FII inflows cross $3 bn on Dalal Street !

It's raining dollars in the Indian stock market with the overseas investment on the local bourses crossing $3 billion mark since the beginning of this year.

Foreign Institutional Investors (FIIs) have put in a net of $3.05 billion (over Rs 13,500 crore) in the Indian stocks so far in 2007, while taking their total net investment in the country so far to over $52 billion.

However, the net FII inflows in the first four months of 2007 is over $1 billion, less than the figure invested in the same period of the previous year.

More than half of the net investment by FIIs this year came in the month of April alone after the overseas investors returned to the bourses with positive sentiments as Sensex regained its once-lost 14,000 level.

The bourses had witnessed a herd-like flight of FIIs after a sharp fall in February this year, but with the corporate earnings results meeting or beating expectations, the sentiments have improved considerably, said a broker.

According to the data available with the market regulator SEBI, FIIs purchased stocks worth close to Rs 46,400 crore and sold stocks worth about Rs 39,500 crore in April 2007, taking their net investment to about Rs 6,900 crore (about $1.56 billion).

However, the net FII investment for January-April period is estimated to remain around $3 billion level, as against about $3.3 billion in the same period of 2006, said another broker.

FIIs had purchased stocks worth a net of about $8 billion in entire 2006, as against a record high of $10।7 billion in 2005.

Is investing in gold a good idea ?

The table captures 5-year and 10-year returns for gold and the Indian equity market between 1997 and 2007 on a rolling basis, at monthly intervals. Equities have delivered superior returns, with a lower possibility of losses over this period. Gold prices are London prices, in dollar terms.
*No. of months investor would have made a loss, out of total.

After a long wait, Indian investors finally have the means to "gild" their portfolio when they draw up their financial plans. With gold Exchange Traded Funds making a debut in India, you no longer have to visit the local jeweller, fork out making charges/wastage and take your chances on caratage when you buy gold.

Instead, you simply buy ETF units and hold them in your demat account, and you can be sure that your investments will closely mirror trends in global gold prices. But is investing in gold really a good idea? What return expectations can you have from the precious metal, if you hold it for the long term? We analysed monthly gold price trends for the past 10 years in the global and Indian markets, to arrive at some answers. Gold, in the global context, has delivered a compounded annual return of 6.6 per cent over the last ten years. The return for Indian investors in gold has been a shade higher, at 6.9 per cent (all returns annualised), mainly as a result of the depreciating rupee.

Expect modest returns

If this seems like a decent, inflation-beating return, do note that you would have earned this return only if you had managed to time your investment rather nicely to end-March 1997, and had held on till date. The recent ten-year window has been a particularly good one for gold, with rising oil prices and a weakening dollar prompting investors to rediscover the metal as an investment option. For those who didn't display such a fine sense of timing, long-term returns from gold have been much more modest.

If you invested in gold with a 10-year horizon sometime between 1987 and today, your returns could have ranged anywhere between a negative 4.8 per cent and a positive 6.7 per cent annually, depending on the month of initial purchase. In comparison, equities appear to have a much better track record of delivering long-term returns, irrespective of the timing. The minimum 10-year returns the Sensex managed between 1997 and 2007 is a negative 0.14 per cent; while the maximum return was as high as 24.7 per cent.

Message: If you are a long-term investor, gold, obviously, cannot substitute equities in your portfolio. In the Indian context, gold has an inferior track record to equities, both in terms of return potential and the probability of losses. Use gold as a supplement to your equity portfolio.

Five years better than ten?

When you buy equities, you are usually urged to hold on to your investments longer if you would like to improve the return potential. But evidence of the past 10 years shows that gold has delivered better returns if held for five years rather than 10. The best five-year return managed by gold between 1997 and 2007 was 19.7 per cent. This is much higher than the best 10-year return of 6.7 per cent. In equities, a shorter holding period pegs up the chances of earning negative returns on your investment.

But if history is any indication, the reverse has been true for gold. Investors who held gold for five years registered negative returns on fewer occasions (5 out of 10) than those who stayed invested for a 10-year period (6 out of 10)!

Message: Invest in gold with a 5-year horizon.

Likelihood of losses

Gold is generally preferred for its "safe-haven" qualities; it performs well when investor confidence in other asset classes such as equities is at a low ebb. However, this does not mean that your investments in gold protect you from losses.

Going by the record of the past 10 years, the probability of losing money on gold is fairly high, even if you stay invested over a five- or 10-year period. For 10-year holding periods, gold has delivered negative returns on 77 out of 122 occasions between 1997 and 2007. It has delivered negative returns on 64 out of 122 occasions for five-year holding periods.

Whatever the investment horizon, the odds of earning a negative return on gold appear higher than those on equities, going by the experience of the past 10 years.

