Your I-T returns may require disclosure of all assets

The intention was mainly to get information about those HNIs who had not been paying wealth tax

Many high-networth individuals (HNIs) have not been declaring all their assets to avoid paying wealth tax. That bliss is set to end soon, with the finance ministry planning to make it mandatory for individuals and Hindu undivided families (HUFs) to report assets and liabilities in income-tax (I-T) return forms.

Senior officials in the ministry said this could be notified soon. "Last year, reporting of assets and liabilities was made mandatory for individuals with foreign assets. This year, it might be extended to Indian assets," said an official.

The official added the intention was mainly to get information about those
HNIs who had not been paying wealth tax. This year, wealth tax collections are likely to be Rs 866 crore - much less than the Budget estimate of Rs 1,244 crore. For 2013-14, the finance ministry has set a collection target of Rs 950 crore.

While declaring the assets, the individual or HUF might have to provide the value of assets on the basis of acquisition cost. For instance, if a house or car was bought in 1998, the cost of the property or the vehicle at the time of purchase would have to be mentioned.

Last year, the new disclosure for foreign assets was introduced in ITR2, ITR3 and ITR4, wherein the government asked whether the taxpayer had "any asset outside India or signing authority in any account located outside India". Individuals with foreign assets cannot file ITR1, which is used by individuals with income from salary/pension, one house and income from other houses. The disclosure provision for domestic assets might be made in all four ITR forms.

This proposal is primarily aimed at checking tax evasion and boosting collections. In the Union Budget, the government has levied a surcharge of 10 per cent on annual taxable income above Rs 1 crore and imposed tax deducted at source on transfer of immovable property costing more than Rs 50 lakh.

Wealth tax is charged at one per cent of the value of assets exceeding Rs 30 lakh and does not include one residential property and financial assets.

Source : BS

Five insurance covers worth taking a look at

Insurance is possibly the best financial tool to protect yourself as well as your valuables from unforeseen circumstances. In fact, you owe it to your family to get the best cover you can afford. However, while it pays to be smart about insuring your family and your valuables, it is even wiser to make out which policies are truly worthwhile, and which ones are redundant - particularly in such times when you can get insurance for almost everything on earth, including your wedding.

You definitely need to know that while each insurance cover has its own benefits, not all of them are needed in normal circumstances. Also, there are lots of insurance policies that use scare tactics to lure you in, and have premiums that are overpriced. Therefore, you need to be selective in choice.

Here we take a look at some types of insurance policies everyone should take into account:

1. Life Insurance

In today's world your top priority should be to insure your life first, particularly if you have financial dependents. That is because it is not wise to leave your dependents without any financial protection in case something untoward happens to you. But you should avoid going for Expensive insurance plans as that would be costly, which will also make it difficult to cover your life adequately. Therefore, a viable and much better option would be term insurance.

Term insurance, in fact, is a no-frills, low-cost option to secure financial security for the family, and therefore should preferably be there in everyone's insurance portfolio. "Term insurance is a 'must-have' if you have a family that is financially dependent on you and if you are the primary source of income for your family. There's never really a good time to die, but dying during one's earning years is particularly burdensome to those who depend on us for income and support. Not having you around in such a scenario can impose a significant financial burden on your loved ones, especially if you have outstanding liabilities as well such as home loans, car loans etc," 

However, term insurance may not be necessary if you are single with no financial dependents and having limited or no liabilities.

2. Personal Accident Cover

Even if you are not keen on taking life insurance, you should at least take a personal accident policy. Personal accident cover basically covers the risk of accidental death and permanent total disablement, and is a good choice to supplement a life Insurance policy. The best part of it is that it is the cheapest cover for self protection and can be taken even by those whose income is low or cannot qualify for life insurance due to medical issues. 

Personal accident cover is also recommended in the early stages of life when one has just started one's career and there is no need of insurance cover as the likelihood of death from natural causes is way too low to require a financially unencumbered person to take on life insurance. The more compelling insurance need at that stage is for a personal accident cover which covers the risk of accidental death.

"Persons below the age of 40 have a bigger risk from death and disability due to an accident compared to any other risk. Disability for a young person can be a bigger tragedy than death. Personal accident insurance provides an extremely low cost option of covering this risk".

