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Showing posts from August, 2009

Real Rate of Return

If one wants to make a one-year bank FD at 9 per cent. On maturity, he says, the capital will be preserved and he would get assured return on it. It is true that fixed deposit is safe and gives assured returns. However, after adjusting for inflation, the real rate of return can be negative. Formula: Real rate of return=[(1+ROR)/(1+i)-1]*100 Type in: =((1+9%)/(1+11%)-1)*100 and hit enter. -1.8% is the real rate of return. ROR: Rate of return per annum; i: rate of inflation (11 per cent here).

Repo Rate

PUT simply, the repo rate is simply the annualised interest rate at which banks borrow money from the Reserve Bank of India ( RBI ) over a short term. This is generally seen as a way of tiding over a short-term liquidity crunch that is experienced by banks. However, to understand how this works, we need to understand the word repo. Repo technically stands for the word repurchase agreement. Most banks generally have a certain amount of government bonds or securities in their possession. When banks are in need for money they borrow money from the RBI using these government bonds or securities as a collateral. There is however the assurance that the bank will recover these later when the borrowed money is returned. The cost of the transaction takes the form of the repo rate. The repo rate is dependent on factors such as the credit worthiness of the borrower, how liquid the collateral is and the rates of other money market instruments. What is reverse repo? The word reverse repo generally

Post-Tax Return

If one wants a bank FD at 10 per cent return for five years. He/She pays income tax. What will be the returns? The post-tax return has to be calculated here. The idea is to know the final returns on a fully taxable income. Interest income from the bank is taxed as per your tax slab. Formula: ROI / (ROI * TR)=Post-tax return Type in: =10 / (10 * 30.9%) and hit enter. You will get 6.91% ROI: rate of interest; TR: tax rate (depends on tax slab) Also used for: Calculating post-tax returns of national savings certificates, post-office time deposits, and Senior Citizens' Savings Scheme.

Investment Planning: Home loan EMI and tenure

Home loan borrowers have experienced a roller coaster ride of highs and lows over the past few years. The interest rates hovered around six to seven percent about four years ago. Until a few weeks ago, they had touched 13-14 percent. Today, some banks offer a modest eight percent home loan interest rate. The fluctuations in interest rates have an impact on a borrower's EMI dues and loan tenure. Scenario 1: When rates go up Increase in the interest rates translates into greater burden on the borrower. The borrower has to pay more from his pocket towards his home loan. When rates go up, the borrower has the option to either increase his EMI or tenure. Increase in EMI keeping tenure constant means greater cash outflow every month towards your loan. Increase in tenure keeping EMI constant amounts to increasing the number of years you'll be repaying the loan. Scenario 2: When rates go down A reduction in rates is good news that borrowers yearn to hear. When interest rates go down

Stock Futures Education

Getting Started in Futures Trading By visiting this page on Futures Education page, you've taken the first step in learning everything you need to know about futures trading, commodity futures trading and all the little things that will help you make your financial goals a reality. The pages on this site are specially designed to be educational and informative for both the beginner and the advanced trader. Trading Facts When getting started, it's important to know the facts. Knowing the facts about futures trading is crucial for people who work in one of the most adventurous corners of the business world. You are about to embark on a journey where the explorer must rely solely on his common sense and ingenuity, and face challenges that require intelligence, strength, and an adventuresome spirit. There are risks, but futures trading is a journey where the rewards justify the risks. What is the Futures Market? Futures markets have been described as continuous auction markets and

Financial Planning to build wealth

If you get rich through a windfall, such as an inheritance, plan finances to build on it Building a corpus during your working years requires effort, discipline and planning. But a privileged few get rich through a windfall - sale of a business or property, settlement of a lawsuit, receiving an inheritance, or insurance settlements. Financial planning can help you leverage this to your advantage. Many beneficiaries are not prepared for the consequences of sudden wealth. They are often clueless about how to deal with a large amount of money. Studies show that more than 35 percent of lottery winners declare bankruptcy in 10 years. There are two main reasons why people lose windfall wealth. One, many are emotionally ill-prepared. Windfalls can stir feelings of guilt, anger, confusion and fear. They may even be accompanied by a sense of loss in the case of an inheritance from a loved one. And two, it's hard for them to plan how they will live and invest, now that they are rich. Should

