Inflation can bounce back, warns RBI

 The Reserve Bank on Friday said economic slowdown is contributing to decline in prices, but warned that inflation could bounce back on account of supply-demand mismatch.

The RBI in its mid-quarterly review, however, hinted at rate cuts in future. It had increased rates 13 times since March, 2010, to tame inflation. The central bank today kept its key policy rates unchanged.

“From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth,” it said.

The central bank said deceleration in growth is contributing to a decline in inflation momentum which is also being helped by softening food prices.

“However, it must be emphasised that inflation risks remain high and inflation could quickly recur as a result of both supply and demand forces,” it said.

Though, reassuringly, inflationary pressures are expected to abate in the coming months, RBI said that both inflation and inflation expectations are currently above the comfort level of the Reserve Bank.

On annual basis, headline WPI inflation moderated to 9.1 per cent in November from 9.7 per cent in October, driven largely by decline in primary food articles inflation.

Food inflation fell to a four-year low of 4.35 per cent as on December 3. The RBI has retained its year-end inflation projection at 7 per cent.

“With moderation in food inflation in November 2011 and expected moderation in aggregate demand and hence in non-food manufactured products inflation, the inflation projection for March 2012 is retained at 7 per cent,” it said.

The apex bank will make a formal assessment of its inflation projections for 2011-12 in the third quarter review of January 2012. 

Nifty closes below 4700 for 1st time since 2009

It was a dire situation for the market on Friday despite RBI's policy on expected lines and flat global cues. The Nifty closed below the psychological 4700-mark for the first time since November 3, 2009 while the Sensex shed 345.12 points. Looking at the sharp sell-off in index heavyweights, it seems investors cut some of their exposure in the second half of trade.
The Sensex closed at 15,491.4, after shedding more than 560 points from day's high of 16,068.90. The Nifty dropped 94.75 points, to end at 4,651.60; it touched the 4800 mark in an intra-day trade.
Sanjay Sinha, Founder of Citrus Advisors listed out the points, which spoiled the mood of markets. According to him, first is global problem, second is currency, third is government policies and fourth is interest rates.
For the week, the Sensex and Nifty fell 4.5%.
Experts feel the mid quarter review of monetary policy announced by the RBI was on expected lines, so it was completely non-event for the market. Breaking of technical level of 4700 amid huge volumes may be the reason that traders opted to short selling.
"Today’s fall is definitely a little more unexpected because the RBI policy didn’t have anything that would spook the market," He feels this is some bout of concentrated selling.
The Reserve Bank of India kept CRR unchanged at 6% (the money banks have to necessarily park with the RBI), SLR at 24% (money which every bank has to maintain in the form of cash, gold or approved securities), repo rate (at which banks borrow money from RBI) at 8.5%, and even reverse repo rate (at which RBI borrow money from banks) remains unchanged at 7.5%.
The central bank insisted that downside risks to growth have clearly increased and inflation is still above comfort level. But it relieved some tension by saying further rate hikes may not be warranted. "Further monetary policy is likely to reverse cycle."
There was another ray of optimism, which is appreciation in the rupee after central bank's intervention. To control speculation in the currency, the Reserve Bank imposed restrictions with immediate effect on forward trading in the local currency by FIIs and traders and capped banks exposure to the forex market.
The Indian rupee moved up 1.5% or by 82 paise to 52.82 a dollar, which is quite better from record low of 54.29 touched yesterday. It was down by 80 paise to 68.85 an euro.
Shares of capital goods companies hit quite badly as experts feel the thrid quarter earnings would be very bad due to low order book and overall slowdown. The respective index fell 4.4%; L&T was down 5.33% and BHEL tanked 3.9%.
The BSE Bank, Realty, Power, Metal and Oil & Gas indices were down 2-3%. Index heavyweight Reliance Industries plunged 3.43%, to close at Rs 723 a share.
Among others, HDFC Bank, ICICI Bank, TCS, ITC, SBI, HDFC, Tata Steel and NTPC dropped 2-3.7%.
However, only GAIL, Cipla, Dr Reddy's Labs and Infosys closed in positive terrain.
The broader indices too followed the same trend - the BSE Midcap and Smallcap indices were down 1.6%.
Total traded turnover on both exchanges was more than Rs 1.98 lakh crore, which was quite high as compared to Rs 1.53 lakh crore in previous session.

