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Tuesday, December 30, 2008

What you should do in a range-bound market

It is time to be defensive. The trick is to pick up every available opportunity to add returns bit by bit
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, a large savvy investor, day traders and introduce a new breed called ‘swing traders’.

The first dimension is a psychological one and here are some ground rules in this market.

Firstly, in a range bound market, buying any stock, going on a holiday and coming back to see your stock double or triple is not going to happen.

Secondly, a good money management will help accumulate more returns systematically than anything else.

Thirdly, for investors — who do not have current investment and have no compulsion to jump in without homework — the markets are not running away anywhere. Lastly investors, who are already invested, doing nothing and just hopping will not stand to gain either.

For the normal average investors, who are infrequent, it is best to watch stocks, which are fundamentally good in Sensex or Nifty. Then watch the movement and buy near the 52-week low, wait for exit at say 10% profit or even lower if it starts turning. One needs to book the losses if they start extending to say 5% below the 52-week low. One has to be patient and buy only when there are signs of stability at the lows but must never take eye off the scrip. A ‘buy and hold’ strategy is not recommended. If one is short of time for doing homework, indirect investment through mutual funds or SIP will be better.

To reiterate, good money management is critical in these times. For large savvy investors, usage of options can come very handy. To give you an example, let’s say an investor is holding a large concentrated holding. A good way to generate yields is to sell out of money calls. You can pick up close to 1.5% return for a month and if that price is a hit, you get out at profit plus the premium and can re-enter when the stock drifts down again.

Due to low liquidity and momentum, however, it becomes hard for jobbers (who buy and sell for a very small movement) to make large monies. It is better that they continue to stick with the large liquidity stocks. The velocity of trades does come down. It is important to guard against compulsively putting trades on account of habit.

It is critical to review the portfolio in which one is already invested. The way to repair a portfolio is either through use of derivatives (if one understands the risks of the same) or simply a sector rotation. Then move into large cap defensives and play the swing game. The trick is to pick up every available opportunity to add returns bit by bit.

The key is awareness that there are times to go on the offensive and then be defensive at other times. In range-bound markets, it’s time to be defensive, look at the risk levels you are running at an overall portfolio level across the full savings and make every penny work.

Small returns will add up to a tidy sum.

Monday, December 29, 2008

Strategy for loss making stock holding

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 cuts than key indices.

Many investors are stuck with these stocks bought at higher levels. Investors are not sure whether they should sell at these levels or buy more to average out their purchase prices.

Here are some points that will help you decide between investing further and exiting after cutting losses:

Stay invested

Long-term investors who are holding blue chip or fundamentally-good large and mid-cap stocks, bought at higher levels, can remain invested. They can also invest more to average out the buying prices. Valuations of many blue chip stocks look quite attractive at this point. Many blue chip stocks are trading in single digit PE multiples and some of them are trading near their book value. The chances of significant decline from current levels are quite remote as most of the negative news has already been factored in current valuations.

Usually, these stocks outperform the index and recover their losses when the market direction reverses. Investors holding unknown stocks should look at exiting cautiously and cut down their losses.

Average out

Investors with high risk appetite can look at accumulating more stocks at lower price levels and hence average out their entry price in stocks. However, investors should only invest their risk capital in the markets. Investors should never take loans to buy shares in the markets. You should try to accumulate more stocks and average out your buying price systematically by buying in small quantities.

Take fresh positions

Many blue chip companies are trading at very attractive valuations in the market. The market is already flooded with a lot of negative news, and hence, there is a limited chance of a further downside from current levels, unless something drastic happens. This can be an opportunity for long-term investors to start picking fundamentally - strong stocks. Investors should avoid taking any positions in penny stocks and always look at investing in blue chip and quality mid-cap stocks only.

Switching from under-performers

Usually, in every market rally or correction there are some sectors that out-perform or under-perform the market. The same trend was seen in the recent correction as well. The stocks that performed quite well last year are under-performing the markets. Many stocks have come down more than 50 percent off their highs.

Investors with a large percentage of under-performing stocks in their portfolio should look at switching their funds to better quality and performing stocks. There has been some pullback in the market recently. Investors looking at cutting losses should carefully watch the price movements and cut their losses if they see a rally in their stocks.

Sunday, December 28, 2008

Go for “Value Investing” in uncertain times

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 a few months ago. Are we seeing the light at the end of the tunnel? Or is it an oncoming train?

The sooner we face it, the better - we are headed for uncertain times. The smooth and easy part of the rally is over and done with. The ride ahead is going to be tough and bumpy. Restructure your portfolio to survive, even thrive, in these challenging times. Keeping in mind the volatility and uncertainties, your portfolio should focus on downside protection. Take care of your capital and the upside will take care of itself.

We are already seeing stocks from the fast-moving consumer goods (FMCG) and pharmaceutical sectors hold firm. The formula of value investing is what will see us through. It offers safety in the face of the current volatility and uncertainty. Sounds like a good idea, but how do you construct a value portfolio?

Scale down expectations

Scale down your returns expectations. Returns of 40-50 percent are a thing of the past. And that is not a bad thing at all. Remember that Warren Buffett is where he is today because of compounded returns of 20 percent. Lower and realistic returns will also help us desist from taking unnecessary risks while chasing unattainable goals.

Focus on predictability

Focus on stocks which have high predictability of revenue and margins. Look at performances over a 3-5 year period to assess them, as one-year financials cannot give enough indication of whether a good performance can be repeated. Also, consider the protection that the margins enjoy. This could be due to a strong brand, distribution network, technology, and so on. A strong moat, as Buffett calls it, which helps the profits from coming under attack from competition.

Focus on price

Buy at the right price. Do not chase momentum or operator stocks. Ignore the hottest tips. Form your own opinion on intrinsic value, and stick by your norms through all types of markets. Do not loosen your norms to meet bull market requirements. And last but not the least, wait. All investing will take time (or else it is called speculation). This is the most difficult part, especially in this age of mass media and instant gratification.

Where to look for stocks?

Which sectors or companies will meet the criteria we set out above? FMCG and pharma are the obvious choices. But we will have to dig a little deeper, even in these sectors. HUL still fails to impress, but ITC and P&G meet our predictability and margin sustainability conditions. ITC has the strongest moat we know of, as new competition is not allowed and even existing rivals can't expand because advertising is restricted. P&G has strong brands and a commendable financial performance. It has invested in growing capacity and distribution recently, and should see sustainable growth going ahead.

In pharmaceuticals, the focus is on Ranbaxy and Dr Reddy's Labs, among others. But value investors will have to look beyond these companies, as they carry heavy balance sheets, capital requirements and constant margin pressures. An Aventis or Glaxo may be more fitting in the value investing theme with high ROIs and the promise of steady growth, with the product patent regime encouraging new launches by the parent.

