Thursday, September 24, 2009

Whether buying of gold makes sense now?

During last few months I am flooded with a question from our readers whether should they buy Gold or Gold ETF. I am really surprised to find that so many persons have been rushing to buy Gold now a days. Gold have been favourite of human being from time immemorial. In fact Indian buys and holds maximum quantity of gold. Indian uses gold in ornaments during the wedding. Fashionable persons were gold jeweleries to make style statement. Yet most of the people uses it as the security for life during the financial crisis.
The birth of GOLD ETF emerged out of this sense of secuirty for life. The orld monetary system revolves round the GOLD standard. Nobdoy knows actually how many tons of Gold are kept in the FORTKNOX of USA but i the belief that works out like miracle. Entire monetary system revolve around the Gold. Recently IMF had recommended that countries of the world can sell Gold to combate recession. It is expected that GOLD price may come down when actual sell of Gold takes place. But according to some economist in the next fifteen years the value of Gold would go up many fold. In that pre supposition value of Gold is going up slowly from now onwards. So whether people should buy Gold or GOLD ETF ?

According to me if someone wants to make jeweleary for ewedding then it would be prudent to buy Gold. But it people wants to make an investment out of Gold then it is better to buy Gold ETF. What is GOLD ETF? Who started it? Is is worth while to buy ETF rather the Gold Metal? These are the questions need to be answaeered now.

Exchange traded funds (ETFs)were first introduced on the Toronto, Canada, Stock Exchange around the early '90s. They were then introduced in to the US and other markets during the 90s. in India Gold ETF was started during Twentyfirst century. What is the meaning of GOLD ETF fund?

A simplified definition would be: An exchange traded fund has funds and stocks in one product and trade is made on the particular fund. Prior to ETFs, stocks and funds, were traditionally kept separate to reflect liquidity issues.

The purpose of an ETF is to be able to invest in the growth of an industry or even commodity that was not easily available to the market prior to ETFs.There are certain inherant benefit of ETF. Those are:flexibility in the timing of purchases and sales. No taxes involves in ETF if investment is held for more than a year. However there are cetain disadvantage that there is no control of thebuyers of ETF over the activities or the content of the ETF. There is no gurantee that ETF buyer would own real Gold metal.The i9nvestor cannot redeem gold or take delivery of the gold. They can ofcourse get Cash equivalent to value of market based gold. To buy ETF there is hidden cost broker but that is minimal . It is even lowers than MFund cost. The unit reflect the price of actual price of London Bullion market. The greatst advantage is ETF is safe and there no problem of storage and cannot be sold any day when market is open.Once you have a brokerage account you can buy Gold ETF by placing an order like a normal stock order to buy listed Gold ETF. Most of the ETF are listed only on NSE. Unfortunately, BSE does not have any Gold ETF listed on it.

Gold EFT are fast becoming a rage in India. One reason attributed to its popularity could be its stellar performance in a relatively subdued market conditions.

It is a wise decision to allocate just a small portion of your portfolio to gold ETFs. Gold ETFs should not be looked at as a mainstream investment. Currently, there are six gold ETFs operating in the market and they are all alike. They are structured in a way that all generate same return. The NAV of all funds should be similar as per the market price of the gold metal .All ETF funds charge one percent expense. So any Gold ETF is virtually cost same and returns are also same.

When first introduced in India, many were skeptical about its relevance and suitability in Indian markets, however increasing volumes and new scheme launches(Quantum, SBI) indicate its growing acceptance in a naive market like India. It is a complex financial instrument. It involves many different entities apart from usual fund managers who manage the scheme. However, its has its own limitations since it is listed on exchanges.

Many people are unaware of ways to buy a GOLD ETF.

You need a Demat account along with broker who is a member of NSE to buy a Gold ETF. How much investment a persons should make in Gold or Gold ETF?

Any investopr should not invest al their disposable income in one basket. The money to be invested should be distributed. A persons of forty years age as the thumb rule goes should invest 60% in equity 20% in Gold ETF and 20% in Debt fund or FD( including PPF and bank saving acount). Investors some time make mistake of high investment in Gold ETF as they find when Dollar value goes down Gold Value goes up. But experience says nothing provide better return in long run than (1) work of art,(2) equity,(3) house and then only(4) Gold or Gold ETF. The investor should have gold ETF in their folio but not in preference to equity,and housing . The Gold ETF is good for creation of Wealth butnot for running their family expenses.

To hedge against Financial Collapse buying physical Gold is good if you have secured place to store.In a situation of great financial crisis GOLD ETF and share of Gold mining comapnies would never help . What should be done now?
Buy Gold or Gold ETF on DIP( not share of manufacturing comoanies) and keep it for for long term. But beaware gold should be a minor part of your portfolio and not the whole of your portfolio.



The Finance Minister recently announced the proposed Direct Tax Code effective April 2011. The code aims at a comprehensive reform in the sphere of personal and corporate taxation. We would however discuss the impact of the code on common people. To safe guard the interest of business, industry and workmen there are number of chambers of commerce and Trade Unions but for common self employed people and retired people there are none. The Code is open for Public discourse hence it should be debated, discussed and recommendations need to be sent to finance Ministry.

