Why you must invest in gold?

Gold has been performing well over the last 10 years. But, many investors are facing the dilemma of whether or not to invest in it at the current levels.  Gold's subdued performance over the past six months has also raised doubts in their minds about its potential.

No doubt, past performance is an important decision-making criterion. However, relying on it alone is never a wise thing to do. It can result either in over-exposure or under-exposure to an asset class, depending on how good or bad the asset class has been performing in the recent past. 

If you are a long-term investor, consider factors such as the contribution of an asset class to your asset allocation process, its ability to hedge inflation, liquidity, flexibility and tax-efficiency of the mode chosen to invest in that asset class. For example, if your objective is to accumulate gold for gifting it to your children on their marriage, the focus should be on investing through your time horizon, rather than worrying about price fluctuations.

As an investor, you must ensure proper asset allocation. Relying mainly on equities and debt instruments alone to achieve diversification in the portfolio may not be the right strategy. Gold can be an integral part of your portfolio, as it has a negative correlation with the other preferred asset classes. 

The price of gold retains its independence, mainly because the fundamental factors that impact it are different from those that affect other asset classes. Moreover, the sources of demand for gold are far more diverse. The existence of a range of buyers, such as jewellers, financial institutions, makers of industrial products as well as investment channels, including coins and bars, gold ETFs and e-gold also cuts the risk of liquidity. 

Besides, demand and supply factors do not always have the same impact on gold, as they do on other commodities for its hybrid nature - gold is a commodity, as well as a currency.  Gold is also a protector of wealth against inflation and can provide good returns over time. 

Another major advantage of investing in gold is it does not carry a credit risk. Of course, you may face the risk of price fluctuation. But, you can tackle it by investing systematically over time. Evidently, gold, as an asset class, has a lot to offer. Therefore, the issue is not whether or not you should have gold in your portfolio, but how much exposure should you have to it. 

While the thumb rule says it should be 10-15 per cent of your portfolio, the actual exposure would depend on the role you would like gold to play in your portfolio. I t is equally important to invest in gold by choosing the right option. There are hassle free options, such as Gold ETFs, gold savings funds and e-gold. 

The key is to realise that investing in paper gold is more beneficial than buying physical gold, especially if it is for investment purposes.

HNIs can look at startup firms as good investment options

Income levels of individuals in our country have increased, and so has the risk-taking ability of the middle class. They have now started investing in riskier products like equities, knowing very well that the markets can deliver superior returns over a period of time.
A large part of the credit for this transformation goes to the financial planners. Financial planners now-a-days are seriously focusing towards self skill development and have started giving need-based advice. The focus on asset allocation also depends on the hierarchy of needs of an investor. These needs are adding up, particularly in the middle and top-end of the hierarchy who are ready to venture into other asset classes also.The assets which you may find in the portfolios of a regular investor today may be as under:Lower level: Endowment insurance plans, fixed deposits (FDs), gold, >> Middle level: In addition to portfolio of lower level, they will have unit-linkedinsurance policies (Ulips), equity mutual funds systematic investment plans (SIPs), house property and equities.

Higher level: In addition to the above, they will surely be holding real estate, structured products, e-commodities and will be involved in equity derivatives and commodities markets.Many equity market investors have one common doubt today, should they be involved in commodities market and the currency market. The answer is ‘yes’. But three caveat’s: 1) Unless you know how these markets work, don’t risk your money. 2) If you have no knowledge, then take advise from a qualified adviser. 3) Enter these markets with hedging in mind and not for making quick money.Research has proved that equities, commodities and currencies have both positive correlation and negative correlation with each other. Hence, one can always hedge or may find a trading opportunity across market segments.

The biggest drawback of these markets is the lack of understanding and, hence, investors need to take the right step of going through financial planners. Since these markets are still largely unknown to the retail investors, they are often lured into schemes which promise to pay above normal returns. Clear understanding can provide a great opportunity towards better asset allocation. One cannot be sure which will be the next best performing asset in the next cycle and, thus, exposure to multiple market ensure we don’t miss out the cycle.

One such investment opportunity which not many people understand and the top-end high networth individuals (HNI) can look seriously at is investing in the startup companies. Companies like Facebook, Linkedin became big in no time, creating huge wealth for the investors. Also, we have success examples of Flipkart and Snapdeal in India.

