Prajna Capital - An Investment Guide

It is time to be defensive. The trick is to pick up every available opportunity to add returns bit by bit BDV-270534-BDV A RANGE-BOUND market is always on the move, but going nowhere! The ‘buy and hold’ will just eat away returns and may not even deliver return equal to say an fixed deposit ( FD ). Therefore, it is frustrating for a long-term investor since it eats into real returns. It is also frustrating for an arbitrageur since volumes generally drift lower and the bid offer of price makes it difficult to make money. Then, there are day traders, who still have work to do since their horizon is short. However, sideways movements generally are preceded and succeeded by large bouts of volatility, which invariably take a toll on some large leveraged players. This leads to some active players withdrawing from the market leading to further liquidity squeeze. However, all is not lost! Let me attempt to outline the investment strategies in a range-bound market for a normal average investor,...

Some tips for investors who are holding stocks that have eroded value in the recent corrections After a dream bull run over the last four years, the domestic markets are in the grip of a slowdown from the last six months. There have been a couple of pull back rallies but every rally is followed by a correction and the markets are falling to new lows in each correction phase. There is a lot of negative news flowing in from all ends and as a result the markets hit their lowest levels in 2008 recently. Currently, the market sentiments look quite bearish. Rallies in the markets are quite short lasting and most of them end in intraday or at the most in a couple of days. There are selling pressures at every level in the market. Many stocks have come down 40 to 60 percent from their peak levels. Stocks and sectors that led the market rally last year are the worst hit in this correction. For example, stocks in banking, financial services, power, energy and infrastructure have seen much deeper...

It can help you restructure your portfolio and survive - and even thrive - in these uncertain times The stock markets the world over have had a fabulous run over the last five years, with indices multiplying many times over. The domestic stock market has been at the forefront of this rally, and has been one of the best-performing markets and the darling of global investors. But all good things come to an end, and the dream run of stock markets worldwide has been no exception. This January was a rude shock that sent investors scurrying for cover. Traders have seen a year's profits get wiped out in a week, and most investors are also yet to recover from the bruises. But, over the last few weeks, markets have seen a semblance of normalcy again. There has been a handsome rally, but doubts and worries still linger. Inflation, an economic slowdown, and the fiscal deficit are the three demons haunting the markets. But we have already had a steep correction. Valuations are not as high as ...

SMALL investors, who often suffer on account of delays in getting their grievances redressed, may cheer. The scope of consumer courts, that are known for providing faster justice on issues touching the life of normal citizens, are set to be expanded to provide small investors easier redressal to their grievances. The new Companies Bill, which is likely to be placed before Parliament this monsoon session, will call for strengthening consumer courts towards that end. The idea is to provide investors faster justice without spending much on legal expenses, which is quite unlikely if one approaches the courts. Investor protection in India is overseen by market regulator Sebi and the ministry of corporate affairs. Officials in the ministry of corporate affairs say that consumer courts are legally eligible to look into investment-related cases, but they need to have a specialised set up for such technical matters. The government also proposes to bring more clarity on the jurisdiction of such ...

Very often taxpayers take loans either for the purpose of buying a house or a flat or a car or for some other personal purposes. They are required to pay equated monthly instalments ( EMI ) of interest and principal. In some cases both the interest and principal are deductible for purposes of income tax and in some cases it is not so deductible. Hence in this article we have discussed the benefits of EMI under the Income Tax Act mainly in relation to home loans. The section in this article pertains to the Income Tax Act, 1961. House should be ready for occupation: One of the most important aspects to be remembered by a taxpayer is that the house or flat must be complete. If the house is not ready or is still under construction, then no deduction either on principal or interest would be allowable and permissible under the Income Tax Act. Bifurcate EMI into Interest and Loan: The next important aspect to be remembered by a tax payer is to bifurcate EMI into two parts . They are (i) Inte...