Another sector which has the capacity to hold margins, especially in the face of current high inflation, is entertainment. But here, we need to look away from current favourites, distributors and exhibitors. These companies need considerable expansion and capital infusion to keep growth numbers healthy. Hence, Zee Entertainment and Sun TV are preferable, looking at the strong brands and consumer awareness. Moreover, the businesses are scalable, with lower investment and a strong ability to hold margins.

Many other stocks and sectors will meet our criteria. All of them will fulfil the basic condition set by a value investor - even a wrong stock at the right price, but never a right stock at the wrong price. Remember, price is what you pay and value is what you get.

Value investing

As Charlie Munger, vice chairman, Berkshire Hathaway, put it, "All intelligent investing is value investing." Value investing is the poor country cousin of growth investing, the city slicker that promises more spectacular returns.

Some features:

• Basic underlying value providing downside protection

Strong performance record providing high predictability

Strong business dynamics providing margin protection

Conviction based on the right price, and not on momentum or the flavour of the day

Patience. Too many investors lose it. The urge to do something - anything - gets stronger as we are bombarded with opinions and news.

Ignore the noise, focus on underlying value

Friday, December 26, 2008

Consumer courts in India to cover retail investors soon

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 courts in matters of investor grievance. The steps under consideration include capacity-building and giving specialised training to officers handling such cases, the official said. It will also bring more clarity in certain grey areas in the Consumer Protection Act.

The National Consumer Disputes Redressal Commission has in a decision early this year made it clear that bourses were ‘service providers’ and would have to compensate investors if brokers default.

Officials feel that legislative changes would ensure that investors could seek redressal at the lowest tier of consumer-justice delivery system, rather than approaching the highest fora. Consumer courts in the country work in three strata at the district level, state level and at the national level. With the increasing number of investor grievances, one of the objectives of the new company law bill is to provide timely and simplified institutional structure for dispute resolution so that investors are not compelled to resort to costly legal proceedings.

Wednesday, December 24, 2008

Income Tax Benefits of Housing Loan EMI

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) Interest and

(ii) Principal.

This is because the deduction of interest as well as principal is governed by different sections of Income Tax Act. Therefore, this is the most important aspect to be remembered by a tax payer.

Interest on home loan for acquisition and repairs:

Under the provisions of Section 24, a deduction of a maximum of Rs 1,50,000 every year is permissible in respect of interest on home loan if the house is self - occupied. A loss up to Rs 1,50,000 of interest can be adjusted against salary income or business income or income from other sources. If a person has taken a loan for repair of house or flat, a deduction of maximum amount of Rs 30,000 is permissible and that too within the said amount of Rs 1,50,000.

Full interest deductible on let- out house:

If the house is let out by the tax payer, then the entire interest irrespective of the amount is fully deductible under Section 24 of the against income from House Property. In case the interest amount is more than the net rent, the loss under the heading "Income from House Property" can be adjusted against other income. It can even be carried forward in the future years

EMI instalment for acquisition also deductible:

Under the provisions of Section 80C the amount of EMI pertaining to the payment of principal for acquiring the house is allowable within the overall limit of Rs 1,00,000. This is for the purpose of acquiring a house through DDA or other housing board like HUDA or any other housing authority. The overall limit in this case is Rs 1,00,000.

Repayment of loan deductible:

Under the provisions of Section 80C (2) (xviii) deduction up to Rs 1,00,000 in respect of repayment of loan is permissible. .The repayment of the amount borrowed for home loan by the assessee is deductible only if it is from Central Government or any State Government, or any bank, including co-operative bank, or the LIC, or the NHB, or a Public Sector Company providing housing finance, or any co-operative society providing housing finance or where the employer is an authority or a Board or a Corporation or any other statutory body or the employer is a Public Company or public sector company or a university or an affiliated Central Government or a local authority or a co-operative society. Besides, stamp duty, registration fee and other expenses for the purpose of transfer of such housing property to the assessee is also deductible under Section 80C.

Monday, December 22, 2008

Sail through Bear Market

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.


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 smart investor, according to capital market experts, is one who gets on with the job of picking up value stocks, notwithstanding where the tide of the market is moving. Such an investor is rightly rewarded with great profits once the market turns. Since we fail to control our emotions, we forget that investment in equity is not for short term. So for long-term benefit, it is important to stay calm and act prudently in such times.


You may have earlier doubled your money in a short span, say six months, by investing in a particular stock during a bull run, but you must remember — what goes up, comes down. Stock investing is not about speculating or making easy money. It is an art and science of buying good businesses at cheaper valuations. It is important to set realistic goals for your portfolio’s long-term return, and buy only good companies with strong fundamentals and good management. To nip your fears in a bearish market, you should avoid selling just because stock prices have dropped. You must review your stock portfolio rationally. Then only you should arrive at a decision to sell losers whose future prospects look weak, and hold on to winners with prospects that remain solid.


Another way you can soothe your nerves in a bear market is by not following the stock markets on a daily basis. Every investor knows that you should buy low and sell high. Bull markets provide you a chance to sell high. Bear markets, however, offer you a chance to buy low. Unfortunately, too many investors are lulled into complacency during bull markets and scared out of their wits in bear markets. So they do just the opposite, buying high and selling low. Thus, you should avoid tracking the stock markets daily during a bearish phase. This way you will save yourself from unnecessary anxiety and fear.


Investors have the tendency to over invest during a bull run, which becomes a reason for fear when the markets turn choppy.

you should have sufficient liquidity in hand for emergencies. This will make sure that you aren’t forced to sell equity holdings or other assets before the time and price are right. To emerge as a winner, all you need to do is recognise the fact that your portfolio will decline from time to time, but take solace in knowing that short-term pain is required for long-term gain.


To make money in equities, it is important to be rational, not emotional. You should always try to look at the positive side in a bad market. Citing an example, he says that a bear market provides an excellent opportunity to buy strong businesses at rock bottom prices. Jain adds that no one can tell you when the next bull market will begin, how long will it last, or how high the market will ultimately go. That should be the key point to drive out your fears in a bear market. So even if the markets are down, you should be convinced that your business is making money. The stock price may not generate great returns due to the bearish phase, but in the long term, your portfolio’s returns will be unmatchable.

Warren Buffett was recently quoted as saying: “I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month.” You don’t get maximum pessimism during bull markets. You get them when the world looks like it’s falling apart. Times like now, for instance.


Last but not the least, you can study behavioural finance to calm your fears in a bear market. For the uninitiated, behavioural finance pairs emotions with investments and shows how emotions and cognitive errors can cause disasters in investment decisions. Individual behaviour, temperament and psychology play an important role in determining investment success. Equity price movements are nothing but a summation of individual behaviours, reflecting their greed and fear.