RBI does it, keeps rate unchanged

In an expected move, the Reserve Bank of India (RBI) has kept key policy rates unchanged in its mid-quarter monetary policy review.
Cash reserve ratio (CRR) has been kept unchanged at 6%, repo rate unchanged at 8.5%, reverse repo at 7.5% while SLR is at 24%. Consequently, the marginal standing facility (MSF) too remains at 9.5%.
The repo is the rate at which banks borrow money from RBI while banks park surplus money with RBI through reverse repo window. CRR is the fixed portion of total deposits that lenders have to mandatorily keep with the regulator.
Food inflation fell to a nearly four-year low of 4.35% in the year to December 3, data on Thursday showed.
India's industrial output slumped more than 5% in October from a year earlier, far worse than expected and the first drop in more than two years, with capital goods output down 25.5%.
Overall economic growth slowed to 6.9% in the September quarter, its weakest in two years, and some economists expect India to struggle to reach 7% growth in the fiscal year that ends in March 2012. The government had been targeting 9% earlier this year.

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German banks are facing capital shortfall

The troubles for Eurozone seem to be getting worse. The latest series of stress tests done on banks in Europe have revealed that the German banks are facing much severe capital shortfall than what was previously estimated. The amount of Euro 13.1 bn payable by next June is almost three times larger than the earlier estimates and has worsened the Euro deficit to Euro 115 bn, up 8%. The recent disclosure is another set back to the Eurozone and could be a pre cursor to further misuse of taxpayers' funds to bail out the sinking ships or nationalization of banks, something that time will tell. However, one thing is for sure. It is a huge blow to the credibility of European banking authority and overshadows the recent announcements regarding rate cuts and measures to support ailing regional banks. It could mean a long period of slow lending, something that triggered the worst recession in American economy three years back. Unfortunately, the damage does not stop here. Given that European economy is one of the biggest, the ripple effect will spread far and wide. It could send US economy in the reverse gear that has recently managed to improve in the last few months

MF Global's Corzine has no clue where the money is

"I simply don't know where the money is." You could be excused from assuming that this comment was passed by some low level employee of a financial institution. But if the CEO utters the very same words, something is hugely amiss. Indeed, these remarks passed by Jon Corzine, the ex-CEO of now defunct MF Global has not gone down well with the close followers of the saga. They would have hurt the company's clients the most as chances of recovering more than US$ 1 bn of their own money have weakened considerably. It should be noted that MF Global recently filed for bankruptcy as it found itself caught in the downward spiral of ratings downgrade and liquidity shortfall followed by more downgrade and more liquidity shortfall. What made matters worse was the sudden vanishing act performed by nearly US$ 1 bn worth of funds from clients' accounts that is supposed to be kept segregated from the firm's money used for making risky bets. And what the clients are getting from the CEO of the firm when asked about the whereabouts of their hard earned money? Well, nothing more than a shrug of the shoulder and a terse 'I don't know the location of the funds'. If you are thinking that Mr Corzine may land himself in prison after all this, banish the thought. He may still be able to go scot free. No wonder, the US society is in a state of turmoil right now.

Nilekani's UID project in trouble?

2011 has been a bad year for the ruling government. Already haunted by the ghosts of the infamous scams, the government came under further criticism thanks to their policy inactions. Things became worse when they decided to backtrack on the issue of Foreign Direct Investment (FDI) in retail just days after approving it. Now it is likely that the government will do another U-turn on another popular project. This time the project under the spotlight is the UIDAI or the unique ID project that was started under the supervision of Nandan Nilekani. The parliamentary standing committee on finance is of the opinion that the Rs 178 bn UIDAI project is costly, unnecessary and will lead to communal disharmony in the country. They also feel that the project is just a duplication of data already collected under the National Population Register. The biometric data collected for UIDAI is also under the scanner with the committee stating that the data is a privacy breach and could be misused. The thing is that the project is a brilliant idea to ensure that people have a single identification card that takes care of their social security, their voting rights and everything in between. Thus, the question that one needs to ask is whether the concerns raised by politicians genuine? Or are the so called 'intelligent' politicians threatened by Mr Nilekani's presence. He is after all not a politician but an ex-bureaucrat. Nevertheless, by the looks of it, another good proposal of the government is headed down the drain.

