How they make gold out of dust!

In recent times, price of no other thing has inflated as much as that of precious metals.

Such has been the price escalation that one almost tends to forget that gold used to cost about Rs 6,500 per 10 grams in 2000.

At present, the price of gold has reached astronomical heights and those in gold, silver and jewellery business are leaving no stone unturned to cash in on the yellow metal's appreciated price structure.

Dust of gold whose price per 10 grams has crossed Rs 25,000 of late, naturally therefore, has substantial market value now. Many people across India deal in gold dust, which is proving to be a good business under the circumstances.

West Bengal is no exception to the rule.However, what is intriguing -- about 5,000-6,000 people are dealing in gold dust in West Bengal for months along the Ganges in and around Shibpur area of Howrah district without any licence whatsoever. On a hot afternoon, we visited innumerable shanties across the Ganges in and around Shibpur in Howrah.

"The business that thrives here is unlicensed and some of the returns reach the hands of some really powerful people," a reliable source had informed us.

On reaching the site, we had no reason to disbelieve the source. We found hundreds of people sifting bags loaded with 'black powder'. However, none agreed to share their identities with us.

For, each one of the workers knew that the business was unlicensed and disclosing their names and other details could prove fatal for their trade.

"This is gold dust, didi", said one of them, busily cleaning the powder with a broom. while another person was mixing some liquid in a tub. "The powder will soon be poured into that liquid and made into a dough".

Some of the craftsmen claimed to be working as independent traders, who bought the raw materials (bags full of gold dust) and sold 'recovered' pieces of gold to jewellery traders in Howrah and Kolkata without the help of any middleman.

At least 90 per cent of the workers were Urdu-speaking Muslims mostly hailing from Bihar and Uttar Pradesh. Recreating gold from gold dust is a rather complicated process.

However, for our benefit, the workers simplified the description.
It is given below: 

Sacks of gold dust are procured from dealers in West Bengal as well as outside.

Sacks containing gold dust arrive by road and also by water.

The gold dust is first gathered and spread out to dry in the sun.

It is mixed with water and made into a dough and then laid out to dry in the sun again.

The dried gold dust is thereafter placed in a crucible (it is a container made of clay that is strong enough to withstand fire) and crushed and melted.

Gold needs to reach a temperature of 1,064° C (1,948° F) in order to melt.

The flame is directed towards the gold dust and is held there until the dust turns into liquid first and then into a molten blob.

The blob soon turns bright red and appear satin-like as it begins to harden.

The gold is removed from the crucible with tongs and is placed on a charcoal block.

The recovered gold is allowed to cool down and is readied to be sold. There is another simpler procedure for making gold from gold dust.

In this procedure, the gold is hammered till it takes the form of sand particles.

Then the gold is poured into a steel pot and water is poured into it.

When the water comes to the boiling point, nitric acid is mixed into the pot containing gold dust and water. The concoction is left in the open and the 'impurities' evaporate.

The same process is repeated twice.

This way, what's left is 24 carat pure gold pieces.

The second procedure is most suitable for rainy season when one does not get enough sun to dry the wet gold dust. Tust as the craftsmen at work at the riverside shanties were eager to exhibit their deftness in recreating gold out of dust, they were equally reluctant to talk about their 'rules of business'.

On being asked several times, how do they manage to do business without any government licence, "we pay those who matter every week" was all the only information we could squeeze out.

A roadside teastall owner, however had something more to add: "All these people are paying the most powerful people every week.

It comprises a hefty cut from their income. Those people pay the municipality bosses who very conveniently turn a blind eye to the issue." This business started about 10 years back and has been growing steadily over the years, the man added.

The teastall owner was also of the opinion that often smuggled gold bars from across the border arrived in these shanties and were crushed and mixed with gold dust to be circulated in the gold market of the state.  Most of these workers claimed that they worked as independent businessmen.

However, there were some who said they worked in groups under the aegis of one midsize of or big trader and got paid at the rate of Rs 200-250 per day in lieu of 14-15 hours of service.

Those working independently too earned almost the same amount daily but for them, the risk was more as they needed to source the raw materials on their own, processed the dust themselves and found buyers in the end.

