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Saturday, October 31, 2009

Equity is for long term. Still…

IF the bull run during the last few years had encouraged retail investors to shed their apprehension regarding equities, the subsequent downturn has made them retreat to traditional safe havens like gold and fixed deposits. While it’s not surprising, this short-term view may prove to be detrimental when investing for a long-term goal such as creating a retirement corpus, which necessitates an investment horizon of at least 15-20 years.

For those who are comfortable with this kind of horizon, there is no need to look beyond equities, as it is the ideal wealth creation tool, feel market experts. As per data provided by IDFC Mutual Fund, top-rated diversified equity funds have outperformed other asset classes over a period of 15 years. Between January 1994 and January 2009, they delivered a return of 14.22% against 6.09% from gold, 8.64% from fixed deposits and 9.97% from real estate.

Equities have always earned a premium over other investments options over a longer period of time. Historical data shows that since 1979, if an investor had invested (in Sensex) at the beginning of any financial year and held on to it for at least 12 years, then he/she would not have lost money. This apart, equities also offer tax benefits and the level of transparency is much higher, with valuations being reported on a daily basis.

Equities Vs Fixed Deposits

While both returns and capital are guaranteed in the case of fixed deposits, the returns may not be capable of beating inflation.

Logically, equities have to perform better than FDs. After all, the money invested by you in an FD is lent by the bank to entrepreneurs, who repay the loan out of their profits. No company will pay a rate of interest higher than the profits made, which means that if you had invested directly into the business (bought shares of the company), you would have earned a better return.

Equities Vs Gold

Equity cannot eclipse the yellow metal’s shine when it comes to safe and steady returns, but it has a slight edge in terms of liquidity. Since most Indians prefer to invest in gold in the form of jewellery rather than bars or coins, they are emotionally attached to their gold possessions, and hence are unwilling to part with the same.

Equities Vs Real Estate

Real estate offers investors the dual benefit of providing shelter and appreciation in value. However, it’s not easy to buy property in the physical form in India as affordability is a huge constraint. Besides, real estate is a relatively illiquid asset, while purchase and sale transactions in equities are far simpler.

Friday, October 30, 2009

How can you prepare your portfolio for a rebound

THE real dilemma today is how to protect wealth from erosion and make it grow sufficiently to at least beat inflation. The volatility has been unnerving and is not restricted to equities; even bonds have seen swings never experienced before. So much so that there was a run on liquid funds in October as risk aversion touched an unprecedented high. Real estate, which witnessed a price spiral in the last three years, is also a major victim of the market slump. Also, compression of time for market moves means shorter window of opportunity to react. Risk aversion and risk premium is at its peak and investments flows have evaporated.

So does the turmoil in the markets mean that investors remain passive and wait for the troubled times to pass? Inaction may not be the best solution for one’s portfolio. As adages go, “Invest when there is blood on the street, sell when there is greed, buy when there is panic.” These words of wisdom which have stood the test of time suggest well thought–out action even in chaotic times. Investors would do well to adopt a portfolio approach where asset allocation is balanced to provide the right measure of safety, liquidity and return. It is also important that the portfolio mix suits the temperament of the investors so that long term investment strategies remain fairly undisturbed and unaffected by likely emotional and impulsive investor action in trying times.

Leading global economies are either stagnating or have slumped into an excruciating recession. In a scenario of global gloom, India and China stand out as oases in a desert. These two large economies are expected to continue to register healthy growth. The Chinese economy will get relief from the large government spending (pump priming) that has been proposed which will help sustain the economic activity levels. China boasts of a massive fiscal surplus which it can spend on keeping the growth engine running. This will help substitute the fall in exports due to weak global markets.

India, on the other hand, does not have the luxury of either a fiscal or a trade surplus. It, however, has the advantage of large domestic demand driving its GDP. It has the advantage of a young population, abundance of skilled human resource and excellent entrepreneurship, advantages well documented and recognised by global investment gurus. It is less leveraged to global economy compared to any other economy in the peer group of emerging markets. This will help to underpin economic growth at 6-7% levels in the current slowdown and propel to double digit growth when order is restored.

The substantial easing of liquidity in the recent weeks and cut in interest rates are efforts by the government to restore business confidence and spur growth. Given that India will be among the first to bounce back, global capital flows are also expected to come back to India once stability returns to the battered world economy. In a scenario of excessive risk aversion, there seem to be no buyers despite valuations of even good quality Indian stocks having crashed to unrealistic levels. This is a rare opportunity to build a high quality portfolio. The key is to take measured, calculated risk backed by incisive research.

In the current juncture, high quality bonds are also a good investment option in India. There are gains to be made by taking a call on the likely compression of the large spreads between corporate bonds and government securities. There has been a rush to invest in government securities, driven by the extreme risk aversion of investors. This has resulted in a sharp decline in the yields on these instruments. On the other hand, bonds of some of the blue chip corporations — many of them owned by the government — continue to rule at high yields. This is a pocket of opportunity to make superior returns by taking measured risk.

So what is the way to leverage this opportunity? First and foremost, we need to protect wealth from erosion so that we live to fight another day. This means a strict no-no to momentum driven approach and get back to basics.

Thursday, October 29, 2009

Education Loan: Loan to study, Save Tax Later. Repayment comes with tax breaks

‘UPON THE Education of the people of the country, the fate of the country depends.’

Our country seems to have taken the wise words of UK’s inter-war year’s Prime Minister Benjamin Disraeli in true spirits. Given the high level of illiteracy in the country, and the need to ensure that Indians are as competitive as their global peers, the government has been taking steps to boost education sector.

While the government has been raising the budgetary allocation for education every year and has also imposed 3% cess to promote primary and secondary education in the country, it also provides tax breaks for those who are pursuing higher education.

Section 80E of the Income Tax Act is in fact a boon for students who wish to undertake graduation and post graduation courses in various educational fields. Rising cost of education has forced most students to take loans to pursue their dreams. Section 80E, thus, ensures that any interest paid on these educational loans is exempt from income tax.

Unlike the interest rate on housing loan, there is no limit attached to the quantum of interest paid during the year. Thus, any amount of interest paid on education loan is exempt from tax, provided the loan has been taken from a financial institution or any approved charitable institution.

However, while exemption for repayment of interest on housing loan stretches through the entire period of repayment, in the case of education loans, it is restricted to eight consecutive years. The eight-year count begins from the first year, when the student actually begins to repay the loan.

Earlier, the exemption under Section 80E was restricted only to the students, who had taken loan to pursue higher education. This was a major anomaly in this section, since in most cases, it is not the students but their parents, who take loan for the education of their children. The anomaly was removed by the Finance Act 2007, wherein the exemption under this section was extended even to the relatives. Thus, now if the loan has been taken and is being repaid by the parents or even the spouse of the individual, they will also be entitled to claim exemption under the section.

Also, it is not just the higher education that has attracted tax-incentives in the country. Individuals paying their own tuition fees or parents paying tuition fees for their children in schools, colleges or universities can claim an exemption for the same from their taxable income. However, there is no separate section for this exemption and the same has been clubbed under the Rs 100,000 limit of Section 80C. It is important to note that this exemption is available only for the tuition fees. Any other expenditure in the nature of development fees or donations shall be disallowed. Besides, this exemption has been restricted to payment of tuition fees to Indian educational institutions only.

Wednesday, October 28, 2009

Health insurance all set to become portable

NON-LIFE insurers will in the near future develop a standardised mediclaim policy to facilitate portability in health insurance. Besides having uniform coverage, the policy would have standardised benefits for ‘no claim bonus’.