As always happens, even experienced investors are susceptible to making judgment errors identified by behavioural finance research. It can help you to be watchful of your behaviour and, in turn, avoid mistakes that will decrease your personal wealth. It provides a platform to learn from people’s mistakes, to modify and improve your overall investment strategies and actually profit from identifying these mistakes.

As for the bottom line, just as it is important to know when to exercise caution, the same way it is important to comprehend when to abstain from fear.

Happy investing!

Sunday, December 21, 2008

What you should ask before buying an insurance policy

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-time or a part-time agent. It’s important to keep a record of contact details of the reporting manager and the branch office, which can come handy if you want to know more about the policy and even for addressing your concerns.

How can I plan my savings and understand my goals?

Financial planners say that you should ensure that the agent is a problem-solver — one who can understand and fulfil your family’s financial security and long term wealth-creation needs. If your agent does not ask probing questions and develops a financial programme, the time has come for you to look for another agent. Asking such probing questions will help you better understand the reason why you’re buying a policy and whether it’s for savings, tax rebate, life insurance or long-term wealth creation. This will induce usage of the goal finder and help both parties. The agent will cover the entire spectrum of coverage available — spanning from traditional coverage plans to health coverage, market linked and retirement planning plans.

What is the product that will suit my needs the best and what are its features?

It is advisable for you to know the features of the proposed plan and how they satisfy your individual needs. You should ask the agent, what are his commitments — in terms of premium size, premium paying term, frequency of premium payment (monthly, half-yearly, annual) and policy term? Further, get a benefit illustration of the policy, especially in the case of a ULIP. This should show returns at 6% and 10%, maturity value and yield at maturity, surrender value and all charges.

What differentiates the product?

Analysts say that you should compare the agent’s offering with other products. This will act as a check on his industry knowledge and product awareness.
Insurance companies are known to offer a wide range of products. The advisor should be informed about the competitors’ products so as to provide unbiased and meaningful recommendations, regardless of how much the agent stands to gain by way of agency commissions. It is recommended that you should check the flexibility offered by the product riders as they come at a comparatively low cost while enhancing the cover of the insurance plan.

How to cancel a policy and where to lodge a complaint?

All life insurance companies give a free-look period of 15 days during which you can review the policy. If you’re not satisfied and feel that the product features are not in sync with the understanding given by the agent at the time of selling the policy, then you’re free to return the policy and claim a refund of the money paid. You should ask questions such as whether the policy has been submitted, status of money receipt and the address of the complaint redressal officer. This will check that the agents are not mis-selling the products.

Friday, December 19, 2008

Equity and Real Estate to beat inflation

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 a bad choice as his purchasing power is increasing by only 3.5 percent whereas prices of goods and services are increasing by seven percent.

Here are some options for an investor to counter inflation:

Real estate investment trust (REIT)

Historically, investments in real estate have worked as a good hedge against inflation. Carefully-selected real estate properties provide high returns. However, real estate investments are huge. REIT is like a mutual fund and investors can buy units of REITs. Therefore, REITs enable all investors to buy shares in a company that invests in large-scale real estate projects and multiple buildings. REITs are not available here but with the recent SEBI's draft proposal on REIT, the way for real estate mutual funds is getting cleared.


Another way to hedge against inflation is to invest a certain portion of your funds in equities. Senior citizens and risk-averse investors should also invest a small percentage of their investment portfolio in equities. Investments in equities may not necessarily be only through stocks; investors can do it through equity or balanced mutual funds too.


Investments in precious metals (gold, silver and platinum) are another popular way of hedging against inflation. However, investors should keen in mind that prices of precious metals can be quite volatile. Therefore, investments in precious metals would be a good addition to one's investment portfolio as a hedge against inflation if it is purchased at the right time.

Measures to control inflation

Controlled inflation is good for the economy as it increases the motivation level of people. The Government, in consultation with the Reserve Bank of India (RBI), decides the inflation threshold in the economy (current inflation threshold range is 4-5 percent). The inflation target is one of the key parameters that go into determining fiscal and monetary policies of any country. Inflation has gone up from the four percent levels to around the seven percent levels over the last few weeks. The main reasons for rising inflation are supply side concerns of some of the basic commodities (vegetables, edible oil, FMCG goods etc) and speculation by traders in the market. The Government and the RBI are taking many measures to control inflation. The RBI has tightened the liquidity in the market by increasing the cash reserve ratio (CRR) and the Government has banned the export of some commodities (rice etc) and importing others (edible oil etc) to increase the supply in the market and hence control the price rise.

Wednesday, December 17, 2008

Seven things to avoid in choppy markets

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 time tested prescriptions.


August-September 2007 had been the investor’s delight due to the booming IIP numbers, 8.5% GDP expectations and the sub 5% inflation. The markets had reached a zenith on hope, and greed prevented investors from selling. The party poopers arrived in the form of a steep rise in crude prices, lingering and massive sub prime mess in the US financials and the recent spike in domestic inflation. With fear gripping the markets in the changed scenario of continuing volatility and short-term bearish outlook, investors should take a balanced view and refrain from extremes — greed (the reckless pursuit of short-term gains) and fear (a substantial reduction in risk taking).


The volatility associated with the see-saw battle between bulls and bears is unlikely to declare the winner in the near term. Under such circumstances, long-term investors should avoid the temptation of timing the market by selling defensively at the top and buying at lower levels. Let us avoid hypocrisy. Even though everybody agrees on the futility of timing the markets, most of us still try to do it with dangerous consequences.


Investors with a long-term horizon should avoid getting despondent with the short term moves/ aberrations in the equity markets. The present volatility on low volumes seems to be a temporary phase and we expect the markets to improve, albeit after a few months, once the disturbing factors settle down. Investors should use this phase to fine-tune their portfolio and avoid taking short term trading calls. The current valuation provides them an excellent opportunity to selectively cherry-pick value stocks across sectors.


Investors should avoid getting emotionally attached to sectors which are expected to be laggards in the medium term, e.g. the rising crude prices are likely to hamper the profitability of the airline industry. Similarly, in the rising interest rate scenario, one would be well advised to temporarily avoid interest rate sensitive like auto and realty and should use every rally to lighten their commitments.


One should systematically build one’s portfolio by accumulating stocks at various falls across time instead of deploying the entire cash in one go. The same methodology should also be followed while booking profits. Investors have traditionally ended up buying near peaks and exiting near bottoms. A case in point is the TMT sector which was deserted by investors after the dotcom bubble burst in March 2000, only to find the sector rebounding in March 2003 when equities began to rally.


With the indexes swinging up and down, steady performers in solid sectors remain the best bet. But this isn’t to say that one should completely avoid mid-cap stocks and switch everything to large caps. One should keep in mind that mid-cap stocks should be a part of any balanced portfolio, regardless of the current economic picture. Their growth potential is simply too great to ignore. Amongst the mid caps stocks, one should look for stocks with high insider ownership, strong balance sheet, solid business model and a compelling valuation.