Message: Gold is not a substitute for your safe, fixed return investments, such as bonds.

If gold has only moderate return potential and can erode in value over long horizons, why at all should one consider investing in gold, you may ask.

The case for gold

There are three key factors that support investments in gold:

Diversifier: Gold could be a stabilising influence on your overall portfolio. Trends in monthly returns on gold over the past 10 years show that gold prices seldom move in sync with returns on other asset classes, whether equities or debt. This makes the metal a good portfolio diversifier.

The correlation of monthly returns on gold with the Sensex over the past 10 years is at a negligible 0.06. Though this correlation has risen to about 0.2 in the recent five-year period, it remains statistically insignificant.

This means that if you hold both gold and equity investments in your portfolio, there is a negligible chance that values of both will decline at the same time, making a big dent in your net worth!

This is also borne out by anecdotal evidence. Gold was among the best performing asset classes just after the tech stock meltdown of 2000-01. Gold prices actually appreciated about 4 per cent in the aftermath of the dotcom bust between March 2000 and October 2001, a period when the Sensex lost a whopping 48 per cent in value!

During the recent corrective episode in May-June 2006, gold prices did peak out at the same time as stock prices and fell when stock prices did. However, the magnitude of decline in gold was much lower than that in equities.

Though gold has historically displayed a low correlation with equities and other assets, investors in gold need to be aware that this relationship could change in the years ahead.

There is a view that the commodity, currency, equity and bond markets across the world are developing stronger inter-linkages due to their dependence on liquidity from large institutional investors (read hedge funds) with a presence across markets and asset classes. Episodes such as the May meltdown (which encompassed stocks, commodities and gold) seem to support this view.

Less volatile: Though gold has offered lower return potential than equities, it has also witnessed lower volatility from month to month. Based on monthly returns for a 10-year period, gold prices have displayed significantly lower variation (standard deviation) than the Sensex.

Similarly, though gold has frequently registered negative returns, the magnitude of decline has been much lower than that on equities. The worst monthly return for gold between 1997 and 2007 was a negative 9.3 per cent, while that for the Sensex was a negative 15.8 per cent!

Insurance against crisis: The above analysis uses historical data to provide a reasonable indication of what gold has to offer as an investment option.

However, in the world of investments, past performance may not always be an accurate indicator of future returns.

Though gold delivered a modest performance over the past 10 years while stocks and bonds have done much better, there are several risks that could materially alter this situation over the next decade.

Gold has traditionally been a sought after asset during periods of intense crisis — a spike in oil prices, a run on a currency, runaway inflation, and so on.

Holding a portion of your portfolio in gold could help you ride out phases in which other assets don't deliver — say, steadily rising inflation (which could hurt bond returns), spiralling commodity prices (which could hurt corporate earnings and thus stocks) or a withdrawal of liquidity from the financial markets (which could hurt the entire range of assets).

RBI may hike interest rates again

The Reserve Bank of India (RBI) will review the monetary and credit policy for the current fiscal Tuesday with chief executives of all commercial banks amid expectations of a hike in short-term interest rates.


"In the light of repeated warning by the central bank on rising prices, we are expecting the reverse repo rate to be revised upward by 25 basis points in the least," said the head of research with a leading securities firm.


The reverse repo rate is the interest charged by the Reserve Bank for the money borrowed by commercial banks and is among the instruments used by the monetary authority to check commercial lending and the supply of money to the system.


The outstanding three-day reverse repo with the central bank stood at Rs.46,070 crore (Rs 460.7 billion or around $10 billion) on July 21.



RBI governor Y V Reddy had surprised the financial markets June 8 by hiking the interest rate on short-term deposits by 25 basis points to 5.75 percent - which was the fourth such increase since October 2004.


Analysts at leading securities research firms such as JP Morgan feel the factors such as high inflation, fast expansion of bank loans, the unprecedented rise in real estate prices and high commercial activity should trigger a rate hike.


"An inflation of 4.68 percent is tolerable. There is no reason for inflationary expectations. If inflation remains moderate, interest rates will be moderate," Finance Minister P Chidambaram said, ahead of the credit policy.


But analysts said Reddy is unlikely to take a soft stand given the fact that successive interest rate hikes have not affected the robust industrial growth in the country nor have they dampened the appetite for credit.


"The headline inflation in our country in a way understates the problem," Redy had told a seminar on monetary policy at the Bureau of International Settlements in Switzerland last month.


"So, in our monetary policy communications we emphasised there is clear evidence of a permanent component in the oil price increase, and hence headline inflation may be understated till that component is fully passed through," he said.


According to analysts, the statements by senior reserve bank officials in recent months indicate that a road map may also be drawn to phase out the cash reserve ratio regime - another instrument of checking money supply.