The general insurance council - an industry body representing non-life insurers - will meet to discuss the details, according to two industry officials.

Health insurance portability, as defined by the regulator, aims to facilitate change of insurance provider without the insured losing out in terms of the policy coverage. While policyholders can shift companies even now, the essence of portability is that an insured is able to carry his track record with him.

In other words if a health policy covers pre-existing ailments only after four years and a policyholder decides to shift to another company in the fourth year he will get immediate coverage of pre-existing ailments and will not have to wait another four years.

Another advantage is, if there is a no claim bonus for earlier years it can be carried forward to the new policy. Today some companies have cumulative no claim bonus where the sum insured increased by 5% for every claim free year, while some products do not have any bonus facility.

Portability can be there only when there is a standardised product. This would mean that the product offered by one company has to be identical to the other with service levels being the only differentiator. While companies will have one standard product, they can have other non-portable schemes as well so that product development will continue taking place. However, they will have to define in their sales literature that a particular scheme is not portable.

The bad news for employees is that group mediclaim policies are likely to be a part of the non-portable products. This means that an employee covered under a group health policy will be treated as a new prospect when he goes to buy a policy after retirement. Group policies differ greatly from individual covers. Many group policies are very wide in their coverage as they cover pre-existing ailments.

Tuesday, October 27, 2009

Guaranteed ULIPs

SINCE their launch, Unit Linked Insurance Plans (ULIP) have been a complete rage; but that's not the case now. This year, thanks to the slowdown, insurers are seeing lower premium income compared to last year.

So to maintain the spark in ULIPs, insurance companies are trying to entice buyers by offering guaranteed returns on ULIPs!

How's that possible? Let’s decode.

As of now three insurance companies are offering guaranteed ULIPs.

SBI Life Insurance Smart ULIP
Birla Sun Life Insurance Platinum Plus II
Tata AIG Life Insurance InvestAssure Apex

Unlike non-guaranteed ULIPs, these newly launched plans shield you from the downside of the market by assuring guaranteed returns.

These plans are like investing in fixed income products that offer secured returns.

Workings of the plan: These plans are structured into four phases.

Subscription phase: During this phase, the plan is open for a limited time only. For instance, SBI’s Smart ULIP is open for a period of one year.

Premium paying phase: In this phase, you pay premium only for a fixed term, which is 3 years. However, SBI’s Smart ULIP allows you to choose the premium paying term for 3 or 5 years.

NAV build-up phase: During this phase, the reset dates, set by the companies are exercised. Reset dates are pre-decided dates fixed by insurance companies to record NAVs. Birla Sun Life and Tata AIG record NAV once a month on the reset date decided by them whereas SBI has two reset dates every month to record NAV.

These plans have a fixed term of 10 years.

Accumulation phase: The remaining policy term i.e. the tenure left after all the reset dates have been exercised is the accumulation phase.

What’s unique about guaranteed ULIPs is that they offer the highest Net Asset Value (NAV) recorded over a given a period of time.

Maturity benefits: On maturity, you get the highest of:

a. The fund value as on date of maturity OR
b. The fund value at the rate of 'highest recorded NAV' OR
c. The starting NAV of Rs 10 per unit

The is highest recorded NAV is the higest NAV among all reset dates.

Death benefits: In case of your untimely death, either fund value or sum assured will be paid out to your nominee, depending on whichever is higher.

Monday, October 26, 2009

Contingency fund – A good to plan a in fluid times

WE ARE all aware of the term personal financial planning as we have heard about it either on television, read in newspapers or had our advisers use it before us.

Earlier, we could afford to ignore it as “earning returns” was not that complicated. But in the prevailing times, when economies world over are struggling to overcome recession, boost demand and accelerate growth, financial planning gains much prominence. It is more a need and necessity than being a matter of choice.

While financial plans differ from individual to individual and situation to situation, one recommendation that is uniformly maintained is the need for maintaining an emergency fund, a contingency reserve that can come in handy if situation demands. It was a common trend to find most people take this part of the plan lightly and not abide by this recommendation, thinking that they could always swipe their debit/credit cards and access liquidity as and when required.

But times have changed. There is an increased level of uncertainty about almost everything. One can’t be sure of the next day in office or how well one’s business would fare. Liquidity has dried up and despite the stimulus packages and relief measures being announced world over, we are nowhere near the perfect safe world that we were a part of just a year back.

For every earning individual, it is highly essential that he/she maintains a contingency fund at all times. As a thumb rule, it is suggested that the contingency fund be equivalent to at least two-three times of an individual’s monthly household expenses but it is best to follow professional advice to determine the exact fund size.

In times like these, when the economic disturbances are widespread, it is best to increase the size of the reserve fund too. The appropriate fund size would vary for an individual who has multiple EMIs running or who has some other obligation due in short to medium term. For people employed in sectors driven by global demand/ linked to share markets, it makes sense to build their fund size month on month.

So, how does one go about this exercise of planning for a fund reserve? Firstly, try to measure and manage your inflows and outflows effectively. If you have your outflows mostly apportioned for committed payments that you can’t do much about, try and cut on the miscellaneous bit and allocate the same towards your contingency fund. On the other hand, if your cash flows are comfortably placed with minimal obligations, still it would be wise to allocate a part of the monthly package towards maintaining the contingency fund.

Secondly, try and incorporate cash as an asset class in your overall portfolio placement. So, if you have your daughter’s higher education goal for which you have allocated 60% equity and 40% debt, then try and modify the overall asset allocation by introducing cash as a part of it. You can follow an allocation with 55% equity, 35% debt and 10% cash. This cash element shall add further weight to your fund reserve and provide you with the much-needed assurance and mental peace. Expert help to modify the asset allocation in light of current situation is warranted.

Just to create an emergency fund, one cannot and should not mess up with the overall cash flow situation. A step by step approach is the best way to create, maintain and manage a fund like this. So, if you are one of those who never gave a thought to maintaining a contingency fund, there is no need to panic. This is the time when wise and well-planned action can help you sort the case. Start with the minimal amount that can be comfortably adjusted in your situation and then periodically increase the contribution to the fund until you reach the ideal size.

It is also important to know that various investment options are available in which one can maintain a contingency fund. You can either hold cash in hand or in a savings bank account or you can also consider investing in liquid and liquid plus funds offered by different mutual funds. As you build on a reserve equivalent to two-three months expenses, the balance amount allocated to the cash fund can be also be invested in short term debt funds/ gilt funds with a view to earn better returns across the specified term.

It is best to view your financial life as a whole rather than follow a piece meal approach. If the current times can help us learn from our past mistakes and reinforce in us a strong well-defined approach towards managing our hard earned money, then why shy away from it.

Sunday, October 25, 2009

How to Evaluate Stocks? Part II

Look for Stocks with Earnings Growth

Companies that show a consistent growth in earnings make attractive investment candidates for stock investors.

Use R&D Spending in Evaluating Stock

Research and development is important to every company, since that's where new products and services are created.

Price Earnings Ratio - How P/E is Calculated

The Price to Earnings Ratio is one of the most important numbers analysts look at to understand how the market values a stock.

Beating the Stock Market - Why you may want to Judge your Stock Investments Differently

Beating the market with your stock investments may not be the best goal for your portfolio.

PEG - How PEG is Calculated

PEG ratio provides investors a way to calculate how much future earnings growth is going to cost based on the stock's P/E and projected earnings growth rate.