3. Critical Illness Cover

Even if you don't have a health cover, you should go for a critical illness cover, if you are a middle-aged person. By opting for this cover, you can insure yourself against the risk of serious illness in much the same way as you insure your car and your house. Under this cover, a guaranteed cash sum is paid if the unexpected happens and someone is diagnosed with a critical illness such as cancer, stroke and kidney failure. The benefit amount is payable once the disease is diagnosed meeting specific criteria and the insured survives 30 days after the diagnosis.

Critical illness cover, in fact, is a very important cover for persons who have crossed 45 years of age. "Although a health insurance policy covers hospitalization expenses, critical illness involves a lot of expenditure even when the person is not hospitalized. Expensive medicines and diagnostic tests, regular doctor visits, special diets etc. add up to a lot of money. A critical illness policy provides financial stability by providing upfront money to the insured for all the treatment".

4. Home Insurance

Your home is not just your most valuable asset, it's your safe haven from the world outside. However, while your home cocoons you and your family, it's your responsibility to see that nothing untoward happens to the building and its contents. Therefore, insuring your home is as essential as ensuring that it has strong foundations.

A home insurance policy, also known as householders' insurance, is the best bet to safeguard your house because "it not only covers the structure of your home but also all its valuable contents from different kinds of perils such as earthquake, terrorism, flood, burglary and house-breaking" .

Besides, "all of us have observed that the weather has become very unpredictable and vicious in the last one decade. The unpredictability of weather, its extremes and increasing crimes in urban areas are reason enough to take this policy,".

5. Auto Insurance

After your dream home, your car remains the second-most prized possession for you. And more value is normally attached to it if it happens to be a luxury car like a BMW or a Mercedes. After all, car buying alone is considered to be a lifetime achievement for many amongst us.

However, unlike other prized possessions, a car is not meant to be preserved at one place and then taken care of. It, instead, has to be run on roads and, most of the time, kept in public places where anything unfortunate can happen to it. It, therefore, needs protection not only from, say, third party liability but also from accidents apart from natural and man-made calamities. And what a better way to protect your vehicle than to give it an insurance cover!

One good thing about motor insurance is that it is mandatory as per law. Under the provisions of the Motor Vehicles Act, all vehicles that ply in public places must have an insurance policy that at least covers 'Third Party Liability' as specified under the Act. But if you really love your car and are not among those who keep changing their cars after every, say, six months, it is better to go for a comprehensive coverage to ensure all round protection.

Source : ET

Why investors should consult professional advisors and stick to suggested asset allocation

Some investors have the tendency to become investment experts overnight, say financial advisors. One fine day, they decide to discard the financial plan and advice given by their financial planners or advisors and make quick investment decisions themselves, mostly based on prevailing market conditions.

This year wasn't any different. Financial experts can tell you stories about clients who didn't invest in stocks as per the original plan because they were pessimistic about the market.

Some clients even liquidated their long-term systematic investment plans (SIPs) in equity mutual funds to invest in gold or real estate because they thought that was the smart thing to do under current market conditions.

However, some of them have already learnt a lesson the hard way. They have got back to their advisors and confessed their strategy has backfired.

"It is a regular phenomenon. Suddenly, someone will feel that the stock market will not perform in the coming year. Then they will think of putting money in bank fixed deposits or gold because these instruments have done well in the past year. People always tend to make this mistake of changing their investment plan based on the market conditions and this year was no different this year too,"

Their are combination of factors which can lead to such a situation. "These investors are literally idiots. They never go to true professionals for advice; they are not ready to pay for the advice. They want free-advice and the advisor, often because of his own frustration, recommends them products that will fetch him a good commission,"

"Advisors are happy pushing High Risk debentures and Unrated Company deposits etc which fetch them more commission . Investors were also happy with the recommendation because the market wasn't doing well. But I will blame only these investors for their plight".

Chasing the returns

A financial planner narrates the story of a client who had last year sold investments worth Rs 40 lakh in equity mutual funds and invested in real estate in her native place.

"The SIPs were meant to create a retirement corpus. Just because someone told her the market won't go anywhere this year and you can double the money in real estate in a year or two. She went ahead and bought the property. Now she is stuck with it," says the planner, who doesn't want to be named.

