Are the physical Gold SIPs offered by Jewellers worth the money?

I have been seeing a frantic rush to buy gold, both in physical and in electronic forms over the last couple of years. It is natural for investors to use gold as an investment avenue when we go through inflationary conditions, as we currently do. Thanks to huge bailouts packages starting from the 2008 bailout of financial institutions to the latest bailout of Greece, there is a huge influx of paper money into the world economy. This in turn drives the erosion in value of various financial assets like stocks, bonds etc., but an asset like Gold is believed to retain value. This is true according to the classical economic theories and validated by our forefathers who bought nothing but gold whenever they had money. From all aspects the clamour for gold has been increasing among the investing community. The price of the gold has also moved up in tandem over the last couple of years.

Sensing a big business opportunity is the Indian Jewellery community which is now vigorously marketing the systematic investment plan in physical gold. Almost all the jewellers in Chennai have launched schemes where people can invest a specified amount of money and the equivalent amount of gold would be credited to their account at the prevailing rate. The jewellers sweeten this deal by foregoing the traditional making charges and wastage. The jewellers market this scheme by informing the gullible investors that the price at which gold they bought is protected for future price escalations. Their basic assumption is that the "price of gold would continue to raise forever". One of the basic tenets of economics is that nothing can keep raising forever and what goes up has to come down sometime.

There are number of questions which crosses my mind:
1. Lack of regulations: Who regulates these jewellers with regard to these systematic investment plans? The answer is nobody regulates them and nobody independently certifies that the price at which the gold is alloted to investors are in alignment with the market price.
2. Credit worthiness of the jewellers: These systematic investment plans are long term products running for 12-18 months and exposes the investors to default risk. They have nothing else to fall back upon other than the empty guarantees of these jewellers.
3. Price risk: One of the biggest risks is what happens tomorrow if the price of the gold crashes to pre-2008 levels? In my opinion this is one of the biggest risks associated with these schemes. You may ask how it is different if I buy gold today at high prices and subsequently the price goes down? Good question, but the answer is the gold you buy today is a bird in hand compared to these schemes where you just pay the money to the jeweller and expect him to honour the committment after 24 months or so.
4. Lack of transperancy: Normally, for these type of transactions, the seller has to properly hedge their positions in the gold market. But we don't know if these are being properly done by the jewellers on a daily basis. Also, I am afraid they dont mark to market their losses if any and account it in their books of accounts. I think I am sounding too naive to expect our Indian Jewellers to do this prudent accounting. First of all, let them account all their sales!
5. Risk of over-trading in commodities/derivatives exchange: If we assume that the jewellers try to hedge their positions in the derivatives market, then there is a risk of over-trading in the derivatives market by the jewellers. We have seen many instances in the past when the traders have literally lost their shirt by excessively trading on the commodity derivatives market. Very recently, there were press reports of the promoters of KS Oils losing huge money by trading in the palm oil futures.

So, overall there are huge risks assumed by the people who go for this systematic investment plans with jewellers and it is better to avoid them altogether. If you want to buy gold, just buy it over the counter rather than joining a scheme like this.

New Product - Mutual Fund based ATM card

Reliance Mutual Fund has introduced the first of its kind "ATM" card linked to Mutual Fund Folios in association with Visa. This is a new concept with regard to Mutual Fund investments and this may ultimately take us closer towards Investment accounts with Cheque book facility.

In this new product, Reliance Mutual Fund would issue ATM card, which you can use like any other bank debit card and it is accepted across 30 million outlets. The ATM card holder should be holding units in Reliance Money Manager Fund or Reliance Liquid Fund - Treasury Plan schemes.

At this stage, we have limited information on this product but we see the following benefits:

1. Flexibility in monetising the mutual fund investments and the ability to carry the value of your liquid investments in an ATM card would be very useful.

2. Possibility to earn higher interest on the liquidity funds as compared to savings bank account. With the recent de-regulation of savings bank interest rates, the difference on yields between savings bank accounts and MF liquid fund investments are reduced.

Clarifications required in the following areas:

1. The modus operandi on the reduction of the units for the usage on the ATM card. What is the expected lead time before the number of units would be reduced?

2. Do they block the equivalent number of units as and when a transaction takes place?

3. Does this service involves any additional charge to MF investors?

These are early days but I think we require new and innovative products like this to liven up the financial services space. We can expect a slew of launches on the same lines from other Mutual Fund players in the coming months, if not in the coming weeks.

