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Saturday, February 28, 2009

Income Tax refunds faster now

The refund banker makes it easier and faster to get the IT refunds due to you

Securing a refund of income tax was a long-drawn process. The completion of assessment takes considerable time. And in case there is any amount of refund due to the assessee, it used to take even longer. In order to reduce the time taken to issue refund orders, the government has initiated the scheme of refund banker. The bank will pay the assessees directly, based on an advice from the Income Tax Department. So the assessee will not have to follow up with the IT Department to check the status of his refund.

According to the Income Tax Act, if any person convinces the assessing officer that the amount of tax paid by him for any assessment year exceeds the amount he should have paid, he will be entitled to a refund of the excess amount. The assessee needs to file an income tax return before the due date of filing returns.

The scheme for sending IT refunds through a bank was inaugurated by the Finance Minister last year. In this scheme, the income tax refunds due to taxpayers will be sent by the State Bank of India directly from their CMP Branch in Mumbai.

The scheme of refund banker is based on the concept of refund bankers for IPOs. In this scheme the assessing officer will process the income tax returns on his computer. If a refund is due to the taxpayer, the data will be picked up automatically and transmitted to the bank. The bank will then send the refund as indicated by the assessing officer either through ECS or by a banker's cheque to the taxpayers address as indicated in the returns of income. An advice will also be sent to all tax-payers regarding the funds deposited in their account by ECS. The bank will despatch refund cheques within three working days of receipt of data.

Where through death, incapacity, insolvency, liquidation or other cause, a person is unable to claim any refund due to him, his legal representative, trustee, guardian or receiver, will be entitled to receive the refund for the benefit of the person or his estate.

Every claim for refund should be made in the prescribed form and verified in the prescribed manner. The claim should be made within one year from the last day of the assessment year. Where, as a result of any order passed in appeal or other proceedings, refund of any amount becomes due to the assessee, the assessing officer will refund the amount to the assessee without his having to make any claim.

With the simplifying of process and expediting refunds, compliance with the tax laws and timely payment of tax liabilities to the IT Department is expected to increase.

Friday, February 27, 2009

Technical Indicators: Types of Trades

Range bound trades, whipsaws and false signals

All technical indicators will fail in range bound stocks / markets and will generate whipsaws and false signals.

Whenever you can get a buy / sell within 10 days (order is immaterial), it means the stock is range bound. At this point, one should visually check the chart and identify areas of support and resistance. Only a break above these levels will create a new trend.

Support and Resistance levels / targets

This is nothing but a "peak" and "trough" based on 5% change. These levels form the basis for calculation of targets.

A break above a "peak" gives a resistance break. Similarly a break below a "trough" generates a support break.

Oversold and overbought stocks

Interpretation of this is difficult and should be done in the context of the prevailing trend.

Overbought means great strength. It does NOT mean stock will correct immediately. It is normal for a stock to remain overbought for considerable periods of time.

Oversold means great weakness. It does NOT mean stock will rally immediately. It is normal for a stock to remain oversold for considerable periods of time.

In an uptrend, oversold stocks present a good buying opportunity near supports (buy on declines). In a downtrend, one should exit overbought stocks (sell on rallies).

Thursday, February 26, 2009

Price - to - Book Value

Sharp Correction Provides Good Value Buys For Investors With A Long Horizon. So how an investor can identify the good stocks to by for long term. In this article we discuss a method to do it.

THE stock market is known to over react on the way up as well as down. So, it should come as no surprise that the market price-to-book value of many fundamentally-sound companies has slid to its lowest level in many years as a result of the recent turmoil.

An analysis reveals that 181 companies (with strong fundamentals) are currently trading at a discount to BSE-500 index average price-to-book value (PBV) of around 4.75. And stock prices of 70 companies are trading at a PBV of less than 2. Such a sharp correction provides good value buys for investors with a long-term horizon.

To give a fair picture, only those companies whose revenues and net profit grew at a CAGR of 15% or more in the past three years have been included in the study. Companies with 3-year average return on capital employed of less than 15% and those with a market cap of less than Rs 50 crore have been excluded. Other than PE ratio, the book value is another parameter that is commonly used to value stocks. But what does P/BV means and how can investors use this parameter to value their investments?

P/BV is a valuation ratio and is arrived at by dividing the market price of a share with the respective company’s book value per share. Book value is equal to the shareholder’s equity (share capital plus reserves and surplus) and captures the intrinsic value of the company’s assets. Book value can also be arrived at by subtracting current liabilities and debt from total assets.

Besides relatively little-known stocks, the list includes some of fundamentally strong companies such as Clutch Auto, GIC Housing, Valecha Engineering, Ramsarup Industries, Indian Overseas Bank, Ansal Properties and City Union Bank, among others. Among the large-cap stocks, companies like Reliance Industries, Grasim Industries, Tata Motors, Bajaj Auto, Tata Motors, Maruti Suzuki, and Ashok Leyland are among the ones that are trading below the P/BV of BSE 500 companies.

P/BV is a good metric to value stocks of companies in the capital-intensive industries like engineering, automobiles and banks, which have large amount of tangible assets in their balance sheets. In contrast, companies in software and FMCG sectors have low amount of tangible assets (fixed assets etc) on their books and, as such, the P/BV may not be a correct indicator of valuation.

If a company is trading at a P/BV of less than 1, this indicates that investors believe that the company’s assets are overvalued or company is earning a poor return on its assets. Also, P/BV indicates the inherent value of a company and is a measure of the price that investors are ready to pay for a ‘nil’ growth of the company.

As such, since companies in the services sectors like software and FMCG have a high growth component attached to them, P/E and not P/BV is a right measure of their valuations.

Wednesday, February 25, 2009

Portfolio Tips

  • An aggressive portfolio with 12 funds and 12 stocks. Mid and small caps account for 52.5 per cent of the overall portfolio.

  • 43.67 per cent of the portfolio is invested directly in equities with most of the stocks being of small and mid cap companies.

  • The remaining portfolio consists of riskier funds which predominantly invest in small and mid cap exposure. Standard Chartered Premier Equity and DSPML Tax Saver are two such funds. The stocks portfolio too is dominated by small and mid cap picks like Tantia Construction, Asian Electronics and Rico Auto Industries.

  • 8 of the 12 mutual funds have a portfolio allocation of less than 5 per cent. Such small holdings would add no value to the overall portfolio.

  • When the stocks invested in directly and the stocks that the mutual funds invest in are clubbed, the overall portfolio gets spread over 744 stocks! And 160 of these stocks have a meagre allocation of less than 1 per cent.

  • On the other hand, the portfolio has negligible exposure to debt (1.9 per cent). This increases the down side risk and makes the portfolio unstable.

  • Though the portfolio consists of two sectoral funds (Tata Indo World Infrastructure Fund and DSPML Tiger Fund), it is overall well diversified across sectors.

  • Now that we have a clear understanding of what the portfolio comprises, here are a few strategies that you, and every investor, need to keep in mind...

What Should Have been Done

  • An investor needs to have a significant component of debt in his portfolio. This depends on the individual's financial goals and risk appetite. A 10-15 per cent debt component can prove healthy for any portfolio as this helps provide the stability when markets are going through a rough patch.

  • Avoid investing huge amount of sums in one go. Opt for an SIP in well diversified and rated funds. If you have lump sum money, spread investments over a period of at least 6 months.

  • You have invested in just one five star rated fund and 33 per cent of your portfolio is invested in unrated funds. While creating a portfolio, you must be cautious while selecting the funds. Star ratings, performance over years and return generated versus the peers are some factors that you can consider. You must also see how the fund performs when markets tank.

  • Assess your risk appetite before deciding on the equity debt allocation you want for your portfolio.And now that you know what should have been done, here's what we suggest you should do now...

What Should Be Done Now

  • Fix an amount which you can invest monthly and choose some funds from the suggested equity funds. Opt for diversified funds from the list and ensure that you do not invest in too many funds.

  • Quality fund selection is very important. Redeem Funds which have proved to be laggards for a long time and have not been rated. Allocate this amount to a debt fund and then do a STP to an equity fund.

  • Debt exposure is extremely essential for your portfolio. Select two funds from the list to invest in. Also look at investing in Arbitrage Funds. These offer returns at par with fixed income funds but are more tax efficient.

  • Rebalancing the portfolio plays a vital role. Do not track your fund's portfolio every day. Check the equity-debt allocation and make changes if required. Do that just once a year or when markets rise or fall sharply.

Avoid direct stock investments. Investing in equities directly needs a lot of research - both fundamental and technical. If you do not have the expertise and time to do that yourself, let the mutual funds manager do it for you. Do not speculate with stocks just on the basis of price or brand name.

Tuesday, February 24, 2009

All about "Derivatives"

What are derivatives?

Derivatives are financial instruments, which as the name suggests, derive their value from another asset — called the underlying.

What are the typical underlying assets?

