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Friday, July 31, 2009

Floating-rate Funds

Floating-rate funds are debt funds though they are less affected by the interest-rate fluctuations than the fixed-rate funds. This is because of the underlying investment of these funds. Floating-rate funds invest predominantly (65-100 per cent) in floating-rate instruments.

The interest-rate on these instruments is readjusted periodically according to the existing market interest-rate hence reducing the interest-risk considerably.

Thus in the prevailing market situation, floating-rate funds are a better option, considering the unpredictable interest-rate movements.

Thursday, July 30, 2009

Functioning of an ETF

An ETF is like an index fund in terms of its portfolio. The basket of stocks is in the same proportion as the pre-decided index. The initial participants give the fund the basket of stocks and in turn take units of the fund in exchange. These units are then traded on the stock exchange through stock brokers. So investors who wish to take up units of an ETF require a demat account.
The price of an ETF fluctuates with the fluctuation in the underlying index throughout the trading day. The NAV is usually a fraction of the value of the index, like one-tenth or one-hundredth. But the value at which it is traded is a function of its demand and supply. So ETF units can trade at premium or at discount.

The benefit of an ETF to an AMC is more or less the same as it would be in case of any other mutual fund. But since it tracks an index, it doesn’t require active management of the underlying portfolio.

Wednesday, July 29, 2009

Tax Returns filling - Get your tax figures right

Some deductions you are eligible for to help you arrive at the right taxable income while filing returns. This time you don’t need to attach any documents to the form. The last date for individuals to file returns is July 31

The time to file the income tax returns is here. July 31 is the last date to file the IT returns for individuals. The returns has to be filed for the previous year - April 2008 to March 2009. So, the transactions should have taken place during that period only. Any subsequent transactions will be taken into account during the next year - 2009-10.

An assessee also needs to compute taxes properly and pay off any outstanding dues. This can be done before the date of filing of the returns.

It is of utmost importance that one uses the correct form, as is applicable to him. In a radical change from the past, no document (including TDS certificate) should be attached to this form. The officials receiving the returns have been instructed to detach all documents enclosed with the form and return them to the assessee.

In order to avoid interest and penalty, you also need to compute your interest liability for either non-payment of advance tax or late payment of instalments of advance tax. The interest rate is calculated at the rate of one percent per month on the specified tax amount. This interest can be paid along with the self-assessment tax.

Obligation to file returns

Every individual and Hindu Undivided Family (HUF) has to furnish the returns of income if the total income before allowing deductions under Chapter VI-A exceeds the maximum amount which is not chargeable to income tax.

Losses, if any, will not be allowed to be carried forward unless the returns has been filed on or before the due date. It is to be noted that the total deductions allowable is limited to the amount of gross total income. Deductions are available under Chapter VI-A.


Details of deductions which are available to an individual and HUF not carrying out any business or profession are:

Section 80C

Some of the major expenses for deduction under this Section are amount paid towards life insurance, contribution to Provident Fund set up by the Government or recognised Provident Fund, contribution by the assessee to an approved superannuation fund, subscription to National Savings Certificates, tuition fees, and home loan repayments.

The aggregate amount of deduction cannot exceed Rs 1 lakh.

Section 80D and DD

This deduction is in respect of medical insurance premium. It also covers deduction in respect of maintenance including medical treatment of dependents.

Section 80E / G

This covers deduction in respect of interest on loan taken for higher education, donations to certain funds and charitable institutions etc.

Other related details:

Step by step Guide for IT Returns filling:

Tax Filling details for NRIs:

E-filling of Tax Returns:

Tax and Donations

Income Tax and Housing loan

Income Tax Refunds

Income Tax planning for next year

Income tax and Mutual Funds (ELSS)

Income tax and HRA

Income tax and Property

Tuesday, July 28, 2009

Filing IT returns

Here are some channels available to help you file your returns conveniently

The financial year 2008-09 has come to an end and it is the time to start filing the income tax returns relevant to the assessment year 2009-10. The income may be from any one or more sources including salary, income from property, business and profession, capital gains, and income from any other source. In case the income from are required to file the tax returns.

Tax is payable on the amount of income that exceeds the basic exemption limit. The requirements for filing of annual income tax returns are contained under Section 139 of the Income Tax Act. According to these provisions, every person having income in excess of the amount not chargeable to tax is required to file the returns.

The returns need to be filed by July 31. Now it is compulsory to obtain and quote your Permanent all these sources during the financial year exceeds the basic exemption limit, you Account Number (PAN) in the returns. PAN is available from the IT department and its authorised agencies. So, before filing the returns an assessee must obtain his PAN.

The returns should be signed by the individual himself or in case he cannot do so for any reasons, by a person duly authorised by him, with a valid power of attorney. The income in respect of which the returns is to be filed may be either his own total income or the total income of any other person in respect of which he is assessable under the Act.

In case an individual has incurred a loss, it is mandatory for him to furnish the returns of income in case he wishes to carry forward the loss. The returns should be filed in the prescribed form.

The returns can be submitted to the Income Tax Department:

In paper form
Electronically under digital signature

Electronically and thereafter submitting the verification of the returns in Form ITR-V. Here, the assessee needs to print out two copies of Form ITR-V. Both copies should be verified by the assessee and submitted to the Income Tax Department. The receiving official will return one copy after affixing a stamp and seal

Through a bar-coded paper form The returns has to be filed before the due date in the prescribed form and duly verified in the prescribed manner. Under the Act the assessing officers do not have any power to extend the date for filing of the returns. Failure to file the returns of income on or before the due date entails a penalty.

  • July 31 is the last date to file the IT returns for individuals.
  • Compute taxes properly and pay off any outstanding dues before the date of filing of the returns
  • The Permanent Account Number (PAN) is required to file IT returns
  • Major expenses eligible for deduction under Section 80C – life insurance, contribution to Provident Fund or any approved superannuation fund, tuition fees of children and home loan repayments
  • The aggregate amount of Section 80C deduction cannot exceed Rs 1 lakh
  • The aggregate amount of Section 80C deduction cannot exceed Rs 1 lakh
  • Section 80 E/G covers interest on higher education loan, donations to certain funds and charitable institutions etc
  • IT returns can be filed online on
  • Unique Transaction Number (UTN) and Challan Identification Number (CIN) have been introduced to enable the matching of information relating to prepaid taxes furnished by taxpayers

Also you can refer to our archives for more derails:

Step by step Guide for IT Returns filling:

Tax Filling details for NRIs:

E-filling of Tax Returns:

Income Tax and Donations

Income Tax and Housing loan

Income Tax Refunds

Income Tax planning for next year

Income tax and Mutual Funds (ELSS)

Income tax and HRA

Income tax and Property

Monday, July 27, 2009

UTI Mutual Fund

Even though only a few of UTI’s funds are great performers, this public sector fund house has many advantages that its rivals do not. It has a huge base of retail equity investors and a vast distribution network.

As a business, it looks stronger than ever, especially in the aftermath of credit crunch. UTI is, by a large margin, the most profitable fund company in the country. This is not surprising, since managing equity funds is more profitable than debt. Its conservative approach and stable parentage is likely to make it look more attractive to investors in times to come.

UTI’s big problem is the dragging performance that many of its equity funds suffer from. In recent times, the management has made a concerted effort to improve performance.

However, these moves have coincided with a disastrous phase in the stock markets and that has made it impossible to judge whether the overhaul will eventually be a success. UTI’s top performers are a few index funds, some hybrid funds and its infrastructure funds. Some of the income funds also stack up well against the competition.

