  | | June 28, 2013 | | | | | | | Weekly Facts | | | Close | Change | %Change | | BSE Sensex* | 19,395.81 | 621.6 | 3.31% | | Re/US$ | 60.20 | (0.6) | -1.04% | | Gold Rs/10g | 26,010.00 | (1,750.0) | -6.30% | | Crude ($/barrel) | 101.87 | (3.5) | -3.36% | | FD Rates (1-Yr) | 7.00% - 8.75% | Weekly change as on June 27, 2013
*BSE Sensex as on June 28, 2013 | |
Impact 
Indian rupee has been on a free fall these days. It has fallen in excess of 8% against US dollar over last one month. The rupee has taken a biting for all known reasons such as widening Current Account Deficit (CAD), lack of policy reforms and overall gloom that prevails in the economy. Falling rupee exposes India to even bigger risks.
(Data as on June 27, 2012)
(Source: ACE MF, PersonalFN Research)
It is making Indian imports costlier and putting further pressure on deficit position. Although CAD has lowered to 3.6% in the 4th quarter of Financial Year (FY) 2012-13; keeping it down would be difficult going forward. The recent fall in the rupee has taken away the advantage of softening commodity prices in the global markets. Foreign Institutional Investors (FIIs) have been relentlessly selling Indian debt and equity. Unstable rupee has made India vulnerable to difficulties in financing Balance of Payment (BoP). Moreover, it threatens to cause inflation to move up again as India heavily depends on imports to meet its energy demand. Thus falling rupee may limit scope of further rate cuts.
PersonalFN believes that the rupee may remain under pressure unless there is any significant improvement on policy reform measures. Furthermore, stability of rupee also depends on how well the BoP position is being handled. PersonalFN is of the view that investors shouldn't speculate about the movement of rupee while taking positions in debt or equity. They would be better off if they focus on planning finances in congruence to their goals. Asset allocation is the key. When currency is unstable; FII flows would also be off and on. Since Indian markets; especially equity markets depends largely on FII flows would also stay volatile. What you may buy today may go up tomorrow but may come down again a day after and vice versa. Focus on quality of holdings (direct equities or mutual funds) rather than on market movement.
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Impact 
Mutual fund distributors handle large volume of mutual fund transactions. While their earning, by way of commissions has reduced (ever since entry loads have been banned); the cost of business has not reduced proportionately. As a result many of them are being forced to shut their shop. In order to reduce complexities, avoid duplication of work and also help distributors reduce costs Securities and Exchange Board of India (SEBI) has allowed to set up a Self-Regulatory Organisation (SRO) for all distributors. Besides above mentioned benefits, SRO would also help various regulators have a better oversight of the industry.
In another move SEBI has also been thinking about allowing distributors to access the stock exchange platforms by granting them "limited purpose membership" of stock exchanges. As clarified by SEBI, the compliance related requirements would be lenient and there would be lesser financial burden to use infrastructure of Stock Exchanges for distribution & redemption of mutual fund.
To reduce the financial and compliance burden on these limited purpose members requirements such as SEBI registration, compliance as member of stock exchange, paid up capital and Base Minimum Capital etc, would not be applicable. However stock exchanges may prescribe suitable eligibility criteria in this regard including net worth requirements, membership fee etc. This limited purpose membership would be granted on the basis of ARNs, granted to Mutual Fund Distributor by AMFI. Further to address the possible risk of default by these limited purpose members, they will not be allowed to handle pay in and pay out of funds as well as units on behalf of investor. Pay in & pay out of funds & units would be directly from and to the account of the investors.
PersonalFN is of the views that although the introduction of new regulations and formation of SRO may help SEBI tightly regulate distributors and eventually curb mis-selling; success of them mainly depends on how they would be implemented. Also it is noteworthy that at present distributors are having a tough time in their business as their income has substantially reduced ever since entry loads are banned. This would limit their capacity to comply even with the relaxed criteria for using infrastructure of stock exchanges.
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Impact
Last week PersonalFN wrote to you about Fixed Maturity Plans (FMPs) losing their flavour and some mutual fund houses either withdrawing their New Fund Offers (NFOs) or extending the last date of their NFOs. But here's a new twist.
Four mutual fund houses viz. DWS, DSP BlackRock and Reliance have launched FMPs (which are close-ended) investing in a combination of debt and equity; having a maturity period of three years. The launch of these FMPs come at a time when there are downbeat economic sentiments prevail in the domestic economy, which in turn have made Indian equities look relatively attractive and yields in longer maturity debt papers have risen.