Any asset, whose price is dynamic, probably has a derivative contract today. The most popular ones being stocks, indices, precious metals, commodities, agro products, currencies, etc.

Why were they invented?

In an increasingly dynamic world, prices of virtually all assets keep changing, thereby exposing participants to price risks. Hence, derivatives were invented to negate these price fluctuations.

For example, a wheat farmer expects to sell his crop at the current price of Rs 10/kg and make profits of Rs 2/kg. But, by the time his crop is ready, the price of wheat may have gone down to Rs 5/kg, making him sell his crop at a loss of Rs 3/kg. In order to avoid this, he may enter into a forward contract, agreeing to sell wheat at Rs 10/ kg, right at the outset.

So, even if the price of wheat falls to Re 1/kg or rises to Rs 20/kg, he is able to sell it at Rs 10, thereby staying immune to any price change.

How do losses occur?

Let us take a scenario, where he has agreed to sell wheat at Rs 10/kg, without being sure of the quantity he will be able to produce in the future, i.e., without having an exposure to the underlying. So, if the price of wheat rises to Rs 20/ kg, he is forced to sell wheat at Rs 10/kg, thereby making a loss of Rs 10/kg.

What is mark to market (MTM)?

The daily inflow or outflow of cash as a result of a favorable or unfavorable movement in the price of the contract, until the whole contract is terminated, is known as mark to market. So, considering our above example, if at a certain point in time, wheat is trading at Rs 15/kg, then our farmer is said to be sitting on a markto-market loss of Rs 5/kg.

Can mark-to-market losses increase?

Of course they can. If the price of wheat in our example keeps rising, then the farmer’s mark-to-market losses keep increasing until he terminates the contract and books his losses.

What do Indian laws say?

Indian laws allow companies to get into the forex derivative market only when there is a genuine underlying exposure. But with the huge temptation of massive profits arising out of a favorable movement in prices, many Indian companies have taken or have been lured into taking naked speculative punts by their banks.

For example, an Indian exporter expecting to be paid in dollars is allowed to take positions in the forex market to hedge against an appreciation in the rupee.

But the exporter has no business taking a USD-GBP speculative bet (whether the exporter is expecting the dollar to appreciate or depreciate against the British pound is irrelevant) when it has no exposure to any asset that is affected by a fluctuation in the USD-GBP forex rate.

Why do they seem to be so notorious?

Because of the high leverage that derivatives offer, they are double-edged swords, i.e., although profits get magnified, so do losses. And at times, because of the high leverage, the losses incurred by an investor are more than even the entire invested capital. This is probably why legendary investor Warren Buffett has been quoted as saying, ‘’derivatives are financial weapons of mass destruction’’.

Monday, February 23, 2009

All about P/E Ratio

The most commonly used valuation metric by investors is the price to earnings ratio or commonly referred to as the P/E ratio. Though commonly used, it is also misunderstood for various reasons. Here is an attempt to simplify this valuation metric.

How is P/E calculated?

It is calculated by dividing market price of a stock by EPS (earnings per share). EPS in turn is calculated by dividing the net profit of the company by the number of shares outstanding.

Having calculated the P/E, what does it stand for?

Lets assume a stock is trading at Rs 100 and its EPS is Rs 20. The P/E multiple is 5 (100 upon 20). Assuming that the company’s EPS is likely to be Rs 20 each year, it will take 5 years for the investor to realize Rs 100. Of course, the assumption here is that the company’s EPS is not growing at all.Now taking the example of commonly traded stocks like Infosys and Tisco. While the former trades at a P/E multiple of 25 times, the latter trades at 7 times. Why is it so? It is believed that the stock price of a company tracks its long-term earnings growth potential. In an economy, some companies (or sectors) are likely to grow at a faster (like say software or pharma) rate. So, the P/E multiple of companies from these sectors are likely to be higher and vice versa. Depending upon growth expectations, the P/E multiple could vary.There is one crucial factor here i.e. expectations. Though Infosys may be trading at 25 times earnings, if EPS is expected to grow by 25% per annum, the investor could realize the money in four years.

P/E – Is it a discount or a multiple?

There are two ways of quoting P/E valuations:

1. Tisco is currently trading at Rs 350 discounting its earnings by 5.5 times

2. Tisco is currently trading at Rs 350 at a P/E multiple of 5.5 times

Which is right? The answer to this lies in the formula for calculating P/E itself.P/E is Market price divided by EPS. If we were to reverse the formula:

Market price = P/E multiplied by EPS.

Stock prices reflect future earnings potential and not past performance. Discounting the current price with historical EPS is not a right way to analyse companies.

Take a hypothetical case. If Tisco’s EPS for the next year is expected at Rs 50 and the growth in EPS is around 15%, the market price is calculated by multiplying Rs 50 with 15 times i.e. Rs 750. When determining the stock price, one does not discount earnings but multiply earnings.

What is the ‘right’ P/E multiple for a stock?

The answer to this question is not easy. In the previous example, we have assigned a P/E multiple of 15 times because EPS is expected to grow by 15% in the immediate year. Is this the right way? Not necessarily. Here, it is important to understand industry characteristics of the company.For a commodity stock like Tisco, EPS tends to grow at a faster rate when steel prices are recovering or are at the peak and the EPS is likely to decline at a faster rate during downturns. To qualify this statement, if we look at EPS growth of Tisco from 1994 to 2004, the compounded growth in earnings is 17%. However, the CAGR growth in the last three years was 193% (the recovery phase). So, if one believes that steel demand is likely to trace long-term economic growth and that 15% growth is unsustainable, the P/E multiple should be ideally much lower than 15 times. Similarly, the long-term growth prospects for software companies could be much higher than commodities. So, the P/E multiple for software stocks could be at a premium.

Determining the P/E multiple for a stock/sector also depends on:

1. Historical performance – Why does Infosys trade at a higher P/E multiple compared to Satyam? By historical performance, we mean, focus of the management (without unrelated diversifications), ability to outperform competitors in downturn/upturns and promise vs performance. This can be gauged if one looks at the last three to five year annual reports of a company.

2. The sector characteristics – Margin profile, whether it is asset intensive and intensity of competition. Less asset intensive sectors (say, FMCG) are considered defensive and therefore, could trade a premium to the overall market.

3. And more importantly, expectations. Take the case of textile stocks. Expectations of significant growth opportunities post the 2005 quote regime phase out has resulted in upgradation of P/E multiple of the textile sector.

When is P/E not useful?

1. Economic cycles - In FY02, Tisco was trading at a P/E multiple of 20.5 times its FY02 earnings. Was it expensive? Based on FY05 expected earnings, Tisco is trading at a P/E multiple of 5 times its earnings (at Rs 250). Is it cheap? If one ignored Tisco in FY02 on the basis that it was ‘expensive’ on the P/E multiple in FY02, the opportunity loss is as much as 350%. Businesses operate in cycles. During downturn, EPS will be low but P/E will be inflated and vice versa. At the same time, during expansionary phase, corporates invest in capacities. In this case, high depreciation costs suppress earnings. P/E, in this context, may mislead investors.

2. Not actively tracked – There are number of companies in the Indian stock market that are not actively tracked by investors, analyst and institutions. For example, Infosys’ average price was Rs 2 in FY94 and the P/E multiple was 17 times. At times, P/E multiple may be lower because some sectors/stocks are not in the limelight.

3. Expectations – On the downside, some stocks may be trading at a significant premium because earnings expectations are higher. High P/E also does not mean a good stock to buy. What if the expectations are unrealistic? One needs to exercise caution to this extent.

4. Means little as a standalone number – P/E, as a standalone number, means little. Besides P/E, it is also important to look at margins, return on net worth, cash generating ability and consistency in performance over the years to assign a value to a stock.

5. Market sentiment – During bear phases or when interest in stocks is low, valuations could be depressed. Since equities are considered less attractive during these periods, valuations are likely to be below historical average or below earnings growth prospects.

When is P/E useful?

A powerful metric – Unlike metrics like discounted cash flow method and so on, P/E is relatively a simple and at the same time, a powerful metric from a retail investor perspective. Though the factors behind determining the ‘right’ P/E multiple are important, a historical perspective of a stock’s P/E could make this exercise less complex.To conclude, valuation of stocks involves subjectivity. A person X may assign a higher P/E multiple to the stock as compared to a person Y depending on the risk profile and growth expectations. In the end, it all boils down to how the company is likely to perform.It is not that stock market is always right when it comes to valuing a stock!

As Mr. Benjamin Graham puts it “in the short term, the market is a 'voting' machine whereon countless individuals register choices that are product partly of reason and partly of emotion. However, in the long-term, the market is a 'weighing' machine on which the value of each issue (business) is recorded by an exact and impersonal mechanism”. Watch the earnings!

Sunday, February 22, 2009

All about Debt funds

With the upswing in the rate of inflation and the high rate of interest, investors are finding it tough to invest in instruments that give them a good rate of return. Both equity and debt market have been quite volatile for the past few months. Debt options like fixed deposits are not giving good returns and most banks on an average offers 8%-9% returns.