Should you invest in IPOs in a volatile market?

he heady years of 2006 and 2007 saw a slew of initial public offers (IPOs) hit the Indian stock markets. Because of the heavy bullishness then, many of these IPOs quoted astronomical valuations but still enjoyed heavy subscriptions on account of very positive sentiments. But all that changed when the global financial crisis hit the world in 2008-09. Since then the IPO market has been going through choppy waters and while the going was good last year, the trend seems to have reversed this year. According to Ernst & Young, Indian companies mopped up barely US$ 1.14 bn through IPOs till November this year. This is around an 89% plunge over last year. The number of IPOs was less than half of that last year, and stood at 34 in the first 11 months of 2011 as compared to 71 in 2010. The deepening debt crisis in Europe and the lack of solution thereof, rising inflation and slowdown in growth in India and policy paralysis in the government have spooked stock markets and contributed to the increasing volatility. This has then made companies wary of raising capital through the IPO route. PSU share sales as part of the government's divestment programme have also petered out. Not surprisingly, this phenomenon is not unique to India and has been seen in Asian as well as the global stock markets with the number of deals and new issues drastically reducing. The problem for Indian companies is that debt is not cheap either. With inflation remaining perisistently high, interest rates have risen and this has made cost of debt dearer. Further, foreign currency loans have their own set of problems with the rupee depreciating at such a steep pace. Having said that, businesses need to grow and growing businesses need capital. The crux here is that those wanting to access capital through IPOs need to price them reasonably. Readers would do well to recall that last year saw the government divest their stake in a number of PSU companies. Many of these companies had strong growth prospects but the icing on the cake was that quite a few were attractively valued and held the potential of strong returns for investors. We believe that this holds true even in a volatile market. As long as companies have sound business models with a strong management and reasonable valuations, there is no reason why investors should not invest in these companies whether they are raising capital for the first time or are already listed on the stock exchanges.

Eurozone sees a drop in commodity demand

If you find a harmless little lion cub bumping into you, do not underestimate the impending danger. Because it is most likely that the lioness would be within close quarters. Even more, a pack of lions wouldn't be too far away. Many commodity traders would regretfully identify with the above story. The little lion cub that we mentioned above is a reference to Greece. When the debt crisis first hit Greece, a lot of commodity traders were quite assured that it wouldn't have any meaningful impact on commodity demand. Plain logic tells you that a country that constitutes less than 0.5% of the aggregate world oil demand is essentially inconsequential. But these traders were careless enough to not consider that Greece may not be the only one. Today the debt contagion has spread into several other economies and has gripped the entire Eurozone in a very severe crisis. Now this region as a whole is one of the most important sources of commodities demand. It accounts for about a quarter of the global consumption of oil and nickel, and about a sixth of other metals such as copper. There is ample evidence that demand for commodities has dropped in the Euro region.

Hold on FDI retail has not gone down well

There is nothing more frustrating than confusion and uncertainty. As human beings we get irritated when people decide on one thing and then reverse their decision at the blink of an eye. So it is little wonder that the international business community holds the same irate view of the Indian government. The government's recent decision to put the FDI in retail on hold to garner popular support has not gone down well with them. As announced by the CEO of General Electric (GE), the government is sending confusing signals to the business world. Such moves lead to the business community having to rethink their business plans in the country. The policy inaction and evasiveness have led to a drop in business confidence in the country. And the government cannot afford to do this. The government is already facing an enormous fiscal deficit. They badly need the foreign funds to bridge the much needed gap in investments. These investments are essential for the country's long term growth. But unfortunately the government prefers to listen to a select few influential voters; rather than relying on its own competence and catering to the needs of the country.