The current bearishness is likely to attract new-comers who had missed the previous bull run. One of the hardest things for them would be identify the right picks in the market mayhem. Hence, avoid direct exposure to equities and instead participate via good quality mutual fund schemes as equity investments are a full-time activity backed by research and analysis.

The ongoing global crisis and the domestic economic situation have made it difficult to take short-term call. We don’t foresee an adverse change in the fundamentals of the Indian economy and still believe that the economy is likely to maintain a stable growth rate of 7.5% upwards over the next three years. With the economy expected to grow at 7.5 -8%, we see no reason why a long-term investor should not enter the market at every fall.

Monday, December 15, 2008

Loss from property can reduce taxable income

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 specified deductions are allowed. These include the municipal taxes paid, interest paid on loan for construction or purchase of the house, and standard deduction. The standard deduction is limited to 30 percent of the net annual value of the house - gross annual value minus the municipal taxes.

In case there still is an income after these deductions, it is taxed under the head 'income from house property'. However, in case the net result is a loss, a special treatment is allowed for set off and carry forward of such loss from the house. According to Section 71B of the Income Tax Act, where an assessee incurs a loss under the head 'income from house property', the loss should be first set off against incomes from other heads - salary, business and profession, and from other sources.

In case such loss is still not fully adjusted against the other heads of income in the same assessment year, the balance loss is allowed to be carried forward and set off in subsequent assessment years. An assessee can carry forward the loss up to eight assessment years. The carried forward loss can be set off against 'income from house property in the subsequent years. The carried forward loss cannot be set off against income under the other heads like salary or income from other sources. Further, only losses pertaining to the assessment year 1999-00 onwards can be carried forward. Losses pertaining to the assessment year 1998-99 or earlier years cannot be adjusted against the current years' income.

Since the carried forward losses can be set off in the subsequent years only against the income under the head 'income from house property', it is essential to have some income under this head in order to avail the benefit of this set off and to thereby reduce the tax liability. In order to claim the benefits of carry forward and set off of losses, an assessee should file his returns of income. Otherwise, the losses cannot be set off against the income.

The losses can substantially reduce the taxable income of an assessee. In case of self-occupied house, the interest that can be deducted is limited to Rs 1.5 lakhs. However, this limit does not apply in case the house has been let-out on rent.

Friday, December 12, 2008

Promoter activity and how it affects your investment

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.


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), promoters are allowed to purchase up to 5% stake in their company in a single financial year through creeping acquisition route, subject to the condition that they don’t cross the ceiling of 55%. The next question which may come to your mind is — but how can you find out promoters’ trading activity in the open market on a daily basis.

For the uninitiated, there are two ways you can do the same.

First, you can visit Sebi’s website and read insider trading disclosures page under Sebi (Prohibition of Insider Trading) Regulations, 1992.

Second, you can regularly keep a tab on the ‘Insider Trading’ column, generally published in financial newspapers with stock market prices. Investors who are not efficient with the online medium find the latter approach more convenient to deal with.


Analysts believe that promoters’ trading pattern in the open market signals their intent towards their future plans. Basically, when promoters sell their share in the secondary market, it is seen as a bearish indication, unless this may not be the case, when they are selling shares to a large or strategic investor or they are doing the same to subscribe to warrants or bonds. Further, if they sell the shares for their own personal diversification, it cannot be viewed as a negative indication.
If the selling activity, however, has a correlation with the projected performance of the company, you should better watch out and take your call whether you want to remain invested in the stock. During the last two years, there have been many instances when promoters’ move to sell their stocks in the secondary market has resulted in their company’s stock prices collapsing on Dalal Street.

However, promoters generally buy their shares from the secondary market via a buyback, which is mandated by Sebi. The buyback can be done either through a tender offer or a market buyback. The company then has to fix the quantity of shares that it wants to buy from the secondary market and inform the market regulator. Under a tender buyback, the company will send you a tender form, which you will have to fill up and send it across to the company. The other option involves companies buying back shares from the open market over an extended period of time.

In India, the multinational companies, in most cases, buy through a tender route. The attempt largely remains to return excess cash to the shareholders or in a few cases, to break the flow of the falling stock prices or arrest the fall in stock prices. You should try to figure out the intention of promoters behind any move in the open market. For instance, if the promoters are buying shares in large quantities, it normally augurs well for the stock prices, and the positive impact is visible over a period of six to 18 months. The buying more often than not indicates that the promoters feel that the stock price of their companies is lower than the true value.

Day traders, generally, get more excited when they see any activity from promoters in the secondary market. For a long-term investor, if a promoter is on a fast creeping acquisition spree, raising his stake from an already comfortable level, it can be seen as a positive indication. You should, however, keep other factors in mind while taking the final call. The fast-paced approach, according to analysts, in a way reflects management’s confidence about the future prospects of a company.

In the last few months, companies which have seen mopping up of shares by their promoters from the secondary market include ACC, GE Shipping, Pantaloon Retail, Reliance Infrastructure, Great Offshore, and Reliance Energy. You should, however, try to ignore any small buying or selling promoters are doing, unless they form a pattern.

Wednesday, December 10, 2008

HRA and income tax deduction relation

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, Delhi or Chennai, 50 percent of the salary.

If it is in any other place, 40 percent of the salary.

For the purpose of HRA and tax exemption on it, salary means basic salary and includes dearness allowance and commissions based on a fixed percentage of turnover achieved by the employee.

The deduction on HRA is not available in case an employee lives in his own house. The deduction is also not available in case the employee does not pay any rent for the house he stays in. The deduction will be available only for the period during which the rented premises is occupied by the employee and not for any period after that.

For example, during the year 2005-06, assume a person resides in Bangalore and gets a salary of Rs 4 lakhs as basic salary and Rs 2 lakhs as HRA. He pays an actual rent of Rs 1.5 lakhs.

In this case, the amount of HRA exempt would be calculated as:

  • Actual HRA received: Rs 2 lakhs.

  • Excess of rent paid over 10 percent of salary - Rs 1.5 lakhs less Rs 50,000 (10 percent of salary): Rs 1.10 lakhs.

  • 40 percent of salary (as the accommodation is in Bangalore) - 40 percent of Rs 4 lakhs: Rs 1.60 lakhs.

  • As out of these Rs 1.10 lakhs is the least, it would be allowed as a deduction from salary for the year.

You can reduce the tax liability by managing the HRA received and the rent paid carefully. Moreover, the deduction is available even if you own a house but are not living in it or have rented it out.