"However, if one works on his own, there is no fear of losing a job", said a young man in mid-30s. Raw materials or gold dust are mostly procured from gold traders across India. Price of each sack is determined rather arbitrarily.

"Price of each bag is determined by the probable percentage of gold in it," informed one of the workers.

Unwilling to quote the actual prices, the workers informed that if luck were in favour, they would earn Rs 200 a day at ease.

"But at times, a processing fault could lead to zero productivity and fruitless labour", said a middle-aged man. The gold that the craftsmen retrieve are sold to gold dealers of Burrabazar, one of the principal markets of the state.

"Generally, we manage to sell our product at the existing market price after a thorough scrutiny but at times, we get less if the buyer has some doubts about the quality of our product," informed an oldish man. The workers who make gold out of dust toil very hard for 14-16 hours a day.

They are barely equipped for such a tedious job. They wear no gloves or masks and have to withstand scorching heat of the burner for most part of the day.

"Most of us don't live for long. We either get tuberculosis of lung cancer. That comes from inhaling poisonous nitric acid that is used to process the gold dust," said a man as he made a vein attempt to cough out the toxic air that he consumed a while ago. Strangely, the state government officials said they had no idea that an unlicensed gold dust business was in vogue along the coast of the Ganges.

Our repeated calls to the Howrah municipality on the issue went mostly unanswered. One of the officials, however, told us, "It's an impossible proposition. How can we not know anything about a business manned by so many people."

When we asked him what his name was, he disconnected the phone with a curt, "We are government staff. We have no time to waste on some baseless media allegation."

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)

Karvy Private Wealth in the News!

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

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No Big Reforms This Fiscal Budget?

The Union Budget is to be announced on 16th March 2012. There is no significant expectation from the government’s fiscal policy, as there are no big reforms which will be addressed. The only thing we are expecting is slight increase in excise duty and service tax rate. We expect the excise duty to be increased from 10% to 12%. The sectors which primarily will take the hit are from this will be automobiles, cements and cigarettes.

We also expect the government to expand the service tax by having an ‘Exclusion List’ for service tax applicable as against the list of sectors where the service tax was applicable previously. All these measures are expected to boost the government’s revenues. There might also be few populist measures like the “Right to Food” bill which could be tabled this time.

A big positive step for the infrastructure sector could be abolishment of 5% import duty on Coal. This move will be positive for most of the power generating companies

Overall, fiscal deficit for FY13 is expected to be at 4.7%, although looking at the current welfare program and social spending we expect the number to exceed 4.7% levels and the realistic estimate for FY13 fiscal deficit should be around 5%, which is on back of assumption that Brent Crude will remain around 110$/barrel for full year

Have You Written Your Will Yet?

When do you think should an individual write a will? People do not write the 'Will' or plan to write the will after attaining the age of 50/60 years.

80% people depart for heavenly abode without writing their will resulting in various avoidable complications hardship for their successors, few of which are narrated here below:

1. Distribution of assets:  In absence of Will, the assets cannot be distributed as per the choice of individual as it governs by the provisions of Personal Law/ Indian Succession Act/Hindu Succession Act/ Muslim Personal Law.

2. Exhaustive legal process:   Obtaining the Succession Certificate/ Execution of Will consume the time from 6 to 12 months.

3. Expensive:  Apart from the time, there is expenses incurred for legal process viz. 8 to 10% Court Fee, advocate fee and other incidental expenses.

4. Disruption in family:  In absence of specific Will, there is instances sourness amongst the family members.

5. Deprivation from assets:  Sometimes the successor is not aware with the details/ whereabouts of the assets and deprived from his right.

6. Tax planning:  In absence of Will the beneficiary cannot plan out their Tax liability or may not avail the tax concessions available to them.

Most of the individuals do not opt for making the Will just because they do not possess many assets or under the impression that they have already made the nomination.  No doubt the nomination is a great help to successors but the Nominee can hold the assets only in the capacity of trustee.  In such a case the nominee has to pass the assets to its successors.