Many entrepreneurs have ideas which can be huge success, but most of these startup are money-hungry to fuel up the growth process. These companies are initially started with promoters’ own funds.India will be the largest consumer market in the world by the year 2025. It, at present, has around 120 million internet users and the number is rising rapidly. Most of the companies which have made big in short duration are in the field of technology and internet. Investors like Rakesh Jhunjhunwala have made big money in this way. A2Z maintenance is one of the examples.

Investing in startup is called the ‘angel funding’. These investors are termed as ‘angel investors’ since they act as the saviors when the company is requiring money. There are many angel investors (read HNI investors) who have come forward and formed groups like Mumbai angels and Chennai angels to source such opportunities where they can invest and make big money. The process is angel investors — venture capital — private equity — initial public offering (IPO). IPO is the final thing where everyone unlocks the real money if the company makes a huge success.

Right company and right valuations is the key. Many HNIs are investing in startups these days, but this requires expertise. There are advisers who have enough knowledge in this segment and can help you choose the right companies.

(The writer is a CFPCM and wealth manager. The views expressed here are personal, and do not necessarily represent that of the organisation. PSB India is the sole marks licensing authority for the CFPCM marks in India)

The World This Week - 2nd April to 6th April, 2012

The financial world keeps changing every now and then. Read the latest happenings around the globe and become a wise wealth planner! 

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Expect 20% Sensex to return in 2012

Based on all four key factors that drive the equity market -- valuation, liquidity, sentiments and fundamentals -- we expect the Sensex to touch 21,000 in 2012, i.e. 20 per cent returns from the current levels.
Moreover, we expect yields on mid-caps to be higher than the Sensex return. Indian equities are currently undervalued vs their own past levels and current peer levels. Since 2007, the Sensex has reached 16,000 for the sixth consecutive year. Meanwhile, the Sensex earnings have grown 30 per cent and the Indian corporate sector has reduced leverage.


Currently, at the 17,000-17,500 range, with return on equity of Rs 18 per cent, the Sensex trades at 13x FY13E earnings, well below the historical average of 15x. Despite the perception to the contrary, Indian equity is cheaper than most Asian peers on a sector-adjusted basis.  For example, although India is a domestic consumption-driven story, Indian consumer companies are at a discount vs. China, Indonesia or Taiwan. The same is true for information technology companies, where India is the global outsourcing leader.

Despite having better capitalisation and consistent growth records, Indian financials do not command a premium vs Indonesia or Taiwan. We expect better liquidity conditions in 2012 vs 2011.
The European Central Bank is on an aggressive quantitative easing mode. Going by the economic condition, outlook and Central Bank stance, both Japan and US are likely to follow suit. To accommodate the large government borrowing and slowing bank deposit growth, we expect the RBI to infuse at least Rs 3,00,000 crore (Rs 3,000 billion) in liquidity during FY13 through cuts in the cash reserve ratio and open market operations, substantially reducing the average banking sector liquidity shortage of Rs 1,40,000 crore (Rs 1,400 billion) in Q4 FY12.

The current gloomy outlook on macro issues -- growth, inflation, interest rate, currency, government finance and public policy -- are depressing market sentiments. Even a small improvement would lead to a strong bounce back, as most negative events are currently priced-in. We expect the outlook on the Indian economy to improve in the latter part of 2012. Investment growth, the key driver of the Indian economy and thereby the equity market during 2004-07, has remained lacklustre since FY09, particularly in the last four quarters.

Going by past trends, we expect recovery in India's capex cycle to start in 2012, led initially by replacement rather than fresh capex. The process is likely to improve the outlook on the Indian economy and companies, particularly those linked to the investment theme.

Investing in 2012 by Mr. Swapnil Pawar, CIO of Karvy Private Wealth

Investment avenues for 2012 can be recommended based on careful assessment of various scenarios that may pan out. The emphasis is more on action rather than on communicating  a certain "outlook". I believe the investors are often flooded with too much "outlook" and too little "actionable input". Here is an attempt to focus on the matter.

I have used what is typically referred to as scenario-building exercise. This is a powerful technique implemented by military planners, oil explorers and geo-political experts. Simply put, according to scenario analysis, the final shape of the world is a function of a few key drivers. These drivers affect the intermediate variables, which, in turn, shape the future. The important factor to consider here is the parallel impact of a given driver on different variables. Thereafter, we can easily come down to a fairly small list of candidate scenarios of how the world would shape up.

Using scenario analysis, we are trying to overcome 2 common problems typically faced in our endeavor of investment advice too specific and inherently speculative prediction on one hand, and too general and anything-can-happen sort of pseudo-prediction on the other. Real life is hard to predict. The attempt , therefore, is to forecast as few different alternative futures as possible, and design an investment strategy in that light. 