Monday, December 8, 2008

Home loan and tax benefits Relation

The tax benefits available on 2 components of a home loan

  1. Interest

  2. 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 taken before April 1, 1999 to purchase or construct the house.

  • It could have been taken on or after April 1, 1999 if for reconstruction, repairs or renewals of a house.

  • If the loan was taken after April 1, 1999, but the construction is not completed within three years from the end of the year in which capital is borrowed.

B) Tax benefits on principal component

The principal component of the loan is eligible for a deduction of up to Rs 1 lakh under Section 80C from assessment year 2006-07.

The maximum deduction permissible in a financial year on the original loan plus on any additional loans taken is Rs 1.5 lakhs. Hence, if your deduction on the existing loan is less than Rs 1.5 lakhs, you can claim further benefits from an additional loan, subject to an upper limit of Rs 1.5 lakhs in a financial year. It is to be noted that the tax benefits under Section 24 and deductions under Section 80C of the Income Tax Act can be claimed only when the payment is made. If a person fails to make EMI payments, he cannot claim tax benefits on the amount supposed to have been paid.

If a person buys a house and sells it within the same year or after three years, and if any profit is made, a capital gains tax liability arises on the profits. For example, if a person purchases a house for Rs 55 lakhs with a loan and sells it in the same year for Rs 75 lakhs, he makes a profit of Rs 20 lakhs. On this profit, he will be liable to pay short-term capital gains tax since the sale took place in the same year. But, if the sale had taken place after three years, a long-term capital gains tax liability would have arisen.

Long-term capital gains are exempt from tax if the profit amount (after factoring in the indexation benefits) is invested in capital gains tax-saving bonds or in a house as specified under Section 54.

According to the Income Tax Act, only the person who has taken the loan can claim tax rebates. Tax deductions can be claimed on home loan interest payments, subject to an upper limit of Rs 1.5 lakhs for a financial year. Interest on a fresh loan can be claimed as a deduction, subject to the upper limit. The interest on a loan, taken for repairs, renewals or reconstruction, also qualifies for the deduction of Rs 1.5 lakhs.

A husband and wife, both of whom are taxpayers with independent income sources, can get tax deduction benefits on the same housing loan. In this case, the tax benefits can be shared to the extent of the amount of loan taken against their names.

If it is proved that a home loan is simply an arrangement between the loan-seeker and the builder or with a third party for the purpose of claiming tax benefits, the tax benefits will not be allowed, and benefits previously claimed will be clubbed to the income and taxed accordingly.

Sunday, December 7, 2008

Risk-averse investors can fancy Capital Protection Funds

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 is learnt that majority of fund managers are buying long-dated Nifty calls, mostly in 2011, an indication that they expect the bull rally to resume by 2011. When an investor buys a call option, he expects the market to rise. The advantage of buying options is that the risk of losing money is limited to the premium paid.

By using long-dated options, an investor takes a longer-term bet on the direction of the market, which helps him ignore short-term losses. Here, the investor does not need to roll over his positions every month or quarter, thereby saving on rollover costs.

The gaining acceptance of this capital-protection product is driving activity in long-dated options. Industry officials said PMS arms of ICICI Prudential Asset Management, Kotak Securities PMS and Emkay Shares and Stockbrokers are among the few, which are offering such products. This could not be individually verified with these players. But, some in the industry said the existing market conditions have made it difficult for them to sell this product to potential clients.

When we approach clients with such a product, the product is designed in such a way to suit market conditions at this moment. When the client finally approves to buy it, the situation might have changed

Friday, December 5, 2008

Tax-saving funds to save your hard earned money from Tax

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.


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 gains tax.


While you may wish to avail of the maximum tax benefits possible, financial experts say you need to invest your money intelligently. Since tax-saving mutual funds are generally close ended funds with a lock-in period of three years, it is better to invest only as much money as you know you will not require in the next three years. This will protect you from liquidity crunches. After three years, when earlier investments will have liquidity, investors can invest in a tax planning fund to the extent of the tax exemption bandwidth of the investors i.e. 1 lakh,.


Investors generally make up their mind based on the previous performance of the fund. But remember, while a fund may be doing good over the last week or the last month, you need to analyse its performance over a longer period. The ideal position would be to compare the performance of the fund over a period of three years or about five years. This should give you a clear indication of whether a fund has stood strong even when the markets have faced a bull run or a bearish phase.


Returns play a pivotal role in determining which fund you choose. However, when you approach your financial experts, they may refrain from making predictions, saying that returns are entirely dependent on market dynamics, macro economic developments, regulatory changes and so on. But the simple and most effective way would be to check whether your fund has outperformed the benchmark in terms of returns over a three-five-year horizon and by how much. You could use this while making the choice between funds, which have similar investment approaches.


Market capitalisation, which means exposure to mid, small and large cap stocks, is another important aspect to be considered based on the investors risk appetite. You need to evaluate whether your fund has a well-balanced approach and is investing both in companies, which have a good record, and also in those which are exhibiting a good growth potential.


It is quite possible that in the process of evaluating the performance of a fund, your financial experts quotes a few ratios that don’t really make any sense to you. For your convenience, here are the explanations of a few of these numbers.


The risk-adjusted return is a good indicator of the performance of a particular fund and this is further indicated by the information ratio. To get the information ratio, subtract the benchmark return from the portfolio return, and divide it by the standard deviation of the portfolio return. This measures the portfolio manager’s ability to deliver excess return over the benchmark for every unit of risk taken.


This is another indicator of risk-adjusted performance. It is generally defined as the excess return per unit of risk that the portfolio carries. It shows how an investor is rewarded (in terms of returns) for each unit of risk that he/she takes. However, for the purpose of evaluation, the higher the Sharpe ratio, the better is the fund.


This is a statistical calculation that measures the volatility of returns and hence indicates risk. A large dispersion tells us how much the return on the fund is deviating from the expected normal returns. The higher the standard deviation, the higher is the risk.

  • Expense ratio

It indicates the maximum expenses that would be charged to the scheme towards administration of the fund, fund management fees, expenses of sending account statements to the investors and so on. This takes away from the NAC of the scheme. So the lower the expense ratio, the better it is for the scheme.


While a tax-saving fund has a three-year lock in period, the advantage is that it begins from the day the money is invested and not on the financial year. Moreover, dividends distributed and the units credited in the event of a bonus declaration are not covered by the lock in clause. There is also a great deal of transparency with regard to the operations. An ELSS scheme also offers the advantage of convenience whereby investors can utilise investment tools like a systematic investment plan that will help mitigate the volatility risks and maximise return potential through the advantage of rupee cost averaging.

Wednesday, December 3, 2008

Tax Planning: Plan Tax savings well in advance

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 will reassess your portfolio and provide recommendations on an ongoing basis.