Will post more as we are able to lay our hands on additional information.

De-regulation of Savings Bank interest rates

The major development during the last week was the de-regulation of the savings banks interest rates of banks in India by the Reserve Bank of India. This is one of the last of administered interest rates in the banking industry and which has an impact on both the parties involved, the customers and the banks. We wholeheartedly welcome this move of Reserve Bank of India as it would lead to finer pricing of savings bank deposits to the customers.

Savings Bank deposits are the most common of the banking relationship the customers have with their bankers. Around 20 to 25% of the banking deposits are in Savings Bank accounts. So what does the de-regulation mean in layman terms? RBI has now allowed banks in India to offer an interest rate which is not mandated to them. They are free to price their savings bank interest rates to attract new customers. RBI has mandated two slabs, for SB account with balances less than Rs100,00 and SB accounts with balances more than Rs100,000. The banks can offer differing rates for these two categories, which I think is very logical. Couple of banks have already raised their SB interest rates. Yes Bank was the first of the block, raised its SB interest to 6%. More banks are expected to follow suit in the days to come.

How does it benefit the customers? The balance lying in the SB account would get higher interest with effect from the Q3 of 2011-12 Financial year. But the customers should also note that with the freeing of interest rates, the interest rates can also go down as and when we see a cheap money policy. That is, when the overall interest rates come down, the SB interest rates would also be coming down and there is no floor stipulated by RBI. Just like the FD interest rates are ruling high currently, the SB interest rates would also be high and may even go up to 7% or so in the coming months, but with inflation coming down (RBI expecting this to happen in Q4) the interest (repo) rates would also come down. Along with that, SB interest rates would also come down. So it is no longer going to be one way street!!

So the point to be noted here is that there is no minimum guaranteed interest rates on SB deposits going forward. This makes it very important for people with high SB account balances to actively manage these funds for better returns. It is not sufficient to just leave it in SB accounts to earn these high interest rates forever.

There would be initial euphoria for this announcement and I expect a flurry of announcements by banks trying to entice customers. There would be increased pressure on the margins of the banks which has a very high quantum of SB account balances, like HDFC, SBI etc., As a result the cost of funds for the banks would increase proportionately to the ratio of Savings Bank accounts in their deposits.

Banks are smart and they would definitely try to pass on this increased cost of funds to the customers in a different manner. They would restrict the number of transactions allowed in a savings bank account per quarter, number of branch visits and anything above the allowed limit would be chargeable for the customers. There is no free lunch in the system!

But over a period of time, the impact on banks because of this new regulation would even out. Actually, in my opinion, banks would stand to gain in the long run. The interest rates would come down but the transaction charges and the limits imposed would remain for the customers. Gain in the short term but its going to be pain in the long term for SB account holders. I wish I am wrong here!!!!

Pre-Payment Penalty on Housing Loans and Discriminatory Pricing between Old and New Customers

During the last week, two significant circulars were issued by the National Housing Bank, the apex regulator of Housing Finance Companies in India. The gist of the circulars are as follows:

1. Housing Finance Companies are not allowed to charge pre-payment penalty on closure of floating rate loans irrespective of the source of funds to close the housing loans.

2. Housing Finance Companies are not allowed to charge pre-payment penalty on closure of fixed rate loans, provided the loan is closed with own funds. That is, the customer is not borrowing from other Housing Finance Companies or banks or NBFCs to close his fixed rate housing loan.

3. Thirdly, the housing finance companies are not allowed to charge differential interest rates for old and new customers on their floating rate loans where the credit/risk profile.

Frequently Asked Questions:

When does these provisions take effect?

It is effective immediately. That is, from 19th October 2011.

What are these Housing Finance Companies?

Few examples of HFCs are HDFC Ltd., LIC Housing Finance Ltd., Dewan Housing Finance Ltd., Gruh Ltd., REPCO Housing Finance Ltd.,

Does this new rule apply to banks like SBI, AXIS, ICICI?

No, it applies only to HFCs. Banks are regulated by Reserve Bank of India.

Can we expect the same set of rules to be enforced for Banks in the near future?

Yes, RBI is working on a similar kind of rules for housing loans issued by Banks. Our guess is it should happen as soon as possible.

Does this new rule apply to part-payment of housing loans?