UTI is co-owned by four public sector enterprises. When the old Unit Trust of India was wound up, UTI Asset Management was launched with four equal owners, Life Insurance Corporation, State Bank of India, Punjab National Bank and Bank of Baroda. Earlier this year, it was planning an IPO, which would have made UTI the only listed fund company in India and also enabled it to offer stock options to employees. However, the fall in the stock markets forced the issue to be deferred. The IPO was to be an offer-for-sale by the four owners which would have brought their stake to 51 per cent. It would also have created room for a strategic partner in the future.

During the last few years, UTI has slipped from being the largest AMC to the number four spot. However, it must be noted that this apparent slippage is not because of any shrinking of UTI’s asset base. As the accompanying table shows, UTI’s asset growth has been robust, but slower than that of some of the others. Most of the disadvantage of UTI has been in the short-term debt categories, which are not only less profitable but are also proving to be problematic because of the liquidity squeeze.However, it still has the largest investor base and the biggest equity assets besides being the most profitable. If its equity performance can be improved, UTI’s unique advantages will ensure that it remains a powerhouse in the industry.

Sunday, July 26, 2009

Tata Mutual Fund

Being a part of the Tata group, the fund has the backing of a very trusted brand name with strong retail connect. While the current CEO has done an excellent job in leveraging the Tata brand name to AMC's advantage, it is ironic that this was just not capitalised on at the start.
Incorporated in 1995, Tata Mutual Fund remained an 'also-ran' fund house for around eight years. Till March 2003, it had a little over Rs 1,000 crore in assets and 19 AMCs were ahead of it. But soon after that the equation changed.

It was the fastest growing fund house in 2004 and 2005. During these two years, it aggressively launched six equity funds, two debt funds and one MIP. The fund house as of now stands at No. 8 in terms of asset size. This fund house has a lot to offer by way of choice. And, it also has a number of well performing schemes. Tata Pure Equity, Tata Equity PE and Tata Infrastructure are all good funds. It also has quite a few good debt funds.

The funds of Tata AMC are known to have bloated stock portfolios. But this intense diversification has not hindered the performance. Overall, it has been a stable player offering decent returns.The fund had gone overboard in innovating with fund ideas. And none of them have really turned out to be blockbusters.

The one theme that really did work and which has turned out to be a source of pride for the AMC has been the infrastructure one. The fund - Tata Infrastructure, was launched in December 2004. It was one of the best performing funds in 2006. But at that time, the infrastructure theme was rewarding all investors and thematic funds from other fund houses did equally well.

Leveraging on that success, the AMC stretched the idea and launched Tata Indo Global Infrastructure in 2007 and Tata Growing Economies Infrastructure Plan A this year.

Saturday, July 25, 2009

Sundaram BNP Paribas AMC

Sundaram BNP Paribas AMC has an impressive line up of equity funds which are good performers at that. The bulk of this AMC's assets are in equity.

Despite putting up a fairly comprehensive product offering on the equity front and delivering on the performance side too, this AMC has not got the attention it deserves. Currently it ranks at No. 13 in terms of assets under management.

The funds have a disciplined approach with a focus on risk management. From being an average performer, Sundaram BNP Paribas Growth has put up a better performance in the past two years. This could be the result of changes within the fund house. The AMC has been laying a lot of emphasis on solid research and fund management. They have a team of one economist, seven research analysts and four portfolio managers, not including the head of equity.

Though the AMC has much to offer by way of equity funds, it has not been too impressive on the debt front. Sundaram BNP Paribas Bond Saver has not managed to beat the category average in the past five years.

This AMC was set up in August 1996 as a joint venture between Sundaram Finance and Stewart Newton Holdings (Mauritius), a subsidiary of the UK-based Newton Investment Management.

In 2001, Newton (which had a 39 per cent stake) was taken over by the US-based Mellon Financial Corporation.

Following this, there was some speculation as to whether or not the objectives of the new partner were in line with those of Sundaram Finance. There must have been some truth to it because in February 2002, Sundaram Finance bought Newton's entire stake.

In 2005, BNP Paribas Asset Management picked up a 49.90 per cent stake in Sundaram Asset Management Company Ltd. and the fund house was renamed Sundaram BNP Paribas AMC.

Friday, July 24, 2009

Reliance Mutual Fund

Reliance Mutual has a history of letting its funds get bloated in terms of AUM. And, the firm’s culture places a premium on running a big fund.

Ever since its start in 1995, the AMC has rapidly increased its AUM. From being India’s largest private sector mutual fund in 2006 it went to being the largest mutual fund by 2007. Reliance Equity Advantage fund created history by mopping up Rs 2,700 crore in its NFO in 2007. This year Reliance Natural Resources Retail mopped up Rs 5,660 crore.

Reliance has managed to garner huge amount of assets because it actively pursues NFOs. The fund house started with the launch of two equity funds–Reliance Vision and Reliance Growth. It’s the performance of these two funds in 2002 and 2003 that made the fund house a hit with investors.

The fund house leveraged this along with the Reliance brand to gain investors’ attention. In three years (February 2005 - January 2008), five of the equity launches lost money. The total NFO collection was Rs 17,960 crore which is now down by more than Rs 6,000 crore to Rs 11,488 crore.

However, having a huge asset-base may not be an advantage in every situation. The large size of its funds have sometimes worked against it. Its mid-cap offering, Reliance Growth, is huge with Rs 4,337 crore. Reliance Diversified Power Sector manages Rs 4,521 crore and Reliance Natural Resources Rs 4,346 crore. And managing investor expectations will not be easy either.

The AMC has many firsts to its credit among sector funds: Banking, media and entertainment, power. This year it came out with a Natural Resource Fund. On the debt side, the fund house has good, low expense ratio funds like Reliance Short Term and Reliance Liquid Treasury.

Though the fund house barely has a presence in the hybrid category, it does have a huge choice in the types of funds with some good performers.

Thursday, July 23, 2009

Kotak Mahindra Mutual Fund

Kotak Mahindra Asset Management is a wholly owned subsidiary of Kotak Mahindra Finance, a leading financial services group. In its initial years, it derived its strengths from debt fund management. Kotak Mahindra Mutual Fund is credited with launching the first ever gilt fund of the country- Kotak Mahindra K Gilt Unit Scheme 98. Till a couple of years back, the fund house still held an edge as far as gilt funds were concerned, with two 5-star gilt funds. Not any longer. Today it has three gilt funds - two are 3-star rated and the other, 2-star rated. Even its debt funds have dipped. Just two have a rating of 4-star and above, a far cry from the earlier statistics.

It was only in 2004 onwards that the fund house began to get aggressive on the equity fund. Now they do have a range of equity funds but only two have really impressed - Kotak 30 and Kotak Opportunities.

Kotak Mid-Cap did show promise soon after its launch but has turned out to be a below-average performer.

Wednesday, July 22, 2009

JP Morgan Mutual Funds

JP Morgan is one of the very new entrants. It launched two equity funds last year and an arbitrage fund in 2008. Equity corners almost half of this AMC's assets.

JP Morgan India Equity fund garnered Rs 824.77 crore when it was launched in May 2007. By October that year, its assets were Rs 1,150 crore. They have now dipped to Rs 874.35 crore. In the recent market slump, the fund has fallen in line with the category average. JP Morgan India Smaller Companies has been worse hit. This fund started off with Rs 509.45 crore in November 2007 and is now at Rs 315.48 crore.