And so it will be prudent to write the Will in addition to nomination.You have all the rights and privileges over your assets during your life time even after you have written your Will.  In other words the contents of will are effective only after your death and your assets are safe during your life time.

You can write your Will, provided you have attained the age of 18 and mentally sound in the eyes of Law.

Source: http://www.moneycontrol.com/news
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The World This Week - Sept12 - Sept16'2011

The World This Week - Sept12 - Sept16'2011

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Do You Know Recession is Occuring Soon? - And is Suspected to be Worse than the Last Time!

The world is going to go under a change and is going to face a recession soon.

A renowned global investor and author  believes the BSE Sensex may not go down to the 8,000 levels, but it would come down from the current levels.

About six to eight months earlier, many economists were saying a dollar crisis may only be seen by 2012 or 2013. Is the time shortening, in the light of renewed concerns over the US and EU economies?

We never really had a recovery in the Western world. The stock markets went up because of the money printing and support in 2009.

Do you expect a total collapse or a gradual decline?

I do not think it will happen overnight but I think, over time, the value of paper money will fall in a low interest and high inflationary scenario.

Has QE3 (the third round of quantitative easing, in the US) started and what do you expect from it?

This time, I think they may not make an official announcement. But some kind of a silent QE3 is already underway, considering that M1 growth (cash and near-cash deposits) has accelerated to the fastest expansion in 35 years.

I have no idea what the Keynesian interventionists, led by Bernanke, Krugman & Co will come up with next, except that they will further pursue their erroneous economic policies. The only question is how far they will move and what the impact might be on asset markets.

What does this mean for the various asset classes, especially on commodity prices?

I think cash and bonds are not very desirable. Equity and precious metals look okay. However, there will be more volatility.

The prices of anything, whether commodity or stocks, depend on many factors.

As far as commodities are concerned, I think the global economy is slowing significantly and the demand for industrial commodities will not grow that fast.

Can Indian markets remain insulated from what could happen in the Western world?

Indian and global markets are correlated. If the global markets slow down, the Indian markets, too, would slow down.

What is your asset allocation at this point?

I have 25 per cent in real estate and real estate-related equities here in Asia, 25 per cent in gold, 25 per cent in stocks and 25 per cent in cash.

Is it possible for Indian markets to drift lower, below 2008-09 levels?

I think the Indian markets will not go lower to those 2008 levels, but would go lower from the current levels to, may be, 12,000-15,000 levels.

From their low in 2009, the Indian markets till recently rose to 21,000, which is almost 100 per cent returns. I do not call this a bear market rally, but a bull market. We now have had the beginning of a bear market.

Are you looking at adding equities at current levels?

How can I buy more equities if I think the markets will go lower? For someone who has no equities at all, I would tell to start buying near 12,000-levels. And, if someone has 100 per cent of his money in stock, then I will say, sell some of it.

Is there more upside in gold?

I have a reason. I have been writing every month that people should accumulate gold. Yes, there is more room for gold to appreciate further. Most people do not own gold. Most people think gold prices are very high.

Today, the gold price is cheaper than in the 1980s when it was around $400 an ounce, considering the increase in global monetary base and the US money printing.

Will that hold true for silver, too?

Gold and silver will move in the same direction, but I prefer gold, though I have friends who prefer silver.

What will drive the gold price?

Gold bottomed out in late January and peaked out on August 23. My first thought was that the closely correlated move between treasury bonds (T-bonds) and gold was illogical.

Then, I considered that investors panicked into T-bonds because of a scare that the financial system would implode (flight to safety). For the same reasons, investors rushed into gold. In other words, the gold buyers were not buying gold because of inflation fears but because they were afraid of a systemic failure.

I think it is important for investors to understand the role of gold as an insurance against a systemic failure and not necessarily as a hedge against inflation. I should add that I own gold for both reasons, believing that it will perform well in both an inflationary and deflationary environment.

In addition, I am not selling any gold but traders should realise the gold price is extremely overbought and that it could easily drop toward the 200-day moving average that is, between $1,500 and $1,600 (not a prediction).

As I just said, I am not selling my gold because I expect much higher prices in future. But, near term, both T-bonds and gold appear vulnerable to a more serious correction.

