Is your money working hard enough? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is your money working hard enough? 

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In this issue:
» Will China trump the US, OPEC in energy reserves?
» Govt determined to meet fiscal deficit targets
» Will mis-selling be rampant in RGESS?
» Is EU's financial tax a good move?
» ...and more!

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Every human being approaches life with a single minded goal. That is to improve his standard of living. Right from getting better education to a satisfying job to sufficient savings, each of these goals is motivated by the biggest and the ultimate goal of having a better quality of life. But most importantly, the savings matter when one nears the twilight years. As income and savings stop piling up, one needs to harvest the invested corpus for a living. Anxiousness about the inability to do so is something that has dawned upon residents of rich and poor nations alike in recent years. Higher cost of living impacted savings. At the same time investment returns failed to live up to expectations. Result being that the worst fear of most middle class families the world over seems to be coming true. That of outliving their retirement corpus. As per CNN Money, a survey of 15,000 working and retired people in 15 countries shows that millions will outlive their retirement savings.

Presumably economies that offer social security did not have a very high household savings rate until recently. But what is shocking is that even economies like China are expected to have a massive problem of dependant retirees. As per the report, global shortage of retirement savings is expected to be 44%. While UK tops the chart at 63%, China and Brazil follow close on the heels at 50% and 48% respectively. Surprisingly, savings shortage in the US and India is likely to be the same at 33%.

Now, for economies that do not offer social security, stronger socio economic variables are a must have. Prime amongst them being a larger working class, high employment, growth in real wages and high savings rate. But despite the presence of these, economies like China and India do not seem to be faring well enough. Poor financial inclusion and inadequate financial literacy about investment opportunities are the lacunae. A higher savings rate will need better employment rates and low inflation. But these are not enough. Households need to be incentivized to channelize their savings well. Particularly into safe and remunerative investments from an early stage. Just like unemployed youth, dependant senior citizens could become a major burden to an economy's well being.

Investors on their part should take the initiative of educating themselves. Intelligent allocation of savings across asset classes that offer inflation hedged returns could resolve all their retirement worries. Not ensuring that our money works hard enough is a cardinal mistake! One that we would not want to live with for the rest of our lives.

How do you ensure that your money is working hard enough for you? Please share your comments or post them on our Facebook page / Google+ page

01:35  Chart of the day
A recent paper published by the Reserve Bank of India (RBI) on the circulation of currency over the past 4 decades offers interesting insights. Particularly the data that compares currency in circulation with private final consumption expenditure. Now currency to GDP is a multiple of two ratios - currency to private consumption expenditure and private consumption expenditure to GDP. As seen in the chart, a sharp increase in former over the past two decades accompanied by only a marginal fall in the latter, has led to surplus currency in circulation.

Data source: RBI

When it comes to fiscal deficit, what the Government says and what it actually does is generally as different as chalk and cheese. Thus, its recent intent of putting brakes on its expenditure was taken with a pinch of salt by the markets. However, it does look as if the Government is going to prove most of us wrong. As per reports by LiveMint, the Government has cancelled its bond auction scheduled for next week. The amount involved is no doubt small, but what matters is the signal that such a move has sent. And the signal seems to be that the Government appears serious in bringing fiscal deficit down. And this applies not just to the current fiscal but to FY14 as well. The implication of this being that Government borrowings next fiscal could come in lower than the current financial year. Indeed, music to the ears of investors and also the central bank. For it will give the latter a fully justifiable reason to bring rates down further and inject life into the economy.

As the European countries are grappling with recession, the acrimony between the European Union (EU) and the financials sectors seems to have intensified. The EU is looking to tax financial companies that want to buy or sell stocks, bonds and derivatives. The rationale is to mop up more tax revenues at a time when the region is saddled with excess debt. But will this move work? Earlier attempts to do so have proved to be quite unsuccessful. Simply because whenever this kind of tax was introduced, trading activity moves overseas. What is more, tax revenues from the same were actually lesser than what was envisaged. EU officials, however, intend to plug these loopholes. They are looking to introduce safety nets which will ensure that such transactions are taxed even if they are moved abroad. Not surprisingly, the financial world is not at all happy with this. But they are likely to not garner much sympathy given that their reckless practices are what caused the crisis in the first place.

Mr Ajit Dayal has time and again raised his voice against rampant mis-selling prevailent in the mutual fund industry. Mouth watering commissions doled out by Asset Management Companies (AMCs) exploit the uninformed investor. It is natural that the distributor is likely to push those schemes that offer him highest commission. And investors being naive fall prey to their selling tactics. They end up buying something that is not in sync with their return requirements or risk profile.