Citibank cuts more jobs

From being the biggest wealth creators, financial firms have now become the biggest job destroyers. 2011 seems to have been hit the hardest. Global financial firms have cut more than 200,000 jobs this year, up from about 58,000 in 2010. It even trumps the 174,000 job losses seen in 2009, according to Bloomberg. Citibank recently announced 4,500 job cuts amounting to 1.7% of its workforce at the end of the third quarter. It plans to take a US$ 400 m charge on its income statement for this. Bank of America also plans to cut its staff by 30,000 over the next few years. But, this may just be the tip of the iceberg. The challenging economic environment, the Euro crisis and regulatory concerns are still huge risks. These firms are finding it increasingly difficult to be profitable. Thus further pain is surely on the horizon for these companies and their shareholders. The global financial crisis seems to be seeing a second coming.

What top fund managers do not want you to know

While choosing certain mutual funds over many others, two of the factors that we look at are the returns generated by the fund in the past and the performance and reputation of the fund manager. Indeed, as far as the latter parameter is concerned, investing in funds that have 'star managers' can appear a very attractive proposition indeed. Does that mean that star managers have always been consistently able to perform above average? Not really. If you look at the global mutual fund industry, big fund managers such as Bill Gross, John Paulson, Bill Miller among others have fared rather poorly in recent times. This has laid bare the fact that life is tough even for the most skilled manager and with markets becoming more dynamic, most fund managers are finding it tough to adapt. During times when the fund manager does not perform, can that be pinned down to bad luck? Certainly, fund managers will not attribute strong performances to good luck but to their skill. This means that underperformance cannot be entirely attributed to bad luck but has a lot to do with human error. According to a report published by Absolute Return Partners, a survey of UK funds showed that out of 1,230 funds across 12 different strategies, only 35 fund managers performed consistently enough to be placed in the top quartile in each of the last three years. So why in recent times, are fund managers finding it increasingly difficult to outperform on a consistent basis? For starters, much of the underperformance in the decade gone by could be a result of the over optimism in the 1990s. Indeed, many believed that equities as an asset class would always go up in the long run and are paying a heavy price for the turn of events now. The current global financial crisis has only added fuel to the fire especially since it looks like a very long time before the developed economies get back on their feet. Herd mentality has also led to funds not being able to deliver. Given the scale of the recent crisis and the uncertainty it has caused, many investors who had an appetite for risk have become risk averse and the simultaneous sell off across all share classes has rendered the technique of diversification meaningless. At the end of the day investors, when they choose to invest in mutual funds, need to do a thorough analysis of the funds that they want to put their money into. Selecting a fund solely on the basis of its 'star manager' may not be prudent. The idea is to have your own investment strategy in place and then select those funds that meet your investment objectives. Also, the notion that funds having a high portfolio turnover tend to generate more returns does not hold true. High turnover portfolios only pile on costs without giving strong returns in the future. Moreover, it only increases volatility and that benefits no one. The days when one could just park money into mutual funds and let the fund manager do all the work without the investor having to do much are gone. Given the times that we are in, investors have to be as vigilant when they invest in mutual funds as they would be when investing in stocks of individual companies.

