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| January 28, 2015 |
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| Weekly Facts | | | Close | Change | %Change | | S&P BSE Sensex* | 29,182.95 | -95.05 | -0.32% | | Re/US $ | 61.87 | -0.16 | -0.26% | | Gold Rs/10g | 28,150.00 | 0.00 | 0.00% | | Crude ($/barrel) | 46.26 | 0.06 | 0.13% | | F.D. Rates (1-Yr) | 7.75% - 8.75% | Weekly change as on on January 27, 2015
*BSE Sensex as on January 28, 2015 |
Impact 
In a dynamic world we live in, we come across a host of events which impact our daily lives. And it is vital that we take important lessons from them. However, there are events which often many get impressed by, without delving much into the details and applicability.
Recently, being impressed by the success of Pradhan Mantri Jan Dhan Yojana received, SEBI chief, Mr U.K. Sinha floated an idea of following a similar approach to increase penetration of mutual funds. Speaking at the inauguration of Mutual Fund Utility, he, said, "We should take some lessons from what is happening around us and try to expand the reach and role of mutual fund industry. If 13 crore Jan Dhan accounts can be opened in such a short time, obviously MF industry should give itself a target to reach out to all the citizens of this country."
Would the 'Jan Dhan' approach work for MFs?
Industry and observers are divided on this issue. While the Association of Mutual Funds in India (AMFI) believes that industry should follow the footsteps of 'Jan Dhan Yojana', a few players in the industry disagree.
PersonalFN too believes following a similar approach would not produce like results for mutual funds. Opening a bank account is far different from investing one's hard earned money in mutual funds, as it entails some element of risk. Moreover, success of 'Jan Dhan Yojana' lies in free value added features (such as a life insurance, accident insurance and an overdraft facility) provided by the scheme.
Difficulties which mutual funds may face if they go 'Jan Dhan' way:
- Implementing Know Your Customer (KYC) requirements strictly would be a challenge
- In absence of any value added features, promoting mutual funds may be a challenge
- Chances of mis-selling can be high
- Unlike PSU banks, mutual funds may not get an aggressive push from the Government
Also, one needs to recognise that mutual funds are wealth creating products to which one needs to deploy his / her hard earned money first to capture potential gains. And to do so, PersonalFN believes there is no alternative to promoting investor education and financial literacy. Lack of awareness is one of the major reasons why investors stay away. Moreover, as they fail to recognise risks associated with mutual fund investing, they tend to overlook possible benefits as well. Mutual funds should also try to minimise the occurrence of mis-selling which eventually results in loss of faith in mutual funds.
Keeping the aforesaid in mind, PersonalFN is of the view that it is unlikely that mutual funds would achieve any significant success if they follow 'Jan Dhan' approach.
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Impact
At PersonalFN we have always recommended to keep aside adequate contingency reserves which may come handy in case of any emergency. Sometimes it may happen that, you may have a sound portfolio of investments but that could be illiquid i.e. can't be quickly converted into cash when needed.
Similarly, a country which heavily depends on imported oil (about 80%) for satisfying its energy requirements, can't afford not to keep a contingency reserve, irrespective of how large the foreign exchange reserves are. Although India has a sound forex management system, resisting a downward pressure on rupee becomes difficult in case fuel prices at the international market shoot up without any prior indications. Sentimental impact on the currency, and in turn on other macro-economic variables such as inflation and flow of foreign capital, is higher than the actual impact. Having said this it is important to manage the oil imports and build contingency reserves.
Keeping the aforesaid in mind, the Government has planned to store 1.03 million tonnes of crude oil as a strategic reserve at Vishakhapatnam in first fortnight of February 2015. In the first phase, the Government has decided to create an inventory of 5 million tonnes at three locations in India. This is the first instance of its kind where India is keeping aside crude oil buffer. With this initiative India will ensure that it stores crude oil which is approximately equivalent to oil import of 13 days. India plans to raise its strategic reserve upto 90 days of oil import equivalent by 2020. At present, only U.S. has such a high level of buffer.
PersonalFN is of the view that, the Government has taken a right step to create a strategic reserve of crude oil. Timing is appropriate too, considering sharp fall in crude oil prices. India has one of the cheapest oil storage facilities in the world. PersonalFN believes, although fiscal impact of this move could be limited, as only 90 days' worth buffer would be created that too by 2020; sentimental impact would be positive. India imported 189 million tonnes of crude oil in 2013-14.
If you recollect, in 1992, India faced crisis of foreign exchange which had left U.S. dollars sufficient only to finance few days' of imports. You can imagine the sense of urgency India had then. To avoid being in similar situation again, it is important to create strategic reserves of oil, especially when crude oil prices have softened.
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Impact 
It is strange, yet most of the times it is true that consumers are more cautious about the price they pay than the equity investors. When it is discount season, consumers flock and shop more; unlike equity investors who get swayed by the exuberance and end up buying when valuations look expensive.