Source: http://www.rediff.com/business/slide-show

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Growth expected in the 2nd half of 2011!!

A Chief economic adviser predicts substantially by saying that the Indian economy will accelerate in the coming second half of current fiscal year!! He called this as a possibility even after the dead effect of the GDP growth of 7.7% in the first quarter of this year.

Though he has predicted the growth to be evident, but he has even claimed that this growth is not going to be very high.

He has asked everyone not to keep extremely high hopes for the coming quarter but he wants to be optimistic for the third and the fourth quarter, expecting a substantial rise.

He said, the economy grew only by 7.7% in the April to June quarter as the manufacturing sector had a poor performance in that period, while in the previous year there was an 8.8% growth in the same period. In the quarter ending of June, 2012, the growth in manufacturing sector had dipped to 7.2%, compared to the 10.6% growth in the previous year.

You Need to Worry: Gold Prices on an All Time High!

Gold may be a glittering investment opportunity on account of a sustained upward spiral in prices, but the meteoric ascent has brought tears to many families in Kerala, where gifting ornaments to brides for their marriage is a common practice.

With gold breaching the Rs 20,000-mark for a sovereign recently, market figures show there has been no let-up in retail buying, as gold is an integral part of marriage, cutting across caste and community divides in Kerala.

According to market leaders, an average of 60-70 tonnes of gold is sold annually in the state, contributing around Rs 200 crore (Rs 2 billion) to the state exchequer in tax.

"We see many touching scenes these days like parents of prospective brides breaking into tears at jewel shops finding their plans and calculations going awry," a source confirmed.

On the other hand, market statistics show that the soaring prices have made the metal a reliable investment option for the rich.

The steady march of gold price has raised investors' interests in the precious metal. The number of people seeing gold as a safe investment option is increasing.

The investors prefer coins, 24-carat biscuits and pure gold bars over ornaments.
Gold crossed the Rs 10,000 per kg mark in October, 2008, after which it has continued to gain ground, with its value almost doubling in three years.

"The demand for gold coins and bars is at an all-time high in the Kerala market.

"This shows the number of people considering gold as a better investment option has gone up.
Traders have come out with strategies to ensure that the increasing prices do not dent demand.

Major jewellers in the state have launched schemes like 'advance booking', which offer delivery of gold at a future date at the prevailing rate on the day of booking.

The recent developments in the US economy and problems in the euro zone are the major reasons for the spurt in gold prices.

Cases of parents becoming bankrupt and even being driven to suicide after running into an inextricable debt trap have also been reported.

"We fear the present gold price hike will add to the woes of the parents of girl children in the state,"is a cause of concern for all.

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Source: http://www.rediff.com/business/slide-show

Mysore Maharaja's Rolls Royce - Up For Auction!

The era when the Maharaja’s galloped on chariots and horses, the Great Maharaja of Mysore, Krishna Raja Wadiyar IV was vrooming in the gorgeous Rolls Royce which even the animals envied.

16^th September, Bonhams London, will hold an exclusive auction where this beautiful machine, which just grows younger by the years will be auctioned. It is estimated to fetch about 4 Lakh pounds. A justified number for this blue blooded machine whose owner was one of the wealthiest man who died with a personal fortune of over $400 million in his time.

They have priced the quality and its ability to endure the road conditions of India. This was displayed at the Delhi Durbar celebrations of King George V in 1911 which included many cars for sale that could be used for the honoured guests and the Maharajas themselves at that time.

The beautiful RR Silver Ghost was passed to the maharaja of Mysore and was decorated by the coat of arms of the Maharaja himself.

Along with this, the second Silver Ghost which will be auctioned by Bonhams is recognized from 1908 and is one of the four models from that very year. Another car restored from the 1990’s by an Irish man is a three row seated RR built by Labourdette, a illustrious coach maker.

Another master piece which was used at Brooklands as a test vehicle for the International Touring Car Trial and is estimated to be auctioned to an amount upto 4 Lakh 25 Thousand Pounds.