Price to Sales Ratio - How to Calculate the P/S

The Price to Sales ratio is a tool for evaluating companies with no earnings that looks at how the market values the company's sales.

Price to Book Ratio - How to calculate P/B

The Price to Book ratio is a way to determine how the market values the book value of a company based on the current market price.

Dividend Payout Ratio - How to calculate dividend payout ratio

The dividend payout ratio looks at what percentage of a company's earnings are paid out to shareholders in the form of dividends.

Use these Simple Calculations to Determine Return on Your InvestmentsYou can use a few simple calculations to determine how your investments are performing and what they are returning.

Dividend Yield - How to Calculate Dividend Yield

Dividend Yield tells you what percentage return a company pays out in the form of dividends.Watch Debt when Evaluating Stocks - Debt should Figure in your Evaluation of an Stock

Here's how to evaluate stocks for debt.

Calculating Annual Compound Growth Rate of your Stock InvestmentsThe Annual Compound Growth Rate of your investments is important because it takes into account the time value of money as well as price changes.

Tools Help You Evaluate Stocks for Debt - Too much Debt makes Stocks VulnerableToo much debt can make a company vulnerable to rising interest rates. Here are two tools to help you evaluate stocks for too much debt.

Book Value - How to Calculate Book ValueBook value of a company is the assets minus liabilities.

Saturday, October 24, 2009

How to Evaluate Stocks? Part I

Evaluation of stock is done with Fundamental Analysis Tools. Fundamental Analysis Tools - These are the tools of fundamental analysis.

Fundamental analysis relies on several tools to give investors an accurate picture of the financial health of a company and how the market values the stock.

  • What is an Economic Moat

An economic moat protects a company from competitors by creating obstacles for entry into the market.

  • A Good Company with a Bad P/E

A good company can be a risky investment if you pay too much for it. The P/E is a good tool for a rough idea about a stock's value.

  • Why Free Cash Flow is so Important

Free cash flow is one of the most important numbers you need to know about a stock. It will help you determine a fair price for the company's stock.

  • Earnings Per Share - How to Calculate EPS

Earnings per share or EPS is one way to compare companies, but it does not tell you about market value.

  • ROA is a Leading Measure of Company's Efficiency

Return on Assets is an important number for investors to know when considering a stock. It provides a measure of efficiency.

  • Picking Stocks begins with Assessment of Need

The first step in picking a stock is to determine where you need to diversify your portfolio.
Be Careful of Investing in Safe StocksInvestors often turn to safe stock sectors such as utilities during difficult economic times, but not every company in safe sectors are good investments.

  • No Bad Time to Invest in Growth Stocks

You can find growth stocks in almost any market, but you may have to look harder in some markets than others.

Friday, October 23, 2009

Tax Planning: Avoid pitfalls while planning your tax

HOW often have people planned a financial transaction meticulously — down to optimisation of tax implications, based on advice, hearsay or their own reading of the law — and then realised to their dismay that a minor detail or development having been overlooked, the entire dynamics changed significantly? Well, one can take heart from the fact that one is not alone in such a situation; many are the circumstances under which people have had to cringe at that one slip, before moving on to correction, defence or litigation.

Take, for instance, the lack of care to report appropriately the details of your income to your employer. You have moved, in the middle of a financial year, to a high-paying job, where taxes are withheld by your employer after taking into consideration the basic threshold for exemption.

If you have not reported the income from your previous employment, and taxes already withheld after having considered the basic threshold, what you find at the end of the year, or when you get down to preparing your return of income, is that there has been a short deduction of tax which needs to be paid off together with interest for short deduction and deferment of tax. Equally, omission to report to the employer details of other income, e.g. interest (especially where no taxes are deductible at source) and house property income details (especially, where it results in a loss on account of interest paid on borrowings) results in avoidable short/ excess withholding, with all their consequences.

That scholarships received are exempt from tax, and have been held to be so even where an employer grants scholarships to employees’ children, with no reference however, to the employment per se, is known. However, it is important that you ensure that the grant is clearly for defraying the cost of the scholarship and no part is seen as compensation for services rendered to the payer as that is not eligible for exemption. Also, such scholarships are subject to fringe benefit tax (FBT). Where the FBT element is passed on to the recipient, you could find to your disappointment, that you receive a sum less (by about 17%) than what you expect or need.

Economic slowdown — whether global, national or in a given enterprise — could see instances of salaries foregone. In such a case, it is worth remembering that salaries are taxable on a ‘due’ basis, whether paid or not, which suggests an obligation on the part of the employer to pay, and a right to the employee to claim the same. If due, any waiver of salary would tantamount to application of income, and therefore be taxable. Legal precedence suggests that a deduction is in order under genuine circumstances, and in the absence of any real income, one would do well to ensure that the salary is forgone before it actually becomes due else to pay taxes thereon would add insult to injury!

Interest on housing loans can be deducted from income from house property-in respect of self-occupied property, subject to a cap of Rs 1,50,000, and to the extent of actual outgo, otherwise. Where a person has two houses, and has the option to choose the one that would be self-occupied while the other would be treated as if it has been let.

A mistake people make is in borrowing in respect of the self-occupied property which restricts the deductible interest even while income from the other property is taxed for the whole year, without any deduction the reform. Leveraging the benefits of the interest deduction available with the use of property is therefore, important.

An expatriate, employed by a foreign company, working in India for say, less than six months, is generally given the impression that no tax is payable on account of short stay exemption available to him. Consequently, the relevant details relating to income attributable to the tenure in India are not specifically maintained. However, where the foreign employer, contrary to initial projections, creates a permanent establishment at a subsequent date, the employee becomes taxable in India. This exposes him to tax liability, interest consequences, not to speak of compliance requirements for him and his employer.

To take advantage of the rules relating to residence, where a person plans to leave India or in the case of the returning Indian, on the last day of the threshold period, his calculations could go awry if the passport is stamped after midnight, or there is an inordinate delay in the flight, and an entire additional day is counted. Despite legal precedence that could be relied upon in such a case, cutting things so fine could inevitably involve litigation.

You could be the happy recipient of gifted property held by your well-wisher for decades. Pleased at its high current value, you sell it for a substantial consideration. You need to now contend with the capital gains implications. While the law is clear as to the cost of the acquisition (cost to the donor), vis-à-vis indexation, the law speaks of the first year in which the asset is transferred to the assessee, or April 1, 1981, whichever is later. Despite decisions at the tribunal level, this has caused grief to some sellers, saddled with a low cost of acquisition, together with an unfavourable index, leading to high capital gains!

Planning does not necessarily preclude slip-ups. Nevertheless the name of the game is to strategise financial decisions as comprehensively as possible, obtain advice and be informed of precedents, not forgetting to hope that no legislation with retrospective effect spoil the theme!

Thursday, October 22, 2009

IPOS- How to make money

Common do’s and don’ts to be followed by all investors are as under:

  1. An informed investor is the one who can make money. Remember to carry out your own due diligence about the promoters of the company, their plans, their past track record etc. Read the offer document carefully.
  2. Like all investments, IPOs are also not risk free. However you can manage the risk by carrying out due diligence and planning.
  3. Never follow the herd mentality. Be yourself. Remember how much effort you make while making purchase decisions for your other needs. Investment in IPOs is no different.
  4. During bull run, a number of fly by night companies tend to take investors for a ride. Beware. Remember we are in disclosure based regime and not merit based regime. This means that any company which meets the requirements can come out with a public issue provided adequate disclosures are made. So be careful about such operators.
  5. Plan for a long term investment. Good investment for a longer period of time will give decent returns.
  6. Not all issues coming with huge premiums are good and not all issues coming with low premiums are inexpensive. Pricing is an important factor and need to be considered carefully.
  7. Remember to limit your investment within Rs. 100000/- if you want to be called as retail investor. There are quotas available for retail investors and which are not available for high net worth investors. So do your calculations correctly.
  8. Also remember that not all shares you are bidding for would be allotted to you. Share allotment is based on proportionate allotment system depending upon the number of persons who have bid for that number of shares in which category you fall. In case of good issues, you may get far less number of shares than what you have bid for.
  9. If you believe that adequate disclosures were not made by the company, you can make a complaint to the lead manager to the issue or SEBI against the company for misleading investors.