Tuesday, July 21, 2009

JM Financial Mutual funds

Due to its concentrated bets in growth stocks, the returns of JM Financial's funds can deviate substantially from category norms. In a bull run, it may have some of the savviest skippers going. But its dramatic fall in slumps is a turn off.

If you find that hard to believe, consider JM Emerging Leaders and JM Basic. Both these funds were amongst the top 5 performers of 2007, JM Basic bagging the coveted No. 1 slot. In this market slump, Emerging Leaders fell by 72.46 per cent and Basic, 66.17 per cent, when the category average was a 49.74 per cent fall (Year-to-date return as on October 13). As for JM Equity, it makes for no comparison with its siblings. It actually underperformed the category average in 2007, when the other two were on a roll, and fell harder than the average when the market slumped. Make no mistake. We think Sandip Sabharwal, Chief Investment Officer-Equity, is a skilled manager who has the courage to ride his convictions. But that said, we think this fund house is only appropriate for aggressive investors. And even then, they may want to limit their exposure, given the high risk and performance fluctuations.

When JM Financial Mutual Fund started in 1994, its first products were a complete basket of a diversified equity, balanced and income fund. But over time, it became recognised as a debt fund house.The fund house historically maintained a very aggressive posture in managing its debt funds, which was evident from the high average maturity profiles most of the time. This, coupled with a relatively lower expense ratio for the short-term funds, held it in good stead. But over the years, the performance of its debt funds have faltered.

Monday, July 20, 2009

HDFC Mutual Fund

One of the fund industry's sturdiest shops, its performance over time has been strong. Lately, however, it has gravitated towards the back of the pack.

The AMC's temperate ways have served it well over the years. It has been a consistent out performer and has also provided a cushion as the racier ones fell precipitously. But the grouse that investors are harbouring right now is that its performance in the second half of the bull run has disappointed. While it is a fact that the risk-adjusted returns were not as impressive, it is certainly no cause for alarm. This AMC's funds will lag the pack when the market's raciest names lead the charge.

What investors have here is a fund manager who has proved his mettle over various market cycles. In 2003, HDFC Mutual Fund bought out Zurich Mutual Fund. This move turned out to be extremely smart. The AMC was instantly catapulted to the second largest fund house in India. HDFC Mutual Fund not only managed to get this brilliant fund manager on board, but also inherited a great equity portfolio, an aspect that was missing earlier. Prior to the acquisition, HDFC Mutual Fund was focussed on debt offerings.

HDFC Mutual Fund has emerged as one of the most highly reputed AMCs of the country. The funds' performances have an enviable track record. It currently has 9 funds that have either a 5-star or 4-star rating. Recently, the fund house has also been losing talent.

Like others, the AMC seems to have gone on an asset building spree. A surprising move since it always steered clear of the NFO mania. In 2007, it launched a number of funds, including two close-ended equity funds, a mid cap offering and an infrastructure fund.

Fidelity AMC

Fidelity AMC was set up in July 2004 but has managed quite a following in these few years. It is also very focussed on equity. Based on the brand equity of the Fidelity name, Fidelity Equity, its first fund, started off with a corpus of Rs 1,460 crore in April 2005. It has gone up over the years to over Rs 2,500 crore. While it impressed in 2006, it dipped in 2007 but in the recent slump has held on quite well.

This has even been observed in its other domestic equity funds. The funds may be average performers when the market is on a roll, but they don't slump terribly in a downturn. The AMC has just five equity funds. One, Fidelity Tax Advantage, is an Equity Linked Savings Scheme (ELSS) and two (Fidelity International Opportunities and Fidelity India Growth) have a global tilt. Of these, only the former has actually started investing abroad-about 10 per cent of its holdings are outside India.

The fund house does not have a huge and diverse product offering. Neither does it chase the NFO route. This year it has only come up with FMPs, no debt or equity offerings.

The investment strategy of the fund is based on their global investment philosophy of bottom-up stock picking. It also aims at spreading the investment across a broad range of successful businesses. As a result, you could find anywhere from 75 to 100 stocks in the portfolio at any given time.

The AMC was also the only one in India to declare its portfolio just once in six months, strictly in line with SEBI regulations. Unlike all the other players which did so every single month. Finally in March 2007, it changed its stances and began to do so every month. But with a caveat: the portfolio revealed has a time lag of one month.

Sunday, July 19, 2009

HSBC Mutual Fund

This fund house has managed to build a fairly sizeable business over a relatively short period of time. Equally impressive is the fact that the fund house did not resort to buying out another AMC. It has stuck to growing organically. Of course, in retrospect, its timing could not have been better. The bull run shortly after the start of operations towards the end of 2002 helped tremendously.

The fund house has regularly come out with equity funds. Except for the year 2003, the AMC has launched equity funds every single year from 2002. In the last three years (2006-2008), there have been two equity NFOs in each year. Each of the products have been well defined and thought out. HSBC Emerging Markets is the one with the international flavour.

HSBC Equity is the fund that put this AMC on the investment map. The timing being great, its performance in 2003 and 2004 was excellent. The way the fund raced ahead in terms of its size is more of a fund-led success, rather than a brand-led one. The fund's sensational start earned tremendous brand equity for the fund family. But after that, it faltered. Recently, there have been signs of revival and this fund once again is looking like a fairly good pick. HSBC Midcap Equity, launched in 2005, has also disappointed in performance and has a 1-star rating.

Another factor to look out for is the expense ratios of its equity funds. Though not the steepest in the industry, they tend to be on the higher side.
From the debt funds launched in 2002, HSBC Income Investment also had a great start but hit a rough patch in 2004 and 2005. It has picked up again. HSBC Income Short Term has not even been an average performer over these years. HSBC Cash has been a reasonable performer.

By and large, this is a well-run and organised fund company. It faltered by way of performance but it’s more of a temporary setback than an inherent flaw with the fund house.

Saturday, July 18, 2009

Entrepreneurs’ Check List

The Rule of 5
What are the winning traits that helps an succeed? Here are the Entrepreneurs’ Dos and the Don’ts and what to look out for.


Ø Always be positive
Ø Search for a silver lining even in the most adverse scenario
Ø Keep the big picture in mind but retain a sense of humility
Ø Always be open to learn, unlearn and relearn


Ø Don't blame. As an entrepreneur you can't blame anyone or any situation.
Ø Don't be afraid of making mistakes but learn from them
Ø Don't complicate matters; the most successful businesses were kept simple
Ø Don't depend on numbers alone. Intuition and creativity can play a major role
Ø Don't search for perfection, search for excellence
Ø Believe in yourself and your colleagues

Friday, July 17, 2009

Balanced investing approach by making use of Dividend from Stocks

Following a balanced approach to investing in equities, investors can recoup the amount invested in stocks in few years

DIVIDEND IS a tax-free income in the hand of shareholders. However, Indian companies are known for not having a regular dividend paying policy. Nonetheless, dividends are far more profitable today than it would have been in the last four years. This is because the stock prices have crashed in last one year, as result the dividend yield (dividend per share divided by price per share) has gone up. Therefore, the dividend per rupee of investment is much more today than it was earlier. However, investors should not aim at accumulating stocks with high dividend yield because such high yields may not be sustainable in case profit falls due to economic slowdown.