Source Link- http://www.rediff.com/business/slide-show

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Increasing EMI and government to the rescue

Another hole in the common mans pocket with an ever increasing rate of interest!! To ensure some comfort to this critical situation the government has stepped into the picture. There was an official letter sent to public sector banks by the ministry, asking them not to increase the EMI rates and levy burden on borrowers which has affected their capacity to their loans.
The ministry even suggested them to increase the tenure instead of increasing the EMI against all kind of loans.
In the time of economic slowdown and high inflation, the banks need to be more cautious while increasing the interest rates. This was said to an MD of a midsized public sector bank by the finance ministry.
The banks increased their rate by almost 300 basis points due to the policy rate rise by the RBI and the Apex bank raised policy rates 11 times in 16 months to resist inflation.
The central bank had questioned the asset quality of banks as the increase in EMI’s on individuals and the borrowers who had taken loans at a floating rate could get affected. They want them to increase the tenure period instead increasing the rate of interest which would give them more time and avoid default.
The public sector banks claim to have an increase in Non Performing Assets in the current financial year. As per the RBI data, personal dues were about 7 Lakh Crore as on 17th June which is about 17.3% more compared to previous year.

The World This Week: Aug15 - Aug19' 2011

The World This Week:Aug15 - Aug19'2011

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Investment Techniques For NRI’s

The Indian Law doesn’t permit the Non-Resident Indians to possess regular savings accounts in India. A certified financial planner recalls a case where an NRI wanted to continue his savings a/c as he wanted to receive interest on it.
It is advisable to either close the account or change it to NRE or NRO accounts as the interest on these accounts is equivalent to savings account.

An NRE account allows you to only deposit foreign funds. This amount or any interest earned is Tax free and on the other hand, an NRO account allows you to deposit any amount earned in India. But not more than 1 million $ can be repatriated in a year and t is taxed flat at 30%.

NRI’s cannot resident FD’s. A joint account holder from the family has to notify to the bank about the status. If not this, then they may be asked to make a fresh account and break the previous one. Since January 1st 2011, with KYC for MF’s is made compulsory for all MF investor and the KYC’s need to be renewed even though the investments are regular.

A financial expert explains that, as the residential addresses would change, link your investments to NRE and NRO accounts. They must submit certified copy of passport and overseas address. Proof of identity or address in foreign language has to be translated in English. The documents can be attested by the consulate office or overseas branches of banks registered in India.

NRI’s cannot open a Public Provident Fund. They can hold the account till maturity or extend it every 5 years and twice thereafter.

The interest or dividend on investments in India will always be taxable as per the Income tax Act. There will be Tax exemption on PFF investments will continue in India.

An NRI needs to be present at the time of renewal as per the law. This is because he needs to do the paperwork for change in status. The privilege of renewing policies online is only for the residents of India or a safer way is to transfer the policy to the foreign partner.

NRE- Non Resident External
NRO- Non Resident Ordinary
MF- Mutual Fund
KYC- Know your customer

Source- http://www.rediff.com/business/slide-show
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Simple Explanation : European Debt Crisis

"So where were you?" asked my roommate as I came back home very late in the night.

"Oh. You know na, Sheena broke up and she just kept crying. So I was trying to pacify her," I replied.

"Yeah. But that happened a month back, na?"

"Yeah it did."

"So?

"Arrey, the teddy bear which he had given her on her last birthday fell out of the loft. And this reminded her of all the good times they had spent together and it made her cry."

"Yeah. As a line in the song Hotel California goes, ". . . you can check out anytime you like, but you can never leave," she remarked rather philosophically.

"Hmmm. You know her situation reminds me of what is happening in Europe."

"In 1958, an organisation called European Coal and Steel Community was formed. This evolved into the European Union (EU) which was established by the Maastricht Treaty in 1993. The European Union introduced the euro on January 1, 1999. On this day, 11 member countries of the EU started using euro as their currency. It benefited countries such as Portugal, Italy, Ireland, Greece and Spain (together now known as the PIIGS)," I said.

"So how did it benefit them?" she ased.

"Before these countries started to use the euro as a currency, they had to borrow money at interest rates much higher than the rates at which a country like Germany borrowed. When these countries started to use the euro they could borrow money at interest rates close to that of Germany, which was economically the best managed country in the EU," I explained.