Plan for expenses

Everyone wants to save for retirement, children's higher education and marriage. Buying a house is one major desire of most middle income families. Then vacations, festivities, medical and other expenses may crop up from time to time. It is essential to chalk out a proper financial plan to meet your goal. Build a portfolio with the right mix of investments that is in sync with your risk tolerance.

Here are a few options:

  • Insurance

The main reason a person decides to buy a life insurance cover is to protect his family from any financial crunch in case of any distressing event. There are term life policies and whole life policies. Insurance cover itself comes in different flavors, meeting different needs and catering to different age groups.

  • Equity

The stock markets are known for their volatility. These are usually long-term vehicles and investors must exhibit due diligence. In a buy-and-hold strategy, stocks with strong earnings potential and strong fundamentals are carefully picked. This is a passive strategy where you anticipate appreciation over the long term.

On the other hand, consider a market timing strategy. Here, the investor seeks to make the best out of short term swings. Whatever strategy you adopt, however risk tolerant you are, a thorough research on the stocks, market news, views and reports is essential.

  • Debt

Though investors can be at peace with preservation of initial investment, debt instruments are not without drawbacks. Fixed deposits, PPF, post office deposits, bonds and even debt funds are preferred by the risk averse and those close to their retirement years. If you thought you could invest in any of these in the last minute without proper analysis, get ready for some shocks. The returns on debt instruments are viable only if they can beat inflation. Some debt funds have fared so poorly that the returns did not even match the ordinary bank interest.

  • Mutual funds

Investors must not get carried away with fancy names. Mutual funds come with entry and exit loads. This fee is deducted from you, even if you make profits or losses. Mutual funds again come in numerous flavors. Balanced funds, pure equity, debt funds, sector funds, index funds and so on. Choose the ones that have a solid past performance and promising future.

Select the right mix of equity and debt investments in line with your risk appetite. Last-minute decisions can prove costly.

Monday, December 1, 2008

Reason why interest rate fluctuates?

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 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 itself to control the rising inflation level. This repo rate hike makes funds costlier for banks and as a result interest rates are quoting high and are expected to go even higher in the coming weeks. However, experts believe that the rates will not go up very significantly as high interest rates have an adverse impact on the growth rate of the economy.


The liquidity in the system is another parameter that influences interest rate movements. Liquidity influences the cost of acquisition of funds for banks. If liquidity is low, cost of raising funds will increase, and hence, they will need to raise the interest rates on their lending. There are many factors that influence the liquidity in the system. Fund inflows from foreign investors and a cut in the cash reserve ratio (CRR) increase liquidity in the system and vice versa.

Sunday, November 30, 2008

How long is this bear market going to last?

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.

Morgan Stanley India economist is of the view that macro fundamentals could take 18 months to bottom out. Based on this, the bear market may have another 25-50 weeks to go, the Morgan Stanley report says, adding that the pace of fall in stock prices will decline going forward.

“The market will likely bounce back as it does in bear markets the triggers this time around could be a sanguine earnings season, benign action from the RBI and weak sentiment,” the report said. But the brokerage maintains that it will use the opportunity to book profits.

While market is betting on early elections, Morgan Stanley feels is unlikely to be the case. Even if elections take place ahead of schedule, it is unlikely to improve matters.

“Subsequent governments since the mid-90s have been broader coalitions causing the markets to sell off post elections,” the report said.

A fall in crude prices would be positive for a oil importer like India, but the reason for the softening of oil prices will be important.

“If it is led by a significant demand destruction, it may not be good news,” the Morgan Stanley report says.

The brokerage expects a delayed recovery in global risk appetite as Central Banks in developed economies are struggling to deal with slowing growth, rising inflation and fragile financial market confidence.

The report says that for the market to bottom out, retail investors have to panic, and there has to a wave of earnings downgrades.

“This is about the worst performance in more than a decade on a year-on-year basis. However, domestic households seem convinced that equities have to be bought and not sold,” says the report.

Views on oil, inflation, growth and currency (hence risk appetite) should ultimately be embedded in the long bond yield, feels Morgan Stanley.

“Eventually, long bond yields need to stop rising, or put another way, the market has to get confidence that the medium-term inflation rate is under control. On our residual income model, if the 10-year bond yields rise to 9.5% the Sensex fair value drops to 11380 (13% lower from here) signifying the importance of this indicator of macro fundamentals,” the report says.

The market is at fair value but may go below fair value before it bottoms out, the brokerage feels. Also the fair value itself could move down as earnings and bond yields move lower and higher respectively.

“Valuation and return dispersion need to narrow for the market to bottom out. For genuinely long-term investors, cash flows (dividends) are now available in several parts of the market at a reasonable price,” the report adds.

Friday, November 28, 2008

Personal Finance: How to move through Stock Market tough times!

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 earlier this year. Today, it’s at about Rs 1400 and that too after a 1:1 bonus. Hence, the actual price being Rs 2800. ITC was at Rs 100 in 2003 and today it is at about Rs 200. L&T was at Rs 400 in 2003 and today it’s at Rs 800 and that’s after a 1:1 bonus. L&T touched about Rs 4,100 earlier this year. Sun Pharma was at Rs 200 in 2002 and today it’s at Rs 750, again after a 1:1 bonus. The Reliance group de-merger happened when Reliance was at Rs 500 and today the total value of all shares of both Reliance groups is around Rs 3,000. The list goes on…. Much of this happened in the last five years. Imagine if you were holding these shares for 10 or 15 years.

If you have lost money, then have a hard look at your holdings. It is time to be patient if you hold good companies. They will come back. If you do not have, then no point worrying about what has happened. Shift to better companies. Shift to business models that have been around successfully for decades. Shift to companies whose businesses make sense to you. For example, would you buy a real estate property where the price doubled in one year? You know it’s exorbitant and unrealistic, so why would you buy shares of such a company?

How does one handle the current situation?

Firstly, understand that inflation is an economic parameter which is dependent on many other factors such as demand and supply of goods and services, interest rates, government policies, etc. All these movements are something we have to live with.

Secondly, understand business and economic cycles. Without making things complex, all I want to submit to you is to remember the old adage — good and bad times oscillate. But you must be prepared for it.

What should you be doing now?

1) Use profits to prepay loans.

Inflation and high interest rates make loans expensive. Consider prepayments. Such prepayments should be made only from profits. And profits come from investments. Profits do not come from the savings you made in fixed deposits and similar so-called “safe” instruments.

2) Invest aggressively.

Most people think this is not the best time to invest in the stock market. The same people will return when markets touch 20,000 or more. Increase your investment budget now if you can.

3) Keep your financial goals in perspective — always!

a) If your goals are to achieve something in one-two years, avoid equity.

b) Between two-four years, consider dividing your assets between equity and debt in the ratio of 60:40 or 70:30 or similar.

c) Over four, five years’ goals can move to equity markets.

d) All the same, I am not only advocating equity investments. Find something else that has the capability of giving you returns of about 5% to 6% more than inflation and invest in that category.