"You hire a professional to manage your money or for advice because you know that you don't have the expertise or time to do it yourself. Since you also pay for the advice or a plan, why don't you follow it," he asks.

This may be an extreme case, but think of those who discontinued their investments in stocks and diverted the money to bank FDs or gold. They lost a chance to earn 20%-plus return last year.

For example, those who thought the stock market won't offer them any returns in the beginning of the year were disheartened to see the market move up by 22% by the end of the year. Compared to this, gold moved up only by 10% during the period; and those who diverted their money to bank fixed deposits would have managed to get at the most 9%.

This is a real loss of a good opportunity because you don't get that kind of return from any investment every year. "When you are getting in and out of investments based on market conditions, you lose a huge opportunity to make money. It is not easy to predict the market, so it is futile to time the market in anyway,".

Planning for the future

Many Planners asks investors to remember that a strategy or a plan is made with a long-term perspective.

"When you are drawing up a strategy, it is for years to come. We haven't made any changes in the allocation for our clients in the last so many years because of bad market conditions," he says.

"But people's return expectations change with the stock market performance.

For example, everybody has started expecting double-figure returns as the market gained this year. Until then, everyone was happy with singledigit returns," he adds. His solution to the problem: get the right guy, pay a fee for advice and stick to the plan.

"Your advisor wasn't charging you anything because he was indirectly paid by mutual funds. It is not happening anymore. So be ready to pay for the advice and look for a professional advisor. Once you get a plan, stick to it,".


Source : Economictimes 

Why FM wants Insurance Agents to Mis-sell

There’s nothing more thrilling than nailing an insurance company.
                           - Deck Shifflet (played by Danny DeVito) in The Rainmaker

Vivek Kaul(Journalist) Personal Experience :

Around three years back, I suddenly got a call from my bank. “Sir, I am your relationship manager,” the female voice at the other end said. “Since when did journalists start to have relationship managers,” was the first thought that came to my mind. It turned out she wanted to help me plan my finances.

Fair enough. But why did the bank have a sudden interest in planning my finances? I had been banking with them for close to four years and they hadn’t shown any such interest earlier. I checked my bank account and realised that there was a fair amount of cash lying around in my savings bank account. A friend had just repaid some money back and a fixed maturity plan which I had invested in had matured.

So the reason behind the bank’s sudden interest in planning my finances became clear to me. I asked my new relationship manager to come and meet me immediately. I was curious to see what financial plan she had in mind.

What she did not know was that my area of specialisation as a journalist was personal finance. The relationship manager soon turned up and in 10 minutes she offered me the solution to all my financial problems in life, which, as expected, turned out to be a unit-linked insurance plan (Ulip).

The bank she worked for also has an insurance company and this particular Ulip was from that insurance company. I just checked the brochure she had brought along and was not surprised to find that the premium allocation charge for this Ulip for the first year was a whopping 60%. What this meant was that if I were to pay a premium of Rs 1 lakh, only Rs 40,000 would be actually invested. The remaining Rs 60,000 would be deducted as an expense.

A major part of the Rs 60,000 deducted as expense would be given to the insurance agent (in my case the bank) as commission. And it would help my relationship manager meet her rather stiff targets.

I pointed this out to my relationship manager and she realised the game was over. I wouldn’t fall for her sales pitch. Then we got talking about other things and realised that we grew up in the same town. Before leaving she apologised for trying to sell me such a plan. She also told me that in the pressure to meet her target last year she had sold the same policy to her brother.

He had taken a policy with a premium of Rs 1 lakh of which Rs 40,000 had been invested. The stock markets had taken a beating since then and the value of the investment had fallen to Rs 32,000. “He doesn’t talk to me properly anymore,” she said, as she left with a tinge of regret in her voice.

Those were the heady days of mis-selling in insurance when even sisters sold Ulips to brothers so that they could earn a high commission and meet their targets. Since then commissions have been reduced and as a result the mis-selling has come down.

But if the finance minister P Chidambaram has his way with things, mis-selling is all set to return in the days to come. But before I get to that let me just share some numbers that the Insurance Regulatory and Development Authority, the regulator, has released in its September 2012 journal.