The World This Week - 12th March to 16th March, 2012

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RBI Mid-Quarter Monetary Policy Review

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Monetary Policy Update From Karvy Private Wealth!

RBI announced the annual policy for Fy12 on 3.5.2011

Policy actions undertaken are as follows

• Repo Rate increased by 50 bps to 7.25%
• Reverse repo to be now a derived value fixed at 100bps discount to Repo. The new rate is 6.25%
• MSF, a new programme for banks to borrow overnight from RBI, with the rate fixed at 100bps premium to repo rate (8.25%).
• Savings Rate increased by 50 bps from 3.5% to 4%.
• Provisioning requirement for certain non-standard assets increased by 10 percent.

All the measures combined would lead to margin compression for the banking space. Also, higher interest rates might lead to further NPL creation.

The tone of the policy was clearly hawkish. RBI stressed on managing inflationary expectations as its number one priority. It expects the high crude oil and commodity prices to sustain at these levels and even gain going forward. RBI has forecasted the Fy12 growth at 8%. There could be downside risks to that if infrastructure and manufacturing activity slows down further. RBI also expressed concern about the ongoing fiscal consolidation with the budgeted crude oil and fertilizer subsidies being clearly insufficient. This might lead to enhanced government borrowing programme in H2 FY12 putting further upward pressure on bond yields.

Banks have corrected almost 10% in the last one week. While most of the price correction would be over in next few days, the stocks might stay subdued for some time. We are changing our stance on the banking space from overweight to neutral with a bias towards private sector names.

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Inflation tops forecast; finmin talks down rate hike

India's headline inflation unexpectedly accelerated in May, heightening expectations the Reserve Bank of India (RBI) would raise rates before its scheduled July review despite concerns over Europe's debt crisis.

The data came along with a sharp upward revision of March's reading and on the heels of April manufacturing output matching its fastest pace in 15 years, indicating strong growth and rising inflationary pressures in Asia's third-largest economy.

Separately, the finance ministry's chief economic adviser, Kaushik Basu, said the strong growth in manufacturing would continue and forecast the economy to grow 8.9 percent in the June quarter, topping the previous quarter's 8.6 percent expansion.

"This (inflation) increases the likelihood of an inter-meeting rate hike from the RBI as inflationary pressures are really showing up," said Sebastien Barbe, Hong Kong-based head of emerging markets research and strategy at Credit Agricole.

"It seems like the markets are also now less worried about the situation in Europe, so the RBI may be less reluctant to tighten before July."

Graphic on inflation.

Bond yields and overnight swaps rose on the data, while stocks trimmed gains. Most analysts had earlier said the RBI would wait until its July 27 review to raise interest rates, seeing its hands stayed by Europe's woes and on liquidity tightness.

That view is now changing.

"RBI will increase the frequency of its baby steps and we expect some tightening measures in June itself and a repetition of those in the July policy," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

"Baby steps" to normalise monetary policy is what the RBI has said is its preferred choice of action, but it has also kept open the option of a rate hike ahead of the July review to combat inflation which it deems "worrisome."

K.C. Chakraborty, a central bank deputy governor, said there was a "fifty-fifty" chance of a hike before the review, while Finance Minister Pranab Mukherjee indicated he did not favour a near-term hike and said price pressures would ease in mid-July.

"There will be inflationary pressures till middle of July but at this point of time I am not thinking of altering interest rates," Mukherjee told reporters in Patna on Monday.

The wholesale price index (WPI) rose an annual 10.16 percent in May, higher than the median forecast for 9.56 percent in a Reuters' poll and April's 9.59 percent.

In a sign the May reading could be an underestimate, March inflation was revised to 11.04 percent from the earlier estimate of 9.90 percent. Recent WPI data have been similarly revised up.

India's economy grew at 7.4 percent in the year to end-March 2010 and is seen expanding at 8.5 percent in the current fiscal year that began on April 1.

REFORMS MORE DIFFICULT

Persistently high inflation, which has been over the central bank's perceived comfort level of 5 percent for seven months running, could turn voters against the ruling Congress party before eight state elections scheduled in 2010 and 2011.

It would also dampen enthusiasm for reforms, such as a keenly awaited freeing up of retail fuel prices, crucial to improving public finances and stop state-run fuel retailers from bleeding.

The government deferred last week taking a decision on freeing fuel prices, worried about political opposition and the impact on prices.

