Prajna Capital - An Investment Guide

PFRDA WISHES TO PROTECT INTEREST OF MEMBERS FROM MARKET VOLATILITY FUND managers overseeing the government’s new pension scheme ( NPS ) may be allowed to invest only in stocks that comprise benchmark indices — the 30-share Sensex of the Bombay Stock Exchange and the National Stock Exchange’s 50-stock Nifty — as the pension regulator looks to protect the interests of members from market volatility. The Pension Fund Regulatory Development Authority ( PFRDA ), which will regulate NPS, may issue a direction in this regard, its head. Keeping in mind the recent global financial crisis and the stock market turbulence. It is not prudent to allow fund managers to put people’s money in just any stock without looking at their fundamentals. The NPS will be available to all individuals from April 1, 2009, and is mandatory for all government employees who have joined service after January 1, 2004. While savings under NPS from central and state government employees are expected to rise to Rs 6,000 cr...

PUT simply, short selling involves the selling of financial assets or securities (stocks, bonds) that do not belong to the person selling it but have been borrowed generally from a broker or a brokerage firm. Short selling works on the premise of making money over the fall in the price of the asset. The process can be explained using the example of stocks. There are always certain stocks in the market, which are overvalued and overpriced owing to different reasons. A short seller predominantly looks out for such stocks, which are sooner or later, expected to see a fall in their prices. The short seller then borrows these stocks from a lender and sells them when the prices are still high. The short seller then waits for the prices to dip after which he buys back the same stock and returns it to the lender. The short seller thus makes a profit as he manages to buy the stock back at a rate, which is lesser than what he makes out of the sale of the stock. WHAT ARE THE REGULATIONS ON SHORT ...

SECURITIES market regulator Sebi is in the process of firming up a policy to push retail participation in mutual funds in an effort aimed at neutralising or lowering the impact of large outflows by corporate or institutional investors as happened recently. The regulator is now weighing the option of segregating the investments of corporate and retail investments so that retail investors are not impacted if corporate investors exit from schemes early, a source said. What this could mean is that fund houses would be told to float separate schemes targeting institutional and retail investors, a practice which is prevalent overseas. “In such a scenario, if a large corporate investor pulls out money from a scheme, then the other corporate investors need to worry and not retail investors as is the case now,” said a person associated with the proposed changes that are underway. Sebi is already in talks with the industry as the regulator and the government look at addressing the issue, whic...

The Securities and Exchange Board of India in its board meeting decided to fix the structural flaw in fixed maturity plans. It was decided that no early exit will be allowed in any scheme of mutual fund in the nature of a closed-end scheme. The schemes which have been approved earlier but not yet launched will also have to be amended accordingly. It will be obligatory for the asset management company to list the close ended schemes. The board also decided that for such close ended schemes the underlying assets will not have a maturity beyond the date on which the scheme expires. This regulatory obligation will save fund managers from distress sale if investors decide to redeem their money before maturity. This is with an intent to guard the interest of the remaining investors. The order will also drive fund managers to be disciplined in building their portfolio as fund have been debarred from buying bonds of longer maturity than their own. For investors, the order will mean a comprom...

Over time, as different asset classes produce different returns, the portfolio’s asset allocation changes. To recapture the portfolio’s original risk and return characteristics, the portfolio must be rebalanced to its original asset allocation. The primary purpose of rebalancing is to maintain a consistent risk profile. Periodic rebalancing will help avoid counterproductive temptations in the market. For example, in this seemingly falling market, rather than be tempted to follow the crowd, who are busy dumping popular stocks, the imbalance created by erosion of the equity component can be used by to book profits on debt portion and buy into equities to bring back the allocation to the original ratio. The balancing act To get all the asset classes back to their original allocation percentages would entail the following: Selling part of the debt or cash and investing the proceeds into equities or vice versa Putting in fresh one-time investments into equity/debt to raise their percenta...

Analysis on the status of debt options in the present market conditions Considerable action was seen on the monetary policy front over the last six weeks. The Reserve Bank of India (RBI) announced sharp cuts in the cash reserve ratio (CRR) and the repo rate. There has been a 3.5 percent cut in the CRR - 1.5 percent cut in the last one month. This is one of the sharpest cuts in key monetary policy parameters in such a short span of time. The intention of the RBI and the government is to ease the liquidity crunch and provide a boost to consumer sentiments by way of low interest rates. The inflation rate is also coming under control due to the slowdown and dip in the rates of many essential goods such as crude oil, metals and manufacturing products. Softer monetary policy measures are expected to influence the returns from debt instruments, but investors should weigh different options carefully before making any changes in their portfolios. Outlook on debt options: Bank fixed deposi...