So what should an investor do in such a scenario? Look for debt instruments that give a good return even if inflation is high or the market is down. Wealth managers feel debt funds can be a good option to invest as it help during times of high inflation since interest rates also go up at such times.

Debt funds helps in preserving capital and the returns you get from it are sufficient to keep up to inflation but not beat it. Investing in debt funds also offers tax advantage compared to interest bearing instruments like deposits and bonds. The frequent fluctuation in the stock markets has led to a new interest in debt funds.

A debt fund invests in fixed interest instruments like bonds, debentures, call money market and other. Since they invest in fixed income instruments and not equities they have a low level of risk. It is a way of investing in bonds indirectly. The fund would invest in a diversified portfolio of debt instruments.

One can choose appropriate debt funds so that returns are higher as interest rates go up. Normally when interest rates are high, equities take a beating. This is one more reason why debt funds are preferred in times of high interest rates.

There are several types of debt funds available in the market. But it's not as easy as picking up a fixed deposit. Some funds do well when the interest rate outlook is down and there are some funds that do better when interest rates go up. So one needs to be aware of the different types of funds and also what would be appropriate at different times so as to benefit from it. "Returns could be poor if a wrong option is chosen.

Kinds of debt funds

  • Liquid funds - which invest in very short-term instruments like call money markets

  • Short-term income funds - which invest in bonds normally with 3 months-18 months time horizons

  • Long-term income funds - 18 months to many years

  • Gilt funds - invest in government securities, which has short and long term options

  • Floating rate funds - in these funds interest rates change automatically and

  • Fixed Maturity Plans - which are close ended with fixed maturity.

Fixed maturity plans (FMP) functions much like bank fixed deposits. FMP invest in debt securities that mature at the same time as the fund. It is also not affected by interest rate fluctuations.

In an environment of high interest rates, liquid funds/liquid plus funds, floating rate funds and fixed maturity plans are preferred options.

The investment time horizon in debt funds depends on the kind of funds you are opting for. Various funds have different maturity options. For FMP, three to six months is ideal. But because of its close ended nature you have to wait for new schemes to launch. Debt funds also provide liquidity, which are not there when one directly invests in bonds.

Today, many investors prefer investing through the debt funds route instead of directly investing in the bonds as it is diversified across various companies and bonds.

If an investor is looking for safety on his/her entire investment than 100% investment should be on debt but a balanced portfolio would entail 50% in equity and 50% in debt. Investors looking for higher return more concentration should be in equities.

Saturday, February 21, 2009

All about Stock Splits

What are stock splits?

A stock split simply involves a company altering the number of its shares outstanding and proportionally adjusting the share price to compensate. This in NO WAY affects the intrinsic value or past performance of your investment, if you happen to own shares that are splitting.A typical example is a 2-for-1 stock split. A company will announce that it's splitting its stock 2-for-1 in one month. One month from that date, the company's shares (having traded the day before at, say, $30) will now be trading at half the price from the previous day (so they'll open at $15). The company, which had 10 million shares outstanding, now consequently has 20 million shares outstanding. The price has been halved in order to accomodate a doubling of the share total.

The most common splits are 3-for-2, 2-for-1, 5-for-4, and 3-for-1. But they can happen any which way: 5-1, 10-for-9, etc. They can even happen in "reverse": 1-for-10, etc.

But why the heck would a company do this?

A few reasons.

First, as a stock price skyrockets, some people will be psychologically unwilling to pay that "high price" so a stock split brings the shares down to a more "attractive" level. Again, the intrinsic value has NOT changed, but the psychological effects may help the stock.

Second, a stock split generally occurs in the face of new highs for the stock. Thus, it's an event dripping with positive connotations and associations. . . it's makes bulls snort and roar to suddenly have "twice as many shares" as they started with, for example.

Third, and final, with lower-priced shares, a stock's LIQUIDITY increases, often reducing the BID/ASK SPREAD and making it easier to trade. This is always good.

I buy 100 shares of ABC Inc. for $10 shares. Six months later the stock is at $20 and splits. Now I own 200 shares at $10 each. However, do I also halve my base purchase price to $5---or does my original, base purchase price remain $10?

Your cost basis (ignoring commissions) is now $5/share. Not to worry! Your money can't evaporate into thin air!

The "record date" means virtually nothing to the stockholder. If you bought the stock before the split, your shares will split the same day everyone else's do, regardless of the record date. You won't lose on the split.

Friday, February 20, 2009

Fire Insurance

A fire insurance guards against the unforeseen. But don’t ignore the finer points in the policy

DOUBT and uncertainty are an integral part of life. Ask Delhi-based businessman.

After a lot of planning and research, the 27-year-old’s dream project, a high-end apparel showroom, catering to HNIs, was supposed to be launched soon. His planning was comprehensive and execution almost complete. Till that day, he had not taken a step wrong. Well, almost. On the night before his launch, a short circuit gutted his showroom.

His whole world came crashing down and the loss was irreparable. But if he had taken an adequate fire cover, the loss could have been easily avoided. In fact, people hardly realize the importance of a policy till a casualty nails them down. Here’s an insight into why you should buy a fire insurance policy, and how to easily navigate through a claim process.


According to insurance brokers, you should always opt for a reinstatement clause while buying a fire insurance policy. You do not have to pay any extra premium to opt for it, and this clause ensures that you get the new replacement value of the item you have lost. It’s a must but you must make sure that you have insured your assets adequately and wisely. The sum insured should be equal to the new replacement value of the assets.

Under fire insurance, the risks that are covered usually include losses arising due to incidents of fire, lightning, explosion/ implosion, aircraft damage, riot strike and malicious damage, storm, cyclone, typhoon, tempest, hurricane, tornado, flood and inundation, impact damage, subsidence and landslide, including rock slide, bursting and/or overflowing of water tanks, apparatus and pipes, missile testing operations, leakage from automatic sprinkler installations and bush fire. But the actual coverage differs from company to company. So you must read the fine print carefully before you buy a policy.

Moreover, by payment of additional premium, any loss in the event of earthquake, terrorism, molten metal spillage, impact damage due to one’s own vehicles and forklifts, spontaneous combustion of goods, spoilage of plant, machinery and stocks, leakage and/or contamination of fluids kept in tanks, deterioration of stocks kept in cold storage and forest fire could be covered. Besides, even consequent losses such as loss of rent, start-up expenses and additional expenses of rent for alternative accommodation can also be covered though additional premium.

While applying for a fire insurance policy, Jain cautions that you should check the actual value of items to be covered under this policy such as the building structure with plinth and foundation, contents and other accessories that are part of the total value declared as sum insured. If the sum insured is less than the actual value, there could be under-insurance leading to a reduction in the amount to be paid at the time of claim settlement.

You should insure all the items when you opt for a policy. It is not a good strategy to pick and choose while insuring. You may feel that you will save a few rupees in premium but catastrophes do not pick and choose when they strike.


As and when a claim occurs, insurance brokers advise that you should immediately inform the claims department of the insurance company by a letter, fax, or helpline for claims registration and deputation of surveyor. You will be asked to fill up a claim form giving complete information about policy particulars, date, time, cause, place and estimate of loss. Subsequently, a surveyor is appointed by the insurance company depending on the estimated loss. The surveyor decides the liability of the insurance company after getting detailed information about the loss.

According to insurance brokers, you should always behave as if you are uninsured after the loss. You must take all such actions that you would have taken had you not been insured. Also, do not dispose of any item even if it has been rendered useless unless it has been inspected by the insurer or the surveyor.

On whether you should buy a customized policy for covering fire risk, that it only caters to a limited customer segment whereas fire policies are generic and able to cater to a wide variety of circumstances and customer segments. “Both are relevant and would continue to exist in the market as both have their set of advantages and limitations.


  • Provide full details as per the proposal form without suppressing or hiding any information related to property offered for insurance.

  • Always provide past claims/loss history to the insurance co.

  • Furnish complete details of previous insurance.

  • Whole property at a particular location should be insured to avoid any under-insurance

Thursday, February 19, 2009

Understanding Price – Earning (PE)

Earning (P/E) is one of the most widely term used in the share market. Every investor now a day supposed to know the term P/E. If the term is so important then what exactly it mean? The meaning of the term is in its name itself. It is ratio of Price to its Earning. In other words, it is the equilibrium of what market expects and how company has performed? Confused?

What is price of the stock? How the price of the stock is determined?

1) Stock Price: It is just the demand-supply concept. Price of any stock is determined on the basis of demand of that script and its supply in the market so in short it can be considered as the expectations of the investor from the script.

2) Earnings : Earnings mean earnings after depreciation and tax. In calculating P/E, earnings are considered per share to bring uniformity in calculation.

So EPS is the actual performance of the company, which is calculated as follows-

EPS = Profit after Tax( Profit for Shareholders) Number of shares outstanding.