Tackle interest rate risk in debt products

You can do so by either actively tracking the market events and acting on them, or investing in a debt fund and letting the manager take care of it, says Uma Shashikant. The current disillusionment with equity markets has directed the attention towards debt markets. Finance companies have been issuing bonds at very attractive interest rates. Mutual funds have been focusing on debt funds, taking these products to retail investors and pitching for investment in the debt markets. Several consider debt products to be complex. Many investors and intermediaries like to know why bond prices move and how money can be made or lost by buying bonds or debt funds. Bonds and fixed income products have traditionally been seen as safe since there is a pre-specified schedule of interest payment and return of principal. For example, an investor who bought a 5-year 8% bond three years ago might be content receiving the interest payment regularly. However, if the current market interest rate for a similar bond is 9%, the older bond becomes less valuable. Assume that both the above were available to a new investor. He would not buy the old bond that pays 8% interest and would choose the new one that pays 9%. This means that more and more investors will be willing to sell the old bond and buy the new one which, in turn, means the price of the old one will fall. It will drop so that the return to the new investor will be the current market rate, which is 9%, whether he buys the old or the new bond. Logically, there cannot be two different returns for two similar bonds. This is why we call the current market interest rate the yield. All existing old bonds will be re-priced to align to the current market rate or yield. The key risk in fixed income products is the possibility that the interest being offered turns out to be higher or lower at a later date. The yield in the market place can alter due to several factors, including the RBI's actions, inflation rates, and government borrowings, to name a few. A 10-year bond providing a 7% interest until maturity may look fairly priced at the time it is offered, but during the period before it matures, the market interest rates may move up or down, making the bond more or less attractive. If new bonds offer a higher rate, the old bonds will lose value; if new bonds offer a lower rate, old bonds will gain value. This is the interest rate risk in a bond, which impacts all those who invest in them. There are two ways in which investors can deal with interest rate risks. The first and the simplest is to buy bonds whose interest rates are aligned to the market rates. Called the floating interest rate structure, it is the simplest way to ensure that investors do not face market risks. The proposal to align all the interest rates in savings schemes to market rates reduces risks for investors. Instead of earning 8% on a 15-year product when the market rate for 10 years is 9%, investors can now hope to earn the market rate itself. The second is to buy bonds that can be traded, so that a view can be taken for interest rates, and bonds can be bought and sold accordingly. The second is a tougher call, which debt funds routinely take, where the fund manager actively manages the portfolio for interest rate risks. The current high interest rate scenario has led investors to make two assumptions about their investments in bonds. The first is that these rates are very high and locking in at these rates is a good idea. The second is that if, in the future, interest rates begin to fall, the bonds bought now will rise in value at a later date. They will then be the old bonds with a high interest rate, sought after at a high price, when the rates have begun to fall. Both the above assumptions have an interest rate view embedded in them. Any investment that predicts the future market behaviour will also have to consider the risks to this prediction. Last September, when 1-year rates were 7.5%, several people in the markets believed that interest rates had peaked. Subsequently, 1-year rates rose 2.5% above that level. A high interest rate has been the outcome of, among other things, aggressive pricing of deposits by banks, high amount of borrowing by the government, and a persistent high level of inflation. The RBI has also been increasing the interest rates to fight inflation. If we take the view that rates have peaked, we need to ask if these assumptions hold any longer. While banks can technically reduce deposit rates since credit growth has begun to slow down, it is difficult to see how they will do so in the last quarter of the year (Jan-Mar 2012), when the demand for funds is high. The government has been borrowing persistently. The inflation numbers have not come down, despite promises. It may be difficult to substantiate the view that the interest rates may have peaked.

DTC Effect: Should ELSS still be a part of your portfolio?