Purchasing Power of money decreases with time. So how to calculate the Purchasing Power of money? Lets say, a family's monthly expense is Rs 50,000. At an inflation rate of 5 per cent, how much will be the purchasing value of that amount after 20 years? Inflation increases the amount you need to spend to fetch the same article and in a way reduces the purchasing power of the rupee. Here, Rs 50,000 after 20 years at an inflation of 5 per cent will be able to buy goods worth Rs 18,844 only. Formula: Reduced amt.= Present amt. / (1 + inflation) ^no. of yrs Type in: =50000/(1+5%)^20 and hit enter. You will get Rs 18,844, which is the reduced amount.

The events that unfolded last week were so extraordinary that the former Fed chief Allen Greenspan called it 'a once in a century occurrence'. In the latest Wall Street crisis investment bank Lehman Brothers filed for bankruptcy protection, the Bank of America took over Merrill Lynch and the Federal Reserve provided an USD 85 billion bailout for insurer American International Group, all of it happening almost at the same time. In fact, the story of Lehman Brothers was scripted in the mortgage market crisis last year. The firm was a major player in the market for sub-prime and prime mortgages. The company had a relatively small balance sheet, and was heavily dependent on the mortgage and repurchase markets for short-term funding. As the mortgage markets did not recover, the company had huge write-offs. Its efforts to raise capital failed. The company's expectations of being bailed out by the government did not work out. Lehman had reached its end, setting off a domino ...

PROMOTERS of listed Indian companies may have to acquire at least half the public shareholding in their firms to become eligible for delisting, going by a proposal being considered by capital markets regulator Sebi. The proposed norms for delisting by companies, which is expected to be approved by the regulator shortly and then notified, will mean that promoters will have to buy at least half the non-promoter holding, keeping the threshold limit of 90% intact. The rules now in vogue allow a company to opt out from listing its shares on an exchange or delist if promoters acquire 90% of the share capital of the company. The new regulations being considered effectively implies that a promoter with a shareholding of over 80% will have to not just acquire another 10% to delist shares but an additional half of the remaining public holding after the 90% threshold limit. In other words, once the promoter has acquired control of the 90% of the share capital of a company, he will have to stil...

Life has changed in many ways after the recent attacks on Mumbai. There is a newfound aggression among voters who have turned more demanding on their elected representatives. On the stock markets, though the attack did not make a negative impact, the developments after the attack have been interesting. One interesting development has been the cabinet reshuffle which in turn has pushed up the bar of expectations. The general consensus is that the new FM's team will usher in reforms and rate cuts to boost spending on the infrastructure front. At a time when the private sector has been left to combat liquidity and slack demand conditions, a helping hand is expected to come from higher public spending. While the stock market was indifferent to both terror attacks and cabinet reshuffle, there is a feeling that the weak sentiment in the domestic economy is more to do with emotion. Many argue that companies have turned over-cautious in the wake of global developments and are going all ...

NHPC, Oil India To Go Ahead, Dozen Others To Wait For Now DESPITE all the hoopla over disinvestment picking up pace following the Left’s withdrawal of support to the UPA government, only two public sector companies may get listed during 2008-09. These two companies are NHPC and Oil India. Plans were afoot to list around 15 public sector companies, including heavyweights such as BSNL, RITES, Coal India and Cochin Shipyard, but public offers of most of these companies are stuck for various reasons. According to government sources, the plans for listing many PSUs have been deferred due to reasons ranging from no or little requirement for raising capital, corporate governance issues and possible protests from employee unions. The government is all for listing of public sector units as it unlocks tremendous value and creates good corporate governance. The companies, however, need to clear regulatory and internal hurdles as per a senior official in department of disinvestment ( DoD ...

As soon as realisation hits that a new year is upon us, there is another one that lurks around the corner. And that is the start of a new financial year. Which means, you have till March 31 to complete your tax planning exercise. So if you have not completed your investments under Section 80C, you have a little more time to get your act together. If one takes a look at the past year, what would seem more appealing would be the fixed return instruments like National Savings Certificate ( NSC ) and Public Provident Fund ( PPF ). After all, at least you are guaranteed a positive return there. The equity markets are in the doldrums and don’t look like they will be reviving anytime soon. But what investors tend to forget is that investing in equity is not a short-term investment. Even though equity has the potential of delivering phenomenally over the short term, the risk of capital erosion is also very high. To truly benefit from equity, one should have the patience to stick around for at ...