Wednesday, October 21, 2009

About CRISIL IPO Grading

CRISIL IPO (Initial Public Offering) Grading is an opinion on the fundamentals of the graded issue that reflects CRISIL's independence and expertise. This opinion is expressed as a relative assessment in relation to other listed equity securities in India. The assessment is based on a grading exercise carried out by industry specialists from CRISIL Research.

A CRISIL IPO Grade 5/5 indicates strong fundamentals and a CRISIL IPO Grade 1/5 indicates poor fundamentals. CRISIL IPO Grading reflects its assessment of the graded company's equity fundamentals as distinct from an assessment of debt fundamentals. A CRISIL IPO Grade should not be construed to mean a comment on the price of the graded security nor is it a recommendation to invest or not to invest in the graded security.

However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The grade is not a recommendation to buy / sell or hold the graded instrument, or a comment on the graded instrument’s future market price or its suitability for a particular investor.

Tuesday, October 20, 2009

Stock Future Investment Strategies

Single stock futures can be risky investments when purchased as standalone securities. There's a possibility of losing a significant chunk of your initial investment with only minimal market fluctuations. However, there are several strategies for buying stock futures, in combination with other securities, to ensure a safer overall return on investment.

One of the most effective stock future strategies is called hedging. The basic idea of hedging is to protect yourself against adverse market changes by simultaneously taking the opposite position on the same investment.

Let's say you buy a share of traditional stock at $50. To make money with that stock, the price has to go up over time. But that's not necessarily true with stock futures. In addition to buying the stock, you could take a short position to sell the same stock on the futures market in three months. This way, even if your stock price goes down in three months, you'll make up some -- or even more -- of the money on the futures market.

Another way to hedge stock futures investments is through something called a spread. A calendar spread is when you go both short and long -- which we learned about earlier -- on the same stock future with two different delivery dates. For example, you could enter into two different contracts involving IBM stock. In the first contract, you agree to sell 100 shares after a month. In the other contract, you agree to buy 100 shares after six months. Using this strategy, you can make money off of both short-term losses and long-term gains.

An intermarket spread involves going long and short on two different stock futures in a related market -- like gas and electric companies -- with the same delivery date. The hope is that one stock future's loss will be the other stock future's gain.

A similar technique is a matched pair spread in which you enter a futures contract to buy shares in two directly competing companies. The idea is that Microsoft's loss is Apple's gain and vice versa. If this always happened, your investments would always break even. The hope is that one future will outperform the other without necessarily inflicting equal damage on the competition.
If hedging and spreads lower the risk associated with investing in stock futures, then speculating substantially increases it. With speculating, an investor is looking to quickly cash in on market fluctuations. By investing on margin with large amounts of money, the speculator tries to predict short-term movements in stock prices for the maximum amount of gain.

In the next section, we'll look at some of the advantages and disadvantages of stock futures in relation to traditional stocks.

Monday, October 19, 2009

Personal Finance: You can insure your wedding

But luck may not always be on your side. With the frequency of such attacks, as also other risks and unforeseen accidents growing, a wedding insurance is something you may want to look at if a marriage is being planned in the family.

Event insurance plans like this is still in its nascent stages due to low awareness. And given the sacred nature of the ritual, nobody wants to discuss or think negative. But as wedding spends and risks grow, it makes sense to cover the potential monetary loss.

The policy in those countries even covers the loss of the wedding ring, the wedding gown not reaching on time and even the expenses/loss due to late or non-appearance of the photographer which may mean staging the event once again for the photograph. In India, most insurance companies — including ICICI Lombard General Insurance, Oriental Insurance, Bajaj Allianz and National Insurance — offer wedding insurance.

The policy is tailor made to individual requirements and needs. The sum insured could be of any amount. The policy should be bought 10 to 15 days prior to the event.

All events related to the wedding — pre and post ceremony — are covered. In addition, a bundled policy which will cover all the eventualities related to the wedding functions can be purchased.
What it covers ?

The typical policy provides coverage against cancellation of the wedding due to accident suffered by bride/groom, accident suffered by blood relatives resulting in hospitalisation within seven days prior to the printed/declared wedding date, and damage to property.

If the marriage hall gets flooded or there’s an earthquake, the irreversible cost of the wedding will be reimbursed as per the policy terms and conditions.

Damage to property like stage, sets, seats and wardrobe due to fire, lightning, explosion, riot, strike and malicious damage, impact damage, aircraft damage, storms, flood and inundation, burglary and theft, terrorism or other external accident can be covered. The insurance can also cover any expenses related to litigation brought against you by third parties injured in an accident at the event.

Fine print of the policy

Wealth advisors say if you are opting for the policy it is important to look at all the exclusions clauses of the document. First evaluate what are the possible kinds of risks. Then one should look at what is the appropriate cover for each of them. It would help to arrive at the sum assured that one can take. Considering it is a customised product, it is likely that the insurance company has sub limits for each of the possible risks.

It is also important to incorporate accidental cover and loss of life/disability due to acts of terrorism. Since it is a customised product, one may need to evaluate options from at least 2-3 insurance providers, say wealth managers. There is likely to be a huge variance in premiums as it is not a standard insurance.


The variation in rates would depend on evaluation of individual risks on the following parameters:

  • Location
  • Venue (outdoors or indoors)
  • Type of decoration
  • Number of days
  • Number of programmes (mehendi, sangeet, cocktail)
  • Number of guests

Sunday, October 18, 2009

What is Open Interest?

Open Interest is the total number of outstanding contracts that are held by market participants at the end of the day.
It can also be defined as the total number of futures contracts or option contracts that have not yet been exercised (squared off), expired, or fulfilled by delivery.

Open interest applies primarily to the futures market. Open interest, or the total number of open contracts on a security, is often used to confirm trends and trend reversals for futures and options contracts.

Open interest measures the flow of money into the futures market. For each seller of a futures contract there must be a buyer of that contract. Thus a seller and a buyer combine to create only one contract.

Therefore, to determine the total open interest for any given market we need only to know the totals from one side or the other, buyers or sellers, not the sum of both.

The open interest position that is reported each day represents the increase or decrease in the number of contracts for that day, and it is shown as a positive or negative number.

How to calculate Open Interest?

Each trade completed on the exchange has an impact upon the level of open interest for that day.

For example, if both parties to the trade are initiating a new position ( one new buyer and one new seller), open interest will increase by one contract.

If both traders are closing an existing or old position ( one old buyer and one old seller) open interest will decline by one contract.

The third and final possibility is one old trader passing off his position to a new trader (one old buyer sells to one new buyer). In this case the open interest will not change.

Benefits of monitoring open interest

By monitoring the changes in the open interest figures at the end of each trading day, some conclusions about the day’s activity can be drawn.