"As the famous American writer Michael Lewis says in a recent piece, 'The rest of Europe, in effect, used Germany's credit rating to indulge its material desires. They borrowed as cheaply as Germans could to buy stuff they couldn't afford,'" I added.

"Ah, sounds like our neighbours. They keep buying stuff they cannot really afford," my roommate said.

"Also other than the low interest rates, the inflation in the PIIGS countries was higher than the rate of interest. As John Mauldin and Jonathan Tepper write in Endgame -- The End of the Debt Supercycle and How it Changes Everything, 'In plain English, that means that if the borrowing rate is 3 per cent while inflation is 4 per cent you're effectively borrowing for 1 per cent less than inflation. You're being paid to borrow,' I said.

"'And borrow they did. And the European peripheral countries (PIIGS) racked up enormous amount of debt in euros.' Take the case of Greece, their debt currently amounts to around 160 per cent of their GDP," I added.

"But what's the connection you are trying to make?" she asked.

"Have some patience, my dear. So, other than the citizens, the governments also started to borrow. This helped politicians keep their constituency of voters happy," I went on.

"Take the case of Greece. A job which now pays 55,000 euros in Germany, pays 70,000 euros in Greece, even with the fact that Germany is a more productive nation. As Lewis writes, 'To get around pay restraints in the calendar year the Greek government simply paid employees a 13th and even 14th monthly salary -- months that didn't exist.'"

"Now that's hilarious," exclaimed my roommate, now quite interested in what I was holding forth on.

"There is more to come. The Greek government categorises certain jobs as arduous. These jobs have a retirement age of 55 for men and 50 for women. 'As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, musicians ' write Mauldin and Tepper in Endgame."

"That's some fraud going on," she frowned.

"Yeah, and it means more and more borrowing by the government, when they already have so much debt," I said.

"But that's just one country you have talked about. What about others?" asked my roommate.

"Take the case of Spain. Spain had the biggest housing bubble in the world. "To put things in perspective, Spain now has as many unsold homes as the United States, even though the US is six times bigger. Most of these new homes were financed with capital from abroad," write Mauldin and Tepper. Spain's real estate debt comes to around 50 per cent of its GDP," I explained.

"So with so much debt going around, why aren't countries defaulting?"

"Oh, every time there are default threats, the European Central Bank (ECB), helps out with a bailout. As Lewis writes, 'Since the start of the financial crisis it (the ECB) has bought, outright, something like $80 billion of Greek and Irish and Portuguese government bonds, and lent another $450 billion or so to various European governments and European banks, accepting virtually any collateral, including Greek government bonds. Of the 126 countries with rated debt, Greece now ranked 126th: the Greeks were officially regarded as the least likely people on the planet to repay their debts,'" I said.

"So basically they keep paying the governments so that they don't default?" she asked.

"The situation is pretty messy because it is interlinked. Take the case of Germany, which keeps contributing the ECB rescue fund. 'The German government gives money to the rescue fund so that it can give money to the Irish government so that the Irish government can give money to Irish banks so the Irish banks can repay their loans to the German banks,' writes Lewis. In case of Greece, a lot of German and French banks which have lent money will be in trouble if Greece defaults."

"That's some connection. But wouldn't it be easier for the German government to just pay the German banks separately, instead of taking this long and convoluted route?" she asked.

"Yeah, you have a point there. There are more such cases. Take the case of Hungary. In 2004, interest rates in Hungary were at 12.5 per cent. This meant borrowing money was extremely expensive," I said.

"'In neighbouring Austria, the banks had started to offer loans and mortgages to their customers in Swiss francs. Rates in Austria, at 2 per cent, may have been lower than in Hungary, but in Switzerland, they were even lower at around 0.5 per cent. Why would Austrians borrow at 2 per cent when they could just as easily borrow at 0.5% per cent?' write Mauldin and Tepper," I quoted.

I went on quoting Mauldin and Tepper: 'The same question applied to Hungarians, except that the difference was much bigger. So the Austrian banks, many of which also had branches in Hungary began to engage in the same business there, lending to Hungarian borrowers.'"

