»5 Minute Wrap Up by Equitymaster

On This Day - 29 APRIL 2011
Will your bank account now make more money?

In this issue:
» Mutual fund mergers not so good for investors
» Phone rates in India to come down further?
» Silver loses shine for its users
» US Fed cannot stop a bull run: Mark Mobius
» ...and more!


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00:00
 
Most investors look at investing their earnings in profitable investment destinations. They look at stocks, commodities, mutual funds, anything that would help them earn handsome returns on their money. They are even willing to take risks to earn these returns. Risks that during volatile times, lead to substantial losses. So why not just leave their money in their respective bank accounts. The reason against this is quite obvious. Because saving bank accounts give almost negligible returns. This is in fact very true as most saving bank accounts give an interest rate of a mere 3.5%. This is lower than the rate on a fixed deposit. And if you compare it with the current inflation rate you end up losing money in savings account rather than making money.

So what if we tell you that if the Reserve Bank of India's (RBI) proposal is accepted then this rate would actually go up? That's right. RBI Governor, Mr. D Subbarao has proposed to 'free the savings rate'. Currently the saving bank interest rates are regulated by the RBI. The reason behind this was to allow people of the weaker sections of the economy earn some returns on their money. If the saving bank rates are deregulated, then it would lead to higher savings rate especially during times such as now when interest rates are on an uptick. Deregulation of the rates would also help the RBI in implementing its policies over the long term as the bank rates would move more easily in the direction set by RBI.

So all would be hunky-dory in the event of rising interest rates. Investors would be happy with higher rates on their savings bank accounts. RBI would be happy as their policies would start to have an effect. Banks would become competitive as they vie for more customers. Each would try to come up with different rates and products to woo the investors. But there are two sides to every coin and there are cons to freeing the rates as well. For instance what would happen in the event of lower interest rates? The interest on the savings bank account would come down as well and may even end up below the current rates.

Do you think saving bank interest rates should be deregulated in India? Share your comments with us or post your views on our facebook page.

01:10
 Chart of the day
 
The Population Census of 2011 is complete and the results are out. There has been an increase in India's population over the past 10 years. But then again, this does not come as a surprise. But the interesting part is the result related to the literacy rate in India. India's literacy rate now stands at 74% which is considerably higher as opposed to the 65% seen in 2001. Considering the pace of technology as well as the quantum of investment made by the Government towards promoting education, it is commendable to see the rise in literacy rates. However, if one delves into the meaning of 'literate' in India, it is not a very bright picture. Anyone who can write one's own name is considered to be literate by this definition. It is not very encouraging to know that the definition of literate is so loosely used. Nevertheless, it is heartening to see that the Governments efforts are yielding better results. We just hope that this number would touch a 100% when the results of the next Census come out.

Data source: Ministry of Human Resource Development of India


02:00
 
What happens when a mutual fund scheme in which you have invested gets merged with some other scheme? While such mergers may augur well for the mutual fund industry, the same cannot be said for unit holders. Let us explain that to you.

Every investor knows that selling stocks or mutual fund units of equity funds in less than a year entails short term capital gains tax of 15% (excluding cess). Now, when one scheme is merged with another, the former ceases to exist. In that case, the units of the first scheme are redeemed. Then without returning the units to investors, the same are reinvested into the new scheme.

This is as good as an investor redeeming units from one fund and investing into another. So keep in mind that such mergers are nothing to cheer about and may just add some unnecessary liability on your shoulders.

02:30
 
Economies of scale surely come in handy for companies in a wide variety of sectors. The telecom sector is no exception to this rule. Just try and ask big companies like Bharti Airtel and Idea Cellular. There is a concept in the sector called as inter connect charge. This is nothing but a charge paid by the mobile operator from whose network a call originates to the mobile operator on whose network it ends. Now, consider the subscriber population of big companies like Airtel and Idea to those of other smaller players. The fact that these companies corner a large chunk of these charges and thus, earn huge profits from it surely doesn't need any more explaining. However, it now appears that TRAI, the regulatory body for the telecom sector is looking to snatch this advantage away from the larger players or perhaps weaken it severely. In its long awaited review of the interconnect charges, it has proposed deep cuts in charges paid by operators to each other. Quite expectedly, the move has not gone down well with larger players and is again likely to create a divide between them and the small players. For the consumers though, it could herald an era of still lower mobile tariffs.

03:10
 
Gold has found its place under the sun with stronger currencies losing much of their sheen. The money printing machines are working round the clock. Inflation in developed and developing nations is emerging as one of the biggest economic threats. Hence, the fall in gold prices does not seem a very near term possibility. But its inferior counterpart, silver, has also raised as many eyebrows. Prices of the white metal skyrocketed 84% in 2010. After that it went up another 54% so far in 2011. Much of the recent rally has been fueled by investors who are piling into exchange-traded funds. They are using it to hedge themselves against inflation or currency declines. Hence, while investors are looking for more ways to invest in this precious metal, users of the metal have had a tough time.

Unlike gold, silver has plenty of industrial uses. Three fourth of the world's silver is used for making jewelry, mirrors, solar panels, plasma televisions etc. Hence the producers of these items are desperately looking for silver substitutes. Not that they have found any feasible solution yet, but the desperation to reduce dependence on the metal may bring down silver demand. Even the silver miners are worried whether they can sell more of the metal at current rates. Hence if you are amongst those who are betting on the silver rally, make sure that you keep your exposure very limited.

04:00
 
The global equity markets are facing a lot of uncertainty right now. One of it is the fear that once the Fed halts its bond purchase program, equities will fall. After all, the so-called recovery in the US has been fuelled by quantitative easing and any attempts to ease it would push the US economy back into the hole. But Mark Mobius of Templeton Asset Management thinks differently. He opines that the global equities bull market will weather any halt in bond purchases by the Federal Reserve. This is because of rising US consumption and investment in emerging markets. Mobius believes that another round of quantitative easing is not necessary and that there will not be an economic slump in the second half of the year. He admits that although consumption has not picked up at a furious space, Americans have nevertheless started spending. We are not so sure about the US economy really recovering. Unemployment there is still quite high and whether the spending that is being witnessed now can be sustained remains to be seen. What is certain though is that another round of quantitative easing by the Fed will only make matters worse for the global economy.

04:30
 
The Indian stock markets fell into the negative territory after posting marginal gains in the opening hours. At the time of writing, the benchmark BSE Sensex was trading lower by 68 points (0.3%). Capital goods and realty stocks were the maximum losers while those from the FMCG and healthcare space were trading firm. Most of the Asian stock markets ended in the red with China being the only exception.

04:55
 Today's investing mantra
"It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently." - Warren Buffett

From The Editor's Desk
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