Is the choppy stock market making your heart skip a beat or two? Put your fears aside. Greed (bull) and Fear (bear). These are two words investors often hear and think of, but are unable to control their emotions when it comes to investing. In fact, when stock markets are northbound, their confidence in buying increases considerably. They buy stocks irrespective of their high price-to-earning ratio and are sure to make good money. If, however, the markets enter a bearish phase, their confidence goes down, leaving them wondering where did they go wrong? The chaotic bear market environment then sets the stage for fear to creep into their minds, thus impacting investment decisions. To make sure that you successfully weather the raging market storms, here are six ways to drive out your fears of losing money in a bear market. STAY CALM AND ACT SMART Easy to say than follow. It is true that bear markets spread panic among investors, often causing them to sell all the stocks they hold. But a...

INSURANCE is a subject matter of solicitation. But how often do you give any thought to this rider, which perhaps is the most important clause while buying a policy. Traditionally, in India, people buy insurance products not because they need them, but because they are goaded to buy a policy to appease a neighbour, relative or a friend who is also an insurance agent. Financial experts hold the view that insurance needs are specific to each individual, depending on their financial objectives. The product that you buy should be in line with your requirements. Here are the pertinent queries that you should ask your insurance agent before being sold an insurance policy. Is the agent qualified or authorised to suggest me a financial solution? As a first step, you should ask your insurance advisor to provide the agent licence number and details such as when was it issued and its expiry date. This will inform you for how many years he has been in this profession. Also, whether he is a full-...

Some options for the risk-averse in times of rising inflation The term inflation refers to a rise in the general price levels. Inflation is measured by an index which is calculated by taking into consideration a set of goods and services, and then the prices of the items in that set are compared to prices one year ago. In India, inflation is measured based on the wholesale price index ( WPI ) which measures the change in prices of a selection of goods at wholesale rates. Inflation gradually reduces the purchasing power of your money and therefore it becomes very important for investors to understand the impact of inflation on their investments. Investors, especially senior citizens, put a lot of emphasis on the safety of their principal amount and in the process they sacrifice the yield on investments. For example, if an investor deposits his money in a savings bank account which generates 3.5 percent per annum and the inflation rate in the market is around seven percent, he is making ...

With the economy expected to grow at 7.5 -8%, there’s no reason why a long-term investor should not enter the market at every fall THE continuous decline in stock prices over the last few months has adversely impacted corporates, insurance companies, financial services firms and mutual funds, amongst others. But these are players who, perhaps, have the wherewithal to withstand such declines. This may not, however, be true of the small investor — the individual investing modest sums for a house, daughter’s marriage, retirement and others. Should then the small investors rush for the sidelines? Or should they view this as a buying opportunity and plough more money into the market? A none too distant survey by an international management school had majority of the experts surveyed saying an emphatic ‘neither’ to the question. This being the consensus, let us ponder on how we can insulate the retail investor. These are not nuggets of wisdom which has remained hidden so far. These are the t...

How losses from residential property can be adjusted against other incomes to reduce tax liability… Here is how… The interest paid on a home loan taken to buy a house is a common loss under the head 'income from house property' . This can be set off against other incomes of an assessee, thereby reducing his tax liability, and can as such act as a measure of tax planning. Under the Income Tax Act 1961, 'income from house property' is a separate and distinct head of income. Accordingly, such income is taxed separately. Under the Act, apart from the income actually received, even the deemed or notional income is taxable. Deemed income is the 'income' that is not actually received by an assessee, but is liable to tax. This happens in cases where the assessee owns more than one self-occupied houses. Only one such property is exempt from tax. Deemed income from all other houses is taxable, although it is not actually earned by the assessee. At the same time, some spec...

By tracking promoters’ move in the open market, you can get a feel of the direction of a stock price THE January bloodbath on Dalal Street this year left stocks of many heavyweight as well as emerging companies quoting at cheap prices. What followed in the next five months was that many promoters used this slump to acquire their company’s shares from the open market. This buying from the secondary market by promoters to enhance their holdings is also known as "creeping acquisitions" . You may, however, ask how it makes a difference to your portfolio. According to analysts, by tracking promoters’ move in the open market, you give yourself a chance to ascertain the direction of a stock price you are holding. Here’s an insight into how you can follow promoters’ buying and selling activity in capital markets to your advantage. FIRST THINGS FIRST Is it legal for promoters to shore up their stake by buying from the open market? As per Securities and Exchange Board of India ( SEBI )...