Consistent in paying dividends and in some cases have also increased the payout ratio. A high payout ratio means a higher percentage of profits are distributed among shareholders as dividends. The table shows the list of companies quoting a dividend yield of 4.5% or higher. The payout ratio has come down for most of the companies in the table. For instance, Great Eastern Shipping paid 38.6% of its profits as dividend in FY 2003, which came down to 17.3% in FY 2008. The drop in payout ratio has to be seen in the light of high growth in profits. When profits rise at astronomical rates, the dividend growth tends to be a bit lesser because the company prefers to retain some amount with it for further investment.

Investors interested in earning dividends should steer clear of companies with high fluctuations in profits. For instance, Tata Motors had incurred losses in FY 2001 and FY 2002. Though the company is incurring losses, it can still pay dividend from its past cash flows. But sustaining dividend payment will become extremely difficult in near future. Similarly, other auto manufacturers, like Ashok Leyland, were also excluded from the sample because they operate in highly cyclical industry.

As we all know that investing in stocks is a risky affair, so, an investor should always try to balance his investments between stocks and fixed interest instruments, which are less risky. We did a simulation (taking the stocks mentioned in the table) to calculate the return purely from the dividend the stocks have been paying. We assume that an investor had put in Rs 1,000 in each of the 10 stocks on April 01, 2003, taking his total investment to Rs 10,000. The amount invested in all stocks was same to make a portfolio with equal proportions invested in different stocks. At the end of first financial year on April 01, 2004, the investor would have received dividends from the companies amounting to Rs 1,264.

To minimise risk, we assume that the investor had invested the dividend in a fixed deposit for one year at the interest rate of 5.25% and then kept on rolling the fixed deposit every year for another one year. This is called ‘hybrid strategy’, wherein the income from risky investments (in this case equity) is routed to relatively less risky investments (in this case fixed deposit).

Similarly, every year on the first day of April, the investor would have got dividends, which he would have routed to fixed deposit of one year. Following this strategy, the investor would have made Rs 8,970 from dividend and interest on those dividends in five years. It is noteworthy that adopting this hybrid strategy the investor would have almost recovered 90% of his entire investment in five years time. This translates to annual return of 13.7% per annum from dividends only.

The most interesting part of the result is that the investor would have made a much higher return on his investments than offered by any fixed rate instrument. On the top of it, that return would have had been entirely free from taxes. The interest on fixed deposit is taxed. As the interest earned formed a lesser part of the return; the tax incidence would also had been much lesser. Moreover, we have not considered the capital gains. The value of the total portfolio stands at Rs 46,302 today— close to five times of the principal amount of Rs 10,000—though the stock market has crashed by more than 50% since its peak.

Thursday, July 16, 2009


Is it necessary to have account with the same DP as broker has?
No. Depository / DP can be chosen by you as per convenience irrespective of the DP of your broker.

Whether my broker can also act as a DP?
Yes he can. In fact most of the brokers are also registered as a depository participant so that they offer both the services and you also get the benefit of synergy in operations. However it is not compulsory for you to open a DP account with your broker.

Whether depository participants are governed by any Rules and Regulations?
Depository participants are governed by SEBI Act, 1992, Depositories Act, 1996, Securities and Exchange Board of India [Depositories and Participants] Regulations, 1996, Rules, Regulations and Bye laws of the respective depository with which he is registered as well as various directives of SEBI and depository issued from time to time.

What are the documents to be signed with depository participant?
Before opening an account with a depository participant, you are required to furnish your details such as name, address, proof of address, etc. to the DP and execute a DP client agreement. These documents list out right and duties of investors and also give the schedule of charges. Please go through all these documents carefully. With effect from April 01, 2006, all investors are required to furnish Permanent Account Number (PAN) while opening new accounts or in case of existing accounts.

Whether I can open more than one DP account with different participants.
Yes you can. You can open as many accounts as you want. There is no bar on opening multiple accounts with different DPs as long as these accounts are genuine and backed by proper documents.

Wednesday, July 15, 2009

Get your basics right before Buying a house

Fall In Interest Rates, Property Prices Makes It Tempting To Invest In A House, But Do A Reality Check

WITH interest rates on a downward spiral and prospects of getting a good deal on a house, the real estate sector could witness some buying in the coming months.

Though property consultants recommend waiting for a few months for the right price, some home seekers may be tempted to kick off their house hunting expedition soon.

Time for short listing

While there is no need to rush into a decision, you can start looking out for a house right away. Once the market bottoms out, home-seekers will start making a beeline for properties and loans. If you have identified your ideal home beforehand, you will be a step ahead. You can jump at the earliest opportunity available — in terms of price and interest rate. Lack of buying activity means that the market is skewed towards the buyer at the moment.

You can start quoting a price that seems reasonable to you. Try quoting a price that is 50% less than the highest price of a property in the locality commanded in the past. Another method of determining a property’s price is to ascertain, if you want to buy it in five years later, too. If the answer is in the affirmative, you can consider sealing the deal. Approaching an agent posing as a seller could be a good idea to determine the real price of the house — chances are that the selling price would be considerably different from the buying price quoted to you.

Identify your needs and capacity

Your heart may be set on a plush residential complex replete with state-of-the-art facilities, but that should not make you lose sight of your basic needs. For instance, if the well-equipped complex is not close to a railway station/bus stop, and you do not own a private vehicle, then commuting could turn out to be a nightmare. Hence, when you commence your house-hunting mission, it is advisable to keep a list of must-have attributes ready. In addition to quality of construction, evaluate the existing infrastructure. Finding a perfect house is nearly impossible, but comparing short listed properties will help you zero in on one that meets majority of your requirements.

This apart, the present and future market drivers, financial ability and personal investment objectives should be borne in mind. A ruthless assessment of your financial situation — current as well as future — is essential; factor in possible pay cuts and job loss. If you are planning to sell your old flat and buy a new one, it is better to do so only after securing the sales proceeds. Though bridge loans meant for such funding gaps are available, in the current scenario, it is better to steer clear of avoidable liabilities.

Consider old flats

If you are not fixated on ‘ultra-modern’ amenities, you can consider buying an old flat. If you locate a well-maintained house in the desired locality that boasts of robust ancillary infrastructure, there is no reason why it should not be considered. After all, the strain on your budget will be minimal. The difference in prices of new and resale properties would depend on various factors, but would usually be a third less than that of a new property. However, a comparison between the new and old houses should also cover renovation costs, the latter would necessitate.

Check if the property is already mortgaged

Many times, builders start developing properties after mortgaging the same to institutions that extend finance to the project. If it is mortgaged, you must insist on getting a no objection certificate (NOC) from the lender or satisfy yourself that your rights under the purchase contract are not subservient to the lenders. You must insist on an Occupation Certificate, sanctioned building plan and the Building Completion Certificate.

Get clarity on refund

While signing the contract, the buyer should enquire about the time frame within which the project will be completed and the penalty that the builder would be liable to pay in the event of delay.

The builder would be legally liable to render a refund, if it can be proved that he has not met his part of the pact. This would include unreasonable delays in construction, flawed construction, flawed title or evidence of previous claims on the property or the land on which it stands.

Buyers should enquire about the portion of advance paid that will be forfeited and the time frame within which the balance will be refunded, in case they choose to cancel the booking.

Tuesday, July 14, 2009

Doorstep Banking Services

It is a convenient banking option for pick-up from and delivery to your place of business. You don’t have to risk carrying cash to or from the bank. Deposit / withdraw cash, deliver / collect trade documents and deposit cheques at the safety of your office

Key benefits of Doorstep Banking:

· It’s convenient. You get service at your doorstep. So no travelling to the branch
· It’s secure. Cash-in-transit insurance, multiple verification and reconciliation procedures make the facility foolproof.
· It’s flexible. You can choose between daily services or service on call.
· It’s hassle-free. Experienced agencies help you with your transactions.