IT Firms will see their EBITDA margins plunge below 20% over the next 3 years TOP Indian tech firms such as TCS, Wipro and HCL will see their EBITDA margins, a measure of operating profit, plunge below 20% over the next three years, as these companies move more information technology projects to India, and align their operations with rising wages apart from the currency fluctuations. Leading outsourcing customers such as General Electric, Royal Bank of Scotland and Bank of America plan to increase their offshore outsourcing in order to lower their cost of managing IT in the US and UK, where billing rates are more than twice of what can be achieved by sending work to offshore locations such as India. It’s going to be growth vs margin dilemma for us — till now, we have protected our margins and fared better than the likes of IBM and EDS. However, in the long run, I would say that even 15% of EBITDA will stand much better than our rivals who hardly achieve 10%. EBITDA (short f...

After CRB Capital, one of the biggest Non-Banking Finance Companies ( NBFCs ) collapsed in 1996, RBI came out with a long list of dos and don’ts that forced hundreds of NBFCs to shut shop. Those were the days when long queues of depositors outside bankrupt NBFC offices were a familiar sight. It raised a hue and cry, made headlines and often forced the local MP (who could also have been a member of the Parliamentary standing committee on finance) to call up RBI and ask, “What’s this all about?” It was a social issue, political embarrassment and a pain for the regulator who, after a point, felt enough was enough. Rules of the game were changed: NBFCs were asked to chip in with more capital, while raising deposits from the public — up until then the main source of NBFC finance — became almost impossible and within a few months, a large number of NBFCs surrendered their licences. The few that survived were big enough to take care of themselves. Everyone thought NBFCs were history. No...

CAPITAL market regulator Securities and Exchange Board of India (SEBI) is set to revise its rules to make it mandatory for mutual funds to list close-ended schemes — both equity and debt — on stock exchanges. The proposed changes are aimed at protecting asset management companies and unit holders from the risks arising out of abrupt, heavy withdrawals by large institutional investors and to discourage early or premature withdrawals by investors. Over a month ago, several fund houses came under severe pressure after institutional investors pulled out funds owing to a liquidity squeeze. Later, the Reserve Bank of India opened a window for banks to access funds for lending to mutual funds to help them tide over the situation. These events prompted Sebi to undertake a review of the structure of MFs, especially debt schemes, taking into account the systemic risks. A review of rules relating to close-ended schemes of mutual funds is under way and the Sebi board is expected to discuss c...

How you can gauge volatility of a stock and evaluate stock value The stock market movements over the past few weeks can be best described as unpredictable. It goes a few impressive points up, only to slide back after a few days. The upward and downward fluctuations can create panic among investors. Returns on stocks become increasingly difficult to predict over the short term. It may be a reaction to global market conditions, high oil prices, world economy and soaring inflation. Volatile markets torment investors. How do you measure market stability? A measure of volatility gives ample information for an investor to base his decisions. The time to enter, buy or sell, are critical decisions that depend on market moods. Shrewd investors find volatile markets or crashes an ideal time for picking value stocks at bargain prices. Since these are purchased at discounted rates, it gives a sufficient cushion for the long-term investor. Though scouting for bargain stocks may appear a lu...

TIGHT financial markets will likely aggravate the down cycle in the real estate sector and lead to a sharp fall in property prices and defaults by few developers, Deutsche Bank said. Reiterating its underweight rating on the sector, the investment bank forecasts further downside in realty shares, which have declined roughly 33% so far this year. “We are yet to see a sharp fall in fundamentals for the sector in terms of a sharp fall in property prices, defaults by developers to banks, and a sharp decline in revenues and profits,” Deutsche said in a recent client note. The investment bank opines that a severe down cycle in the sector now seems inevitable with the reversal in economic growth, low property prices, slump in mortgage rates and under-supply of units. “We forecast major shortfalls in net cash flow, with asset-liability mismatches in a tight financial market environment and a currently cautious central bank. Most developers will not acknowledge a significant down cycle...

THIS could be the first instance of policy makers in India learning lessons from the Wall Street collapse. The finance ministry and regulators are looking at the possibility of banning credit rating agencies (CRAs) from providing allied services to clients whose debt instruments they rate. The government feels that when ancillary services such as consultancy and financial advisory are offered by the rating agency to the client which it rates, the former may be constrained to please the latter — a favour that would help in developing the market for their allied services. This would lead to the rating agency compromising on rating and make investors misjudge the worth of the securities they buy. This is in addition to the larger conflict of interest involved in accepting fee from the same entity whose instruments they rate. The proposed regulatory framework for credit rating agencies would explicitly address the conflict of interests grappling these entities, which is highlighted b...