Since P/E is the ratio of expectation and performance, it is calculated as –

P/E = Price of the share in the open market Earnings per share.

The next thing is why P/E is so much important while taking any investment decision? The answer to the question can be figured out from following-P/E is expressed in terms of multiple of EPS like 20x means price of the share is 20 time of its EPS. It tells you the time required to get your investment back in the form of return from company i.e. how much years an investor requires to wait for getting his investment back in form of EPS. (However while framing the judgment one assumption is kept in mind and is that the EPS will remain constant throughout the period.). The assumption seems to be unrealistic; as everyone knows that EPS can’t be the same. So for removing the defect one can consider the past profit trend and accordingly adjust the EPS and can make the formula somewhat realistic.

From P/E one can figure out about the expectations of the market from the particular stock. Higher the P/E more bullish is the market on the stock. In the current days most appropriate example is that of real estate stocks. Consider example of Lanco infratech Ltd having P/E 544. Means investors are highly bullish on the same, but one should be cautious enough while investing because market expectations always may not be correct. P/E expresses the market expectations from the company, however it does not means that the stocks with lower P/E are bad. On the contrary the stocks with lower P/E but good fundamentals can prove to be the best investment opportunity.

Thus it can be a useful tool for locating the gem in a coalmine. P/E is a useful tool for comparing two stocks belonging to the same industry or for comparing a particular stock with the industry. This comparison will direct the investor about the risk he will bear if opted for investment. For the long-term investment P/E will prove to be the effective tool.

There is one concept call PEG i.e. price to earnings growth concept. According to this, along with price the other important factor is that of the growth rate of the company.

Suppose the P/E of the company is 40 and the company’s growth rate is more than its P/E lets say 45 then it indicates that the stock of the company is undervalued and it is the best time to invest in the stock. The other use of P/E is to calculate future expected price of the stock –From the past trend expected EPS growth can be predicted so once expected EPS is finalized, calculating the expected price is a matter of minute.

Check the following illustration –Suppose Price of Infosys is Rs.2200,EPS is Rs.45Then P/E would be 2200/45 = 48.89Now Infosys has an average growth rate of 33% hence expected EPS will be around Rs.60 and expected price would be Rs.2933 (i.e. P/E multiplied by expected EPS)

Wednesday, February 18, 2009

Portfolio Building – Thumb Rules

Now that we know about your portfolio, here are a few pointers about what you should be doing...

  • Small allocations would not add any value to the overall portfolio. If a fund outperforms but has a meager allocation, the portfolio would not benefit from it. Make sure you allocate a significant part of the portfolio to a stock or a fund.

  • Avoid speculating and stick to funds that have proved their mettle. Invest in well rated funds. Look at a 3-5 years performance history and ratings before investing.

  • Quality is more important than quantity. Investing and managing so many funds can become a tedious task.

  • Invest in fewer funds and do not get lured to the new fund offerings. Add a new fund to your portfolio only if it adds a unique diversification.

  • Some significant component of debt is always helpful to a portfolio. Debt plays a major role in a bearish stock market and provides the cushion when markets tank.

  • Ensure that the portfolio has a healthy debt component irrespective of the risk that you can handle. You can also invest in government debt instruments like bonds, fixed deposits or NSCs, but they are not tax efficient.

  • Once you are done with the equity debt allocation, make sure you re-check the allocation and re-balance the portfolio (if required) at least once a year. This should also be done when stock markets crash or rise rapidly in a small interval.

  • Being regular is the key. It is not possible to time the markets, nor should one try to do so. Be regular and systematic. Even if you prefer doing one time investment at times, you should also have SIPs to complement those.

  • The SIP approach can also be adopted in stocks (of course it is not as simple as a mutual fund SIP). If you consistently buy a stock on a regular basis, it would help you average the cost over time. Make sure you do enough research before choosing a stock or consult an expert.

  • Set a ceiling on exposure to a particular sector or stock/fund. High exposure would make the portfolio largely dependent on its performance.

  • Do not track your mutual fund portfolio every day. Tracking funds' portfolio once in six months should suffice.

  • Do not worry about short term fluctuations. Market sentiments can change overnight. If you are a long term investor you should not worry about the market gyrations

Tuesday, February 17, 2009

Guidelines for Portfolio Management

Guidelines applicable to portfolio managers as prescribed by SEBI

A portfolio manager advises his client on the management or administration of his investment portfolio. He may either be a discretionary or non-discretionary portfolio manager. A discretionary portfolio manager individually and independently manages the funds of each client in accordance with the needs of the client. A non-discretionary portfolio manager manages the funds according to the directions of the client.

An applicant for registration or renewal of registration as a portfolio manager is required to pay a non-refundable application fee of Rs 1 lakh. Every portfolio manager is required to pay a sum of Rs 10 lakhs as registration fee at the time of grant of certificate of registration by the SEBI.

SEBI takes into account all matters which it deems relevant to the activities relating to portfolio management. The applicant has to be a body corporate and must have necessary infrastructure like adequate office space, equipment and the manpower to effectively discharge the activities of a portfolio manager. The principal officer of the applicant should have professional qualifications in finance, law, and accountancy or business management from an institution recognized by the Government.

The applicant should have in its employment at least two persons who, between them, should have at least five years' experience as portfolio managers, stock brokers or investment managers. The applicant has to fulfill the capital adequacy requirements, etc. The portfolio manager is required to have a minimum net worth of Rs 50 lakhs. The certificate of registration by SEBI remains valid for three years.

The portfolio manager, before taking up an assignment of management of funds or portfolio of securities on behalf of the client, enters into an agreement in writing with the client, clearly defining the inter se relationship and setting out their mutual rights, liabilities and obligations as specified in Schedule IV of the SEBI (Portfolio Managers) Regulations, 1993.

The SEBI (Portfolio Managers) Regulations, 1993, have not prescribed any scale of fee to be charged by the portfolio managers. However, the regulations provide that the portfolio manager can charge a fee as per the agreement with the client for rendering portfolio management services. The fee so charged may be a fixed amount, a return-based fee or a combination of both. The portfolio manager should take specific prior permission from the client for charging such fees for each service rendered.

A portfolio manager is required to accept funds or securities having a minimum worth of Rs 5 lakhs from the client while opening an account for the purpose of rendering portfolio management services.

A portfolio manager is permitted to invest in derivatives, including transactions for hedging and portfolio rebalancing, through a recognized stock exchange. However, leveraging of portfolio is not permitted in respect of investment in derivatives. The total exposure of the portfolio in derivatives should not exceed the portfolio's funds placed with the portfolio manager and the portfolio manager should basically invest and not borrow on behalf of his clients.

The portfolio manager provides to the client the disclosure document at least two days prior to entering into an agreement with the client. The disclosure document, inter alia, contains the quantum and manner of payment of fees payable by the client for each service rendered by the portfolio manager, portfolio risks, complete disclosures in respect of transactions with related parties as per the accounting standards specified by the Institute of Chartered Accountants of India in this regard, the performance of the portfolio manager and the audited financial statements of the portfolio manager for the immediately preceding three years.

Monday, February 16, 2009

Realty Funds - REMF for a pie of the real estate action

An insight into real estate mutual funds that allow small investors to benefit from the healthy returns investments in the real estate sector offer

Real estate mutual funds (REMFs) make it possible for everyone to use the real estate boom to earn handsome returns. You don't need to buy property to actually benefit from the high capital gains it offers. You can go the real estate mutual funds way.

Advantages of REMF

Retail investors will be able to participate in the real estate sector. In case of venture capital funds, the minimum investment size is around Rs 1 crore. For REMFs, this is expected to come down to about Rs 10,000. Retail investors will have one more investment option to diversify their portfolio.

Institutional investors will get a good exit option by way of transfer of assets to REMF. Real estate as an asset class provides excellent risk adjusted returns along with low correlations with other asset classes.

The real estate sector will get an additional source of capital via retail investors' money. Companies' operations will become more transparent and accountable.

Returns investors can expect

The US REITs have delivered high yields and have a low correlation to other asset classes, helping investors balance the risk-reward characteristics of their portfolios. The US REIT market produced an average annual income return (Morgan Stanley REIT Index) of 6.96 percent for the period December 1993 to January 2003 and an average annual total return of 10.1 percent for the period June 1993 to June 2003.

Risk Factor

REMFs derive their risk from the underlying asset i.e. property. However, the risk gets reduced substantially because of diversification across multiple investments. Of course, they are riskier than diversified equity funds as REMFs focus on only one sector i.e. real estate.

Ideal investment horizon

REMFs are going to be close-ended funds as per SEBI regulations. Thus, you do not have the option of selling the units back to the fund. You can sell units only on the exchange. The investment horizon would be equal to the fund tenure. Also, as real estate projects have long gestation, it is advisable to stay invested for a long term.