The probability of getting 12% to 20% average returns over five-seven year period is highest with equity investments and this is a known fact proved across the world markets. Needless to say, patience, financial discipline and resilience will always be amply rewarded.

If you still don’t believe this, mark this day and make a fictitious investment of Rs 1 lakh in your mind into some diversified equity fund or in the index. Forget it thereafter and compare the value five years later.

Inflation, economic turbulence, adverse government policies, failures, scams and all other bad things will be there always. You need to be able to steer clear and it is only you who will be ultimately responsible for what do you for yourself, your family, for your children and their children.

Wednesday, November 26, 2008

Economic Numbers that Impact you – PLR, CRR, Repo Rate, Reverse Repo Rate

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

The RBI can borrow money from the banks and offer them a lucrative rate of interest. This is called the reverse repo rate and banks will be glad to have their money with the RBI for a good interest rate as the money is safer here. When the reverese repo rate is increased, banks find it more attractive to have their money with the RBI, and hence money is drawn out of the system.

Monday, November 24, 2008

How to build your portfolio in volatile stock markets

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 performance in the last six months and many investors lost money in equities and equity-based funds. According to global stock market analysts, valuations in the domestic markets were over-stretched last year, and that is why the huge correction this year. Some analysts feel the domestic markets will remain in a sideway movement in the short to medium term - in the next six months or so.

Here are some investment options you can explore in volatile market conditions:

Debt mutual funds

Investors can look at higher portfolio allocation to debt-based funds. Debt and liquid mutual funds are offering higher returns due to the tightening of the monetary policy.

Investors willing to take a calculated risk can look at investing in balanced mutual funds. Balanced mutual funds invest a certain percentage of their total corpus in debt instruments and the remaining in equities.


Investors with a moderate to high risk appetite and long-term investment horizon - more than one year - can look at investing in blue chip stocks of select sectors.

Many blue chip stocks are trading at attractive valuations in the market. Investors can invest in these sectors based on a careful analysis.

Here are some tips to help you pick stocks with potential:

  • Investment objective: Identify fundamentally-good stocks based on your investment objectives.

  • Limit portfolio: Keep your portfolio limited to 6-8 stocks only. Keep your portfolio diversified with stocks from different sectors.

  • Analyse before exiting: Do not panic during volatile market moves. Use these market moves to enter into your identified scrips or exit from your positions slowly and gradually. Build your portfolio slowly by accumulating stocks in small quantities at every buying opportunity - dip in the market. Don't hurry and invest your entire corpus at one go.

  • Profit target: Always have profit/loss target in mind. Once the profit/loss target is achieved, analyse your investment and decide on booking profits or loss, or revising the target, based on a proper analysis. Often, investors fall into a trap by not booking profits or cutting losses once the target is achieved.

  • Risk capital: Always invest your risk capital in the markets. It is not advisable to borrow to invest in the stock markets.

Sunday, November 23, 2008

Ways to use your bonus money

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 this windfall is not part of regular investment plan. It’s better to park it in safe instruments, which can later be used for down payment of home loan. This would lower the overall loan amount.

  • Retirement corpus

If you are above 35 years old, you could also look at adding this amount to your retirement corpus. Consider index funds or balanced funds. If you have smaller amounts like Rs 50,000 or below, you could look at PPF. That would shore up your long-term savings.

  • Equity is good for long term

When you think long term, experts suggest equity. The reason being equity investments can give tremendous returns in the long term. This may be a good time to buy stocks, given that markets are looking choppy. But the bigger question is whether you want to enter the equity route via stocks or look at equity mutual funds? You should look at splitting your money over 5-6 blue chip companies. If you don’t have the expertise, then a diversified equity fund will be a safe bet.

  • Park the money in liquid funds, FDs

Consider parking the money in liquid funds, fixed deposits if you require money in the near term. Liquid funds can be a good alternative as the effective tax rate would be less.

Every windfall comes with a price tag. In this case, the bonus amount will be taxed as part of your salary. How much it would exactly cost you would depend upon the tax slab. You could look at insurance, PPF or even equity-linked saving scheme, which would come under Section 80C. Even home loan could help.

The overall tax deduction on the interest component for a single borrower is Rs 1,50,000 and Rs 3 lakh in case of joint loans. Even the principal component of the loan enjoys tax rebate. So, base your decision on the post-tax return, not to mention your liquidity needs.

Friday, November 21, 2008

Just play it SAFE in turbulent stock market times

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.


No investor likes a range-bound, highly volatile market, marked by spikes and falls at regular intervals. And if you believe industry analysts, there is no let-off in the second half as well. They hold the view that bears and bulls will continue to punch each other to gain supremacy in the capital markets over the next six months, and losing the bout, probably, will be you — the investor. Thus, it is better to go for a defensive positioning. If you wish to dabble in the stock markets, then better buy defensive sector stocks — FMCG, pharma, healthcare and information technology.

You should opt for large-cap blue-chip liquid stocks, as in a tough macro economic environment, these stocks can withstand pressures. The focus should be to identify stocks in this space which are quoting at attractive valuations, without trying to time the market.


If you think you don’t belong to the first category, are cautious about your investments but still you want to get the best out of the equity markets, then you should better spend the next six months piling up cash. Over the near term, markets will remain volatile due to multiple factors such as policy responses to rising inflation ahead of national elections, absence of FII flows until the global scenario improves and earnings growth moderation. Further, growing strains amongst the ruling coalition pose additional uncertainty for the markets. In this scenario, analysts think it won’t be a bad idea to stay with cash, which you can accumulate to your advantage in the long-term, particularly till the market stabilises after the general elections.


If the first two themes don’t excite you, and you are an investor who wants to enjoy the best of both equity and debt markets, then you should opt for structured products with capital protection. The advantage of investing in a capital protection product is that it allows participation in the stock markets without the accompanying worries of capital erosion. Typically, capital protection funds invest up to 20% in equity. Thus, not only your portfolio benefits from a reduced credit and interest rate risks, but also gains from the current high yields. In a nutshell, it acts as a hedge against a difficult market situation.


If you are an aggressive investor, then probably your investment outlook should be to do value picking in the stock markets. In the current market scenario, analysts believe that quality stocks across sectors will clock relatively good performance as investor focus returns to fundamentals. You should slip into the contrarian investing style, buying stocks that are currently trading below their net asset values. The recent volatility in the markets has thrown up attractive opportunities. Stock prices of various front liners at the current level seem to have already factored in lower growth prospects and look attractive.

Financial and engineering stocks are a good bet in the short-term, considering they have undergone sharp falls during the last few months. The banking sell off is overdone, and this sector remains a strong growth sector.