The cash reserve ratio was hiked to 4.75 percent in September 2004 and to five percent in October 2004 and its phase-out is among the policy changes that are needed before India starts moving towards rupee convertibility, analysts said.


In the past, the central bank was presenting a monetary and credit policy for a given fiscal in April followed by a half-year review in October. But since last year, two quarterly reviews have been added to make it more contemporary.

Can India be next global metal hub?

India has the potential and capacity to become a global metal hub not only to serve the industry domestically but also make a significant pitch in the international arena, according to an expert.


Several firms, including Mittal Steel, have announced plans to set up new steel plants in the country but most are yet to firm up the projects.





"We believe that India can become a global metal hub, meeting all domestic requirements. Countries such as China and Vietnam can also be best served by India," said V Krishnamurthy, Chairman of the Prime Minister's National Manufacturing Competitiveness Council.


Krishnamurthy stressed that besides being endowed with natural resources such as iron ore, coal and other minerals, India also has the necessary engineering and metallurgical talent for manufacturing value added products and the capacity to design steel plants and equipment that goes into the plants.





"The government needs to recognise that the metal industry can be a big engine for growth. We wish to create a vibrant 400 million tonne industry," he told a committee meeting organised by the Confederation of Indian Industry (CII).


Highlighting a need for government intervention, Tata Steel managing director B Muthuraman said specific tracts of land near the coast or near the source of the raw material should be earmarked for projects, particularly steel units, as they require a large area.


"Many states don't have rehabilitation policies - a hindrance while acquiring land for the project. The Indian steel industry will become uncompetitive unless captive raw material is provided. Our natural resources must be used for the development of our country first," Muthuraman said.


Other factors for building an enabling environment include better connectivity to the mines and steel plants as also plentiful water as steel production is a water guzzler, he said.


"These are the major and fundamental problems. None of the (new steel plant projects) capacities announced will take off due to the lack of availability of land," Muthuraman cautioned.

Tips to handle your tax returns efficiently !

31st July seems to be the day, which all individual taxpayers dread because it is the last day to deal with all those complicated forms and file your tax returns. The first thing, one needs to have to file income tax returns is a Permanent Account Number (PAN). If you don’t have one, click here apply for one. It takes about 10-15 days to get a PAN.

Who must file tax returns?

Now the eligibility to pay tax and file returns is different for men, women and senior citizens. If a man's annual income is more than a lakh, he needs to pay tax on the exceeding income, depending on his level of income. Women are eligible to pay tax, only if their yearly income exceeds Rs.1,35,000 and the tax-exemption for senior citizens is Rs, 1,85,000. According to the latest amendments in the income tax law, you need to file your return only if you have a taxable income. This is an amendment compared to the earlier requirement of fulfilling a one-by-six criteria to file tax returns.

Which form to fill?

In case of senior citizens
Rs.1,85,000

In case of young ladies (all ladies below the age of 65)
Rs.1, 35,000

In case of others
Rs.1, 00,000



People who don't have business income can fill up form 2D, 2F or 2E. Of these, 2D is the simplest form that everyone, except companies, can use for filing tax returns. The Central Board of Direct Taxes (CBDT) has set up help centres in over 300 cities to assist in filing of returns.

Expert tips on filling up a tax return form



What documents to attach?
A. Statement of Income (not mandatory)
The next thing to do is to prepare a statement of income for the previous year and show how you computed tax on it. This document helps to prevent deletions or overwriting, while filing your returns. A copy of this statement should also be preferably enclosed with the returns you file. However, if you can fill in all the details in your form itself, then this statement is not required. But as Partner, Kanu Doshi Associates, Ameet Patel says, it is always advisable to attach this copy.


B. Form 16

As a salaried individual, at the end of the month, you would want the amount, which you were promised at the time of appointment. But if you look closely at your pay slip, the taxman has already taken his share. The employer, on behalf of the taxman, deducts as certain amount as Tax Deducted Source (TDS).



You should have a certificate from your employer detailing that the tax has been deducted at source on your income for the year. Form 16, as it is called, is an important document; so if you haven’t got it, ask for it. While filing your tax returns, you must attach Form 16 (in original) as proof that your employer has deducted tax at source, to prevent any double payment of tax.



C. Proof of investments
To get the maximum tax benefit, many of you may have invested your money in various instruments like Public Provident Fund (PPF), NSC (National Security Certificate), Equity Linked Savings Scheme (ELSS), life insurance premium, pension funds offered by mutual funds and so on. If your company has not taken these investments into consideration, while deducting tax at source, you need to attach the documents proving your investments. You can then either claim a rebate or will have to pay tax on returns, depending on the scheme.



Tax and investment consultant, Subhash Lakhotia told Moneycontrol, “Please do remember that when you go now to file your income-tax return for the financial year 2005-2006, no standard deduction would be granted to salaried employees. Thus, this is an important point to be taken care of by all salaried employees, so that they do not claim standard deduction, while filing their income tax return for the year ending on March 31, 2006.”