How the fund works

They will invest in real estate projects, mortgage backed securities as well as in equity, debt and debentures of real estate companies. They will earn returns from properties by way of rents and capital appreciation. They will also get interests, dividends and share price appreciation from securities of real estate companies.

Choosing a fund

If you want a steady income stream, you should go for a fund that invests most of its corpus in stabilized rent producing properties. If you want quick appreciation, you should go for a fund that invests in the early stages of development projects.

Proposed portfolio allocation of the fund across sectors, such as office, retail and residential is significant. For example, the office sector is popular worldwide for its stable income yields, while retail is considered aggressive. As REMFs are close-ended, you should look at the tenure of the fund. This should match your investment horizon.

WHAT do you do when home markets get choppy? Shop outside, right? Well, not quite when it comes to investment. In fact, even though the Indian economy and capital markets are increasingly becoming influenced by global forces, people prefer to invest locally here.

Reason? Analysts say it is largely due to lack of understanding of global market trends and apprehensions of a volatile market which have changed the investor beliefs and behavior. Or perhaps, made him more cautious in his approach.

So what’s the takeaway for the moment? Should the investor wait-and watch for the ground situation to improve or look for greener pastures by rejigging his portfolio? Opinions differ, but most fund managers believe the need of the hour is to balance one’s high investment concentration to Indian markets with appropriate global diversifiers such as investments in a global real estate mutual fund (REMF). When we look at the Indian market, we see people taking on extreme risk. They live in a world of high returns and high risk. You earn in this economy, your pensions are in this economy, and your investments are also in the same economy. So, you are running high concentration risk.


With Indian avenues getting saturated, there’s a growing realization that local people are already fully invested in India, and it makes sense to diversify. According to ING Clarion Real Estate Securities research, the global real estate market size is expected to grow from $23.6 trillion as of December 2006 to $33.3 trillion by 2010. In developed markets, investors place up to 50% of their financial portfolios in overseas assets. Half of this, feels Vohra, should be in diversifiers such as alternative assets, including real estate and commodities. Given that global investment is new to India, an allocation of at least 20% to global real estate will give investors an optimum decrease in risk and growth in returns. The idea is to give lower volatility than an equity fund and greater returns than a bond fund. In fact, a person who has followed global asset diversification would have been spared the pain that the Indian markets have seen in the last few months.

In the first quarter of 2008, ING’s Global REMF has given a return of 9% when the Indian markets were falling and has outperformed all equity funds, gold and debt in that period. Its return since its inception six years ago is in excess of 20%. The majority of these investments are via REITs that have low volatility versus equities and more real income than bonds.

Financial planners are, however, not so upbeat on this asset class. Experts assert that you should invest in a global REMF if you have surplus funds. You must think about investing in a global REMF only if your financial planning goals are satisfied. The product is yet to prove its mettle in the Indian market. Thus, you should carefully evaluate the underlining assets where this fund will invest and be fully aware of risks involved before taking any exposure. It is, however, safer to invest in a fund, which receives rent by leasing properties than a fund that allocates money in new projects. If satisfied, you can look to park 20% to 30% of your surplus fund in a global REMF.


Before investing in this fund, analysts recommend that you should bear in mind three crucial factors: These are not principal protected investments and you should not chase performance. Global markets are at least 50-100 times bigger than Indian capital markets and it is important to pick the right manager with experience, presence and track record before you venture overseas, and currency and sovereign risks are essential ingredients for any offshore investments. Therefore, you must choose markets carefully to manage these risks.

Diversification point of view, global REMFs does make sense but the recent sub prime crisis has affected its returns. “It is a flexible investment option providing advantage of a transferable security/asset class, which could be in the form of the units provided by trust/fund house managing it. However, there is a concern of the impact of rising interest rates and appreciating rupee on the returns of this fund.

Though rising interest rates impact real estate, rates across the globe don’t move in tandem. Interest rate cycles may vary by a year or two from country to country. This has a huge impact when you are running a global portfolio because you can latch on to these different cycles and smoothen things off. Similarly, currency movements are never one sided, they move in cycles.

Real estate MFs - Easy On The Pocket

Real estate MFs and REITs offer the cheapest and most convenient way to own a stake in the booming lucrative property market in India

THEY SAY bureaucracy in India can be slower than the most patient snail. So, more than seven years after the proposal was first mooted, the Securities and Exchange Board of India (SEBI) came out with its draft guidelines for real estate mutual funds (MFs). This move has brought much joy and relief to the MF industry.

Now, the industry is out to convince domestic investors that the move could not have come at a more opportune time. In these volatile times, real estate acts as a good diversification option due to its low correlation with equity and bonds. Besides, retail investors can now invest in actual real estate projects with amounts as low as a few thousand rupees.

Sebi’s move to launch realty MFs will not only foster diversification in the MF industry, but will also promote wider participation in the real estate sector the move will help bring the Indian market place closer to global norms. As for delivering returns, sample this... ING’s Global Real Estate Fund, which invests in shares of international real estate companies, emerged unscathed in the recent stock market turbulence. The fund not only took the crash in its stride, but also delivered positive returns over the same time period. If you had invested Rs 10,000 separately in the BSE Sensex, BSE Realty index and ING Global Real Estate Fund on January 10, ’08, your investment would be worth Rs 7,900, Rs 5,500 and Rs 10,800, respectively, as on April 22, ’08. Sebi has given approval to two kinds of real estate funds. The first category is of real estate MFs, which will invest in real estate projects and mortgage-backed securities. These will be closed-ended funds, listed on the exchanges. As their net asset values (NAVs) will be declared daily, investors will have the option to exit any day. So, you can now say goodbye to the old tradition of illiquidity in real estate investments. Real estate investment trusts (REITs, in short) constitute the second category of real estate funds. These products are very popular abroad. The most common version of this class of funds allows an investor to earn fixed income like returns through rents of commercial properties. Most REITs are listed on the exchanges and have tax incentives for investors. Put simply, REITs work like fixed income instruments (rents as coupons), while realty MFs will seek capital appreciation (like a stock price going up) by investing in properties.

For years, real estate was synonymous with lack of transparency in transactions and absence of an index, making it difficult to track prices. Various fund officials hope that the introduction of REITs in India will change all that. They are betting on such products ushering in greater liquidity to this asset class, as well as freeing up developer capital for further investment, changing the dynamics of the sector as well.

With the current real estate boom and no signs of any fall in demand for homes or offices, this may be the best time for investors to own a share of the lucrative realty sector. Real estate MFs and REITs offer the cheapest and most convenient way to do so. However, let’s hope that smoother legislative framework and a clear taxation policy will be put in place for these products, making them investor-friendly. BDV-270534-BDV

Sunday, February 15, 2009

Arbitrage Funds - Risk Fee Earners

Of late, there has been an avalanche of bad news flowing out of the Indian stock markets. The Sensex tottering around the 14K mark, the Nifty around the 4K mark, the plummeting stock prices of most companies, mutual funds failing to garner any positive returns... the list seems to go on and on, and on. Amidst all of these sob stories, we have become almost desperate for some positive information. Well, look no further.

While the markets have been crashing around us, there has been one category of mutual funds that have actually generated returns in the green. They are the Arbitrage Funds. Quite often referred to as equity-and-derivative funds, arbitrage funds are an ideal way of earning a reasonable income from equities with the modest amount of risk, And here's how.

The objective of an arbitrage fund is to capitalise on a stock's price difference between the spot market (cash segment) and the derivatives market (futures & options segment).

These funds basically generate income by taking advantage of the arbitrage opportunities arising out of the mis-pricing between the two markets (spot and derivative).

Let's illustrate this concept with a hypothetical situation. Let's suppose that the stock of Company XYZ is trading at Rs. 500 in the spot market. Simultaneously, the stock is also being traded in the derivatives market where the stock future is priced at Rs. 510. Now, when an arbitrage fund manager sees such a mis-pricing, he sells a contract of the XYZ stock future at Rs. 510 and buys an equivalent number of shares at Rs. 500 from the cash segment. In this way, he earns a risk-free profit of Rs. 10 per share (minus relevant transaction costs). The best part about such profit earnings is that they can come irrespective of the overall market movement.Furthermore, on the settlement day of the derivatives segment, the stock prices in both the markets tend to coincide. So, the fund manager will reverse his transaction - buy a contract in the futures market and sell off his equity holdings in the spot markets - and earn more profits. An arbitrage fund carries out a number of such transactions to generate favourable returns.

Sounds highly appealing, doesn't it? Well, arbitrage funds have clearly outperformed debt funds and the returns of an arbitrage fund become tax-free after a year, but these funds have a few concerns as well. The main concern would be a bloating asset size. If the AUM of an arbitrage fund increases heavily, then a majority of the assets would remain parked in money market instruments simply because of the lack of enough arbitrage opportunities. However, it is not time to be overly concerned as yet because more and more stocks are being introduced in the derivative markets, hence broadening the investment universe for arbitrage funds.