There is a great difference between" Code" and the "ACT". The government is trying to bring in Direct Tax Code" instead of present system of "Tax under Finance Act".
.The Code would be permanent affairs like "Cr P C" or "I PC". Once tax act is converted into a code it would generally not be necessary to introduce changes every year along with budget. This is a reform which the government wants to bring in for the good of the people. The code has proposed no change in the exemption limit of the personal tax. It remains 1,60000 for men,1,90,000 for women and 2,40,000 for senior citizen. Yet percentage of taxation has been reduced up to income of Rs.Ten lakh.

Prima facie, the tax liability will reduce significantly as the draft code proposes to tax incomes up to Rs 10 lakh at 10%, that between Rs 10 lakh and Rs 25 lakh at 20% and sum in excess of that at 30%. Now people pay 10% tax only if his income is less than Rs Three lakh. A person drawing Rs 10 lakh now pays Rs 2.11 lakh as tax. If Code is implemented he would pay tax amounting to Rs 84,000/- only. Is it not really good?

But all deduction now under 80 c will vanish as it is available now except for a few like new pension schemes, LIC etc! This means death nails on small saving schemes. However deduction under 80 C will be enhanced from Rs one lakh to Three lakh. This allowance would surely help generation next. But the exemption on retirement benefits would vanish. The retirement savings will become taxable on withdrawal, as the draft code has proposed to usher in exempt-exempt-tax (EET) regime. The PPF and PF will loose all its glamour and tax benefit.

For younger Home owner there is a bad news too, the deduction of Rs 1.5 lakh allowed on interest paid on home loans appears set to be scrapped. There is no mention of such a deduction being allowed in the draft code. Young people will not get tax benefit.

On implementation of the code all perks would considered part of the gross salary for the purpose of taxation. The impact of that on tax liability of an individual will be known only when the rules are prescribed by the income-tax department at a later date.

But there would be equity in the tax system both vertically and horizontally across all sectors.. The tax treatment of the perks enjoyed by the government employee and the private sector employee will be the same. Till now government sector was in advantage!

It has also proposed that benefits such as gratuity payment made to employees on change of jobs will be allowed tax exemption only if it is invested in a retirement fund.
The most significant reform would be to bring in the EET regime for all approved provident funds, approved superannuation funds, life insurance and New Pension System trust from April 1, 2011 . The PF and PPF were under EEE system now. This benefit will vanish. The amount would be taxed on the year of withdrawal. This would hurt middle class and specially retired lot.
However, the proposed code provides that the withdrawal of any accumulated balance as on March 31, 2011 , from the specified instruments such as PPF will not be subject to tax. The senior citizen should not withdraw amount in a hurry to save tax. Because, where ever they invest the interest would be taxed. The money in PPF should be kept there itself, if possible, as the interest earned would be exempted from tax. When ever emergent requirement occurs then only it should be taken out after paying tax .In that event tax incidence would be much lower. Of course, the rollover from one exempt fund to another fund will not be subject to tax. This means from PF or PPF you can transfer it to NSC and NPS without attracting tax...
The code has proposed to continue with other deductions such as medical insurance premium, medical treatment or maintenance of disabled dependent, treatment for specified diseases for self and dependents, for the handicapped, interest on loan taken for higher education, rent paid for residence, donations to certain non-profit organisations and specified institutions and tuition fees for children.

The long term capital gain tax on equity based instrument was exempt from Taxes till now. But if code is approved it would be taxed like short term capital gains. This would affect the sentiments of investors. Now mutual fund investor would prefer to invest in dividend mode for the dividend would remain exempt from tax.
It appeared that for middle class two things would adversely effect. The taxation on withdrawal of PPF and PF and withdrawal of long term capital gains tax. The code was released for Public response. It would not be wise to sleep over it. Posterity would blame if present generation do not participate in such reform process for common people


Monday, September 7, 2009


Tea as a drink has a wide acceptance. From Queen of England to President of America tea is a welcome drink. Similarly homeless of Britain to Indian residents of below poverty line also love their daily cup of tea. But now world has experienced a different usage of tea. This use is for various product of medicine and health therapy .

Tea is being lately used for colouring of fabric also. Due to antioxidant quality, tea is being used in shampoo, skin care products and even in shaving leather. For the first time I have found shaving leather having tea as an ingredient . This is available in boutique Bath and shower stores. The most value added tea product, however, is now decaf tea. It has much higher value comparative to traditional tea as a drink.This has given rise to a specialised market for tea leaf and tea bush too. In its new application tea formulations are used as health product and in cosmetic application . In these new applications ,more than the tea leaf, tea bushes, branches and trunk of the tree are used generally. A different kind of tree, akin to our tea plant, but are planted and grown much taller mostly in similar climatic zone, of sub Sahara , China and in Australia for extraction of oil.