Mutual Funds: Equity Linked FMPs

An Equity-linked Fixed Maturity Plan is a debt fund which intends to invest primarily in the bonds issued by the corporate, banks, non-banking financial institutions, etc. These bonds are generally zero coupon bonds whose returns are set with the returns of underlying assets (e.g. group of stock or index) they choose. There is no fixed coupon rate, instead a participation ratio is fixed and on that ratio, the return is generated. The participation ratio is the fixed proportion of upside in the underlying asset that the investor is entitled to get. But here’s a catch, there is a cap on the upside known as knockout level. That is, if the value of the underlying asset reaches or exceeds a pre-determined level the investor will just get a fixed rate of return. Birla Sun Life Mutual Fund is introducing two Equity linked FMP schemes, Series-A (Aviator Plan) with maturity of 36 months and Series-B (Gladiator Plan) with maturity of 21 months. The participation ratio of Aviator & Gladiator

Doubling, Tripling of Money

I can get 12 per cent return on my equity investments. In how many years can I double or even triple my money? Formula: No. of years to double = 72/ expected return Type in: =72/12 and hit enter. You will get 6 years. For tripling, type in: =114/12 and hit enter. You will get 9.5 years. Formula: No. of years to double = 114/ expected return For quadrupling, type in: =144/12 and hit enter to get 12 years. Formula: No. of years to double = 144/ expected return

Investing Styles: Contrarian world of equity investing

IT IS a blend of value investing with aspects of behavioural finance . It tends to be bearish when the market is bullish and vice-versa. Welcome to the world of contrarians — who believe in going against the wind. Although it is never easy, remember what doesn’t kill you makes you stronger . The-60 year-old (a contrarian investor) is a firm believer that to be successful, you should invest in out of flavour stocks or sectors that are not of prime interest to most investing community. Rather than investing in then popular sector stocks such as realty, banking and others invested a large chunk of money in sugar stocks in January, when the market was at its peak. His intellectual independence with a healthy dash of agnosticism about consensus views reaped dividends. Unlike the other sector stocks, which are bleeding right now, His decision to invest in sugar, stock saw his portfolio’s worth increasing by almost 30-40%. Here’s an insight into the contrarian world of investing, what

Investment Style: Build wealth by Long term planning

Here are some tips to help you put together a portfolio for wealth creation With most asset products failing to offer the expected returns, investors have begun to wonder what the right investment approach to building a portfolio is. The choice of product depends on the risk appetite of the investor and tenure of investment. It takes a mix of various products in the current environment to build a good portfolio. The task is probably easier for a fresher. It is quite challenging for an investor with a short-term outlook. For instance, if an investor is bracing himself for a corpus creation by 2010, it could leave him with little choice as he has an uncertain one year ahead for his wealth creation and would be poorer by a good 25-30 percent (depending on his period of accumulation) in his wealth. With the current year likely to unfold some more pain before bottoming out, the current environment also offers some lessons for building wealth in the coming years. Investors who have b

Portfolio: GOLD FUND

Use GOLD FUND to Capitalize on rising gold price - How Gold Fund works for investors keen on exploiting the yellow metal’s potential With the recent spurt in the price of gold, gold funds are looking brighter. Recently, a gold exchange-traded fund ( ETF ) touched its all-time high of Rs 1,504 on the National Stock Exchange and closed at Rs 1,503 per unit. Other gold ETFs have touched new highs as well. There has been higher buying interest in gold ETFs. The price of gold here crossed Rs 15,000 per gram. The international price is around USD 962 per ounce. Higher global gold prices, combined with the rupee going below 49 to a dollar, helped in the surge in gold prices here. Gold ETFs have delivered a handsome return of about 30 percent over last one year. Gold ETFs have the basic characteristics of mutual funds. They are traded like stocks on the exchanges. The fund is available for investments on the stock exchange, and it can be bought and sold like any stock. An ETF is norm