So, should you opt for an investment in arbitrage fund? The facts and figures sure support the cause. Arbitrage funds offer better returns than debt or income funds and their earnings become tax-free after a year. But, increasing assets could be a cause of concern, albeit not yet. The category currently manages a moderate amount of assets and is made up of 10 funds. But the deciding factor could be that arbitrage funds generally thrive on volatility. The higher the volatility in the markets, the higher is the potential of mis-pricing between the spot and derivatives markets. Hence, at a time like now, when the markets are at their volatile best, arbitrage funds might just turn out to be the most favourable form of investment.

Saturday, February 14, 2009

10 Simple Ways to Build Your Brand

1. Create an affiliate program. A good affiliate network allows you to grow your e-business efficiently and affordably, channeling additional traffic to your site without the expense of pay-per-click advertising. Provide your affiliates with links and ads that carry your branding message.

2. Start or contribute to a blog. Look for a highly trafficked and searched blog in your industry, then write and post relevant articles about your business. Let your personality shine through in the tone of your writing.

3. Print your logo on labels or stickers and place them on all communication with customers. Stickers appeal to our tactile nature and add interest to just about anything. They don't need to be fancy, but they should feature your logo and colors.

4. Attach your tagline to your e-mail signature. If you don't already have a tagline or motto that communicates a key difference between you and your competition, create one and consider trade marking it.

5. Print your logo on an inexpensive premium like a hat or golf ball. The more memorable the item, the better. Distribute your premium on every sales call, to customers, prospects and even suppliers. Buy in bulk to reduce costs.

6. Start an e-mail newsletter for your customers and prospects. Include your own articles and link to other pieces related to your industry. This is a great way to keep your brand in front of customers and prospects regularly.

7. Offer your expertise to local or industry media publications that are read by your target customers. Make yourself available as a source for upcoming stories related to your business. Or, write an article and pitch it to target publications.

8. Visit your clients around holidays (or minor holidays like Groundhog's Day), leaving them a holiday-themed surprise with your logo on it. Use the stickers you print (see No. 3) to customize the treats you choose. This one takes some creativity, but a little candy can go a surprisingly long way.

9. Follow up with customers to thank them for their business and get feedback on your product or service. Call, e-mail or visit current customers as often as time permits.

10. Ensure that all your promotional materials match one another graphically. At the very least, your business cards, stationery, signage, packaging, brochures and website should all feature your name, logo and tagline consistently.

At its core, branding is about building trust with your target audience. This takes time and consistency, but not a huge advertising budget.

Friday, February 13, 2009

8 Investing Strategy

The stock market ‘meltdown’ witnessed since the start of 2005 (notwithstanding the recent marginal recovery) has once again brought to the forefront an inherent weakness existent in our markets. This is the fact that FIIs, indisputably and almost entirely, dominate the Indian stock market sentiments and consequently the market movements. In this article, we make an attempt to list down a few points that would aid an investor in mitigating the risks and curtailing the losses during times of volatility as large investors (read FIIs) enter and exit stocks. Read on

Manage greed/fear:

This is an important point, which every investor must keep in mind owing to its great influencing ability in equity investment decisions. This point simply means that in a bull run - control the greed factor, which could entice you, the investor, to compromise with your investment principles. By this we mean that while an investor could get lured into investing in penny and small-cap stocks owing to their eye-popping returns, it must be noted that these stocks have the potential to wipe out almost the entire invested capital. Another way greed affects investor behaviour is when they buy/hold stocks above the price justified by its fundamentals. Similarly, in a vice-versa scenario (bear market), investors must control their fear when stock markets turn unfavourable and stock prices collapse. Panic selling would serve no purpose and if the company has strong fundamentals, the stock is more than likely to bounce back.It is apt to note here what Warren Buffet, the legendary investor, had to say when he was asked about his abstinence from the software sector during the tech boom, “It means we miss a lot of very big winners but it also means we have very few big losers…. We’re perfectly willing to trade away a big payoff for a certain payoff”.

Avoid trading/timing the market:

This is one factor, which many experts/investors claim to have understood but are more often wrong than right. We believe that it is rather impossible to time the market on a day-to-day basis and by adopting such an approach, an investor would most probably be at the losers’ end at the end of the day. In fact, investors should take advantage of the huge volatility that is witnessed in the markets time and again. In Benjamin Graham’s (pioneer of value investing and the person who influenced Warren Buffet) words, “Basically, price fluctuations have only one significant meaning for the ‘true’ investor. They provide him an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times, he will do better if he forgets about the stock market”.

Avoid actions based on rumours/sentiments:

Rumours are a part and parcel of stock markets, which do influence investor sentiments to some extent. However, investing on the basis of this could prove to be detrimental to an investors’ portfolio, as these largely originate from sources with vested interests, which more often than not, turn out to be false. This then leads to carnage in the related stock(s) leaving retail investors in the lurch. However, if we consider this from another point of view, when sentiments turn sour but fundamentals remain intact, investors could take the opportunity to build a fundamentally strong portfolio. This scenario is aptly described by Warren Buffet, “Be fearful when others are greedy and be greedy when others are fearful”.

Avoid emotional attachment/averaging:

It is very much possible that the company you have invested in fails to perform as per your expectations. This consequently gets reflected on the stock price. However, in such a scenario, it would not be wise to continue to hold onto the stock/buy more at lower levels on the back of expectations that the company’s performance may improve for the better and the stock would provide an opportunity to exit at higher levels. Here it is advisable to switch to some other stock, which has promising prospects. In Warren Buffet’s words, “Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks”.

Avoid over-leveraging:

This behaviour is typical in times of a bullrun when investors invest more than what they can manage with the hope of making smart returns on the borrowed money. Though this move may sound intelligent, it is smart only till the time markets display a unidirectional move (i.e. northwards). However, things take a scary turn when the markets reverse direction or move sideways for a long time. This is because it leads to additional margin calls by the lender, which might force the investor to book losses in order to meet the margin requirements. In a graver situation, a stock market fall could severely distort the asset allocation scenario of the investor putting his other finances at risk.

Keep Margin of Safety:

In Benjamin Graham’s words, “For ordinary stocks, the margin of safety lies in an expected ‘earning power’ considerably above the interest rates on debt instruments”. However, having a stock with a high margin of safety is no guarantee that the investor would not face losses in the future. Businesses are subject to various internal and external risks, which may affect the earnings growth prospects of a company over the long-term. But if a portfolio of stocks is selected with adequate margin of safety, the chances of losses over the long term are minimised. He further points out, “while losing some money is an inevitable part of investing, to be an ‘intelligent investor,’ you must take responsibility for ensuring that you never lose most or all of your money.”

Follow research:

The upswing in the stock markets attracts many retail investors into investing into equities. However, picking fundamentally strong stocks is not an easy task. In fact, it is even more difficult to identify a stock in a bullish market, when much of the positives are already factored into the stock price, making them an expensive buy. It is very important to understand here that owning a stock is in effect, owning a part of the company. Hence, a detailed and thorough research of the financial and business prospects of the company is a must. Given the fact that on most occasions, research is influenced by vested interests, the need of the hour is unbiased research. Information is power and investors need to understand that unless impartially represented (in the form of research) it could be misleading and detrimental in the long run.

Invest for the long-term:

Short-term stock price movements are affected by various factors including rumours, sentiments, market perception, liquidity, etc, however, in the long-term, stock price tends to align themselves with its fundamentals. Here it must be noted what Benjamin Graham once said, “…in the short term, the market is a ‘voting’ machine (whereon countless individuals register choices that are product partly of reason and partly of emotion), however in the long-term, the market is a ‘weighing’ machine (on which the value of each issue (business) is recorded by an exact and impersonal mechanism).”Of course, it must be noted that the above list is not exhaustive and there may be many more points that an investor needs to understand and follow in order to be a successful investor. Further, the above points are not just a read but needs to be practiced on a consistent basis. While making wealth in the stock markets was never an effortless exercise, it becomes all the more difficult when stock markets/stock prices are at newer highs.

Thursday, February 12, 2009

Child Policy: Pick your child's insurance plan carefully

What’s the biggest financial commitment of a parent today? At least two out of three say, “It’s to meet the rising costs of their child’s education.” The fact is that most financial planners say that as inflation rises, the first thing to get impacted is the education sector. Planning for the child’s future is an important step.

Child insurance plans are one of the tools that help parents secure the financial future of their child. Children’s insurance policies have always been popular in India, but their significance has gone up of late due to rising costs, particularly in education.

Earlier, the trend was that a policy was taken in a child’s name, which was a simple money-back plan. Now, parents take a term cover in their name, which would be replaced if there is any loss of income due to the untimely death of any of the earning parents. So, it has the twin benefits of investment and protection.

How do these plans work?

Most of these child insurance plans aim to meet your financial needs. These insurance plans provide you with funds at pre-fixed intervals, which will help you meet your child’s financial needs at different milestone years.