"Of course, now Austrian banks have lent 140 per cent of their GDP to countries like Hungary. Even though Hungary has put in austerity measures and is trying to repay, if there was a blow up, the Austrian government wouldn't be able to save the banks and ECB might have to step in," I said.

"Similarly, Swedish banks have also lent a lot of money to Estonia, Lithuania and Latvia, countries which aspire to have Euro as their currency some day," I added.

"So it's all connected to one another?" she said.

"Yeah, it is."

"But can't countries get out of the Euro and go back to their own currencies and then print money to repay their creditors?" she asked.

"The thing is that the mechanics of leaving the euro are very messy. Also going back to your own currency might lead to other problems for a country. When countries go back to their own currencies to print it and repay debt, citizens will be concerned," I explained.

"Why will they be concerned?" she asked.

"Simply because when a country prints currency in huge quantities, the currency will not remain of any real value. So the citizens of the country will try and move their money to either other assets like gold, or will continue using the euro," I said.

"This will lead to bank runs, with all the people queuing up at banks at the same time demanding their money back. This, of course, will lead to a lot of banks collapsing," I explained.

"Yeah, that makes some sense," she nodded.

"Mauldin and Tepper elaborate on this using the example of Italy. 'Households and firms, anticipating that domestic deposits would be redenominated into the lira (Italy's currency before it started using the euro), which would then lose value against the euro, would shift their deposits to other euro-area banks. A system-wide bank run would follow. Investors anticipating that their claims on the Italian government would be redenominated into lira would shift into claims on other euro-area governments, leading to a bond market crisis. . . this would be the mother of all financial crises,' write the authors," I told her.

"So what's the moral of the story?" she asked.

"Oh, that's simple. Relationships are easy to get into, but very difficult to get out of," was my quick response.

"That is quiet an analogy. Kindly explain!" she said.

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source: http://www.rediff.com/business/slide-show/slide-show

The World This Week: July 25th - Jul 29th ' 2011

The World This Week: July 25th - Jul 29th ' 2011

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Do you know it all about - Electronic Clearing Service?

ECS is an electronic mode of funds transfer from one bank account to another.It can be used for making payments such as distribution of dividend interest, salary, pension, among others.

It can also be used to pay bills and other charges such as telephone, electricity, water or for making equated monthly installments payments on loans as well as SIP investments. ECS can be used for both credit and debit purposes.

How do you avail of an ECS scheme?

You need to inform your bank and provide a mandate that authorises the institution, who can then debit or credit the payments through the bank.
It is the responsibility of the institution to communicate the details of the amount being credited or debited to their account, indicating the date of credit and other relative particulars of the payment.
The ECS user can set the maximum amount one can debit from the account, specify the purpose of debit, as well as set a validity period for every mandate given.

What are the processing or service charges levied on the customer?

The Reserve Bank of India has deregulated the charges to be levied by sponsor banks from institutions. Destination bank branches have been directed to afford ECS credit free of charge to the beneficiary account holders.

How do you discontinue an ECS scheme?

There are two steps you have to follow to ensure appropriate closure.

Step 1 : The service provider, which is the beneficiary of the payment, will have to be given a written communication in the way stipulated by them, in order to discontinue the services.
Step 2: The bank, which is the channel of payment, will also have to be given a written application stating you would like to discontinue.

Source: http://www.rediff.com/business
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India 2012 – A trillion dollar wealth management market

Indians will have one trillion dollars worth investable wealth by 2012, with the country’s robust economic growth driving a four-fold surge from just about 250 billion dollars in 2007.

According to a report by international consultancy firm, India is set to become a huge hunting ground for wealth managers with the number of their potential clients and size of manageable wealth both expected to grow four-times through 2012.

The wealth management market will have a target size of 42 million households by 2012, as against just about 13 million in 2007, noted the report titled ‘Overview of the Wealth Management Market in India’.

“The wealth management sector is poised to witness tremendous growth. India’s economic growth is making larger sections of the population prospective customers of wealth management providers,” report claims.