These plants are akin to our tea plant but grown much taller and even known as Tea Tree . After an extensive research it was found that oil extracted from these tea bushes and trees have produced Tea oil . These oil have found use now in cosmetic products. This is high time for our scientific laboratory to experiment whether tea bushes of Assam could also produce similar oil or not. It is understood that in South India and in China a few entrepreneurs have tried to develop tea oil from the fifty years old bushes also Just before uprooting.

Recently it was established that Tea tree oil is an effective antibiotic and it can help human being to cure skin problems too like acne,herpes, sun burns, blisters etc. According to the recent studies it was found that tea tree oil is also beneficial in curing sickness like cold, cough, soar throat, respiratory problems etc. It strengthens human body with an awesome immunity. And so patient can fight in a perfect way with flu like condition. Till recently there were not much diverse use of Tea. Only research revealed that tribal population used it for medicinal value.

Diverse use of tea would be very helpful for young Assamese tea planters if research could be carried out by our tea laboratories. As the time progress the cultivation of tea alone would not be very profitable for cost of production of tea would go up every day. As the time has progressed due to bad weather condition, cost of fertilizer and increase in human and administrative cost have gone up. If the cost of production continues to go up every year then, It may not possible to profitably run the gardens by most of the planters.

Now a days tea is facing competition not only from cold drinks and natural juices but from chocolate and milk too. The most important competition of traditional tea have come from the " bottled ready to drink tea" itself. Ready to drink have been bottled for sportsperson, parties of youngsters and for those persons who want to rejuvenate themselves for dancing and for partying beyond midnight. These tea are edible bottled drinks made out of tea leaf, and are costly. Yet there is a huge demand as it is marketed as "life style product". Recently tea has been adopted by wine and spirit industry also. In America Vodka and wine made out of tea has been marketed recently. None of these are made of Assam Tea. Mostly these are made from tea produced in Argentina, Ceylon and Papua new guinea. Would anybody from Assam like to try and reap much higher benefit out of tea ? In that event communicate with marketing organisations of USA, Germany and UK for collaboration.Why not start winery in Assam or produce Vodka based on tea leaf. Now a days Polish vodka based on rye and French vodka Grey Goose based on grain are considered top of the line, beating traditional Russian Vodka made out potatoes. Vodka based on tea could be an amazing product too!

The government despite its willingness to support the tea industry may not be able to free the gardens from all taxes and rates. Neither it would be desirable nor possible. Tea industry is the most heavily taxed industry now in the country. The establishment cost would always go up every day and the cost of fertilizer and Electricity would be doubled every five years. A time would come when either small tea gardens manged by individual( like china or south India now) or few very large corporations would be only able to sustain plantation, for the cost of irrigation would also become prohibitive , with the change in climatic condition .

The importing countries of the world now purchase much less tea from producing countries and mix it with various fragrance as the cost of tea has gone up. Even Earl Grey Tea is not pure Assam Tea anymore . It has an aroma of orange in it.Many tea drinking nations have evolved various other fragrance like ginseng, lemon, cantelop, ginger etc. The most recent fragrance used in tea is that of celery.These mixing have been initiated to change the drinking pattern and mainly to change people's drinking habits and for reduction of cost per cup of tea consumed..

Tea tree oil is very popular all over the world and the main reason for this is the high rate of return and low cost of production. It is great value added product for treatment of bacterial, fungal or viral infections are concerned. Since hundreds of years, tribal people living in tribal areas and jungles have relied on tea tree oil as an effective disinfectant. There are many medical benefits of tea tree oil. As far as properties of tea tree oil are concerned people can identify it by its yellow color. It has smell that is similar to nutmeg and green tea leaves. These tall tea Trees are cultivatd in Australia mainly.According a specialist these can be cultivated in Assam , Arunachal and Meghalaya too.

The most demanded traditional value added tea at present is decaffeinated tea and organic Tea. It is a value added product. But in Assam perhaps none are trying to produce decaffeinated tea formulations . The most marketeers in USA and Britain import solution of decaf tea from Germany who are the biggest buyers of Assam Tea. During my conversation with the president of the Harish Tea Company of USA , Mr. Chirayu Baroowah told me that his company imports decaf solution from Germany. From these solution selectively decaf tea are produced and marketed by their company in entire Northern and Southern America. He felt in case decaf formulation technology could be developed in Assam, either through technical hook up with Germans or through development of research locally, the entrepreneurs of Assam could be greatly benefited. Organic tea produced in Assam has created a niche in the world market slowly. Young tea producers of India should make an effort to contact overseas-es technologist for such up gradation of tea product from ordinary leaf product to value added product. Slowly Assamese tea planters should think of diversifying the planting base to other part of the world like Argentina. If Assamese computer and Dot com specialists can make it big in Northern and Southern America why not Assamese entrepreneurs can come out to Australia and South America where Tea Tree are planted now a days for different use. In case alternative use of tea could be taken up by young entrepreneurs of Assam they would be able open an new area of development that might make them millionaire like young IT entrepreneurs.


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