For the period April 1 to June 30, 2012, the insurance companies in India collected Rs 12,015.5 crore as first year’s premium by selling around 67.9 lakh new policies. Given this, the average premium per policy works out to around Rs 17,690 (Rs 12015.5 crore divided by 67.9 lakh).

The total sum assured (or what is in general terms referred to as a life cover, i.e. essentially the money the nominee will get if the policyholder dies) on these policies was Rs 150,902.8 crore. So the average life cover per policy works out to around Rs 2.22 lakh (Rs 150,902.8 crore divided by 67.9 lakh).

Hence, for the first quarter of 2012, the average premium on a life insurance policy was Rs 17,690 and it had an average life cover of Rs 2.22 lakh. If a 35-year-old were to just buy a pure life cover of Rs 2.22 lakh, the premium works out to around Rs Rs 500-700 per year on a 25-year policy. Assuming that a pure life cover of Rs 2.22 lakh can be bought for a premium of Rs 700 per year that would mean a premium of Rs 17,000 is left over.

And this is the amount that is invested by insurance companies after deducting the commission paid. In the year 2010-2011(i.e. between April 1, 2010 and March 31, 2011), the average commission paid on the first year premium was 8.89 percent. This is the latest data that is available.

Assuming this to be the rate of commission, the commission on a premium of Rs 17,690 works out to Rs 1,573 (8.89% of Rs 17,690). Deducting this from Rs 17,000, around Rs 15,417 is left over.

This is the amount that is invested depending upon the mandate chosen by the policyholder which could vary from 100 percent stocks to 100 percent debt.

So what this basically tells us is that Indian insurance companies do not sell life insurance, they sell high-commission paying mutual funds. As my calculations show less than 4 percent (Rs 700 expressed as a percent of Rs 17,690) of the total premium goes towards actual insurance. Around 9 percent is paid as commission and the remaining amount is invested depending on the mandate given by the policy holder.

Finance Minister P Chidambaram now wants to encourage the sales of these high-cost mutual funds masquerading as insurance policies. He is in the process of offering a series of sops to insurance companies so that they can sell more. Among the proposed sops are greater tax deductions on insurance premiums, banks being allowed to sell policies of more than one insurance companies etc.

This is being done so that insurance companies are able to sell more policies and in the process more money from the domestic investors is channelised into the stock market. Since the beginning of the year domestic institutional investors have sold stocks worth around Rs 38,475 crore. The government wants to turn this tide in order to ensure that the stock market continues to go up.

This is very important if the government hopes to divest its stake in a lot of public sector companies. The disinvestment target for the year is Rs 30,000 crore. But a lot more shares will have to be sold if the government wants to control the burgeoning fiscal deficit

So the higher the stock market goes the more the number of shares that the government will be able to sell. And for that to happen, more and more money from domestic investors needs to come into the stock market. And that will only happen if the insurance companies are able to sell more policies.

As anybody who does not make money selling insurance policies or is honest enough, will tell you that mutual funds remain a better investment option. So the question that crops up here is why does Chidambaram want to encourage only insurance companies to sell more and not mutual funds?

Mutual funds are much more transparent. Their performance when it comes to generating returns is much better than insurance companies. I haven’t seen anybody who makes a living out of selling insurance talk about returns generated by insurance policies till date.

There are a couple of reasons for Chidambaram encouraging insurance companies and not mutual funds. One is that commission offered by mutual funds is very very low compared with the commission offered by insurance companies, Infact I can say as no commision at all in Mutual fund . Hence, agents of all kinds prefer to sell insurance rather than mutual funds. Chidambaram needs a lot of money to enter the stock market and he needs it to come quickly. That being the case, it’s easier for insurance companies to do this than mutual funds.

The second and more important reason is the fact that Life Insurance Corporation (LIC) of India which is India’s biggest insurance company, is government-run. Between April and July of this financial year LIC collected 76.5% of the total first year’s premium. So three fourths of insurance in India is basically LIC.

The money collected by LIC can be directed by the government into specific stocks. If the stock market does not have enough interest in shares of a company being divested by the government, LIC can be instructed to pick up those shares.