Investment Principle: Fill Life Insurance Application Form with Care

IN an age when shares can be purchased at the click of a mouse, filling a life insurance proposal continues to be a major chore. More often that not it is the insurance agent who, in his eagerness to sell, fills in the details on behalf of the insured. What the proposer doesn’t realise is that such a casual approach can make a crucial difference when it comes to pricing, and in ensuring that claims are not prejudiced. Unlike other transactions, insurance is based on faith. Since the insurance company cannot verify every bit of information, it accepts in good faith whatever details the proposer provides. The flip side is that this gives the company the right to reject claims if there is non-disclosure of a fact that is material to the pricing of premium. If there is a vague or incomplete entry in the proposal, the underwriter may play it safe and bracket the insured in a higher risk category. This is more applicable in case of policies where there is a high sum insured. Tak

Portfolio: Exchange Traded Funds (ETFs)

THE EVENTS of the last few days have caused almost everyone to reflect on the security provisions that are available in the country. In retrospect, the sheer lack of preparedness to cope with acts of terror like that experienced in Mumbai hits you in the face. The realisation, however, has only come after the dastardly event took place. Retrospection on your portfolio may not be the first thing on your mind currently but in a sense, investors need to be reminded that preparations need to provide a certain degree of stability to your portfolio. And diversification is clearly the mantra that financial experts recommend. One step towards achieving this diversification could be by investing in Exchange Traded Funds ( ETF ). WHAT ARE ETFs? Technically speaking, ETFs are collective investment funds , which have underlying assets such as gold, stocks etcetera. However, what is significantly different about ETFs is that they are traded on the stock exchange in the same way that a share is t

Investing Principles: Investing in equities

INVESTING in equities is riskier than and definitely demands more time than other investments. However, it can probably be more rewarding than you can imagine and certainly very exciting! World over, and even in India, stocks have outperformed every other asset class over the long run. Stocks are probably your best bet against inflation too. If equities tempt you but you are scared to take the plunge during these volatile times, here's a complete step-by-step guide on investing in equities. Step 1: Understand how the stock market works When you read you begin with A-B-C. When you sing you begin with Do-Re-Mi. And when you invest in stocks you begin with business-company-shares. Before you embark on your journey to invest in equities, teach yourself how the stock market works. Step 2: Learn how to choose a stock Having understood the markets, it is important to know how to go about selecting a company, a stock and the right price. A little bit of research, some smart diversificati

Inflation and home loan rates

A further drop in home loan interest rates is not expected as the inflation rate is under control now The unpredictable rate movements, the Reserve Bank of India's ( RBI ) moves and mixed response from the lenders has put borrowers in some confusion. The inflation monster which had pushed prices to unimaginable highs has finally been tamed. From as high as 12.91 percent this year, the inflation rate has almost come down to half of that. Does this mean borrowers can expect banks to reduce their home loan rates, if this trend persists? What is inflation? Inflation is an increase in prices and/or decline in purchasing power. An increase in the amount of currency in circulation results in a relatively sharp and sudden fall in its value, and rise in prices. It can also be defined as a persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of availab

Initial PublicOffer (IPO) Process

Where can an investor get a form for applying/ bidding for the shares? The form for applying/bidding of shares is available with all syndicate members, collection centers, the brokers to the issue and the bankers to the issue. These are also available with your friendly neighborhood news paper vendors and sub brokers. How are offer documents prepared? The offer documents such as prospectus etc. are prepared by an independent entity know as Merchant Banker, which is registered with regulatory authority SEBI. They are required to carry out due diligence while preparing an offer document. The draft offer document submitted to SEBI is put on website for public comments. Is it compulsory for an investor to have a Demat Account? All the public issues of size in excess of Rs.10 crore, are to made compulsorily in the demat more. Thus, if an investor chooses to apply for an issue that is being made in a compulsory demat mode, he has to have a demat account and has the responsibility to put the