In addition to this, if a parent signs up for an income benefit rider, the child gets 10% of the sum assured till the child reaches his/her milestone years, which compensates the income loss. Similarly, if you have a Unit Linked Insurance Policies (ULIP)-linked endowment plan in your child’s name, you can prematurely withdraw 20% of the sum assured after 5 years from the effective date of the policy.

In the case of Aviva’s Little Master Plan, you can avail of the benefit of premium waiver. In case of a parent’s death, all future premiums are paid in a lump sum to take back as partial withdrawals during the last five policy years. If the parent opts for a comprehensive health benefit rider, upon contracting 18 listed illnesses, your child can avail of the above benefits.

Similarly, if the parent opts for an income-benefit rider, in case of the death of the parent, the plan provides a regular pre-determined income at every future policy anniversary to meet the present education expenses. These are either conventional endowment plans or ULIPs, which aim to generate handsome returns over and above the insurance cover for the earning parents.

Are they worth the money?

There are various savings instruments available like PPF, MFs, shares, gold, real estate, etc. The insurer pays the sum assured to the nominees immediately after the demise of the parents. Additionally, the insurance company starts putting in the premium amount into the same plan on behalf of the policyholder.

This money keeps growing and is given to the nominee once the policy matures. However, financial planners have a different take. They say a child plan is nothing but an endowment policy, which could either be a ULIP or a conventional plan.

Wednesday, February 11, 2009

Salary planning Article

1. The salary (basic + DA) should be low. The rest should come by way of such allowances on which the employer pays FBT and you don't pay any tax thereon.

2. Interest paid on housing loan is deductible u/s 24 up to Rs 1.5 lakh (Rs 150,000) on self-occupied property and without any limit on a commercial or rented house.

3. The repayment of housing loan from specified sources is also deductible irrespective of whether the house is self-occupied or given on rent within the overall ceiling of Rs 1 lakh of Sec. 80C.

4. Where the accommodation provided to the employee is taken on lease by the employer, the perk value is the actual amount of lease rental or 20 per cent of the salary, whichever is lower. Understandably, if the house belongs to a family member who is at a low or nil tax zone the family benefits. Yes, the maximum benefit accrues when the rent is over 20 per cent of the salary.

5. A chauffeur driven motor car provided by the employer has no perk value. True, the company would pay FBT. It is @30 per cent on 20 per cent of the value thereby bringing down the effective rate to 6 per cent. Better still, the employee owns the car and the employer pays the cost of petrol and maintenance.

6. Contributions up to Rs 1 lakh (Rs 100,000) per annum to Superannuation Fund of the employee is not taxed either as fringe benefit in the hands of the employer or as perk in the hands of the employee.

7. Contributions to some specified schemes (Company PF, PPF, NSC, life insurance premia, etc.) qualify for a deduction u/s 80C from gross total income with an overall ceiling of Rs 1 lakh. PPF has a ceiling of Rs 70,000 to contributions made to the accounts of self and minor children whereas the contributions to accounts of self, wife and children (major or minor) attract the deductions.

8. Employer's contribution to Company PF in excess of 12 per cent of employee's salary is taxable. Employee contributes equal (or more) amount to his PF account. Again, any excess over 27 per cent of salary contributed by the employer to company Provident Fund and Superannuation Fund put together is to be treated as perks.

9. Any death-cum-retirement gratuity received up to Rs 3.5 lakh (Rs 350,000) -- subject to certain conditions -- is exempt.

10. Leave Travel Allowance given as reimbursement of expenses incurred by the employee and his family for traveling while on leave is exempt, once in two years.

11. Transport allowance for commuting between residence and place of duty is exempt up to Rs 800 per month.

12. Reimbursement, not exceeding Rs 15,000 in a year, for medical treatment from any doctor for himself and his family members is deductible. 13. Under section 80D, deduction up to Rs 15,000 paid as medical Insurance Premiums on the health of assessee himself, his spouse, parents (dependent or not) and dependent children is allowed. Where an individual has insured a senior citizen (parent or himself) a higher ceiling of Rs 20,000 is available. Additional deduction up to Rs 15,000 on premiums paid for parent/s of the assessee has been made available w.e.f. 1.4.08.

14. Professional tax paid by an employee is deductible u/s 16(iii).

15. ESOP was brought under the purview of FBT by Finance Act 07. The employer has a right to collect the FBT tax paid by him on ESOP from the employee. In that case, it will be treated as tax paid by the employee.

16. In respect of HRA, the least of the following is exempt from tax u/s 10(13A): (a) 40 per cent of salary (50 per cent for Mumbai, Kolkata, Delhi and Chennai).# (b) HRA for the period the house is occupied by the employee.# (c) The excess of rent paid over 10 per cent of salary.

An employee living in his own house or where he does not pay any rent is not eligible for this exemption. If you are staying in a house belonging to your family members (preferably not your wife), start paying rent to the owner and ask for HRA from the employer.

17. A helper engaged for the performance of the duties of an office or employment of profit is not considered as a perk.

18. If the employer employs a gardener for the building premises belonging to the employer, it would not be treated as a perk. The possibility of it being extrapolated to other servants is logical.

19. Perk value of confessional loan to the employee for purchase of house or motor cars shall be the difference between the interest payable calculated at the rate of interest for similar loans, charged by SBI and the actual interest charged.

20. Loan for medical treatment specified in Rule-3A is exempt, provided it is not reimbursed under any medical Insurance scheme. Where it is reimbursed, the perquisite value shall be charged from the date of reimbursement on the amount reimbursed but not repaid against the outstanding loan taken specifically for this purpose.

21. Small loans up to Rs 20,000 in the aggregate are exempt.

22. Expenses on meals provided to the employee during his hours of duty are not treated as perks. FA 08 has declared that expenditure on non-transferable pre-paid electronic meal cards is not a perk.

23. FA 08 has also declared that provision of creche facility for children of the employee and sponsoring of an employee sportsman is not a perk.

24. Employer pays FBT on the value of the gifts. Gifts up to Rs 50,000 received without consideration by an individual from any person are tax free in the hands of the donee. However, the Department may claim that such gifts are in lieu of salary.

25. Employer pays FBT on the value of the facility of credit cards and expenses for the club.

26. Where a movable asset is transferred by an employer to his employee directly or indirectly, the perquisite value shall be the actual cost to the employer minus the cost of normal wear and tear @10 per cent for each completed year during which such asset was put to use. In the case of motor cars the normal wear and tear would be @20 per cent whereas in the case of computers, data storage and handling devices, digital diaries, printers, etc., it would be @60 per cent. These do not include household appliances (i.e., white goods) like washing machines, microwave ovens, mixers, hot plates, ovens etc.

27. Uniform allowance to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the performance of the duties of an office or employment of profit is exempt.

28. Expenses for soft furnishings (table cloths, curtains, etc.) including maintenance at the residence for those officers entertaining guests at home for official purpose are also exempt.

29. Goods at concessional rates, membership of professional associations, subscriptions for technical and business journals and newspapers are not considered as taxable perks.

30. Payment or reimbursement by the employer towards bills on Telephones and cellular is not a perk.Caution: If employer is exempt from FBT, employee pays the tax Fringe Benefit Tax is not applicable to an employer who is an individual, HUF, any fund or trust or institution eligible for exemption u/s 10(23C), or registered u/s 12AA. Rule 3 has been amended so as to include valuation of perquisite in case of benefits provided by such employers to its employees w.e.f. FY 07-08 by Notification SO 1896(E) dt 7.11.07.

Tuesday, February 10, 2009

Lottery Money - income tax on windfall earnings

A guide on the laws governing tax on windfall earnings.


It’s indeed painful to forego a part of your winning amount, and hence it’s your right to know why you are subjected to pay income tax on winnings, especially when they are not regular source of income like salary. The Income Tax Act 1961 has a quick answer to your query. Under section 2(24) of the Act, windfall earnings in the nature of winnings from lotteries, crossword puzzles, card games, any form of gambling, betting or any type of race (including horse races) which do not have an element of regularity, have been specifically clarified to be income. Being a form of income, it is then subject to taxation.

As per section 56(2)(ib), windfall earnings are classified under the head income from other sources. However, when you are paying your tax at the end of the year, if your total income includes income from sources such as lotteries, card games and so on, under section 115 BB, the total income tax payable will be the aggregate of the amount of tax on income from such activities and the amount of tax that you would have to pay if on the rest of your income.


The critical question, however, remains — how much to pay on a windfall earnings. You are expected to pay a basic tax of 30% on your winnings. However, including a surcharge and an educational cess of about 3% (2% education cess + 1% secondary higher education cess), you will effectively be taxed at 33.99%. What you need to remember is that even if your net taxable income is below the income tax limit, you still have to pay the above mentioned tax on your winnings.


Under section 194 B of the I-T Act, the person/ organisation who/ which is paying you an amount (winning) of more than Rs 5,000 has to deduct tax at source effectively at 33.99%. The TDS certificate, thus, issued would be mentioned in form 16A. However, in case of horse racing, it is slightly different. Income by way of winnings from any horse race exceeding Rs 2,500 shall be subject to tax withholding.