If Chidambaram had encouraged mutual funds instead of insurance companies he wouldn’t have had this flexibility. So once these measures to help insurance companies are pushed through, insurance companies and agents will be back to doing what they do the best i.e. mis-sell. Don’t be surprised if in the days to come you run into insurance agents promising you the moon, from your investment doubling in three years to you having to pay premiums only for five years.

And in this case this renewed attempt at mis-selling will be a result of Chidambaram’s preference for insurance to mutual funds. The more insurance agents mis-sell, the greater will be the money invested in the stock market which will lead to the stock markets rallying and thus help the government sell more shares than it had originally planned.

Source : First Post 

Details of Rajiv Gandhi Equity Savings Scheme

The Union Finance Minister Shri P. Chidambaram approved a new tax saving scheme called "Rajiv Gandhi Equity Saving Scheme" (RGESS),exclusively for the first time retail investors in Securities Market. This Scheme would give tax benefits to new investors who invest up to Rs. 50,000 and whose annual income is below Rs. 10 lakh.

The Scheme not only encourages the flow of savings and improves the depth of domestic capital markets, but also aims to promote an 'equity culture' in India. This is also expected to widen the retail investor base in the Indian securities markets.

Salient features of the Scheme are as under:

1 . Scheme is open to new retail investors, identified on the basis of their 

     PAN numbers.This includes those who have opened the Demat Account 

     but  have not made any transaction in equity and /or in derivatives till 

     the  date of notification of this Scheme and all those account holders

     other than the first account holder who wish to open a fresh account.

2 . Those investors whose annual taxable income is ≤ Rs. 10 lakhs are 

     eligible under theScheme.

3. The maximum Investment permissible under the Scheme is Rs. 50,000 and

    the investor would get a 50% deduction of the amount invested from the

    taxable income for that year.

4. Under the Scheme, those stocks listed under the BSE 100 or CNX 100, or 

    those of Public sector undertakings which are Navratnas, Maharatnas and 

    Miniratnas would be eligible. Follow-on Public Offers (FPOs) of the above

    companies would also be eligible under the Scheme. IPOs of PSUs, which 

    are getting listed in the relevant financial year and whose annual turn

    over is not less than Rs. 4000 Crore for each of the immediate past three 

    years,  would also be eligible.

5. In addition, considering the requests from various stakeholders, Exchange 

   Traded Funds (ETFs) and Mutual Funds (MFs) that have RGESS eligible

   securities as their underlying and are listed and traded in the stock 

   exchanges and settled through a depository mechanism have also been

   brought under RGESS.

6. To benefit the small investors, the investments are allowed to be made in 

    instalments in the year in which tax claims are made.

7. The total lock-in period for investments under the Scheme would be three

    years including an initial blanket lock-in period of one year, commencing

    from the date of last purchase of securities under RGESS.

8. After the first year, investors would be allowed to trade in the securities in

   furtherance of the goal of promoting an equity culture and as a provision to

   protect them from adverse market movements or stock specific risks as well

   as to give them avenues to realize profits.

9. Investors would, however, be required to maintain their level of investment

   during these two years at the amount for which they have claimed income

   tax benefit or at the value of the portfolio before initiating a sale

   transaction, whichever is less, for at least 270 days in a year. The

   calculation of 270 days includes those days pursuant to the day

   on which the market value of the residual shares /units has

   automatically touched the stipulated value after the date of debit.

10. The general principle under which trading is allowed is that whatever is 
     the value of stocks/units sold by the investor from the RGESS portfolio,
     RGESS compliant securities of at least the same value are credited back
     into the account subsequently.However, the investor is allowed to take  
     benefits of the appreciation of his RGESS portfolio, provided its value, as
     on the previous day of trading, remains above the investment for which
     they have claimed income tax benefit.

11. For the purpose of valuation of shares, the closing price as on the

     previous day of the date of trading will be considered so that new 

     investors are certain about their debits and credits into the account.

12. In case the investor fails to meet the conditions stipulated, the tax 
     benefit will be withdrawn.

Like all financial products which have reached out substantially to the retail investors (post office savings, life insurance policies etc) through tax benefits, this tax break for direct investment in equity is expected to substantially encourage the retail participation in securities market as well as to enhance their participation in the growth of Indian industry.