How Doorstep Banking works:

At a time specified by you, a designated agent will visit your business premises. All you need to do is confirm the agent’s identity, match the unique transaction ID and hand over the cash / cheques / documents in an envelope. Doorstep Banking Service is especially designed for entities having large number of branch transactions every day. It helps you focus on your core business activity without spending time and efforts on visiting the branch for banking transactions. Imagine your bank being so close, right at your doorstep.

Monday, July 13, 2009


HEALTH, THOUGH important, is by far the most neglected aspect when it comes to health expenses. Notwithstanding the rising medical expenses - thanks to the hectic lifestyle - not many people in the country today have adequate insurance covers. While the public may not be concerned, government ensures that citizens protect themselves and their dear ones with adequate medical cover by giving tax breaks on expenses incurred for getting health insured.

Premium paid up to Rs 15,000 on a medical insurance policy is exempted from tax under section 80D of the Income Tax Act. A tax-payer paying premium toward insurance cover of dependant parents shall be entitled to an additional tax benefit of up to Rs 15,000.

If the parents are senior citizens, then this limit gets enhanced to Rs 20,000. Thus, the maximum tax benefit that a taxpayer can now avail by insuring the health of his/her entire family (including dependant parents) is Rs 30,000 or Rs 35,000 as the case may be.


Salaried employees are eligible for tax-free medical reimbursement from their employer up to a maximum of Rs 15,000 per annum. If the tax-payer incurs expenses (up to Rs 50,000)for medical treatment (including nursing, training and rehabilitation) of a disabled dependant, the same shall be reduced from the taxable income per annum under section 80DD. Where however, the dependant suffers from severe disability, the amount of deduction shall be Rs 75,000 per annum.

Disability, for the purpose of this section includes autism, cerebral palsy and also mental retardation. Any amount spent on the medical treatment of a dependant suffering from diseases like cancer, AIDS, Parkinson’s disease, chronic renal failure, Thalassaemia etc. can be claimed as a deduction from the taxable income up to a maximum of Rs 40,000 under section 80DDB of the Income Tax Act. In case the dependant is a senior citizen, the amount of deduction shall get enhanced to Rs 60,000 per annum.


Any amount paid as a premium to cover the life of the tax-payer, his/her spouse or children shall be eligible for deduction from the total taxable income under section 80C of the Income Tax Act, up to a maximum of Rs 1 lakh per annum. It is however important to note that this deduction is applicable provided the amount of premium paid does not exceed 20% of the sum assured by the insurance policy. (Sum assured is the amount ought to be received by the policy-holder from the insurance company after completion of the policy term. This term is usually referred to in case of endowment and money-back plans.)

Sunday, July 12, 2009

Foreign Direct Investment (FDI)

IN SIMPLE terms, foreign direct investment refers to the investment made by an entity (generally a company) in an enterprise located in a different country. By virtue of making this investment, the investor gains a certain degree of influence or control over the management of the enterprise. It is generally believed that to qualify as FDI, the investor should be in possession of at least 10% of the shares of the company and have access to voting power in the company.

FDI can be both outward and inward. In the case of inward FDI, the investor can enter the country by incorporating a company, either by getting into a joint venture with an Indian company or setting up a wholly owned subsidiary. Alternatively, he could retain the status of a foreign company and simply set up a liaison, project or branch office in India. However, it is generally expected that FDI signals long-term commitment on the part of the investor as there is a lot of physical investment included.

What are the benefits of FDI?

FDI comes with benefits for both the investor and the economy where the investment in made. For the investor, this could be a chance to tap markets where he could make profits. The investors are wooed with techniques such as tax breaks, easier regulations, low interest rate on loans and so on. For the economy, FDI has provided a much needed push in terms of injecting liquidity apart from bringing in better technology, creating more job opportunities and so on.

Are there any regulations on FDI?

The Government has laid down rules both on the basis of the sector as well as the nature of activity that is meant to be undertaken with the FDI. For instance, FDI in an activity like mining for diamonds and precious stones does not require prior permission. A notification simply needs to be sent to RBI within 30 days of receiving the remittances and documents needs to be submitted in a period of 30 days after the shares are issued to the foreign investor. However, in certain other sectors like broadcasting , the proposal needs to be sent and approved by the Foreign Investment Promotion Board (FIPB). There are also caps on the amount of foreign investment in particular sectors and in certain cases, this is inclusive of both FDI and FII investment.

What is the difference between FDI and FIIs?

The most visible difference would be that while FDI includes investment directly into a particular company, Foreign Institutional Investors (FIIs) are known to invest either in the primary or secondary markets, in stocks, mutual funds or via instruments such as participatory notes, dated government securities, commercial papers etcetera. There is also a greater perception of stability that is associated with FDI. In periods of market instability, FIIs are known to beat a hasty retreat leaving the market in a lurch.

Saturday, July 11, 2009

Fixed Maturity Plan or Fixed Deposits?

By number of funds as well as money invested, one of the most important type of mutual fund in India is something that is generally called a Fixed Maturity Plan. Of the 1920 mutual funds that are currently available, no fewer than 805 are FMPs, as they are known. And of the Rs 5.61 lakh crore that is invested in Indian mutual funds today, 68,000 crore is in FMPs.

FMPs are generally used by companies and large investors as an alternative to bank fixed deposits. In general, these funds resemble FDs more than they do other mutual funds. These are closed-end funds, meaning that one can only enter them when they are launched and exit them when their pre-stated term is over. Actually, one can exit them earlier, but generally after paying a load that is high enough to be a serious discouragement. More importantly, fund companies offer an ‘indicative return’ for FMPs. Unlike other types of mutual funds, FMPs are run in such a way that this indicative return actually has some meaning.

FMPs invest in debt instruments with the intent of holding them to maturity. This means that regardless of any ups and downs in the market value of the investments, the final earnings are predictable. Therefore, the indicative returns that FMPs provide to investors reflect the reality.
One obvious question is why investors should prefer FMPs to bank deposits. The reason is mostly to do with tax efficiency. When you put money in a fixed deposit, the interest gets added to your income. In FMPs longer than a year, if you elect to take all your gains as capital appreciation, the taxation is merely 10 per cent with indexation benefit or 20 per cent with indexation. That’s generally quite a saving from the tax rate which either individuals or companies would pay on the interest earned from a bank deposit.

Even for investments less than a year, there’s a tax advantage if the investor takes the option of receiving the gains in the form of dividends. In this case, individual investors will get taxed at 12.5 per cent of the returns and corporates will get taxed at 20 per cent. This is the dividend distribution tax that is deducted by the fund company. Once this is paid, no further taxation applies to the income. Although this is obviously not as much of a tax advantage as the long-term capital gains option, it’s still a lot lower than the full tax payable on bank deposits.

The only question that remains is if they are as safe as bank deposits. In theory, they aren’t. Like any other mutual funds (and unlike banks), you could lose all your money in an FMPs. In practice, FMPs have been predictable and safe.

However, to enhance the overall yield FMPs may assume high credit risk and run the risk of default. Nowadays, the increasingly tight liquidity and credit situation could mean that some of the companies in which FMPs invest could be sailing closer to the edge than earlier. There’s plenty of talk about how some real estate companies are facing tough times. If an FMP has invested in such a company’s debt, the chances of an FMP returning less than the indicated yield or even turning in a capital loss cannot be ruled out completely.