Increasing open interest means that new money is flowing into the marketplace. The result will be that the present trend ( up, down or sideways) will continue.

Declining open interest means that the market is liquidating and implies that the prevailing price trend is coming to an end. A knowledge of open interest can prove useful toward the end of major market moves.

A levelling off of open interest following a sustained price advance is often an early warning of the end to an up trending or bull market.

Open Interest - A confirming indicator

An increase in open interest along with an increase in price is said to confirm an upward trend. Similarly, an increase in open interest along with a decrease in price confirms a downward trend. An increase or decrease in prices while open interest remains flat or declining may indicate a possible trend reversal.

Saturday, October 17, 2009


I bought 500 shares on 1 January 2007 at Rs 220, 100 shares on 10 January at Rs 185 and 50 shares at Rs 165 on 18 May 2008. On 21 June 2008, I sold off all the 650 shares at Rs 655. What is the return on my investment?
XIRR is used to determine the IRR when the outflows and inflows are at different periods. Calculation is similar to IRR's. Transaction date is mentioned on the left of the transaction.

In an excel sheet type out the data from the top most cell as shown here. Outflows figures are in negative and inflows in positive. In the cell below with the figure 4,25,750, type out

=XIRR (B1:B4,A1:A4)*100

Hit enter. The cell will show 122.95%, the total return on investment.

Also used for: Calculating MF returns, especially SIP, or that for unit-linked insurance plans.

Friday, October 16, 2009

Some indicators that point to a stock market correction

It is not easy to predict the market direction. But in order to maximise returns, it is important to buy the right stock at the right price and sell it at the right time. Investors always ask the question - is this time to sell or should I hold it for some more time? These are a subset of symptoms that can indicate a possible correction in the near term. Investors can start taking profits (or part profits) when one or more of these symptoms show up in the market.

  • Stretched valuation

Market valuation is the sum of individual stocks valuation. Valuation of stock is derived from its expected future performance. In a bull market, stocks have a tendency to surpass the true valuation. When a lot of stocks go way beyond their true valuation, the market looks over-valued and signals a correction.

  • Global events

Global events have direct or indirect impact on stock markets. Things like rising of crude oil prices, metal prices, and fall in the global markets can trigger a fall in the local stock markets. This is one of the prime reasons for some corrections that we saw in our markets.

  • Liquidity signals

Liquidity increases the risk appetite in the market and as a result pushes the market up. Therefore, any signals that indicate tightening of liquidity (actions of US FED, Japanese Central Bank, RBI actions etc) may lead to a fall in the stock markets.

  • Government actions

The government is the policy maker in a country. Therefore, stability of the government, new policies or changes in the existing policies is very closely tracked by the stock market. Budget announcement by the government is very closely followed by the stock markets. Any bad news on this front can trigger a sell-off in the market.

  • Technical indicators

Technical analysts study various chart patterns (head and shoulders, ascending wedge, moving averages, relative strength analysis etc) and track many other market parameters (put-call ratio, day trading volume etc) to predict market directions. The study of these indicators is quite exhaustive and tedious, and is not very easy for the retail investors to follow. Retail investors can read these views as one of the parameters they track in the market.

However, the happening of one or more of these factors does not guarantee a fall in the stock markets and investors should not try to time the market. They should invest in the market with well thought-out strategies.

These are some tried and tested strategies:

• Invest with a long-term horizon. It is not advisable for investors to trade in the market for short-term gains
• Do not invest blindly in stock markets. Analyse your investments and always maintain a profit/loss target on your investment. Take partial or full profits/losses in case your targets are triggered
• Since the stock markets are quite volatile, keep a constant eye on your investments. If you cannot track your market investments, you will be better off keeping your money in bank fixed deposits or mutual funds
• Look for diversification of investments. Do not invest in one market instrument
• Analyse your risk profile and accordingly invest in proper proportions into various instruments (stocks, equity and debt mutual funds, bank fixed deposits etc)

Thursday, October 15, 2009

Iffco-Tokio launches weather insurance in five districts

The Iffco-Tokio General Insurance Company has introduced Barsha Bima Yojana (BBY), a weather insurance policy, for the Orissa farmers during the current kharif season.
The scheme has been launched in five districts of the state on a pilot basis. The districts are Ganjam, Cuttack, Kendrapada, Khurda and Nayagarh. “We will extend the policy to other districts subsequently based on the response from farmers”, said A K Mishra, the Orissa state head of the private general insurance company.

Describing BBY as an index-based weather insurance product, he said, it provided protection to farmers against anticipated crop loss due to either excess or deficiency of rainfall depending upon the geographical locations, weather conditions and crop requirements of a specific region.
The prominent feature of the product is that it is not linked to the declaration of drought or flood by the government. The insurance claims will be calculated on the basis of the rainfall data recorded at the weather station of a particular area.

The National Krishi Bima Yojana, introduced by the government, only benefits farmers when the state government declares either flood or drought in a particular area.

The BBY generally covers the farmers as a group policy through co-operative banks and primary agriculture cooperative societies (PACS). The individual farmers can also buy this policy. Initially, the company had decided to insure only the paddy crop in kharif season.
As the product is farmers’ friendly, Mishra hoped the farmers would appreciate it and come forward to insure their crop to protect it from rain-related natural calamities. The farmers are expected to benefit from the product as the state is visited by either flood or drought at regular intervals.

The company expected to collect around Rs 25 lakh premium from the newly introduced insurance scheme. “As it is a new product, we have fixed a low target”, Mishra said. With introduction of BBY in Orissa, this insurance product of the company is now available in 11 states.

Tips to avoid online fraud

• Avoid accessing your Internet Banking account from a cyber cafe or a shared computer.

• Every time you complete your online banking session, log off from site. Do not just close your browser.

• To access the site on internet, always type in the correct URL into your browser window. Never click a link that offers to take you to the website.

• If your log-in IDs or passwords appear automatically on the sign-in page of a secure website, you should disable the ‘Auto Complete’ function.

• Use letters, numbers and special characters [such as !,@, #,$, %, ^, &,* (, )] in your passwords to make it complex and difficult for others to guess.

• Never share your Internet Banking passwords with others, even family members. Do not reveal them to anybody.

• Do not respond to any mails asking for confidential information like PIN, password or account number.

• Always check for Pad Lock icon (There is a de facto standard among web browsers to display a Padlock icon somewhere in the window of the browser)

• Check the web page’s URL. When browsing the web, the URLs (web page addresses) begin with the letters ‘http’. However, over a secure connection, the address displayed should begin with ‘https’ – note the ‘s’ at the end.

• Always check the last log-in to your Internet Banking account.

Wednesday, October 14, 2009

Instant cheque reading ATMs with Cheque Truncating Machine

SBI, IDBI & ING Vysya Among Banks Interested In Special Machines; Reserve Bank Blesses Move

NEED cash urgently but have already overdrawn from your account? You have a cheque from a client but it is of little use in the dead of night. Lost or misplaced your debit card and need cash to pay the party organiser for your little one’s first birthday celebrations? Help is on way, as a couple of banks in India are testing a technology that facilitates instant cheque encashing at ATMs.

Used widely across North America and Europe, cheque truncating machines (CTM)—the contraption that make real-time cheque verification and clearance possible—sit inside special ATMs that the world’s largest makers of these machines, like US-based NCR and Diebold, are now hawking to few banks in India. Government-owned State Bank of India, the country’s largest lender, IDBI and ING Vysya are a few banks that have evinced interest in such ATMs. Banking regulator RBI too has welcomed the move, saying it will be good for customers.