Entry of more retail investors are expected to further deepen the securities markets as they bring in long-term stable funds, which can counteract the volatility created by the liquidity providers of the market. The Scheme, thus, also furthers the goal of financial stability and promotes financial inclusion. Since Exchange Traded Funds and Mutual Funds have also been brought under the Scheme, the Scheme should provide encouragement and re-assurance

to the first time investors.

The broad provisions of the Scheme and the income tax benefits under it have already been incorporated as a new section 80CCG of the Income Tax Act, 1961, as amended by the Finance Act, 2012.

Department of Revenue will notify the Scheme and SEBI will issue the relevant circulars to operationalize the Scheme in the next two weeks.

Source: Taxman

My Personal View on how to make your child expose to money?

I often get questions from parents on how to teach their child about money? When is the right age for the child to expose to the money? What they could do to improve financial literacy?  And the list goes on.  My standard answer for this entire question is “Children of today’s age are already exposed to Money from the time He/She is born. Education and financial awareness/literacy are two critical thing which have to be nurtured regularly. But unfortunately our systems always give former the preference and the latter is neglected

If someone would have asked me the same question before starting this profession, I would be reacting like any Parent that money means discussing about banking, transaction, Investments, Money Management etc and would be in an illusion to shield child from aspects of money so that he/she focuses on his/her education, But in reality we would be shielding the child for earning, Investing and  management aspect of money. As I am writing this article, I remember the famous quote from Mr. Robert books to all the parents “Intelligence solves problem and produces money. Money without financial intelligence is money soon gone”. If People still think that money will solve the problem, I am afraid these people will have rough ride.

Today Media is playing a very big role in creating financial awareness and the Generation - Y/Children’s are exposed to those. I, as a financial planner still feel that we should also expose our next generation on the four tenants of Financial planning - Income, Expenses, assets (Investments) and Liabilities (Borrowing) in  a systematic manner. Right age to expose child to money management is from the day he/she learns to spend money. The day you give child currency to purchase a toy or chocolate, ask him / her to make a note of it. The Budget habit should begin from there

There are few things which I have been practicing with my son Ronak, who is 1.8 year old.  When he completed 1 year, my wife made him sow seed in a pot and made him to water it on daily basis.  She made it a regular practice every morning.  Over a period he saw nurtured seed converting into plant. He now waters 2 plants. Firstly this is a good habit in all aspect. From Money training Perspective it will help me to explain my child the concept of nurturing wealth.

Last week, I happened to visit my friend’s place who is practicing CFP for past 3 years, I found a Piggy bank by the name Chocolate bank. When I asked my friend, what is it all about? He replied that, every time he gives chocolate to her daughter, she deposits in her chocolate bank. From the bank she eats chocolate twice a week. She observes Chocolate Pilling Up when deposited and reducing in numbers      when withdrawn. He said this will help him to teach her daughter about the Funds Inflow and outflow in future. 

One more Interesting concept I got to learn from my Client’s driver (Mr. Ramesh) was about goal based planning. I happened to visit his place one Sunday morning. When I visited his house to collect one important document of my client. I saw one Transparent Glass bottle (to be precise Old Horlicks bottle) in the Hall with few currencies. When I asked him what it is, he said this was his Son’s collection. I did not get it at first time, when I asked him the same question for the second time; he replied that the money available in glass bottle was his son’s savings. Since he did not want to spend on buying a piggy bank, he uses to save it in transparent glass bottle. When I asked his son, how did he managed to collect the money, he said that he used to deposit money which were given on festival season and other family occasion. Next to the piggy bank there was a cycle picture. When I asked the child, what is it all about? He replied that he was saving money to buy a cycle. I was surprised with his answer. I think if we all follow this concept we would be in better position to help our child in setting financial goals easily.

If the financial literacy is properly passed on to the kids, then over a period of time it becomes a habit and they start practicing by themselves. It is like planting a tree. You water it for years and then one day it does not need you anymore. Its roots would have gone down deep enough. Then the tree provides shade for your enjoyment.