Though it is not specifically mentioned in the NHB circulars, it is very logical to assume the same set of rules for part-payment of housing loans. So, there won't be any penalty for part-payment of either fixed or floating rate loans out of own funds.


Who should make use of this new set of pre-closure rules?

Having high balance in Savings bank account but paying high interest on their housing loans fearing exorbitant pre-closure charges, should be first set of people who must take advantage of this new provision.

Whom should I contact if my HFC doesn't allow pre-closure of loans without penalty or if there is discriminatory pricing?

You should contact National Housing Bank.

Special Demat account for non-equity holdings

We have always felt the need for a demat account which can help people to hold on to various financial instruments, like Mutual Funds, Debentures, Non-convertible bonds, Deep Discount bonds etc., who don't normally invest in direct equities. There is a huge section of people who desist from investing in equities but would like to hold other debt and MF instruments in demat form. Off late, we are also seeing an increasing tendency among the issuing companies to go for electronic form of holding these debt instruments as it makes their lives easier.

Sensing this requirement correctly, Integrated Enterprises have come out with a special purpose demat account to hold these non-equity financial instruments at a very nominal cost of a refundable deposit of Rs1000/-. Integrated Enterprises claims that they would not charge any other charges during the lifetime of the account, which makes it all the more interesting.

Key features of this demat account are:

• You can maintain all existing Mutual Fund units in the Demat account.
• Demat account is compulsory for investing in Corporate Bonds/NCDs. There is NO TDS, ONLY if you maintain them in the Demat mode.
• Demat account is compulsory for investing in Gold ETFs.
• You can invest & maintain Long Term Infrastruture Bonds (with income tax benefit 80-CCF) in the Demat account

We think this is a significant development for small and retail investors and it also helps to further deepen the reach of these financial products.

For more information, you may please visit their website.

Happy Investing!!

Disclosure: The above information is collected from the publicly available information disseminated by Integrated Enterprise and shared on this blog without any obligation. We don't have financial or business dealing with Integrated Enterprise. Please check their terms and conditions carefully before concluding any transaction.

Welcome back!!

We are back online after a 2 year hiatus. We know, this is quite a long period to be away, and we would try to be more regular going forward.

Wish you all a very happy reading!!

Co-operative societies and stamp duty evasion issue

In the last 3 - 4 years, lot of co-operative societies in Tamil Nadu has promoted and marketed many housing plot lay-outs. The chief attraction of these lay-outs are the waiver of stamp duty of 9% at the registration of these housing plots. Using this effectively, many co-operative housing societies have sold plots to investors and end-users over the last so many years.

Whats the catch here?

As per the Government regulations, the waiver of stamp-duty is available only in respect of housing plots laid out on the land owned by the Co-operative society. The Co-operative Society is supposed to follow the following process:

• Pool resources from the members
  
• Purchase a piece of land and register it in their own name
  
• Sub-divide it into housing plots and get the necessary approvals
  
• Allot the sub-divided plots to its members
  
• Register the plots in the name of its members with the stamp duty waiver
  

What went wrong in this case?

Instead of Co-operative societies buying land and sub-dividing them into housing plots, they started marketing the land owned by other individuals/promoters for a commission. They offered the prospective buyer stamp-duty exemption in respect of the plots which are only marketed by them for a commission but not owned by them. The buyer of the plot enjoys stamp-duty waiver, owner of the land is able to sell fast and the co-operative societies were making their money through commissions from the land owners.

Who is the loser here?

The state Government. The Governmnet of Tamilnadu has now woken up and stopped all registrations of plots which are just marketed by Co-operative Societies by its order dated 05 Oct. The Government estimates that the revenue loss of close 400 crores over the last 5 years or so.

What would happen now?

The Government has found out that there are atleast 20 lay-outs near Chennai, another 5 layouts in Coimbatore are currently being sold under this route. The Government may order for an audit of the past registrations and issue a stamp-duty demand notice on the current and erstwhile property owners.

What we should be careful about?

If you are currently in the look out for a plot of land promoted by a co-operative society, be careful when somebody tells you there is a stamp-duty waiver in respect of the property. Ask and clarify from the co-operative society if the stamp-duty waiver is applicable to that particular lay-out which is being promoted by them and if possible, seek documentary evidence of the same. You can also check and ensure that the land is owned by the co-operative society and the registration is done with the co-operative society as the seller.

Caveat Emptor!!