NCR has been showcasing its CTM-ATMs to banks in India since last month. We will also be launching new ATM machines, in which you can just insert a bundle of notes of any denomination. The ATMs will read the notes, and credit the amount in your account instantly

Currently, one has to put cash inside an envelope to deposit inside ATM. It gets credited in about 24 hours. There are over 48,000 ATMs in the country, split between three big makers––NCR, Diebold and Germany-based Wincor Nixdorf.

A CTM-ATM scans the cheque inserted in and produces a digital image of the same. It sends the digital cheque image electronically to the IT network of the issuing bank for clearance.

Within seconds, the amount is credited to your account, which one can withdraw immediately via a debit card. Or in case you have lost or misplaced the debit card, issuing a cheque to a friend can solve the cash crunch as she can withdraw the money using her debit card.

An RBI spokesperson said that banks are already allowed to use CTM (Cheque Truncating Machine) scanners for inter and intra bank purposes.

What is risk appetite?

This article outlines different degrees of risk tolerance investors have, and suitable investment options
Investors often hear of the maxim, 'greater the risk, greater the reward'. Risk tolerance is the level of comfort with which a person takes risk. What exactly is this risk and how does it effect an investor's decision?

Risk appetite can be defined as the willingness of an investor to bear risk.

Investors despise uncertainty. Risk appetite, risk aversion and risk premium is often used in place of the other. However, there are some finer nuances that distinguish one from the other.

A) Risk appetite - Some people take higher risks. In other words, they are willing to lose more until they get the expected returns. A person who can stand all his money getting eroded has a greater risk appetite.

B) Risk-averse - Reluctance to accept. Risk-averse persons exhibit reluctance to accept a bargain with an uncertain payoff. He would instead be content with a deal that is more certain, but possibly with lower-than-anticipated returns. An investor is said to be risk-averse if he prefers less risk to more risk

In between the two behaviors of risk aversion and risk seeking is a state called risk neutrality. One who is indifferent to risk is risk neutral.

C) Risk premium - Risk premium is the return in excess of the risk free rate of return that an investment is expected to yield. It can be construed as the reward for holding a risky investment rather than a risk-free one.

An investor's appetite for risk decreases with age. A young unmarried investor may be quite aggressive. This is simply because he has not much financial commitment and has many more working years ahead of him. Even if he loses he can earn more.

On the other hand, an investor in his retirement years has to be more cautious. He cannot take high risk because he is dependent on the returns. He cannot afford to lose his investments. His need for money is far greater with inflation and day-to-day expenses. A middle-aged man will invest mostly in equity, while judiciously setting aside some funds for fixed instruments and retirement savings.

An investor must first understand his risk appetite. Once he comprehends it, he must invest in instruments accordingly.

  • A high-risk investor has mostly equity instruments in his portfolio.
  • A low-risk investor concentrates on fixed income sources.
  • In the middle path are investors with medium-risk tolerance. They can have a mix of equity and debt in their portfolio.

Take for instance the balanced funds, offered by many fund houses. Aimed at such investors, they have a balanced mix of both high risk and low risk instruments.

Tuesday, October 13, 2009

Banks tweak ATM strategies

Unrestricted usage of third-party ATMs ends on Thursday

The era of free ATM usage will come to an end on Thursday, October 15. Every transaction carried out on another bank’s ATM could cost an account holder as much as Rs 20 and withdrawals will face a limit of Rs 10,000, the Indian Bank’s Association has said in its guidelines.

According to the guidelines, banks can offer savings-account holders five free thirdparty withdrawals every month —they can be charged from the sixth transaction onwards.
Current account holders can be charged the fees, which ranges from Rs 18 to Rs 20, from the very first transaction.

Most banks are convinced that charging current account and no-frill account customers from the word go is a good idea. It suggests that the usage of ATMs by current-account holders is price-insensitive. For others, banks have decided to frame their charges depending on the profile of the customer. For instance, HDFC Bank is allowing its salary account and premium customers an unlimited number of free third-party ATM withdrawals, while restricting savings-account holders to five free withdrawals. HSBC is also waiving ATM charges for its Premier and PowerVantage customers.

“This is likely to be the trend in the industry and I expect most banks to follow suit. Remunerative accounts will not be charged, whereas no-frills and zero-balance accounts will be charged,” said a senior executive of a private sector bank.

Axis Bank, which has the third largest ATM network in the country, has chosen to break ranks and not charge any customer for third-party withdrawals. Informed sources said this is a part of the bank’s strategy to attract low-cost current account and savings account (CASA) customers. The bank was seeing positive interchange flows even when the free ATM rule was in place and is thus in aposition to offer this facility to its customers.

Customers have been enjoying the flexibility of withdrawing cash from any banks’ ATM free of charge since April 1, 2009 when a Reserve Bank of India (RBI) directive to that effect came into force. However, banks complained that the number of transactions had increased dramatically since then, while the ticket size of each withdrawal had reduced, resulting in increased interchange expenses for banks. Every time a customer uses another bank’s ATM, the customer’s bank has to pay the acquiring bank an interchange fee of Rs 18 to 20. There could be a reversal of sorts in this trend once the new regime falls into place on Thursday.
Banks were required to inform customers about the charges one month in advance. Most banks said they have been doing so through quarterly statements and advertisements at ATMs and branches.

Portfolio Basics

An increasingly common and rather disturbing trend in many investments is the absence of a solid 'core' portfolio.

In recent times, we have met several investors (most were new to investing in mutual funds) whose investment portfolios were constituted of only thematic and sectoral funds. To further complicate matters, these investments were made in new fund offers launched at a time when markets were surging northwards. Expectedly, such portfolios are in dire straits at present.

What is “The core portfolio”

By the core portfolio, we are referring to a mix of investment avenues that is capable of delivering an enduring performance across market cycles.

For instance, in the mutual funds segment, well-managed diversified equity funds, balanced funds and monthly income plans with proven track records could form the core portfolio. Of course, the investor's risk profile and investment objectives would play a part in determining the core.

Once this core is in place, the investor can consider (if at all) allocating a smaller portion of his investible surplus in ancillary offerings like thematic/sectoral funds and global/international funds. However, given that the reverse seems to be the order of the day, it is certainly a cause for concern.

So what causes this imbalance?

There are several reasons. In rising markets, investors can and do succumb to the unwarranted hype accompanying certain investment avenues. Fund houses and mutual fund distributors do their bit to convince investors of the merits of every offering ranging from infrastructure funds, funds investing in global markets to those investing in commodity stocks.

Of course, the downside risk of such an investment and/or its precise allocation in the investor's portfolio rarely features in the sales pitch.

Investors need to share some blame as well. For some inexplicable reason, several investors have a fascination for 'new' offerings. Investors are willing to get invested in an offering simply because it is new and its investment proposition seems innovative. Aspects like the avenue's aptness or its ability to add value to the portfolio are conveniently ignored.

Finally, the single largest factor responsible for this phenomenon is that investments are made in a haphazard manner. The recommended method for investing entails first defining the investment objectives and then drawing up investment plans that can aid investors achieve the stated objectives.

However, it is not uncommon for investors to skip the first step (i.e. defining the objectives) and get invested in an adhoc manner. This is akin to starting off on a journey without a roadmap. The results aren't hard to guess.

What investors should do?

For starters, investors must appreciate that investing is all about achieving certain goals. Hence, there is no place for things like 'fascination for new' while investing. The key is to have in place a strong core that will be resilient in testing times and yet enable the investor achieve his goals over the stipulated investment horizon.