Further complications can arise if your winnings are entirely in kind or if they are partly in cash and partly in kind. As per proviso to section 194B, where the winnings from lottery, gambling, etc, are either wholly in kind or partly in cash and partly in kind and the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of the winnings, the person responsible for paying shall ensure that the tax has been paid in respect of the winnings. In some cases, if the winnings are in kind, then tax is computed on the market value of such winnings.


As per section 58 of the I-T Act, no deductions are allowed on windfall earnings. And you cannot set-off losses incurred in other fields against your windfall earnings. Unfortunately, there is not much scope for tax planning in the case of windfall earnings. However, if the windfall is in kind and the person who has received it feels the tax amount payable by him can hurt his cash flow, then he could consider selling the windfall gain in kind and use the cash for productive purposes. But if the windfall happens to be an asset, then you will have to pay capital gains tax on selling it. Alternatively, you can also consult your financial planner and evaluate his advice to make the best of windfall gain.

Monday, February 9, 2009

Evaluating Mutual Funds

Here are some parameters that give you an indication of a fund’s performance

The performance of a mutual fund scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on a weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published. All mutual funds are also required to put their NAVs on the web site of the Association of Mutual Funds in India (AMFI). Investors can access NAVs of all mutual funds at one place. The NAV is the most common denominator which summarizes the entire performance of the fund.

The mutual funds are also required to publish their performance in the form of half yearly results which also includes their returns/yields over a period of time i.e. past six months, one year, three years, five years and since inception of schemes. Investors can also look into other details like expenses as a percentage of total assets as this has an affect on the yield.

In addition, mutual funds are also required to send annual reports, or abridged annual reports, to the unit holders at the end of the year. These contain details of investments made by the fund in addition to the other financial information.

Various studies on mutual fund schemes, including yields of different schemes, are published. Many research agencies publish research reports on performance of mutual funds including ranking of various schemes in terms of their performance. Investors should study these reports and keep themselves apprised about the performance of various schemes of d i f f e re n t m u t u a l funds.

Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity-oriented schemes with the benchmarks like BSE Index, Sector Index, Nifty etc.

The mutual funds are required to disclose full portfolios of all of their schemes on a half-yearly basis. Some mutual funds send newsletters to the unit holders on a quarterly basis which also contain portfolios of the schemes.

Some mutual funds send information about the portfolios to their unit holders. The scheme portfolio shows investments made in each security i.e. equity shares, preference shares, debentures, money market instruments, government securities etc, and their quantity, market value and percentage to NAV. These portfolio statements also required to disclose illiquid securities in the portfolio, investments made in rated and unrated debt securities, non-performing assets (NPAs) etc.

On the basis of the performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme.

It is to be noted that the past performance of a mutual fund may not be a true indicator of its future prospects. A fund launched at a time when markets are low may show comparatively better results vis-a-vis a fund launched when the markets are booming. Moreover, the regularity of dividend payments, amount of dividend payments, bonus issues, and entry/exit charges also affect the performance of a mutual fund.

Ultimately, the performance of a fund would depend on the sector in which its investments have been made, and the stocks in which the investments have been made.

Choosing a Mutual Fund

Some factors you need to analyze before investing in a mutual fund

A mutual fund is a pool of money managed by professional fund managers. Mutual fund managers invest this money in market securities such as stocks and bonds on the recommendations of their research team. Typically, an equity mutual fund invests a large portion of the funds in stocks.

Usually, stock markets are volatile in nature and hence it's difficult to predict the market direction over a short term. Therefore, investors should take into account that investments in mutual funds (especially equity funds) have a certain degree of risk. In general, fundamentally strong stocks give better returns than any other investment instrument over the long term. This is because time provides a cushion to absorb all the short-term market volatility. Therefore, investors should not look at mutual fund investments for quick money in the short term.

The last few years have been quite good for the domestic equity markets. There has been an unprecedented rally in the stock markets and as a result investors reaped huge returns from equity mutual funds. Many equity funds even doubled the investors' principal within one year. These good returns created euphoria in the markets and investors were attracted to equity mutual funds.

From the start of this year, there has been a correction phase in the domestic stock markets. The markets corrected as much as 30 percent from their peak levels in just three months. Mid-cap and small-cap stocks are the worst hit in this market correction. Many mid-cap stocks dropped more than 70 percent from their peak levels. The net asset values (NAV) of mutual funds also came down sharply (especially of those mutual funds with higher beta - co-relation factor with market). Investors who entered near the market peak have lost a significant portion of their principal investment and others have seen a significant dip in their capital appreciation. Investors who invested in mutual funds without a proper understanding of the market forces are finding themselves on the wrong side.

Here are some of basic factors investors need to keep in mind while investing in mutual funds:

Risk appetite

First of all, investors should understand their risk appetite. Investors with low risk appetite should go for blue chip funds and diversified equity funds, while investors with high risk appetite can go for midcap funds.

Investment horizon

Investors should invest in mutual funds with a long term perspective. This way your investments get more time to grow by way of compounding interest. Time also gives a cushion to absorb the risks and hence reduces the risk of loss.

Avoid switching frequently

Mutual fund investors should avoid frequent switching from one fund to another. Switching from one fund to another involves transaction cost.

Realistic expectations

Investors should have realistic expectations from investment instruments. Information quoted in various reviews is past performance. Remember that the past performances of the instrument may not be repeatable.

Analyze performance

Performance of mutual funds is highly dependent on the fund manager, fund house and its equity research team. Investors should do thorough analysis/tracking before making investment decisions. It's not always advisable to invest in a new fund offering (NFO) with a new fund manager as they have no/limited track record.

To evaluate a mutual fund's performance, investors should look for the fund's total returns (dividends, growth, tax savings etc). This information can be accessed from the mutual fund's periodic reports, websites and in various reviews.

Sunday, February 8, 2009

ALL about buy Gold Exchange Traded Funds (ETFs)

Although gold ETFs and gold mutual funds belong to two asset classes, both offer good investment options

This article gives you a low down on how to buy Gold Exchange Traded Funds (ETFs) and gold mutual funds.


The basic difference between gold ETFs and gold mutual funds are that they belong to two different asset classes. Gold ETFs give the investor the opportunity to invest in units of gold, which are then traded on the exchange as a single stock. The units issued under the scheme represent the value of gold held in the scheme. Gold ETFs hence fall into the category of commodities.

Gold mutual funds, however, fall into the equity category as they invest in equity and equity-related securities of gold mining companies. Since gold mining companies are not listed on Indian stock exchanges, the gold mutual funds invest in world gold funds that invest in gold mining companies across the world.


The predominant criterion for all investment remains the returns that can be expected from these funds. An investor should expect a return of around 15% per annum over a two to three-year time horizon. The world gold fund has given absolute returns of 31.9% in the period since its inception in August 2007 to July 2008. The gold fund they invest into has given an annualised return of 29.5% over the last three years. However, most financial advisors advise that investment in gold must be made for the purpose of diversification and at any point in time, about 10-15% of your assets must be invested in gold.


There is also a strict difference with the regard to the aims of this fund and how they are managed.

Gold ETFs are known to follow a passive investment strategy. The fund simply buys and holds gold on behalf of the investor without actively managing it. The aim is to give returns as close as possible, post-expenses, to that given for gold as a commodity. However, when choosing between ETFs, investors need to be aware of the tracking error, which is the difference given by the gold ETF and those given by physical gold.

In fact, when investing in a mutual fund, the investor can rely on the expertise of a fund manager who indulges in active portfolio management and is able to make crucial decisions regarding selecting stocks of gold companies. The fund manager has an understanding of the quality of gold reserves to mined and will be able to decide which companies will do better than others.


The reason most gold mutual funds give for choosing a mutual fund is that stock prices of gold mining companies have risen much more than the price of gold itself. The GDM index, an index of gold miners, has moved up close to 6.5 times since 2000 as compared to a gold price increase of over three times in the same period. There is a multiplier effect on the profitability of gold mining companies with the rise in gold prices, on account on operating leverage.


ETFs give investors the opportunity of buying as less as 1 unit on the exchange. Since investors can enter the trade through brokers, there is no entry or exit load and brokerage expenses are not very high. This is favourable in comparison to mutual funds, which have a defined load structure, entry and exit loads and other expenses. However, things like minimum unit size vary for investors who invest in ETF via asset management companies.


The advantages of holding ETFs are seen during trading, given that ETF units can be traded like shares. It gives the investor the ability to buy and sell quickly at market price, making them highly liquid assets. Moreover, intra-day trading is also possible with an ETF, which is not possible with open-ended mutual funds. Moreover, portfolio disclosures occur only once a month in a mutual fund but everyday in an ETF.

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Invest in Tax Saving Mutual Funds Download Any Applications
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