Are you one of those who turn to equity-linked savings schemes (ELSS) to reduce your tax liability? What has been a popular tax-saving route for most investors, may not work any longer. Under the Direct Taxes Code (DTC), which is likely to come into effect from 1 April next year, the government has proposed to remove this tax benefit associated with ELSS funds. This has led to some confusion among investors about how to approach these funds. Can ELSS funds still be a part of your portfolio? Will the ELSS funds be closed? If the proposal is accepted, you will no longer be able to claim tax deduction for investment in these schemes. So what happens to the existing ELSS funds in the market? There are currently 28 such schemes, with nearly Rs 20,000 crore in assets under management. The fund houses have also failed to give any direction to its investors, probably because of the ambiguity over the implementation of the DTC, which might get delayed further. Even if it is introduced by the start of the next fiscal year, most fund houses are hopeful that the government will extend the tax benefit. Says Harshendu Bindal, president, Franklin Templeton Investments (India): "If the government wants to encourage long-term savings flow into the capital market, ELSS is a good option." He points out that the mutual fund industry has made a representation to the government through the Association of Mutual Funds in India (Amfi) to consider continuing the tax benefits to ELSS. Even if the ELSS funds lose their tax benefit, they are not likely to end overnight. They could be merged with other existing equity schemes, but this could be a tricky proposition. For one, many of these schemes have very high AUMs and it would be difficult to create synergies from the mergers. Secondly, since ELSS schemes come with a lock-in feature, investors cannot sell the units for three years after the purchase. A merger essentially amounts to a redemption, or sale, from the scheme being merged. Under the current rules, this would not be possible for the investors whose lock-in period hasn't ended. Unless Sebi allows relaxation, fund houses will have to think of another way to treat these funds. It is likely that these funds will continue to exist post-DTC, albeit without the tax benefit and lock-in period. Jayant Pai, VP and CFP, Parag Parikh Financial Advisory Services, says, "These funds could be subsumed into some other diversified equity fund within the same fund house. Or the fund house could change the name of the scheme to exclude the word 'tax'." In the absence of the tax advantage, these funds will operate as normal equity schemes. As a result, investors may no longer put additional money into them. Since fresh inflows will be hampered, it will affect the funds' performance. Says Hemant Rustagi, CEO, Wiseinvest Advisors: "Fund managers may find themselves handicapped as fresh inflows will not come in if the tax benefit is removed. This will affect the performance of tax-saving funds." How you can benefit This doesn't mean that investors cannot take advantage of the tax-saving funds. Investors should avoid taking an adverse view at this point and redeeming units is certainly not the right way of going about it. All investments made in these schemes till 31 March next year will be eligible for tax deduction. As such, you should continue to invest in these, especially if you need to reduce your tax liability for this year. Rustagi asserts, "Investors should make full use of the tax benefit while it is still available for the rest of the fiscal year. The low market valuations also offer good entry points into these schemes." Dhirendra Kumar of Value Research agrees, "This could be the last opportunity for investors to benefit from tax-saving funds. One should invest small amounts in these schemes over the remaining four months."

FMPs best bet in high interest rate scenario

Interest rates are high, equity markets are volatile: So where do you invest? Fixed maturity plans (FMPs) could be one of the answers. The past one year has seen a large number of FMP launches across various maturities, ranging from 90 days to three years. FMPs have seen interest from both retail and institutional class of investors. Definitely, rising interest rates could be one of the key reasons for the popularity of FMPs among investors. Over the past two years, CD (certificate of deposit) rates have risen by 400-500 basis points (bps) or more. Similarly, corporate bond yields have also risen by 100-200 bps or more. Short-term CDs, CPs (commercial paper issued by companies) and corporate bonds are the preferred debt investments of fund managers of FMPs. One needs to only take a look at the portfolios of FMPs of various fund houses that are published on their websites. What has been the reason for the rise in interest rates? High inflation, rates hikes by the Reserve Bank of India (RBI), tight banking system liquidity and government’s high borrowing in this and last financial year. RBI has hiked rates by 13 times since October 2009. In the most recent RBI policy review announced on October 25, RBI has indicated that they may be nearing the end of the rate tightening cycle. Thus, we may see short-term rates peaking off in the near future. Accordingly, it could be an opportune time to lock investments in this high interest rate scenario by investing in FMPs. The question then comes why not traditional investment options, which are also offering high interest rates, or other debt schemes like gilt and income funds. As far as those traditional options are concerned, the main benefit for a tax-paying investor, especially, if she/he falls in the higher tax bracket, is the lower tax rate on FMPs, which makes post tax returns far higher for comparable tenure FMPs. FMP returns are market-linked and you may take advantage of higher rates, however, traditional products rates move with a lag, so, even if market rates move up, it does not necessarily mean those products rates would also move up. However, traditional investment products do give certainty of returns as the rate of return is known. In case of FMPs, the actual returns are not known, however, in consultation with one’s financial adviser, who may be aware of the market movements, one can get a good idea of the range of returns that can be expected as fund managers invest in debt instruments maturing in line with the maturity of the FMP. FMPs, thus, carry very low interest rate risk (risk of adverse mark-to-market movement), and this is one of the advantages that they have over duration funds like gilt funds and income funds, which can be more risky. FMPs do carry credit risk, even though, they take exposure to companies, banks and other institutions. However, with new regulations introduced by the Securities and Exchange Board of India (Sebi), mutual funds are required to declare the indicative portfolio with indicative ranges not exceeding 5 per cent in the SID (scheme information document) of the asset classes (CPs, CDs, gilts) and rating classes (AAA, AA) that they plan to invest in at the time of launch itself. This may help an investor to understand the credit risk in an FMP portfolio that he is looking to invest in. Further, mutual funds are also required to disclose credit evaluation policy for the investments in debt securities in the SID of the FMP. All in all, the ease, convenience and transparency of investments make FMPs one of the suitable investment products to take advantage of in the present interest rate scenario.