House rent allowance ( HRA ) is given by employers to employees as part of salary. It is mentioned in the terms and conditions of employment. HRA is given to meet the cost of rented premises taken by an employee for his stay. A person can claim exemption on his HRA under the Income Tax Act, if he stays in a rented house and is in receipt of HRA from his employer. The exemption of HRA is covered under Section 10 (13A) of the Income Tax Act and Rule 2A of the Income Tax Rules. Two basic conditions need to be met to qualify HRA received for tax exemption. One, rent must actually be paid by the assessee for the house he occupies, and two, the rented house must not be owned by him. The amount of HRA exempt is the least of these: The actual amount of allowance received by an assessee in the relevant period, and during which the rented accommodation was occupied by him. The amount by which the rent paid by the assessee exceeds one-tenth of his salary. If the house is in Mumbai, Calcutta, Delh...

The tax benefits available on 2 components of a home loan Interest Principal There are some tax benefits available on home loans. The tax benefits can be claimed on both the principal and interest components of a home loan as per the Income Tax Act. These deductions are available to assessees who have taken a loan to either buy or build a house, under Section 24(b). A) Tax benefits on interest component If these conditions are met, interest on borrowed capital is deductible up to Rs 1.5 lakhs: Loan is taken on or after April 1, 1999 to buy or build a property. The purchase or construction should be completed within three years from the end of the financial year in which the loan was taken. The bank extending the loan should certify that interest is payable against the loan advanced to buy or construct a house. If these conditions are not met, the interest on the loan is deductible up to Rs 30,000 only. However, these conditions have to be fulfilled then: The loan should have been tak...

THE term ‘ risk’ is slowly finding its way back into investor lexicon. This is evident from the rising demand for capital-protection products offered by brokerage houses in their portfolio management schemes ( PMS ). Of several such products, the one which uses bonds and the recently introduced long-dated options, is the most sought after for now. What differentiates this capital-protection product from others is the use of long-dated options, that Sebi introduced in January this year. The product has been structured in such a way that a major chunk of an investor’s capital is put into highly-rated bonds, while the rest is used to buy Nifty call options, which expire 1-3 years from now. So, for instance, if a client puts in Rs 100 into such a product, the fund manager of the PMS would invest, say, Rs 90 in bonds at a fixed interest rate to protect the capital. Rest of the money is used to buy (pay the premium for) a long-dated Nifty call or put that expire in 2009, 2010 or 2011. It i...

AT A time when most people are getting impacted by rising inflation and poor returns on their investments, tax planning assumes great importance. Most people look for avenues that would help them not only evade the claws of tax collectors but also save on money. Among the many options available, most financial experts recommend investment in tax-saving funds, tempting you to put all your money into this scheme. But before you take the plunge, here’s what you need to look into before investing in a tax-saving fund. TAX BENEFITS While the primary benefit of a tax-saving fund is implicit in its name, tax benefits are dependent on the investment made in the fund. According to Section 80C of the investment tax law, all investments up to Rs 1 lakh are exempt from tax. In addition, tax-saving schemes offer tax rebate under Section 88 up to a maximum of Rs 10,000. Also, since the lock-in period for tax saving funds exceeds one year, you can be guaranteed of exemptions from long-term capital ga...

It is ideal to make your financial plan for the year early. Don’t leave tax-saving options for the last minute Many people rush to make last-minute and hasty investments to save on tax. Such hurried investments are usually made without much deliberation. The result - either the investment is unsuitable for your profile or you have to take a loss. Get down to financial planning and manage your finances well to meet your goal. Planning well in advance gives you ample time and opportunity to investigate, prepare and schedule investments. Set Goals The first step to financial planning is chalking out your goals and refining them. Next, define your risk appetite. A professional financial planner can help you save and invest for your future goals. Decisions have to be made based on inflation, income tax, current income and investment levels, asset allocation, and returns in various asset classes, expenditures, long-term commitments, short-term commitments and objectives. A financial planner ...