Generally speaking, FMPs invest in high quality instruments, which have been rated by at least one credit rating agency. In case of investment in unrated papers, prior approval of the board of directors of the AMC or the Trustee has to be obtained. All things considered, even though FMPs are generally seen as something that only companies invest in, there’s no reason why individuals should not use them as more tax-efficient fixed deposits.

Friday, July 10, 2009


Beta is a statistical term; it measures the volatility of stock (or fund) relative to the market (or the benchmark). The value of beta of a stock or mutual fund is always stated against its benchmark. The beta of benchmark or market is always equal to 1.

If a stock is benchmarked against Sensex and has a beta value greater than 1 (say 1.5), this indicates that the stock is 50 percent more volatile than the market as the beta of Sensex is 1. The stated stock will deliver 15 percent return if the market has delivered a 10 percent return in same time period. Its opposite is also true if Sensex delivers 10 percent negative return, then the stated stock will fall by 15 percent in the same time period. A beta of less than 1 implies lesser volatility.

The desirable value of beta depends upon the individual risk bearing capacity. So while you can expect a high return from a stock that has a beta of 2, you will have to expect it to drop much more when the stock market falls.

Thursday, July 9, 2009

Budget and Personal Finance


If you are someone who’s used to friends showering you with expensive gifts, there’s some bad news. Postbudget, any gift – in cash or kind (including immovable property) – worth more than Rs 50,000 will attract tax. So, think twice before accepting such gifts.


If you’ve are rejoicing the increase in exemption limit across categories, here’s a dampener that could have escaped your attention: abolition of Fringe Benefit Tax (FBT). While the employers do not have to pay the tax, the tax burden has shifted to employees in case of certain perquisites, puffing up their taxable income. You would do well to take this into account when you undertake your annual tax-planning exercise.


If you were paying 1% tax on your wealth exceeding Rs 15 lakh, you can afford to relax. Thanks to the Budget, now this limit stands enhanced to Rs 30 lakh.


The hike in customs duty on gold bars from Rs 100 to Rs 200 per 10 gram means that the cost of purchasing gold ETF units could go up marginally. However, the fact that gold is expected to continue to be a safe haven in the coming months should make you ignore this development.


Despite having an entire year to plan taxes, most taxpayers postpone the exercise till March 31 – the last date for making investments allowed as deductions under Section 80C. The first quarter of this assessment year has already passed and you would do well to start planning right away as last minute decisions could prove to be costly later.


Buy a mediclaim for your parents to enjoy twin benefits. First, health covers can come in handy at a time when healthcare costs are soaring. Secondly, you can enjoy a tax deduction of Rs 30,000 over and above the Rs 30,000 limit that you enjoy on your individual cover provided you fund their insurance from your bank account.


Invest in Public Provident Fund (PPF) for a decent rate of return and for peace of mind as investments in PPF are backed by sovereign guarantee and cannot be attached in a legal action. Invest in PPF before the 5th of the month to earn interest for the full month.


Switching lenders makes sense for home loan borrowers only if the new rate is 1-1.5% lower than the existing loan rate, as it involves certain charges. It includes prepayment penalty with the existing lender at 1-2% of the loan outstanding. The processing fee adds to another 0.50-1% of the total loan amount. Factor in these costs and then calculate to see if it makes financial sense to change lenders.

Wednesday, July 8, 2009

Fiscal policy

When the government makes use of its revenue and expenditure programmes (to achieve the above mentioned goals) and affects the aggregate level of demand for goods and services in the economy, then this action is essentially known as fiscal policy. Related to fiscal policy are deficits and surpluses. When the government’s expenditure exceeds its revenue, then there is a fiscal deficit and the opposite of this is known is fiscal surplus.

What is the difference between fiscal and monetary policies?

Renowned economist Keynes believed that taxes and expenditure decisions, that is fiscal policy, should be used to stabilise the economy. According to him, government should cut taxes and increase spending to bring the economy out of a slump, this kind of a policy action is known is expansionary fiscal policy. On the other hand, government should increase taxes and cut expenditure to bring the economy out of inflationary pressure, that is, it should follow a contractionary fiscal policy. The classical economists however believed that the government can affect the level of output, overall price level and interest rates by determining the level of money supply in the economy. When the central bank uses tools like CRR and repo rate to control the level of money supply to stabilise the economy then it is known as the monetary policy.

How does a fiscal policy affect the economy?

Aggregate demand, which is the total demand for goods and services in the economy, depends on three main variables- consumption, private investment and government spending. When the government increases its expenditure then it spurs the aggregate demand in the economy. A higher aggregate demand in turn will stimulate output, growth and employment. Whereas if the government lowers its spending then it decreases the aggregate demand and hence slows down the growth of the economy.

What is the purpose of the recent fiscal stimulus and what will be its impact on the economy?

The present fiscal stimulus packages are being given away by the government because of the impact of the global financial meltdown on the Indian economy. The global crisis has had a huge impact on our exports, financial markets, production (due to a slowdown in demand) and also on job market to a certain extent. Although most economists believe that we can not do much in terms of own policy action when it comes to exports and exports will continue to suffer until importing economies like US and European Union will recover, but a boost can certainly be given to the domestic demand. Hence present fiscal policy actions aim at stimulating domestic demand and have focus on sectors that provide huge employment. Roughly 70% of our demand is domestic hence the government believes such policy actions should pull out India out of the slowdown.

Tuesday, July 7, 2009

Debt Funds - Check The Expiry Date

This time we give you an insight into something that most debt fund investors would be unaware of, the Average Portfolio Maturity.

As we all know, debt funds invest in bonds and securities. These instruments mature over a certain period of time, which is called maturity. The maturity is the length of time till the principal amount is returned to the security-holder or bond-holder. A debt fund invests in a number of such instruments and each of these instruments would be having different maturity times. Hence, the fund calculates a weighted average maturity, which would give a fair idea of the fund's maturity period.

For example, if a fund owns three bonds of 2-year (Rs 30,000), 3-year (Rs 10,000) and 5-year (Rs 20,000) maturities, its weighted average maturity would be 3.17 years.

What is the big deal about average maturity then, you may ask. Well, knowing a fund's average maturity is important because it tells you how sensitive a fund is to the change in interest rates. It is also important to keep in mind that change in interest rates affect different securities differently. The price of long-term debt securities generally fluctuates more than that of short-term securities when the interest rate changes. Consequently, mutual funds with several long-maturity papers in its portfolio are more sensitive to NAV fluctuations.

For example, among all debt medium-term funds, DWS Premier has the highest average maturity (13.55 years as on April 30, 2008. As a result, this fund's standard deviation — a measure of a fund's volatility is also on the higher side. On the other hand, Canara Robeco has an average maturity of just 0.08 years and hence is least volatile.

The average maturity of a portfolio changes with time and also whenever the portfolio is churned. As a debt security approaches its maturity date, the length of time to maturity becomes shorter. Thus, even if a fund buys and holds a debt portfolio, the average maturity of a fund keeps on decreasing till the security held reaches its maturity date.

Also, if a fund sells one security and buys a fresh one, it is obvious that its average maturity will change.

· Gilt funds usually have a relatively higher average maturity and are the most volatile among all debt funds.
· Cash funds (debt ultra short-term funds), on the other hand, usually have the shortest average maturity and are the least volatile.

But we usually associate high risk with higher returns and hence, gilt funds are capable of delivering higher returns than other debt funds.