Rajiv Gandhi Equity Saving Scheme (RGESS) seems to be another case in point where mis-selling could occur. It may be noted that RGESS was announced in the Union Budget 2012. It is a tax saving instrument that provides deduction to first time investors investing in stock markets. After RGESS was being announced at least 5 fund houses launched their RGESS mutual fund schemes. And with financial year coming to an end soon many AMCs are in a rat race to sell their schemes. These AMCs are offering commissions in the region of 6% to their distributors.

Now, as highlighted before RGESS offers benefits to first time investors investing in markets. Thus, it is likely that their understanding of equities and mutual funds can be lower. Plus high commissions could persuade distributors to sell the wrong kind of funds. And that's where mis-selling could happen. Not to mention that the high commission will ultimately eat into investor returns.

A few months back we had discussed the emergence of US as a major energy player. With its shale gas deposits it is slated to become the largest oil producing nation by 2020. But there is another country that is all set to become a major global force in terms of oil production. And that too much earlier than US. The country is none other than China. As per the Financial Times, China will produce enough oil outside of its borders to rival OPEC members like Kuwait. Through overseas oil investments the country is expected to produce nearly 3 m barrels of oil per day by 2015. This is double of what it produced in 2011.

The emergence of China as a major oil producing nation has two major implications. The first being the supply. There is a lot of dispute on this front. China is the world's second largest importer of oil. As a result it would be natural to assume that most of the oil that its companies discover would be shipped back to China. The Chinese oil companies have said that they sell the offshore oil in international markets. But given that China's own needs are quite high, they may send a large part back home. The second impact would be China's exposure to foreign politics. All oil producing nations are perpetually on the centre stage. And China is all set the join them.

It has been over two decades since liberalization was introduced in India. While the same has changed the way business is done across different sectors, oil and gas sector is yet to see its influence. However, things seem to be taking a turn for the better. As the Government recently announced a phased increase in diesel prices, the industry is planning its move to make the most of this as and when a free fuel pricing regime rules.

As such, the Federation of All-India Petrol Traders is seeking government's nod to allow sales of multiple brands of fuels at dealer-owned-dealer-operated (DODO) pumps. The approval will let dealers sell products of state run oil companies and private companies all under one roof. Not only it will let pump owners earn better margins, but also empower customers by offering options with regards to the fuel brand. In short, a win-win situation for all. However, the real benefits will be seen only when market pricing regime sets in. And with general elections around the corner, we believe things are unlikely to change at least in the near term.

Except for selective buying interest in commodity and energy stocks, the benchmark indices in Indian equity markets have had a lackluster session today. The BSE Sensex was trading higher by around 11 points at the time of writing. Other major Asian stock markets closed a mixed bag while markets in Europe opened flat to positive.

04:50  Today's investing mantra
"In security analysis the prime stress is laid upon protection against untoward events. We obtain this protection by insisting upon margins of safety, or values well in excess of the price paid." - Benjamin Graham
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4 Responses to "Is your money working hard enough?"


Feb 21, 2013

Financial inclusion and literacy? It will remain a meaningless exercise, even one fraught with danger, as long as the markets and instruments remain unregulated leaving investors unprotected. Indian regulators and courts respond extremely slowly to issues, hence education may well only draw people to markets, but wont keep them there.



Feb 21, 2013

1.Open PPF aact at the earliest and contribute max yearly. Do not ever withdraw from it unless inescapable.
2. Open another PPF in the name of your wife for her tax savings. Same as before.
3. Equity diversified 20%.
4.Gold 10%
5.Liquidity 10% () 6 months house expenditure.
If u can do it i.e save first and then expend balance
u will be able to swim afloat and ashore.

Like (1)

G Darad

Feb 21, 2013

All middle class investors are resigned to submit to the machinations of an irresponsible Govt. which cares little about its woes. It is an established fact that no any investment class other than realty or equity can give you inflation adjusted returns. But both have fallen victim to the manipulations of unscrupulous elements who manipulate at will and corner away the lions' share of benefits, if any, despite a professedly regulatory framework. All your research and understanding become useless and frustrating when you are outwitted in one smart move by this class.

Like (1)


Feb 21, 2013

to improve financial literacy in the country , I think the issue needs a multi-fold approach -- such as disseminating the info thru govt run media (Think Financial awareness programs on DD similar to Krishi Darshan) and other areas such as higher secondary schools/colleges/polytechnics. At the same time improve the infrastructure thru good network of banks/financial intermediaries all across the country which will provide correct and factual info on the various savings avenues available, also transparency in the fiancial dealings so that the potentail investor knows what risks he is taking at the time of investment, as well as easy access to info so that after investment the investor knows the exact status relating to the holdings, redemption etc . The issue is more of building a rapport and confidence with the potential investor.regds

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