The growth would be seen across all income-levels, but the lower-income segment would record the maximum growth in terms of volume, while high-networth households would contribute the most in terms of wealth size, it noted.

“There is an increasing momentum towards structure in this previously chaotic domain. We should expect some very India specific innovations in the near future,”added the report

The market is currently dominated by unorganized players, whose share is 1.5 times that of the organized market. However, a structural change is taking place and organized players are drawing clients away from the unorganized players.
Wealth management revenues are expected to contribute 32-37% of the total revenue of full-service financial institutions by 2012.

According to the report, mass-market (Rs2-10 lakh of disposable income) would be a key driver, accounting for 40% of the overall growth in the number of households.
A majority of wealth managers, except niche players, would target the mass market because of its youth-dominance and this market would see more service providers entering the fray with a ‘own them young’ policy.

Besides, 10 lakh new households would join mass-affluent category (Rs10-50 lakh), taking their population to 18 lakh by 2012. However, a vast majority of 39 million households, out of the total 42 million target market population in 2012, would belong to the mass market (Rs2-10 lakh).

Private banks, independent financial advisors and full service brokerages would serve the high networth segment, while ultra high networth households would be served by private banks and family offices.

Source: http://www.livemint.com
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Did you know - Six things about arbitrage funds?

Arbitrage is a strategy that consists of concurrent buying and selling of equal or comparable securities from at least two markets in order to profit from the variation in their prices.

What makes this strategy risk-free is the fact that both buy and sell transactions precisely balances each other, thus making them invulnerable to market swings.

• Arbitrage funds are mutual fund schemes that invest in the equity markets to benefit from mispricing situations in the stock, cash and derivative markets.

• These funds buy stocks in the spot market and sell in the derivative market to earn from the difference in pricing.

• The returns from these funds typically reflect the current short-term interest rates in the market.

• The returns from arbitrage funds mainly depend on the availability of arbitrage opportunities.

• During periods of market volatility, greater price anomalies are more likely and these funds tend to generate good returns.

• Arbitrage funds attract a short-term capital gain tax of 10% and are tax-free if held for a period of more than one year.

Source: http://economictimes.indiatimes.com/personal-finance
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Myths Busted: E-filing of IT Returns

E-filing of income tax returns was introduced by the income tax department couple of years ago. Using e-filing is a simple and very easy way of filing the return for everyone.

Statistics prove only 16% of tax payers file their return through e-filing while the rest of the taxpayers take the conventional physical route.

Even in large metros where the accessibility of the Internet is very much, only 30 to 35 %of the taxpayers opt for filing their taxes online.

Myth: Need digital signature for e-filing the income tax return.
Reality: You need digital signature only when you file your return completely online. You don't need one if you e-file your return and then post a signed ITR V form to the income-tax office in Bangalore.

The new rule, which requires a taxpayer to send the ITR V by post within 120 days, has made the submission process very simple and convenient.

Myth: More chances of scrutiny for the electronically filed returns.
Reality: This is purely a fictitious assumption.
Every year income tax department pulls out random list of people to scrutinise. Whether the person has filed income tax returns electronically or through traditional paper filing method have no bearing on this list.

In fact, digital filing can help in automatically tallying returns particulars filed by you and that filed by your employer, banks and other financial institutions.

Myth: E-filing costs while physical return doesn't cost anything.
Reality: E-filing through the government site is free but it's difficult to use in terms of usability.

Others offer various packages.
Alternately a lot of people utilise the service of tax professionals and chartered accountants which may be much more expensive. Also, consider the cost of your time and the environmental cost that mother earth pays for every return that is filed physically.
E-filing is also an environment-friendly way.

Myth: Cannot revise the return if filed electronically.
Reality: E-filed returns can be revised in the same way as those filed in any other manner. All e-filing portals allow you to file revised tax returns.
Myth: E-filing is unsafe.

Reality: All registered e-filing portals send the tax returns uploaded by assesses to the Income Tax Department.

Conclusion
E-filing has made filing of income tax returns so simple and easy that any individual can file her/his return any time anywhere by just few clicks. You only need to fill a simple form and submit.
Source: http://www.rediff.com/getahead