Policymakers have repeatedly said inflation would ease on better prospects for crops from good monsoon rains. But a hike in fuel prices could push it up, an adviser has said.

On Monday, Basu said the impact would be limited.

"The inflation figure you are getting is going to go up," he said. "But if you go six months down the road ... in my opinion you would see a smaller inflation then."

The benchmark 10-year bond yield, which had risen 6 basis points after the WPI data, ticked up another point to go past a five-week high of 7.68 percent.

"The hawkish comments by Basu led to a further sell off in an already nervous market," said Bekxy Kuriakose, head of fixed income at L&T Investment Management.

One-year indexed swap rates rose 6 basis points. The swap rate has risen over 50 basis points from a more-than 5-month low of 4.71 percent in early May on concerns over tight liquidity and expectations of higher policy rates.

Basu and Finance Secretary Ashok Chawla said the high WPI readings were a matter of concern, but inflation would soften in the months to come on cooling food prices.

Chawla forecast WPI to fall to 5-6 percent by December, with Basu adding it would be below 5 percent by end-March 2011.

Source: Reuters.

India won't pause rate hikes for now - Mukherjee

India will keep unwinding economic stimulus deployed during the financial crisis and continue raising interest rates despite uncertainty linked to the euro zone's debt woes, Finance Minister Pranab Mukherjee said on Friday.

Mukherjee told Reuters Insider television a deepening debt crisis in Europe could hit India's and other emerging economies' exports and growth, but such a risk was not stopping India from gradually reversing loose fiscal and monetary policies.

Asked whether uncertainty about the impact of Europe's debt crisis on the global economy was a reason to hold off with further interest rate increases despite last quarter's buoyant growth, Mukherjee said: "No, we won't pause them."

The finance minister was speaking on the sidelines of a meeting of Group of 20 finance ministers and central bankers in this South Korean port city.

The Reserve Bank of India raised rates in March and again April by 25 basis points and signalled more hikes would follow, when it last met for a regular quarterly policy review in April.

India's benchmark 10-year bond yield rose as much as 2 basis points from the day's lows to 7.57 percent after Mukherjee's comments to Reuters.

However, recent market volatility and worries that Europe's efforts to rein in debt will sap global growth, cast doubt on the scope of monetary tightening by major central banks.

Such worries also gave rise to suggestions that major emerging markets economies, such as China, India, Brazil and Russia, should help sustain global recovery by delaying the exit from loose policies put in place during the global downturn.

Mukherjee, however, said that Asia's third-largest economy would continue to consolidate its finances and underscored the contrast between the relative fiscal health of emerging economies and debt-laden euro-zone members.

"You need fiscal prudence and in the developing countries, we are doing so."

Mukherjee said that India, which has pumped an equivalent of 3 percent of gross domestic product into its economy to shield it from the global crisis, planned to withdraw that stimulus next year.

"I hope to have next year a total exit policy."

EMERGING ECONOMIES NOT IMMUNE FROM EUROPE WOES

The Indian economy grew by 8.6 percent in the March quarter from a year earlier, in yet another sign that the world's major emerging economies have been little affected by Europe's troubles.

However, Mukherjee said a deeper, protracted crisis would not leave those economies unscathed.

"If the larger Europe and the entire euro zone is affected by this crisis and the recovery process is slowed down, naturally it will affect both exports from the developing countries ... and the flow of FDI (foreign direct investment)," he said. "We do hope the crisis will be resolved sooner rather than later."

Wholesale prices, the Reserve Bank of India's (RBI) most closely watched gauge of inflation, eased slightly in April to 9.6 percent, but are not far from 10.1 percent seen in February, which was the highest since October 2008.

Mukherjee said Prime Minister Manmohan Singh's target of bringing inflation down to 5-6 percent by the end of 2010 is realistic.

"The inflationary pressure on food items has started coming down and it reached as high as 21 percent in the month of December but now it is around 15 percent, and with the good weather conditions and good rainfalls I do hope that the reason for huge inflationary pressure on food items will not be there," he said.

While many economists and investors in India had expected the Reserve Bank of India to raise rates once more before its next quarterly review on July 27, the liklihood of such an off-cycle move has waned in recent weeks, some observers have said.

"These statements mean that the RBI and the government will be guided more by domestic developments than by what is happening in Europe, and they are confident that whatever turbulence will happen in the financial markets will be managed," said Rupa Rege Nitsure, chief economist at Bank of Baroda.

Source: Reuters