Where to submit return?
Since there is no extension of date to file your returns, all salaried individuals must go to the nearest IT office, ask the public relations officer, PRO, about the jurisdiction and find out where to submit the documents. The income tax authorities have said that special counters would be opened from July 28 to meet the eleventh hour rush of tax filers.

India vs China

China is in a tearing hurry to tap the Indian market and the CCPIT’s assistant chairman Wang Jinzhen lost no time in putting his cards on the table.

China would like India to accord it market economy status as quickly as possible. It would like clarity on foreign direct investment in the retail sector, and it would be helpful if India’s infrastructure sector could be opened up to Chinese companies without further ado.

Additionally, it would also like the controversy surrounding its telecom giant Huawei Technologies resolved quickly, so that new investment in India could be speeded up, as the record on investments has been fairly dismal so far (see ‘Needles of Suspicion’).
But whatever the misgivings on either side, trade is booming —even if there is no agreement on who is gaining. According to the latest statistics released by China Customs, two-way trade grew 79 per cent to touch $13.5 billion in 2004, and reached $18.7 billion in 2005. This means the target, set three years ago, of reaching $20 billion by 2008 could be met two years before schedule. It also means that China will soon be overtaking the US as India’s main trading partner.

Why does Indian industry blanch at the idea of an FTA with China? The answer lies in the structure of their economies and their relative strengths. Slightly over 50 per cent of China’s GDP comes from manufacturing and construction, 34.5 per cent from services and just under 15 per cent from agriculture. The fear is that the world’s factory will be flooding India with its products.

Compare this with India’s profile. More than half of its GDP (52.2 per cent) comes from services, while industry contributes just 26 per cent. As one businessman points out, “What will we gain from an FTA with China? Not lower tariffs because their tariffs are already low. All it will do is open the floodgates. Just look at what it has done to the big economies. Both the US and Japan have a huge trade deficit with China and we are pygmies compared to them.”
Ready or not, Indian industry will have to learn to tango with the dragon. China is here and it means business.

7 Lessons from the Racetrack

1. "At the racetrack ... every bettor is playing only against the other bettors.... Your opportunity for profit at the racetrack consists entirely of mistakes that your competition makes in assessing each horse's probability in winning."It's both important and sobering to remember that on the other side of every transaction is another person,who holds an exactly opposite view. Achieving above-average returns (on a risk-adjusted basis) requires seeing value where others currently don't.

2. "This is the way we all have been conditioned to think: Find the winner, then bet. Know your horses, and the money will take care of itself. Stare at the past performances long enough, and the winner will jump off the page.... The issue is not which horse in the race is the most likely winner, but which horse or horses are offering odds that exceed their actual chances of victory."A good company is easy to spot, a good value is not. Many people spend all of their time searching for the next big stock idea, yet wouldn't have a clue about what's already priced into the stock of whatever company they find. Knowing how to value a business is key.

3. "...Handicap[ing] horses is work that you do before the betting opens. As soon as those first prices go up on the board, you are looking for discrepancies between your odds and those set by your opponents....You must have a clear sense of what price every horse should be, and be prepared to discard your plans and seize new opportunities depending solely on the tote board."The key is that good investors, like good horseplayers, do their homework ahead of time to become familiar with what they're looking at. Good investors put themselves in the position to act quickly when bargains emerge because, as every shopper knows, a good bargain doesn't last long.

4. "It might not be a great deal of fun, but you could sit around and wait for mismatches, races in which one horse is so clearly superior to the competition that anyone could fairly agree that he has a better than 50 percent chance of winning the race.... There is no shame in passing a race because you just don't see any value in it.""Sitting around and waiting for mismatches" is exactly what Warren Buffett has done for the past half-century. He is well aware that "shame" comes not from shrewdly "passing a race," but recklessly entering one. "You don't get paid for activity," Buffett instructed, "You get paid for being right."

5. "What defines sucker money is not the horse selected, but the acceptance of odds on that horse that are substantially out of line with its chances of winning." A bad (or good) investment has as much to do with what price was paid as it does with what business was bought. So it's entirely possible that the stock of a bad business can offer attractive returns. And just as a bad company can make for a good investment bet, a good company can be a bad investment bet.

6. "...The world's savviest bettor cannot win with bad opinions"There are plenty of people who come up with very precise valuations for companies (down to the penny in some cases), yet their knowledge of the companies is scant, and therefore, their valuations worthless. Truly understanding the business is a prerequisite for valuation.

7. Finally, as Crist says, "If all of this seems too calculating and joyless, by all means feel free to forget about it and enjoy yourself at the races betting horses you fancy regardless of their price. You'll have plenty of company, and the rest of us could use your money."