Over the past 4 years as a financial planner, I have observed that children who were exposed to money management in child hood go on to become financially responsible adults compared to children who are shielded .Don’t shield your child, empower them.  We all live in times of greater and faster change and if we empower people with right information/knowledge they would be taking informed decision and capitalize many bull and bear rally in next 25 to 30 years.

Do share your ideas on the same. It will be beneficial to the group

 - Article by Nishith.B 

Why the world has faith in gold ?

Gold as an asset class is in vogue again with prices reaching a new high in rupee terms. With rising prices, the usual pitch from so called experts too has risen as to how gold is in an “ultimate bubble” phase and is all set to go bust. Frankly, it is nothing new. In 2010, George Soros, one of world’s most accomplished investors, dumped his gold holdings at around $1,200 per ounce but interestingly, he recently surprised the markets by deciding to reinvest into gold at $1,600 per ounce. Pimco, the world’s largest bond fund manager, also added gold allocation in its commodity fund as prices dipped lower around $1,500 per ounce. They are not the only ones to have turned buyers from being sellers. Central banks across the world including Russia, China and other emerging nations have become net buyers after a long time. According to a recent report from World Gold Council, June quarter recorded official sector (central bank sector) gold purchase was more than double compared with the purchases made in the same period last year. If you consider the fact that gold represents only around 1% of total global investment assets, it seems crazy to be not invested in the asset. It is thus important to understand what is driving gold prices before drawing conclusions on the future course of prices.

To start with one has to understand that strictly speaking gold has no value as it is a non-income generating asset. With no cash flows associated with gold it is always at a disadvantage to other income generating assets including real estate. Till few years back it was not widely accepted as an asset class because either fixed income or equity alternatively used to do well. Investor perceptions have, however, undergone a change in the recent past. In this era of negative real interest rates, investors are looking out for assets to protect their investments. While Indians have been among the largest savers, the trend is fast changing as deposit rates have remained below inflation (CPI) for some time now, rendering the real interest rate negative. The combination of low capital gains and low returns in equities on account of a “stagflationary” environment has further reduced investment options. Gold thrives well in this environment, especially given its enviable track record of 11 straight years of positive returns.

Gold continues to remain in a primary bull market since the last decade. History has shown that commodity prices move in cycles of 16-17 years which might mean four-five more years of gold bull market yet to capture. One also should not forget that corrections in bull markets of around 30% are a normal occurrence and have been observed in the past. Investors need to be aware that the last leg of any bull market is often the most profitable and the most volatile. Hence, one should periodically use corrections as opportunities and gain from investing in gold.

Indian investors, however, continue to remain puzzled that though globally gold prices are almost 10% below its all-time highs, the prices in rupee terms are at all-time highs. A large part of this can be attributed to fiscal mis-management in the country, which is reflected in 20% depreciation (yearly) of rupee. The recent doubling of import duty on gold has also led to investors paying higher for gold in rupee terms.

On the positive side, Indian investors are now exposed to more efficient investment options in gold. Other than most travelled route of physical gold or jewellery, mutual funds offer exposure to gold in different fund types such as hybrid funds, exchange-traded funds and fund of funds. Though we have seen demand from India dampening this year, we believe higher inflation would help retain demand in the long run. In India, inflation has played a crucial role in gold’s popularity as an inflation hedge. In addition, globally gold has become more a proxy of the political stupidity and hence a crisis hedge.

One would still ponder on the question: how high is high enough for gold? It is very difficult to answer that question given the fact that it doesn’t have a fundamental value attached to it. We believe that it isn’t the gold prices that are moving up; it is the value of currencies that is depreciating which is pushing gold prices higher. Gold prices act as good proxy to lack of confidence in the fiat currencies. The crisis which started with companies being under financial stress has now moved on to countries. Gold acts as a hedge for investors in such times. If one believed that the future is bright, businesses will pick up and the real interest rates will turn positive, would one still buy gold? The answer would be no. But in the current market environment where the US, the world’s largest economy, is running at more than 100% debt-to-GDP ratio and Europe is struggling to keep its union up and running, we can be reasonably comfortable in believing that good times are farther than they appear. Till then, have faith in gold!

Source : Ritesh Jain - Head of Investments - Canara Rebaco AMC