So if you are an aggressive investor, you know that gilt funds would suit your needs while cash funds are for the more stable investor.

Monday, July 6, 2009

Financial Planning: Difference between Investment and Insurance

This blog post explains the difference between Investment and Insurance.

Most of the time people confuses both savings and the insurance. Some times without proper knowledge investing in the insurance will eat your money. Here you will see a simple example explains all that.

Insurance and Investments

A lot of us confuse Investment and Insurance.

  • Investment is something that we save up to use while we are alive.
  • Insurance is something we save up for our family to use once we are gone.

The goals of Investment and Insurance are totally different. A lot of us take Insurance policies as investments. This is the reason why there are a whole group of people running behind us telling us how great their new Insurance policies are.

Let me explain with a simple arithmetic. Assuming you pay an Insurance policy premium of Rs. 25,000/- for a policy that would mature in 20 years The Insurance agent would have told you that the policy is worth Rs. 5 lacs and you would get a bonus amount equivalent to it and hence you would be getting Rs. 10 lacs at the end of 20 years. This is a big amount and obviously most of us would be lured into taking this policy. What do we forget here?

1. A fat portion of the premium we pay in the first few years would be paid to the agent as a commission

2. Every year a portion of your premium (Atleast 2%) would be paid to the agent as a commission

3. The Insurance company would deduct a portion of our premium (Atleast 5%) as mortality charges.

4. The Insurance company can invest only in debt instruments and hence the returns on our investments cannot exceed 8 or 9 % per annum.

Assuming you invest the same Rs. 25,000/- every year in a bank Fixed deposit that earns an interest of 9% per annum, what do you think will be the maturity amount? You wont believe me. It is Rs. 13,62,745/- which is Rs. 3,62,745/- more than what your insurance policy would give you. (Assuming what your agent said was true and you would get Rs. 10 lacs)

You will be wondering how this amount of more than Rs. 3 lacs got reduced. The answer is simple: “COMMISSION”. Your Agent eats this amount from your investment and hence you are getting only 10 lacs.

Sunday, July 5, 2009

Personal Finance: Different EMI repayment options of Home loan

Ready to take a home loan? The bank may recommend a particular EMI scheme as the best, but one should look at the loan agreement for details before signing on the dotted lines

Bear in mind, very little is known to most people about the different EMI repayment options beyond what the banks recommend to you when you take a home loan. Banks and home financing companies such as SBI, HDFC, HSBC, LIC Housing Finance and others may have one or many options that they may recommend as the right scheme for you. The criteria taken into account by the loan-giving agency include age, income, saving history, educational qualifications, job profile, number of dependants, type of property (including the builder) and so on.

Here’s what you need to know about different EMI options available in case you are planning to take one.

First things first. The simple ground rule for all EMI options is that the longer the term of your loan, the smaller will be your EMI. The EMI also has two components — principal and interest payments. The most common repayment option availed of by most home loan customers is still the traditional normal EMI option under which a fixed amount is paid every month. With the amount to be deducted steady, there is a regularity to the remaining amount that is available for use. The customers can thus plan their cash flow. However, the payment towards the principal is quite high and the amount towards interest is comparatively low, which effectively means a sufficiently high EMI.

The customised options or the newer schemes work on the principle of lower principal repayment and higher interest payment within the EMI. Some banks offer to structure EMI options entirely around the needs of their customers. Many of the options are available only for professionals such as doctors, lawyers, chartered accountants and so on, given their propensity of increase for this category.

Among the options available, the step-up repayment option is ideal for those who envisage a growth in income in the course of their repayment schedule. This would be a good option for those at the beginning of their career, with the possibility of climbing the ladder. While they pay lower EMIs initially, they are gradually stepped up at intervals, which vary according to the term of the loan.

There are also those who want to finish repaying their loans in as short a time period as possible. For such individuals , there is the option of accelerating your EMI every year in proportion to your increase in income. The customer then does not have to pay interest for the remaining term. Moreover, with the loan off his hands, he also has the chance to park his money in alternative investment options. But the case may not be so with a slightly older person, particularly someone near retirement or someone whose repayment capacity is likely to alter. One could take the case of a couple with a home loan for 15 years where the husband will stop earning after the 10th year. In such cases, the flexible loan installment plan makes a way for a person to pay a high EMI during the earlier years which then decreases according to the reduced income.

EMI payments generally begin only after the entire loan amount has been disbursed. In the pre-EMI stage, the customer is charged only simple interest on the amount disbursed. However, there are a few customers today who want to start their EMIs on partially disbursed loans and when their homes are still under the process of construction. This option is generally referred to as Tranche EMI. However, tax implications are very different from what is available for regular EMI payments.

Many people in India, however, take a home loan for the tax benefits involved. The longer the term of the loan, the longer one can avail of the tax benefits. Tax deductions up to Rs 1 lakh are available on loan repayments. There is also a deduction available if the house has been rented out during the period of the loan.

Customers who feel they are unable to pay the current EMI option should talk to the bank to see if they can switch to another scheme. Some banks allow the customers to switch, provided they have the credibility of savings and are able to repay the loan according to the new option.


  • Regular EMI: Pay a fixed EMI every month for the entire term of your home loan
  • Step-up repayment option: Pay a lower EMI in the initial years and a higher EMI in the later years. EMI is stepped up at regular intervals
  • Acceleration of EMI: Increase your EMI every year to finish paying off your loan faster
  • Flexible Loan Installment plan: Pay a high EMI during the earlier years and a lower EMI in the later part of the term when there is a possibility of decrease in income
  • Flexible Loan Installment plan: Pay a high EMI during the earlier years and a lower EMI in the later part of the term when there is a possibility of decrease in income

Saturday, July 4, 2009

Credit Card - How to guard against fraudulent activities adopted by them

IF ONLY life were as good as the ads portrayed it to be. You could travel to exotic locations, shop till you drop, indulge in the choicest delicacies — with nothing but that sleek plastic card in your wallet. In fact, freedom is the trump card that credit card companies always play up to sell their gold, silver and platinum cards.

However, the reality is that when you come back home from that fancy vacation or shopping spree, at your doorstep will lie a bill that, as much as you try, you cannot wish away. And if you’re not the kind of person who cares for detail — remembers where or when you spent what — chances are that you may be paying more than you actually spent. To help you guard against fraudulent activities by credit card issuers (generally banks and NBFCs),


If you’re one of those who haven’t given this a thought, here is a chance for you to find out if you are being victimised or not. You need to know that no bank has the right to forcibly issue a credit card. But there have been cases when the bank has sent individuals credit cards without their consent and then begin to charge them for the same.

However, one of the most common complaints among individuals has been with regard to the interest rates. In some cases, individuals have found that while they were issued a card at 0% interest, after the initial period of a few months, they were charged interest. Some have also experienced a sudden increase in their interest rates. While banks have the discretion to make changes, the RBI has now released guidelines stating that the total annual percentage rate cannot be more than 30%.

Another pretext that credit card companies often use is that of late payment, especially as interest begins to get charged on all unpaid balance. This often happens to people who put their cheques into drop-boxes on the day when the payment is finally due, especially as there is no mechanism to mark the date in which you have deposited the cheque. Moreover, a few banks have recently introduced the concept of charging people for not using their credit cards. There could also be innovative methods adopted especially with regard to insurance covers on credit cards. For instance, a reputed credit card issuer who offered an insurance cover on the unpaid balance, initially promised to pay the premium. However, after three months, the premium was charged to the credit card holder.