An investment advisor/financial planner can play a vital role in building the core portfolio. Beyond this, subject to the investor's risk profile and availability of surplus monies, smaller allocations can be made to avenues that can provide a fillip to the portfolio.

However, while doing the same, the higher risk involved shouldn't be ignored.

Monday, October 12, 2009

HDFC Bank seen strongest in Asia-Pacific

IN A world without Lehman, big may no longer be the best as far as banks go. With bigger banks slowing down their loan and deposit growth, midsize banks are now clawing to the top. HDFC Bank has been spotted as the strongest bank in Asia-Pacific followed by state-owned players Punjab National Bank (PNB) and Union Bank of India, which has been ranked seventh in a survey conducted by Asian Banker, a company that provides information for the financial services industry. Surprisingly, the survey has ranked the country’s largest bank, State Bank of India, at No. 42. Last year’s list of top-20 banks included 10 banks from Australia, Hong Kong, Singapore, South Korea and Taiwan. But this year’s survey features only two banks — Australian bank Westpac Banking Corp and Citi Hong Kong —from this bigger markets. Interestingly, among the Indian lenders, two PSU banks — Corporation Bank (11) and Bank of India (18) — besides the private bank Axis (19) find place in the list.
Several banks with huge assets find themselves way below the list. The exception, however, is China Construction Bank which has been ranked 10th.

One of the world’s biggest banks, Mitsubishi UFJ Financial Group of Japan, with an asset book of $2.08 trillion, has been ranked 162.

The top three banks in last year’s survey — HSBC, Oversea-Chinese Banking Corporation and Hang Seng Bank — have been ranked 39th, 24th and 30th, respectively, this year. The top 20 banks have scored high on either asset growth, loan growth, deposit growth, profit growth or all the indicators. Liquidity has been a key factor in the way markets have viewed banks in the past few quarters.

Retirement Planning: Plan for comfortable retirement years

It is easier to ensure a steady income stream through your retirement years if you plan early
Some things are hard to predict and planning for post-retirement is surely one of them. The task is more challenging in the current scenario with the growing uncertainties. You are not sure whether you will drag on till 58 or 60 in your current job and the uncertainty could even come from you if you decide to hang up your boots for entrepreneurship in your mid-40s. However, this is for those who are planning to have a long innings in their current job and have a few decades on hand to plan for retirement.

Here's how you can plan for a comfortable retirement:

List out expenses

Before you set out to plan for your life after retirement, check out your expenses. Some of those expenses may not be visible at present but could prove to be a key factor at a later stage. A classic example of this is medical expenditure. As you are aware, medical insurance too does not take care of medical expenses which could be in the form of medicines or regular check-ups. While this expense may not exist during working life, it becomes an integral portion for many at a later stage in life. And interestingly, this expense has shown the tendency to move up well above the normal inflation rate, and hence, you need to brace up for this expenditure with proper planning.

Besides, medical expenses, think of some of the nonrecurring expenses which may not exactly be part of your daily consumption. For instance, a television set is unlikely to serve you for life and the chances are that you may have to buy 1-2 new sets even after retirement.

Similarly, your planning needs to take into account short holidays, gifts for the dear ones on special occasions etc. They may not form part of your monthly expense and your pension plan may not account for it, but you need to keep these expenses in mind. For such irregular expenses, an equity fund with dividend payout or an MIP with systematic withdrawal can do the job.

Pension plans

Now the question is, how does one plan for post-retirement life? The commonly known products are pension plans. Till now, many employers took care of this facility by deducting a portion of the amount from the salary. Though it didn't take care of complete monthly expenditure for too long, it provided the basic liquidity for individuals who hadn't planned for life after retirement. However, over the years, many companies have withdrawn this facility and have forced individuals to focus on retirement planning. Since the task is a reality, it makes sense for individuals to think of retirement planning well in advance.

Those who think of it at an early stage can rely on purely a pension plan. This could be in the form monthly or annual contributions. A pension plan with long tenure can look at higher equity component as this can be less risky over the long term. Since pension plans allow plenty of flexibility in terms of asset allocation, it can come in handy in the long term.

However, not every individual can have the luxury of pension plans at an early stage. For instance, some might have invested large sums in equity and ignored products like pension plans. Such professionals can look at pension plans with a single premium component or can look at it for funding a portion of their future cash flows. The need for a pension plan is a necessity because it ensures cash flows without active fund management. On the other hand, other investment options like property, equity and debt would need regular monitoring and products like equity are highly illiquid.

Sunday, October 11, 2009

Lost your credit card? Deactivate it first

If you delay informing the bank, you may end up with a huge balance. Unless, of course, you have covered the card against fraud

WHAT’S the first thing you should do if you lose your credit card? Just call up the bank’s 24 hour call centre and deactivate the card. This should take precedence even over your attempt to track your wallet in the lost trail. This is because very few banks in India offer protection against fraudulent use of credit cards. Of course, you can breathe a little easy if your bank insures your lost card from any misuse.

Standard Chartered Bank, for instance, has tied up with Tata AIG General Insurance Company to launch the ‘Plus Extended Protection Plan’ last week. This product, which has to be bought separately, will cover the card customers from any possible fraudulent use of the cards prior to reporting the loss. “We receive several lost card reports in a month. The product will ensure protection to our customers against any fraudulent use.

The insurance cover will reimburse (up to Rs 50,000) per fraudulent transaction up to 12 hours prior to the customer reporting the loss to the bank. Also, the bank has extended this cover to all debit and credit cards. Similarly, even ABN Amro Bank offers this cover with a total coverage of Rs 2,000-Rs 5,000 at a monthly premium of Rs 100. In the case of SBI Cards, the credit card company caps the liability to a maximum of Rs 1,000 for non-gold cards once it receives a proper notification of the loss by the customer. The gold card customers enjoy zero liability once they notify the bank authorities.

Among the other leading credit card players, Citibank is still mulling the idea of offering a similar protection. ICICI Bank, however, doesn’t offer any such cover. This cover is not very useful. We send mobile alerts whenever customers swipe in excess of Rs 2,000. That would help them keep a tab on all cards.

HDFC Bank offers an insurance cover, which covers the customer from fraudulent transactions for up to 24 hours. Moreover, the cover comes free of cost. But you have to also file an FIR to hedge against these frauds. For claiming insurance on any fraudulent transaction, you have to file an FIR with the police. Then you have to furnish the FIR along with credit card details to file a claim. Once the claim gets validated, it compensates for the fraudulent transaction.

So, if the credit card company doesn’t offer any protection, then it holds the customer liable for any fraudulent transaction. You have to report the loss of the card immediately if you want to play safe. Once the customer communicates to the bank in telephone/writing the customer continues to enjoy zero liability on their lost cards. This means you don’t have pay a single penny if your credit card is stolen and has been subjected to fraudulent practices.

In the US, the maximum liability on the customer is capped at $50 per credit card. As the days pass by, this liability increases to $100 for the second day and $500 for the third day. If you don’t file a complaint with the bank for more than 60 days, then the customer is liable for every fraudulent transaction. However, the possibility of the customer being unaware of the loss for 2 months is very less, say experts.

This is an optional cover. But if your bank offers the cover to protect the lost card against fraudulent use, it is definitely not a bad idea. You will be spending a monthly amount of Rs 100 for saving a credit limit of may be a lakh from being misused. But most big banks are yet to offer this insurance cover. If it still pops out of the wallet, make a quick call and deactivate it. Follow the call with a written complaint and post it to the credit card company.