Mutual Funds: Systematic Transfer Plans (STPs)

systematic withdrawal plans (STPs) are for optimal and efficient investing EARLIER in this series, we discussed the investment and redemption strategies of systematic investment plans ( SIPs ) and systematic withdrawal plans ( SWPs ). SIPs let you invest a specified sum of money at specified intervals—generally weekly, fortnightly, monthly or quarterly—irrespective of market conditions. SWPs let you withdraw money systematically from funds, as opposed to lump sum withdrawals. This week, we look at a plan that combines the best of systematic withdrawal and investing—the systematic transfer plan ( STP ). An STP withdraws a pre-specified sum of your money from one scheme, and invests it another within the same fund house, at regular intervals. It thus lets you re-allocate your from a liquid fund (a money market debt fund with low risk, but much higher returns than a bank savings account) to one or more equity schemes of the same fund house. As there is no exit load on a liquid fun

Get your life insurance policy right

Here are some tips to help you choose the ideal insurance policy that meets your needs Numerous insurance products such as children's education plans, life insurance plans with huge death benefits, and accident insurance covers are marketed aggressively. Often, people aren't aware of the actual insurance coverage. They jump onto the bandwagon, without reading the fine print. Tax payers make hasty last-minute insurance purchases to avail tax benefits under Section 80C. Though you may be saving a small amount of tax money, you could be stuck to a worthless policy for long years. Here are a few points to ponder over while buying an insurance policy: Insurance is not investment Insurance products are designed to provide protection. A term cover usually offers insurance protection but no benefit in case the insured survives the term of the policy. A unit-linked insurance policy ( ULIP ) on the other hand provides dual benefits of insurance protection and a flexible inves

Portfolio: Investing in Silver

SILVER, which in European folklore, is believed to have saved the lives of many people who were attacked by vampires and monsters, now has the power to give investors good returns. And going forward, it is expected to outperform gold in terms of price appreciation. In fact, silver had been beating gold till recently. Up to 2008, silver outperformed gold in terms of one, two and three-year compound annual growth rate (CAGR). Last year on March 11, silver registered a three-year CAGR of 131% against 106% CAGR posted by gold. GOLD-MANIA HITS SILVER PRICE In the last one year, gold prices have moved up sharply and beaten silver. Since March 11 last year, gold has appreciated by around 18%, while silver prices have corrected by around 12%. This is mainly because of the global financial crisis and weak performance of most of the other investment classes. Investors have been flocking towards gold, as it provides a hedge against uncertainty, which in turn fuelled gold prices to touch new hi

Tax Planning: Income from property and tax

Some rules that specify when a tax deduction is available Property is an important source of income. In case you own a residential property, it may either be self-occupied or rented out. If you rent out the residential property, a rental income is derived. Leasing out property and renting out property mean the same. The rental income earned is taxable in the hands of the recipient. It is taxable under the head 'Income from House Property'. The tax liability is calculated according to the provisions of Sections 22 to 27, after allowing for the admissible deductions. No deductions are allowed except those specified by the Income Tax Act. In case you have rented out your commercial property, the income earned from this source is also be taxable. It is taxable under the head 'Income from Business and Profession'. The lease rent earned through leasing out commercial property constitutes business income for the owner of the property. As such, it is taxed as business