The interest rate of company fixed deposits varies from company to company and investment tenure. Generally, the rate of interest given by the company is one to two per cent more than what is given by the Bank Fixed Deposits (FDs). But unlike Bank FDs, which are risk-free, the company FD is not risk-free and carries a high risk of default. Company Deposits are rated by different rating agencies like ICRA, CRISIL etc. Higher the rating safer the investment is. One can invest in FMPs, which are more like an FD, but are more tax efficient. Debt funds with low average maturity could also be considered as they carry lesser interest rate risk.

REFLECTING tight liquidity conditions in the money market, banks have pulled out close to Rs 38,000 crore in the last four months from various mutual fund ( MF ) schemes. According to the latest Reserve Bank of India ( RBI ) figures, total MF investments dipped to Rs 27,691 crore as of Feb 12 09 from a high of Rs 59,700 crore as of May 08. Officials at fund houses point out that most of the MF investments by banks are in liquid or liquid-plus schemes, which almost work as a current account as far as liquidity is concerned and yet earn a return, which the banks do not earn in a current account. Banks often park surplus funds in such schemes that helps them earn some extra return and yet retain the liquidity of the funds. The tightening domestic liquidity in recent times has been primarily due to advance tax outflows and forex intervention. However, this is likely to be transient in nature once the quarter-end pressures are off and due to the liquidity measures undertaken by RBI. L...

Eleven banks participated in the mock test carried out by the Bombay Stock Exchange (BSE) for the new IPO payment facility recently permitted by SEBI. The first IPO in which the facility will be used is that of 20 Microns, which opens on Monday. This facility, called the Application Supported by Blocked Amounts (ASBA), allows banks to block IPO application money in the applicant’s bank account till the time of allotment of shares. Only that amount proportionate to the share allotment will be transferred from the account. The markets regulator has said that ASBA will be operationalised from Monday. . This coincides with the opening of the IPO of 20 Microns, the first issue in which the ASBA process will be used by investors. Interface tested “BSE has successfully tested its interface with 11 banks for participation in the ASBA (Application Supported by Blocked Amounts) process,” said a BSE news release. The 11 banks that participated in the mock test were Bank of Baroda, Corporation Ban...

IS this the right time to buy? Shall I start averaging my portfolio? These are the questions uppermost in the mind of most retail investors. The not-so-savvy investors, who entered the market near the peak, are too stunned to react even as their portfolios continue to shrivel by the day. But the million dollar question is: Will averaging help small retail investors? Retail investors have very little choice, experts opine. It seems, they can only hold on to their investments. If they have money and there is no immediate cash requirement, investors can start buying stocks in small lots. They should buy large-cap stocks that have been showing growth over the past few years. Companies caught in the market rumours should be avoided. The fall in the market has triggered big losses in the portfolio of majority of investors, barring a few lucky ones who managed to make a timely exit. Market-cap of stocks in the BSE 500 have seen a reduction to over 75% of what they stood at the beginnin...

AIG has borrowed nearly $150 bn from US Government ans its seeking more now. But hte total market cap og the company itself is $ 1 bn. Those of you worried about the state of AIG Mutual Fund can rest now. The U.S. company was on the verge of declaring bankruptcy and needed up to $100 billion to stay afloat. Naturally, its shares plunged on Wall Street amid fears of its collapse. But the government has come to the rescue of the American International Group (AIG). Under the bailout deal, the U.S. Federal Reserve will lend AIG up to $85 billion to guarantee its short-term liquidity. But there will be a price for this lending hand. In return, the U.S. Government will take an 80% stake in the company with the right to veto the payment of dividends to shareholders. This will save the company from bankruptcy. But it will need to sell assets to repay the loan, which will be due in 2 years' time. An insurance company takes premium from people who've bought insurance and instead of inves...

AN investor-friendly measure adopted by Association of Mutual Funds of India ( AMFI ) has put distributors in a spot. As prescribed in Amfi’s best practices, the repealment of no-objection certificate (NOC) for shifting to a new financial planner (a mutual fund distributor or agent, in this case) has left a hole in the earnings kitty of large distributors. Amfi had amended the clause regarding the no-objection certificate in a bid to empower investors over unscrupulous distributors. Freedom for investors to choose their distributor will, over the long run, promote healthy competition as distributors are forced to raise their service standards to retain customers. However, the new rule is also being used as a weapon to poach businesses of other distributors by hiring well-networked relationship managers working with established product distributors. The modus operandi is simple. Fund distribution, as a business, is predominantly dependent on relationship managers, who push fund pr...

