this will help reduce risk. However one needs to stay away from U.S. or Euro oriented offshore funds in such a scenario, but instead may look at investing in domestic value style equity funds. Ideally you should opt for the SIP (Systematic Investment Plan) mode of investing as this will help you to manage the volatility of the equity markets well (through rupee-cost averaging) and also provide your investments with the power of compounding. But, remember, while investing select only those equity funds which follow strong investment processes and systems, and invest with a long-term horizon of at least 5 years.
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Impact
 With the Insurance Regulatory and Development Authority (IRDA) keen on nudging insurance companies towards a diversified ownership, promoters of insurance companies may have to make a public offer within a year of completing a decade of operations.
"Insurance companies will be required to list within six to nine months of completing 10 years. The idea is to have diversified ownership. This is in line with what the Reserve Bank of India had done to new private sector banks," said a senior official at IRDA.
At present the insurance regulator has come out with the final guidelines for life insurance companies to raise funds from the public, and have also charted different disclosure norms due to nature of business involved using policyholders’ money. However, some leeway is expected for companies which have completed 10 years of existence. But a noteworthy point is the IRDA is yet to suggest a standard way valuing an insurance company, and has thus asked the Institute of Actuaries to suggest a method.
We believe that while the move is intended towards having a diversified ownership for insurance companies, many of companies would oppose the move given the ownership structure. In fact with most foreign partners (of insurance companies) looking at increasing their shareholding to 49% (if the proposal of increasing FDI limit from 26% to 49% goes through), they may not disagree on stake dilution; and this can dampen the mood of the insurance sector in India. Also it is noteworthy that with the current markets condition, garnering investors’ interest would be a difficult task for insurers.
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| Weekly Facts |
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Close |
Change |
%Change |
| BSE Sensex* |
16,213.46 |
(633.4) |
-3.76% |
| Re/US$ |
51.76 |
(0.3) |
-0.56% |
| Gold/10g |
29,135.00 |
85.0 |
0.29% |
| Crude ($/barrel) |
109.24 |
(2.1) |
-1.87% |
| FD Rates (1-Yr) |
7.25% - 9.40% |
Weekly change as on December 08, 2011
*BSE Sensex as on December 09, 2011
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In an interview with Bloomberg UTV, Mr. Nilesh Shah, President-Corporate Banking at Axis Bank shared his views on turbulence of the Indian equity markets, valuations of the Indian equity market and impact of depreciation of the Indian rupee.
Mr. Shah certainly believes that we are certainly passing through a turbulent phase, but is of the view that the advantage to India is that, we have solutions to every problem, when compared to the developed world that has probably more of problems and less of solutions. But in his opinion it is difficult to predict such markets, where the bottom will be. However speaking from a valuation point of view he said, "Clearly, valuations are in favour of investors. We are trading historically below our average PE (price-to-earnings ratio). We are trading below our average price-to-book." Hence, he’s also of the view that foreign investors will edge towards the fact that this market is cheap rather than bearish.
Explain his impact of depreciation of the Indian rupee he said, "Rupee has depreciated significantly in the last three months and that is hurting the economy; it is hurting the stock market in terms of damage to foreign institutional investments. It is inflating our import bill and India, being a net importer, gets adversely affected. But if we remove gold imports as an item of investment rather than as an item of consumption, our deficit comes under very reasonable level."
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Primary listing: The main stock exchange where a publicly traded company's stock is bought and sold. Having a prestigious primary listing, such as the New York Stock Exchange, lends company credibility and makes investors more likely to purchase its shares. In addition to its primary listing, a stock may also trade on other exchanges. A company might want to do this to increase its liquidity and ability to raise capital.
(Source: Investopedia)
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QUOTE OF THE WEEK
"Money is hard to earn and easy to lose. Guard yours with care."
- Brian Tracy
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