Fixed Maturity Plan - Fixed yet Flexible

Looking for an investment avenue when the stock markets are choppy? A fixed maturity plan not only guards against the unforeseen but also gives good returns. STOCK market opportunities may look like a mirage in a desert. In fact, what may look like a lifetime opportunity can turn into a black hole, and swallow your hard-earned money. But it shouldn’t deter you to make a foray on Dalal Street. A smart investor is one who holds his fort secure while keeping an open eye for better avenues. Fixed maturity plan ( FMP ) is one such investment that guards your portfolio against unforeseen risks and gives the good returns on your investments. Here’s a low down on what you need to know before taking an exposure in FMPs. MATURE OUTLOOK Financial planners say that FMPs, which have been offering high yields during the last couple of years, have become an important investment avenue. Though all segments of investors can benefit from them, this investment option is especially advantageous to those w

How Return on MIPs is Taxed

Tax treatment of returns from Monthly Income Plans ( MIPs ) depends on the way you derive them. If you opt for dividend plan, then like all debt funds, MIPs are liable for Dividend Distribution Tax ( DDT ) which is 12.5 per cent for debt funds. If you choose the growth plan, all gains will be treated as short-term or long-term depending on your period of holding. Any short-term gain (less than 1-year holding) from debt funds is added to your income. Long-term gain from MIPs is taxed at 10 per cent without indexation or 20 per cent with indexation, whichever is lower. Deriving gain from an MIPs Growth option through Systematic Withdrawal Plan ( SWP ) could be more tax efficient than dividend plan. SWP is redemption of units worth predefined amount and periodicity. Besides, you will also have a greater control on your cash inflows.

HDFC MF seeks partial refund of brokerage

IN A move that is expected to create a flutter among mutual fund distributors, HDFC Mutual Fund has asked its distributors to refund a part of the brokerage they received for selling fixed maturity plans, as a result of premature redemptions. HDFC MF — the country’s second-largest mutual fund in terms of assets under management — has decided to invoke a clause in its agreement with distributors, which mentioned that in the event of investors pulling out before the maturity period, brokers would have to refund the brokerage proportionate to the ‘unexpired period’. What this means is that distributors are paid the entire brokerage upfront, assuming that the investor will stay invested in the FMP through its maturity. If an FMP had a maturity period of one year, and the investor withdrew from the scheme after nine months, the broker will now have to refund the brokerage for three months. Understandably, some of the HDFC Mutual Fund’s distributors who have been slapped with this dem

ICICI Prudential Mutual Fund

It's like having two AMCs under one roof; a large, well-run fixed income one and an average equity one. The fund house has been quite aggressive in its product launches. In the equity segment itself it came out with three schemes this year. By and large, it offers a lot of variety to investors. Unfortunately, its performance in equity does not match up to its debt funds. From its inception a decade ago, it has created history in the fund management industry. It followed a path of aggressive growth and reached the number two position in just five years. But ICICI Prudential is more dependent on institutional investors and debt assets. Out of its asset base of Rs 49371.12 crore, around 28 per cent comes from cash funds and almost 20 per cent from Fixed Maturity Plans ( FMPs ). The fund house is credited with running the largest ultra short-term fund and floating rate short-term fund. ICICI Mutual Fund was promoted by ICICI and later US-based investment bank JP Morgan acquired a stake

IDFC Mutual Fund

This one has had a colourful history of ownership. It started off as ANZ Grindlays Mutual Fund in 2000 and was renamed Standard Chartered Mutual Fund after the takeover of Grindlays Bank by Standard Chartered Bank. This year, the AMC was sold to Infrastructure Development Finance Company Limited (IDFC) for approx $205 million, a high price indeed. A specialised debt fund house, it moved into equity in 2005. Since then, it has made a sustained attempt to increase its exposure to equity, which now stands at 23 per cent. This AMC introduced many new products in the category of debt funds, like the short-term fund and the dynamic fund. It also introduced a fund of funds which invests only in debt funds. Another first was the introduction of funds which sought to provide capital protection and stable returns. The fund house also set new service standards- it was the first one to offer same day redemption for cash funds and next day redemption for income funds. In the past, most of the deb