The list above is by no means exhaustive. In fact, it is only the tip of the iceberg as the means of defrauding multiply on a regular basis. Acknowledging this, the RBI released fresh guidelines on the credit card operations of banks in 2008. However, while the RBI has issued a list of guidelines, these are generally not issued to the consumer. Experts, however, say that if a company uses a misleading or false statement to sell a product such as promising to offer a free service and then charging for it, then this would be unfair. Moreover, withholding of information by the credit card issuer is also considered an offense. Banks are also expected to be transparent especially in their terms and conditions. In fact, the RBI has ordered that the terms and conditions should be printed in a size that is easy to read and in a manner in which it should be easy to understand.


If an individual finds that there is something wrong with regard to credit card transactions, the first thing to do is to create a record of the incident by writing to the head office of the card issuing organisation. Most banks now have a dispute redressal mechanism in place these days. If you are registering a complaint on the phone, remember to note the name of the person who you are speaking to and the time and date at which the conversation took place. If your complaint is not acknowledged and no action is taken within a month, then you have the option of lodging a complaint with the banking ombudsmen appointed by the RBI. The other option, which is available to individuals, is to appeal to the consumer courts. But the process tends to be more complicated in this case and often takes much longer.


In addition to finding means to correct follies, you also need to constantly guard against them. For instance, when an issuer tries to sell you a product on the phone, you must ask the person to send the terms and conditions, application forms and so on before you agree to take a credit card. If you decide to take the card, make it a point to file those terms and conditions safely. Also, ensure that all verbal promises are given to you in writing, so that you have a record just in case a dispute comes up. Make it a priority to fill in all application forms yourself instead of simply signing on the dotted lines and allowing others to fill your forms. Also choose your credit card company only after reviewing all the specifics such as interest rates, processing charges and so on. If you are faced with the same problem for the second time, then use the opportunity to get the best bargain from the bank, which will be concerned about retaining customers.

Steps to follow if you feel defrauded

  • Send an official complaint to the head office. Keep a copy of the letter
  • If the complaint is registered via phone, note down details like the name of person, date and time of conversation
  • If no action is taken, then approach the banking ombudsmen
  • Alternatively, you could appeal to the Consumer Court

Thursday, July 2, 2009

Personal Finance: Dividend Yield helps in evaluation of portfolio

This article explains how you arrive at the dividend yield of a share to determine its efficiency as an investment option

Equity investors look for two types of returns -

  • Capital appreciation, i.e., the increase in the market value of the shares, and
  • Dividend income.
Companies declare dividends on equity shares from the profits. The balance funds left after paying off all expenses is used to create reserves and declare dividends. Calculating dividend yield is important to calculate the true returns from an equity investment. Also, dividend yield helps analysts calculate the value of an investment, and whether it is good to invest in a particular stock.

Dividend is declared on the par value of the shares. For example, a 30 percent dividend on a Rs 10 par value equity share means a dividend of Rs 3 per share. However, in case you have paid Rs 30 to acquire the share, the dividend is still payable on Rs 10. So, the dividend yield would be 10 percent only.

Dividend yield is not equal to the amount of dividends paid by the company. It is the dividend payout with reference to the market price of a stock. It is equal to the returns from the stock as dividends. Dividends are always paid as a percentage of the face value of the share. When the dividend is received, it is computed as a percentage of the current market value of the share, and is called dividend yield.

Dividend yield is a major determining factor for stock prices. An investor has basically two objectives of investing. One is income from capital appreciation. The other is income from dividends. And it is the ability of any stock to give both these incomes, which determines its market prices on the stock market floor.

A dividend yield indicates the percentage of an investor's purchase price of a stock that is repaid to him as dividends. The absolute amount of dividend does not count for this comparison. Many investors who want a regular income - dividends - look for stocks which either maintain a steady or an upward trend of dividend declaration. They invest in scrips having a high dividend yield. A low market price combined with high dividend payout, gives high dividend yield. Dividend yield is a simple tool for any investor to evaluate his investments in scrips and choose the right portfolio, depending on his priorities.

Dividend yield also specifies how much an investor is willing to pay for the expected dividend stream to be generated by a single share. You can use the expected dividend amount over a period, or the past dividend payouts, to make the analysis.

Dividend yield varies for different investors for the same scrip. This is because the common denominator for calculating dividend yield is the market price. As the cost price for each investor will be different, depending on the time of his investment, the dividend yield will be different too. For example, assume an investor purchases a scrip for Rs 10, another purchases it for Rs 100, and the third for Rs 200. Assuming the company declares a dividend of 25 percent on the par value of Rs 10, the dividend paid will be Rs 2.50 per share. As such, the dividend yield for the first investor is 25 percent, for the second investor it is 2.50 percent, and for the third investor it is 1.25 percent. So, for the same amount of dividend, the dividend yield varies for different investors, depending on their cost of investment.

A high dividend yield does not always indicate a good investment, as it may be wiped out by the losses incurred on the falling market prices of the share. From an investment perspective, both dividend yield as well as capital appreciation are necessary to make a scrip attractive for investors. By comparing the yield of a scrip, over a period of time, you can determine whether the growth in the dividend payout has been proportionate to the increase in the market value of the share.

Wednesday, July 1, 2009

Financial Planning: Choosing the right debt option

You may not be always right with debt, as some products require timing just like equity

While debt has always had its relevance for investors, its performance in the last one year has sent many rushing for it. Equity's under-performance in the last one year has only further made its case stronger with the equity market's weakness wiping out a few years' good performance at one go. While debt gives the comfort of capital safety and assured returns, not all debt options are safe in the real sense. In fact, debt can be a negative earner in a real sense if the choice of product is wrong. Hence, choosing the right debt product is as important as choosing the right stock, and in some cases, could be tougher too.

Interestingly, the challenge for many is when to allocate for debt rather than how to choose it. While the bad performance of equity automatically forces everyone to debt, it need not be the case if the investor resorts to asset allocation. If you go by the principles of financial planning, you would find that debt is an integral component for all categories of investors though the percentage of allocation may vary depending on the age and needs of the investor. For instance, young investors with limited sources of income but staring at financial commitments on a monthly or annual basis may not have the liberty to dabble with equity even if age were to be on their side.

For most other investors, debt is a necessity because of a number of factors such as protection of profits, and capital or asset allocation. Such investors probably have the luxury of altering the ratio towards debt, depending on the economic environment.

For instance, in the last 12 months, many high net wroth individuals preferred to stick to debt rather than go with equity because of the uncertain economic environment. Interestingly, a number of investors from this community began looking at the debt option way back in December 2007 when the equity indices were still on a rampage. The argument of these investors was that after the bull run for 3-4 years, investors need to turn to debt to protect profits. For some, the rising inflation and interest rates were other indicators for shifting the portfolio into debt.

In fact, during a conference in mid-2007, a fund manager of a leading insurance company commented that while investors were chasing equity, his fund was increasing its allocation towards debt and particularly in products like gilt and income funds. The performance of both these products is visible for all and unfortunately, even at current levels, the rush has continued for debt.

Those who are looking at debt for higher returns from the portfolio can look at products like gilt or income funds only with an investment horizon of 12-15 months as the returns from these schemes are likely to taper off once the rate cuts are completed. On the contrary, long-term investors can look at floaters or assured return products such as fixed deposits from companies, which offer double-digit returns. However, while parking funds in deposits, you need to take into account the tax angle as it would lower the effective yield.

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