A loan to purchase or build a house is available at around the 10 percent level. It used to be around seven percent a couple of years ago. Also, the interest rates remained quite volatile over the last few quarters. However, this is a cyclical phenomenon. Over a long loan tenure, it will move upwards and downwards. The average rate and tax incentive together add up to make it good for the borrower. Here are some factors that influence interest rate movements: Inflation Inflation plays a significant role in influencing the monetary policy of the Reserve Bank of India ( RBI ). It forces the central bank to hike the interest rates. Currently, inflation has gone up over 11 percent (way above the RBI's mandated inflation level of around five percent per annum). The main reasons for this high inflation rate are a sharp rise in prices of basic commodities, and hike in rates of petroleum products (petrol, diesel and cooking gas). The RBI has announced a repo rate hike twice this month itse...

The stock market has been staying below its 200-day moving average and forming lower tops and lower bottoms, confirming that it has tanked out THE debate on whether we are in a bear market or not should be over, as it now feels and seems like a bear market, says brokerage house Morgan Stanley, in its India strategy report titled ‘How Long Will This Bear Market Last?’. A key indicator has been the market staying below its 200-day moving average ( DMA ), and forming successive lower tops and lower bottoms. In the three bear markets of the last 20 peak, Indian benchmarks have already fallen close to 40% from their record highs seen in January this year. But the moot question here, according to Morgan Stanley, is how long this bear phase will last, and not how much further prices are going to fall. This bear market has averaged 1.3% in the 25 weeks that it has fallen since its January top—slightly higher than the average of 1.1% in the first 25 weeks of the previous three bear markets. Mor...

If you have lost money, then have a hard look at your holdings. It is time to be patient ULTIMATELY, you cannot really lose money in the stock market! If you have, then either you have not been in the stock market long enough or you are in the process of getting the most expensive education. In the last 15 years, I have portfolios earning about Rs 5 lakh from share dividends alone against others who started with Rs 5 lakh and today owe the broker about Rs 3 lakh. When the markets, Sensex moved from 4,000 to 7,000 points, people thought it was a bubble and many sold out by the time it reached 12,000 points. A huge majority lost the run from 9k to 16k. Seeing their folly, many entered around 17-18k levels and in two months, saw their portfolios doubling. Greed peaked, speculation peaked and the fall shattered millions of dreams. Is there someone sitting on profits today? The answer is a resounding yes! Here are examples. HDFC was quoting at Rs 300 in 1999 and touched about Rs 3,000 earl...

Prime Lending Rate (PLR) PLR or prime lending rate is a benchmark against which the lender sets his rate of interest. Cash Reserve Ratio (CRR) This is the portion of funds that banks have to retain with the Reserve Bank of India ( RBI ). When the RBI increases this percentage, the amount actually available with the commercial banks comes down. The RBI increases the CRR to draw out excessive money from the banking system and thus checks increase in prices. Bank Rate This is the rate at which the RBI lends to other banks. If the RBI increases its lending rate, the ripple effect will be felt across all the other banks that will hike lending rates to continue making profits. Repo Rate If banks face any shortfalls in funds they borrow from the central bank. Repo rate is the rate at which banks borrow money from the RBI. If the RBI reduces the repo rate, it will be cheaper for banks to borrow money. On the other hand, if the repo rate goes up, borrowing becomes expensive. Reverse Repo Rate T...

You can use the correction phases to build your portfolio with value picks. Volatility is a basic nature of stock markets. Stock markets are driven by investor sentiments and expectations of corporate earnings. Usually, markets react sharply to negative or positive news developments. The volatility this year is due to a negative bias. There are many factors that contribute to negative investor sentiments. For example, a persistent high inflation rate (especially the core inflation rate that is driven by basic commodities), rising commodity prices in global markets, slow down in global economy and no visible signs of improvement etc. Global investors who were pumping money into emerging markets are exiting. Large foreign investors are bearish on the global growth potential and expect the global economy to deteriorate. Since the stock markets are in a sideway movement and not doing very well, equity funds are also not delivering good returns. In fact, most of them delivered negative perf...