THE present banking system is called a “fractional reserve banking system”, as the banks are required to keep only a fraction of their deposit liabilities in the form of liquid cash with the central bank for ensuring safety and liquidity of deposits. The Cash Reserve Ratio ( CRR ) refers to this liquid cash that banks have to maintain with the Reserve Bank of India ( RBI ) as a certain percentage of their demand and time liabilities. For example if the CRR is 10% then a bank with net demand and time deposits of Rs 1,00,000 will have to deposit Rs 10,000 with the RBI as liquid cash. How is CRR used as a tool of credit control? CRR was introduced in 1950 primarily as a measure to ensure safety and liquidity of bank deposits, however over the years it has become an important and effective tool for directly regulating the lending capacity of banks and controlling the money supply in the economy. When the RBI feels that the money supply is increasing and causing an upward pressure on inflat...

Falls Only 20% Compared To 30% Drop By Sensex Not only have they managed to raise IPO money easily in London, now their stock prices too appear to have taken a ‘comparatively’ lesser hit. India-focussed companies listed on London’s AIM (Alternative Investment Market) have managed to stomach the correction in stock prices, better than sensex companies. This means, on an average, investors in these India-focussed companies would have lost less than investors in sensex companies. Prominent companies, that are a part of AIM India Index compiled by The Times of India, are power project development firm KSK Power Venture, Bollywood film content distributor company Eros International, IT & ITeS dedicated SEZ investment firm Unitech Corporate Parks and Noida Toll Bridge Company, the operator of the Delhi Noida Expressway. Companies operating in NICE areas such as Dhir India Investments that invest in under performing assets and companies in India or gaming firm DQ Entertainment are als...

If you are an earning member of your family, and there are members of your family who are financially dependant on you, you need life insurance. But how much life insurance do you need? There are many factors that are relevant in determining the amount of life cover you should buy. Need for minimum protection It is essential that a particular level of income should be maintained for the family even when its breadwinner is not around. Suppose a family's present needs are Rs 25,000 p.m. The extent of life insurance for its earning members should be such that interest income from the sum assured can meet the family's monthly expenses of Rs 25,000. If one also wants to provide for the future fall in the purchasing power of rupee due to inflation, one must necessarily take policies for higher amounts. No widow, they say, has ever complained that her husband bought too much insurance. Current income level Payment of insurance premium results in an outflow of disposable income. You ...

It's vital to revisit and monitor your portfolio at least annually to check on the status of your allocations and make sure your investment funds are performing as expected. Why? Here's the rebalancing 'problem' in a nutshell. Let's assume you're an investor with a portfolio that includes $100,000 in stock funds (50 per cent of the portfolio) and $100,000 in bond funds (the other 50 per cent). For simplicity's sake, let's say the stocks have doubled in value to $200,000. Note, however, that your portfolio's asset allocations are now 67 per cent in stocks and 33 per cent in bonds, a 17 per cent deviation from your original portfolio. Depending upon your stage in life and your financial plan, this happy development may mean it is time to rebalance. When is it time to rebalance your portfolio ? Long-term investors should only rebalance when truly necessary, for example When significant gains (such as those from the bull market) or major losses have sk...

It's interesting how laying hands on investment-related advice, i.e. the 'dos and don'ts' of investing, is rather easy nowadays. However, there is little information available on how to make the most of one's money. Following some rather elementary tips can go a long way in not only saving money, but also deriving maximum benefit from it. Perhaps it's the demanding nature of our everyday chores that make us overlook these tips. In this article, we discuss 4 tips that will help you make the most of your money. 1. Do not allow your money to lazy Leaving money languishing in a savings bank account is akin to committing a cardinal sin in financial terms. At best, a conventional savings bank account can fetch an annual return of around 3.50%. The smarter thing to do is to put that money to use by gainfully investing it. Of course, a provision needs to be made for contingencies. However, all monies over and above that should be invested. For example, you could consid...

Certainly, there are just so many factors affecting share prices. For example, high oil prices, interest rates, GDP and CPI to name few. However, many beginners are focusing too much on the external factors than what can happen from the accounting perspective. They can easily get frustrated from their own ignorance. Therefore, before you think of getting cheated next time, spend time to read this article very carefully. 1) Dividend Effect I love dividend as much as you do, but apparently, it does not comes for free. Simply because, the share price drops in the same value as the dividend paid after the ex-date. For instance, if Wal-Mart Stores Inc. decided to distribute $1 per share as dividend to its shareholders, its share price will generally drops from $49 to $48 per share after the ex-date. So, do not comment so much in the future if the stock price drops after the dividend payout, because you took the money away already. 2) Bonus Issue Bonus issue is additional shares given by the...