Mutual Fund: Index Funds

One of the ways in which the investing preferences in India are radically different from many of the first-world markets is our lack of interest in index funds. In the US, nine per cent of the money invested in mutual funds is in index funds, in India, this number is less than half a per cent, or about Rs 2,700 crore. However, among the investing community, index funds take a mindshare that is out of all proportion to their size. The reason is that the concept of index investing is important, and so is the availability of index funds as an option for investors. Index funds are mutual funds that aim to replicate the performance of a market index. Thus, an index fund that is based on the BSE Sensex should have exactly the same 30 companies’ stocks that the Sensex has in exactly the same proportion. Thus, investors who put their money in such a fund would find their money gaining and losing in exactly the same proportion as the BSE Sensex does. In some senses, an index fund completely rev

Internal Rate of Return (IRR)

I paid Rs 18,572 every year on a money back insurance policy bought 20 years back. Every fifth year, I received Rs 40,000 back and Rs 4.5 lakh on maturity. What was my rate of return? The internal rate of return (IRR) has to be calculated here. It is the interest rate accrued on an investment that has outflows and inflows at the same regular periods. In the excel page type Rs 18,572 as a negative figure (-18572), as it is an outflow, in the first cell. Paste the same figure till the twentieth cell. Then, as every fifth year has an inflow of Rs 40,000, type in Rs 21,428 (40,000-18,572) in every fifth cell. In the twentieth cell, type in? 18572. In the twenty first cell, type in Rs 4,50,000, which is the maturity value of the policy. Then click on the cell below it and type: = IRR (A1:A21) and hit enter. 5.28% will show in the cell. This is your internal rate of return. Also used for: Calculating returns on insurance endowment policies.

Home loan checklist

While choosing a home loan option to buy a house, there are a few important aspects. You need to go into these Scheme of loan Whether the loan is a fixed or floating rate one. As is common knowledge, in case of floating rate loans, the interest rate will move up or down with each revision in the benchmark rate of the bank. In case of a fixed rate loan, the interest rate may remain fixed for either a given period of time or entire tenure of the loan. Rate benchmark In case it's a floating rate loan, what the rate is benchmarked against is important. Usually, floating rates are determined with reference to the prime lending rate (PLR), fixed at the time of taking the loan plus a mark-up. If your home loan is at a spread of one percent to the PLR, which is say 10 percent, you will pay an interest rate of 11 percent per annum. How often the bank changes the benchmark rate should be checked. Banks periodically revise the PLR to which the home loan interest rate is pegged. The

Financial Planning: Common financial mistakes that parents make

A lot of parents in India postpone or neglect crucial decisions pertaining to their own futures. Throughout their working career, the focus is almost always on providing the best to their children at every level. This often leaves them high and dry and dependent on their children to deal with their needs post-retirement. Such financial mistakes are common and often perpetrated generation after generation. OVERSPENDING New parents are often the biggest spendthrifts. The spending sometimes begins even before your little bundle of joy makes his/ her arrival into the world. Your excitement levels are at their peak and when you enter a shop with baby supplies, almost everything on display seems like a necessity for the little one. But you need to return to ground reality and make the crucial distinction between a necessity and a luxury and incorporate this theory into the making of your budget. PUTTING OFF PLANNING Many people put off the idea of formally making a budget and allocating wha

Financial planning for retirement: Plan your Sunset years

People usually underestimate how much they need and over-estimate how much they have. This blog post explains why this is more important while financial planning for retirement IF RETIREMENT planning is crucial to providing you and your loved ones a secure future, the same holds true for post-retirement planning as well. Particularly if you don’t want to run out of money in the sunset years, even while maintaining a comfortable standard of living when you are no longer earning. The ultra-high standards of living that people achieve today using credit cards and other types of credit are based on the assumption that they will have an unlimited future during which they’ll tighten their belts and pay all the borrowed money back. Unfortunately, people can’t carry this lifestyle into retirement unless they become rich, and that’s unlikely. Post-retirement planning, thus, acquires added importance because people usually under-estimate how much they need and over-estimate how much the
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