You may be surprised to know that, some of the Indian companies are the most expensive ones in the world; yet investors are chasing them. Indeed, India is a booming economy with favourable demographics, but even after considering that, valuations of some companies are unjustifiably higher vis-à-vis their global leaders in the respective industries.
For example, the Price to Earnings Ratio (P/E) ratio (which is the most commonly used valuation ratio) of Asian Paints is nearly 4 times higher than that of the PPG Paints, a global leader in paints. Market capitalisation of the Asian paints is however less than half of that of PPG Paints. In other words, if Asian Paints keeps rallying the way it has been for last 5 years, its market value would easily cross that of the PPG Paints. Sounds unreasonable, isn't it? This is not just one example. Many well-known Indian companies such as Hindustan Unilever, Maruti Suzuki, UltraTech Cement, HDFC, Larsen and Toubro, and DLF currently command unimaginably higher valuations as compared to the global leaders in their respective industries.
If you consider the valuations of the bellwether index, S&P BSE Sensex, you would find that Indian market is not cheap at all. Rather, it is of the most expensive ones across the world.
Are high valuations justifiable?
(Source: Business Standard, PersonalFN Research)
From a market capitalisation point of view the mid and small caps have run ahead of large caps. But valuations in mid and small cap segments are not cheap either when compared with their historical averages.
To read more about this news and PersonalFN's views on it, please click here.
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Impact
While you apply for a loan, banks expect you to be fair and transparent while disclosing material facts. However, it has been observed that, despite tight regulatory controls, banks sometimes give discriminatory treatment to borrowers. According to the report released by RBI, at times, banks don't treat old borrower and the new borrower (with same credit profile) at par. Moreover, the report also suggests that, banks have been found changing interest rate spreads arbitrarily. To overcome this and examine the problems associated with pricing of loans, RBI had appointed a working group under the Chairmanship of Mr Anand Sinha. Based on the recommendations of the working committee, RBI has tightened the discloser norms for banks with effect from April 01, 2015.
To know more about this story and to read our views, please click here
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- Sex ratio in India, which measures female population per 1,000 males, has improved over the years. Going by census 2011, India's sex ratio is 943. However, this is an average of the whole country. Some states of India have dangerously low population of women. For example, states such as Uttar Pradesh, Punjab and Haryana have population of less than 900 women per 1,000 males. In many places of India, the male child is favoured which brings along a social imbalance.
To improve the sex ratio, a number of initiatives have been introduced so far at various platforms. "Beti Bachao campaign" is one of them. Under "Beti Bachao campaign", the Government has decided to provide some monetary incentives to those who have a female child. As a part of this initiative, Prime Minister recently launched a unique deposit scheme, "Sukanya Samriddhi Account". This account can be opened by parents or the legal guardian of a girl child with an age of 10 years or below. The account can be opened either in a post office or any public sector bank and a passbook is provided.
Features of the account...
The account will be functional till she turns 21 or till her marriage after she attains 18. In a financial year, minimum of Rs 1,000 can be deposited in the account. Maximum deposits are capped at Rs 1.5 lakh per financial year. One needs to make sure that you do not skip contributing into the account each year, or else a penalty of Rs 50 would be levied for each year of non-contribution. As a parent you can keep contributing into the account for 14 years from the date of opening. So here the best thing is to start early and keep contributing, so as to accumulate a significant corpus which could be used to meet her education and / or marriage needs.
For the current financial year, the rate of interest on this account has been notified as 9.1% p.a. (compounded on an annual basis) for this year. Here it is vital to note that the rate of interest on this account is not fixed and will be notified on a yearly basis or from time to time whenever applicable, very much as in a PPF account. The amount deposited in the Sukanya Samriddhi Account is eligible for a deduction under Section 80C of the Income Tax Act, 1961. Talks of exempting the interest income too are on, but aren't finalised yet.
As far as withdrawals are concerned, only 50% of the amount can be withdrawn before maturity (i.e. at the girl's age of 21) after the girl turns 18.
PersonalFN is of the view that, this initiative would play a dual role of providing fixed source of funds to banks and offering long term savings option to parents of the girl child. Making interest income exempt may make these deposits would make the product furthermore attractive from financial planning point of view to cater to financial goals such as daughter education and marriage needs. Nevertheless, the Scheme is a good product to save systematically with a tax benefit offered.
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Contingency: A potential negative economic event which may occur in the future. In finance, managers often attempt to identify and plan for any contingencies that they feel may occur with any significant likelihood. To mitigate risk, financial managers often err on the conservative side, assuming slightly worse-than-expected outcomes, and arranging a company's affairs so that it can weather negative outcomes with the least distress possible.
(Source: Investopedia)
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Quote : "Never depend on single income. Make investment to create a second source." - Warren Buffet
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