It’s that time of the year when your salary is supposed to look fatter — after all, the financial year has ended. And the New Year brings cheer with pay hikes and lump sum performance bonus, if any. Pay off bad and ugly loan It’s better that you pay off your ‘bad and ugly loans’ with it. These could be your high interest-paying credit card bills, personal loans or car loan. Any loan that costs above 14% should be paid off. Never miss the wood for the trees and ensure that any investment is directed towards the ultimate financial goal, experts say. The idea is that you should see your money grow to meet your financial targets. Safe instruments If you want to use the money for medium-term needs, say 3-4 years, consider safe instruments like debt. This could be debt funds or even arbitrage funds. Arbitrage funds generate fixed income by taking advantage of price differentials between the cash and the futures market. Advise would be not to invest this bonus in aggressive instruments as thi...

Most investors want to play safe in turbulent times, yet expect reasonable returns on investments. Below is the list of five themes to help you come out unscathed DARE to bare your wisdom in the current market situation? You better shelve the idea if you have the faintest clue of the factors behind the negative sentiment. In fact, over the last six months, weak global market cues, skyrocketing commodity prices, particularly crude oil, high inflation, suspense over signing of the nuclear deal and political uncertainty have all cast a pall of gloom over the markets and made even the best laid-out investment plans go awry. And if you are a first time investor, this can’t be a more inappropriate time. All, however, is not lost yet. Out five investment themes which may help you to beat the market blues over the next six months. DEFENSIVE POSITIONING No investor likes a range-bound, highly volatile market, marked by spikes and falls at regular intervals. And if you believe industry analysts,...

Market Regulator SEBI Allows Repricing Of ESOP, this is due to market conditions as Exercise Price Becomes Less Than Market Price making ESOP less attractive. THE bloodbath in the stock market has forced some firms to restructure their employee stock option programmes ( ESOP ) to assuage employees who are seeing a large portion of their ‘ wealth’ disappear. Thanks to the market correction early this year, a number of Esop schemes have become redundant or gone “ underwater ”. This means the current market price of the stock has fallen below the Esop exercise price. This is true of most firms that issued Esops over the past one-and-half years when the markets were high and bullish. There are many firms which started Esops last year, particularly those which got listed in 2007. All firms who have a vesting period of one year would either have to reprice the options or see it as a worthless option at the hand of the employee which won’t be exercised. Employees who got Esops before the mar...

MAJOR emerging market fund groups recorded outflows during the fourth week of August with EMEA (Europe, Middle-East, Africa) equity funds hit the hardest in percentage terms, according to Emerging Markets Portfolio Funds Research. Investors pulled money out of the diversified Global Emerging Markets ( GEM ) Equity Funds for a fifth-straight week and extended Latin America Equity Funds’ losing run to 12 weeks and $4.1 billion. Since the second week of June, EPFR Global-tracked Emerging Market Funds have surrendered a net $23.1 billion, the note said. Appetite for exposure to emerging markets has been eroded by a sharp correction in commodity prices during the current quarter, a string of downward revisions to economic growth forecasts and painfully high inflation rates in several key markets including Russia, India, South Africa and Argentina. Investors still have appetite for direct exposure to China, although the $175 million they committed to China equity funds was more than offset b...

DURING the past six months, the financial and economic scenario has undergone a sea change due to high inflation of nearly 12%, softening property prices after reaching astronomically high levels, reduction in gross domestic product ( GDP ) forecasts and consequent slower growth rate of the economy, political uncertainty, sub-prime financial crisis and slowdown in the US. In view of the above, let us review what investment strategies one can adopt. STOCKS The stock market is a reflection of psychology as well as earnings, dividends and asset value. The BSE Sensex is currently at 15,000 level, implying a price to-earnings ( P/E ) ratio of about 18 (with EPS of say Rs 850) and an earnings yield of nearly 6%. So, is this the time to buy, hold or sell stocks? This is definitely a difficult question to answer as no one can accurately predict the future direction of stock markets. Historically, a P/E ratio of 15 for the stock market is considered fair, implying a BSE Sensex of 12,750. Alth...