Savvy investors flock to STPs for higher returns

Systematic transfer plans or STPs — an investment route that allows mutual fund investors to shift a fixed sum from one scheme to another at regular intervals — are gaining popularity among affluent investors. With heightened uncertainty over the stock market's prospects and debt schemes churning healthy returns, these investors are increasingly opting for STP to ensure they do not miss out on higher debt returns, while waiting for opportunities in equities. Most of them are investing a lump sum in liquid schemes which, in turn, transfer a fixed amount every month to equity schemes. This is how an STP works. If an investor has Rs 1 lakh to invest, but is not comfortable with putting the entire money in the stock market, he can lock in the money in a short-term debt fund that has STP options. The investor then sets a time or event trigger on the debt scheme. If the investor has set a time trigger —say a monthly trigger — a pre-determined portion of the investment moves out of the debt scheme into the chosen equity funds every month. An event trigger will allow the investor to put in a portion of the money every time the market falls to acertain level. "STP gives investors the best of both worlds. It allows investors to build an equity portfolio without taking huge risk. The time the money is not invested in equities, it generates huge returns in the debt portfolio," said A Balasubramanian, chief executive officer, Birla Sun Life Asset Management. The advantage of STP is that investors are able to pocket higher returns till such time the money is invested in equity schemes. At current rates, investors get 8.5-9.5% on their liquid fund portfolios vis-a-vis 6% on bank's fixed deposits. "Affluent investors are opting for STPs to pocket higher short-term yields, while waiting for investment opportunities in equities market. Apart from higher yields, investments in liquid funds get better tax treatment than bank FDs," said Srikanth Meenakshi, director, Wealth India Financial Services. Returns on liquid funds are taxed at about 14% annually, while gains from bank FDs are taxed at 30%. Over 10% of the money flowing into systematic investment plans (SIPs) of equity schemes comes through STPs, as per industry estimates. The fund industry receives about Rs 1,800 crore though SIPs every month. Fund houses like HDFC, Reliance Mutual, Franklin Templeton, Birla Sun Life Mutual and Tata Mutual, among others, are promoting STPs in a big way. They are giving 'daily transfer', 'event transfer' and 'weekly transfer' options to investors. Some fund houses also give the option to transfer gains (made on liquid portfolio) into equity funds. "Fund houses are promoting STPs to attract lump sum investments from investors. It's the easiest way to convert them into equity fund investors," said the marketing head of a bank-promoted fund house.

Income Inequality Doubled in India Since 1990

Income inequality is an ever existing detonation. But in last two decades it is doubled in India which lagged it in all rising economies. In 1990s the top 10 percent of wage earners used to earn 6 times more than the bottom 10 percent, which has now completely doubled and become 12 times. There are many reasons for this persistent rise of gap. In India the prime reasons are lack of good education system, unemployment, corruption, population etc.

Recent report from the Paris-based international organization – ‘Organisation for Economic Cooperation and Development’ (OECD) stated that the income inequality has raised in 17 to 22 countries and also provided the reasons for this across advanced economics. By this cross-country study of fiscal inequality it’s been clearly seen that these income gaps are not inevitable and technological forces which drives incomes can be successfully countered by active government policies. This gap has mostly widened in U.S., Germany, Finland, Israel, Luxembourg and New Zealand but is highest in Mexico and Chile.