Last but not the least, your investment theme should be one which includes a disciplined approach to investing. Markets are expected to be cyclical and in such a scenario, analysts recommend that either you can reduce the risk of equities by increasing your holding period or invest regularly through systematic investment plans (SIPs). It is advisable to avoid momentum and concentrated bets in a range bound market. The advantage with systematic plans is that it helps to average out your investments to the ups and downs of the equity market.

Wednesday, November 19, 2008

SEBI Allows Repricing of ESOP

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 market crash at the then prevailing market prices have seen a significant erosion in the value of their options. This places them on an inequitable ground compared to employees who are getting Esops priced at currently depressed share prices, as they would get to exercise their Esops at a lower price. Companies in such a situation are considering repricing of Esops issued earlier.

So far only a handful of firms have resorted to repricing though. DTH firm Dishtv, for example, last week approved a proposal to reprice the stock options at Rs 36.10, which have already been granted but not yet exercised. In August 2007, the firm had approved its Esop Scheme 2007, where it planned to grant 30.7 lakh options to 43 employees at a price of Rs 75.2 per share. In April this year it approved the grant of 1.84 lakh options at a price of Rs 63.95. However, the current price of Rs 39.05 makes all these options redundant.

Sometimes repricing may be required if the management feels that the options were granted at a time when the valuation was unrealistically high, in which case its more of a correction exercise.

He, however, warns that repricing is a double-edged sword. If done during usual market dips, it may signal insecurity and lack of confidence in the future growth trajectory on the part of the management, which can send out wrong signals to their people. It can create wrong expectations in the minds of the employee that the firm will continue to do so whenever the prices are not favourable. This defeats the very purpose of a stock option, which is intended to reward only if the market valuations are rewarding, and is not generally meant to be guaranteed profit.

Market regulator Sebi allows repricing of options if the exercise price becomes less than the market price. Of course, options are underwater not just in India. According to New York-based compensation consultancy Steven Hall & Partners, as of June end as much as 40.3% of Fortune 500 firms’ stock options were out of money by an average of 34.5%.

Monday, November 17, 2008

Gloabal Emerging Equity Market (GEM) funds lose sheen

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 by redemptions from Asia (excluding Japan) equity funds, Greater China equity funds, India equity funds and Taiwan equity funds.

The abrupt loss of enthusiasm for Russia, fueled by state pressure on firms in “strategic sectors” and the recent incursion into Georgia, has played a role with outflows from Russia equity funds since late June exceeding $800 million, the EPFR note says. And since late June investors have pulled nearly $4 billion out of the Emerging Europe equity funds, which currently maintain a 42% weighting to Russian equities.

Among developed markets, US Equity Funds experienced outflows — for the first time in five weeks — of $2.52 billion as modest flows into Mid cap funds were more than offset by redemptions from Large cap Blend ETFs.

The two diversified fund group geared primarily to developed markets — Global and Pacific Equity Funds — recorded their third-straight week of outflows respectively. The $835 million removed from Global Equity Funds pushed year-to-date outflows from last year’s most successful fund group in terms of attracting new money to nearly $8 billion. Investors pulled out $1.23 billion from Europe equity funds during the week, and year-to-date outflows from this fund group are now within striking distance of $45 billion versus $50 billion for the much larger group of US Equity Funds, the EPFR note said.

Growth in the 15-member Euro zone is also slowing sharply as tighter credit squeezes domestic demand. Inflationary pressures, meanwhile, have prompted hawkish rhetoric from the European Central Bank.

Japan equity funds extended their losing streak to the fifth-consecutive week, with $128 million of money flowing out at the net level.

Sunday, November 16, 2008

Where to invest when the chips are down

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.


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. Although, the economy is currently expected to grow at 8% and the corporate sector is showing strong developments and profits, although it is showing some weakening trends now. Hence, an investor should start gradually investing at/ from BSE Sensex 12,750 to 15,000 level from a long-term perspective.

As for the promising sectors to invest in, retail, diversified financials, real estate, healthcare services, capital goods and telecom can offer good returns over the long-term. In India, over the last 10 years, growth stocks have outperformed value stocks, which have generated returns of 15% and 13%, respectively. Thus, a long-term investor should focus on growth stocks in the above sector.


The bond yield on 1-year, 5-year and 10-year government securities (G-secs) is currently approximately 9.46%, 9.42% and 9.41%, respectively, and on 5-year corporate bond (AAA rating), it is 10.80%.

The Reserve Bank of India (RBI) first quarter review of Annual Policy for 2008-2009 on July 29, 2008 made the following changes:

Repo rate (the rate at which banks borrow funds from RBI) is increased by 50 basis points (bps) i.e. 0.50% with immediate effect — thus, borrowing cost of banks will rise and effectively, interest rates charged by banks have/will also increase.

Cash reserve ratio (CRR) — the amount of funds that the banks have to keep with RBI — will be hiked by 25 bps with effect from August 30, 2008 — in effect the amount available with banks will come down as it will drain out the excessive money from the banks.

Bank rate (rate at which banks lend money) and reverse repo rate (the rate at which banks park surplus funds with RBI) are unchanged at 6%.

Due to the inverse relationship between bond prices and interest rates, the current trend of rising interest rates have brought down the prices of bonds and consequently, the gain thereon. On account of this, the returns on medium-long-term debt funds, including MIP, have been very low over the last year.

Thus, it is advisable for investors to maintain/ invest in lower portfolio durations to minimise the impact of rate increases. In effect, investors should invest in short-term products — directly in G-secs or through mutual funds in debt mutual funds, especially fixed maturity plans.

Although banks are offering high rate of interest on fixed deposits, debt funds are most tax-efficient for investment since interest on fixed deposits are taxable at the regular rate of tax ranging from 10.30% to 33.99% while dividend on debt funds is tax-free (however the debt fund would be liable to pay tax on distributed income ranging from 14.1625% to 28.325%, depending upon the type of holder and type of debt funds) and long-term capital gain (holding period of more than 12 months) is taxable at the rate of 10% (without indexation) or 20% (with indexation).

Therefore, for an investor falling in the highest tax bracket of 33.99% planning to park funds in debt funds, for short-term investment (holding period not exceeding 1 year) dividend option and for long-term investment (holding period exceeding 1 year) growth option would be more tax-efficient.


Gold has appreciated by a whopping 35% over the last 1 year. In the long term, gold prices are expected to increase but not at double digit figures year over year. In the past month and in short term, gold prices have and can still marginally come down respectively.

Thus, investors should stay away from precious metals like gold and silver.


Property prices in India have softened in the recent 3-6 months and could get cheaper in the near term. Thus, it may be a good idea to buy prime property (commercial or residential) from a long-term perspective after carefully analysis as immovable property is not very liquid.

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