You see, most FMPs which are mandated to be hybrid in nature, usually allocate their assets between debt and equity in the ratio of 80:20, thereby being categorised as debt oriented mutual fund schemes. While the debt component of the portfolio intends to preserve capital, it is noteworthy that interest rate cycle, liquidity conditions, and other macroeconomic factors are risk thereto and determine the course of yields for FMPs. The equity component of the portfolio for such hybrid FMPs act to be catalyst for accelerating the process of wealth creation over the maturity period. To read PersonalFN's view on whether you should be investing in such hybrid FMPs, please click here.
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Impact
Indian debt markets have been witnessing a U-turn as far flow of foreign capital is concerned. From net buyers a few weeks back; Foreign Institutional Investors have turned net sellers nowadays. Concerns over India's worsening Current Account Deficit (CAD) and weak rupee may cap the scope of further rate cuts going forward and in worst case, Reserve Bank of India (RBI) may even think about tightening interest rates if the Government policy framework remains sloppy and India fails to attract greater FII inflows. Yields on 2023, 7.16% benchmark sovereign bond hardened to 7.42% recently. Such drastic changes in yields push bond prices down. Longer the maturity of the paper, greater would be the impact on bond prices. Clearly, those managing debt assets have a tough time ahead.
In India, Insurance companies have a massive exposure to government as well as corporate debt. As per mandate, life insurance companies invest atleast 25% of their assets in Central Government securities. For pension funds, annuity and group businesses the prescribed limit is even higher. Although insurers have a stable asset base of investors who are in for the long term, volatility in interest rates and obscure outlook impacts their performance. Citing this reason, Insurance Regulatory and Development Authority (IRDA) has proposed to let insurance companies hedge their risk more effectively. IDRA has proposed to allow insurance companies to enter derivative contracts with a maximum tenure of 10 years. To read more about this news and the view of PersonalFN over it, please click here.
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- Here's some good news for home loan borrowers. The State-owned bank and the regulation authority, the National Housing Bank (NHB) is planning to lower risk weight on home loan and residential housing projects by 25 basis points (bps).
What does this mean?
Well, it infers that as a home loan borrower you may fetch a better (reduced!) interest rate while you endeavour to buy your dream home. This is because house finance companies, as an implication of the aforesaid proposed move, would have to set aside less capital, thereby facilitating them to offer you a better rate for your home loan.
It is noteworthy that last week, the Reserve Bank of India (RBI) reduced the risk weight on home loans upto Rs 75 lakh from 0.75% to 0.50%, and for loans above Rs 75 lakh from 1.00% to 0.75%.
PersonalFN is of the view that, aforesaid proposal from NHB and initiative from RBI would provide an impetus to the housing sector (which is sailing through troubled times) as well as home loan borrowers. It would result in better demand in the housing sector (thereby benefitting developers) as a result of better rates offered to home loan borrowers. However, bank captains ultimately do pass this benefit to home loan borrowers, has to be seen.
- If you are seeking to obtain a Permanent Account Number (PAN), you may now encounter a stringent process. The Finance Ministry sighting some gaps in the current process, intends to make the system more full-proof and robust, by asking for better proof(s) of identity and address. So now, your ration card or rent receipt may longer suffice to make a PAN card. Instead, one will now have to provide a copy of the rent agreement along with the proof of address of the owner. Likewise, your Aadhaar number, gas connection documents, and / or certificate issued by the employer in a prescribed format would be accepted as identity / address proof after changes to the income tax rules are made shortly. It is noteworthy that the new rules would be applicable only to fresh applicants.
You see, the proposed move has come after the Economic Offences Wing found some foreign nationals, particularly from Afghanistan, were using fake PAN cards as proof of identity. In most of these cases, a fake certificate of identity and address signed by a Member of Parliament (MP) was issued.
PersonalFN is of the view that, the aforesaid vigilance will help reduce the number of frauds and bring down the gap between those who holding a PAN card and number of people who don't file tax returns. Very often it so happens that people who do not file tax returns get a PAN card, as it serves as a proof of identity.
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Hybrid Funds: A category of mutual fund that is characterized by portfolio that is made up of a mix of stocks and bonds, which can vary proportionally over time or remain fixed.
Source: Investopedia
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Quote : "Successful investing is anticipating the anticipations of others." - John Maynard Keynes
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