Saturday, October 10, 2009

Load & Taxes on Mutual Funds

Here are some useful information on mutual funds.

  • Do mutual fund investors get the benefit of bonus shares, dividends, rights issue etc?
  • When the portfolio is switched by fund manager more often, how is the cost (Brokerage+ Securities Transaction Tax and Short Term Capital Gains Tax etc) passed on to the investor.
  • Are these expenses met through entry load and exit load?

Ofcourse. All benefits in the form of dividend, bonus share, right issues, interest and gains on all investments accrue to the fund and reflected in the NAV.

Mutual funds have a unique tax status. From the income tax point of view, it is exempt from paying tax on gains accrued due to normal process of business, such as short-term capital gains tax and long-term capital gains tax. The other expenses incurred by the fund can be classified into two broad heads - transactional expenses and operational expenses. All these expenses are charged to the fund and ultimately passed on to the investors.

The transactional expenses include Brokerage, Securities Transaction Tax, etc. Such expenses are incurred on a day-to-day basis on buying and selling of securities and get deducted from the NAV of the fund on a daily basis.

The operational expenses of a fund include management fees, custodian fees, audit fees, etc. These expenses are met through the expense ratio, which are also adjusted on the daily basis from the NAV of the fund. The upper limit for expense ratio differs for different types of funds. It is 2.50 per cent for equity funds, 2.25 per cent for debt funds, 1.5 per cent for index funds and 0.75 per cent for fund of funds.

Friday, October 9, 2009

Medical expenses and tax deduction

Some conditions that enable you to claim a tax deduction on the expenses incurred towards the medical treatment of family members

You can take a medical insurance plan for yourself, your spouse, parents or dependent children. Under Section 80D, you can claim a deduction up to Rs 15,000 for the premium paid. Mediclaim policies are offered by almost all insurance companies. Mediclaim policies provide insurance cover for the treatment of most ailments and hospitalisation. In addition to the basic cover, add-ons are available on payment of extra premium.

You should go through the coverage and exclusion clauses carefully. In some cases, pre-existing ailments are also covered on payment of an additional premium. The cover may be enhanced to ailments which are not normally covered also. Some insurance companies provide cover for day-care and annual medical checkups as well.

For senior citizens who are tax payers and 65 years of age or more, the limit now has been enhanced to Rs 20,000. The condition of dependency of parents has now been removed from this financial year. Thus, even if your parents are not dependent on you, you can claim a deduction after paying the premium for their health plans. However, the premium for health plans should always be paid through a cheque. That is, the tax benefit is not allowed if the premium is paid in cash.

In the case of an individual, the amount deductible includes any sum paid for the insurance of the assessee, spouse, dependent parents, and dependent children. The dependence of parents will have to be proved in order to claim the exemption by the assessee. Dependence will be evident in case the resources of the parents are not sufficient to support them. In case of a Hindu Undivided Family, the amount deductible includes any sum paid for the insurance of any member of the family.

In order to claim this deduction, the amount should be paid by cheque. Further, the amount should be paid in the relevant previous year. It should be paid out of the income chargeable to tax .The scheme of insurance should be approved by the General Insurance Corporation of India.

In case of dependents

Medical expenses of a dependent with a disability also qualify for tax benefits under Section 80DD. In this case, deductions up to Rs 50,000 can be claimed. A life insurance policy bought for the benefit of a physically challenged person is also eligible for this benefit up to Rs 50,000. In case the disability is severe, the claim can go up to Rs 75,000. However, to claim any deduction under this section, a certificate from a medical authority is mandatory.

In case of specified ailments

Deductions of expenses incurred on treatment of specified ailments can be claimed under Section 80DDB. The maximum amount of deduction allowed from the gross total income is restricted to Rs 40,000 (which goes up to Rs 60,000 if the age of the person treated is 65 years or more) on the condition that no medical reimbursement is received from any insurance company or employer for this amount. In order to claim this deduction, one has to submit Form 10-1 from a specialist doctor working in a government hospital, confirming the treatment.

Thursday, October 8, 2009

Getting started with equity investments

You need to invest money and time to build and maintain a portfolio that yields high returns

John Maynard Keynes said, 'Don't try to figure out what the market is doing. Figure out a business you understand, and concentrate'. Investing in stocks is more a science than an art. There are certain ground rules which investors must follow to be successful. Even before you decide to invest in stocks of individual companies, it is pertinent to have a proper asset allocation plan, that is, what portion of your portfolio should be dedicated to equity. If you belong to the category to investors who do not have the time to monitor investments closely, you would be better off investing in an equity mutual fund rather than picking up individual stocks.

If you want to design you own portfolio, here are some points to help you get started:

Identify your comfort zone

Are you an investor who would likes to be defensive or are you an aggressive investor? The choice of stocks would depend on what you are willing to own. Would you like to invest in a blue-chip with a stable business and regular dividends, or would you rather look for a mid-cap company which is tomorrow's possible bluechip? Are you chasing growth, looking for value, or would you like to have the best of both? Identify your niche and then go for the appropriate companies.

Buy value, not momentum

Do not rely on tips or 'hot picks' to build your portfolio. When you decide to invest in a company, it's important that you see value in that investment. For a start, understand the business of the company, check the credentials of the management, study the earnings, profits and growth of the company, the outlook of the sector or industry in which it operates, performance vis-a-vis its competitors etc. Research the company through various research reports available and study the balance sheet of the company. It's important to recognise the difference between the price of a stock and its value - that is what you are paying for the stock and what it is worth.


The age-old wisdom of not putting all your eggs in one basket applies to equity investments too. You may have a liking for a particular sector but it's always prudent to diversify. Study the outlook of different sectors from a macro perspective and if the prospects of certain sectors are particularly good, try and identify the best companies to invest in, in those sectors. This would be a 'top-down approach' to investing.

Think long-term

Warren Buffet says, 'If you don't feel comfortable owning something for 10 years, then don't own it for 10 minutes'. When you are investing in individual stocks, in the short-term, their prices will be governed by the market movements. Irrespective of whether the movement is positive or negative, stick to your company, unless something has gone fundamentally wrong. If a business does well, the stock price is bound to follow. Do not take decisions based on rumours or pessimism - there is no room for emotions while investing.

Monitor investments

Once you have built a portfolio of individual stocks, it is crucial to monitor them and continue to study the earnings, profits and growth plans of the companies. You may have made a mistake in your selection. It would be prudent to admit it and make amends to the portfolio. Do not hesitate to cut losses on worthless investments. Don't hold them endlessly in the hope that they may redeem themselves in future. You may be losing a better opportunity.

Equity may be a high risk investment, but actually, risk comes from not knowing what you are doing. If you spend time and effort on building a portfolio of potential stocks, the rewards will be well worth the investment of time, effort and money.

Wednesday, October 7, 2009

RIL declares 1:1 bonus

Investors' darling Reliance Industries today announced issue of bonus shares after a 12 year-hiatus, a move that analysts expect would flare up the markets on the eve of Diwali. The company founded by Dhirubhai Ambani, credited for drawing retail investors to stock markets in the 1970s, recommended an issue of one bonus share for every share held by shareholders and would help unlock value. The shares fell 1.57 per cent to Rs 2,099 on the Bombay Stock Exchange, but is expected to jump after the unscheduled announcement. The board has also approved a dividend of Rs 13 per fully paid-up equity share of Rs 10 of the company to the shareholders, Reliance Industries CFO Alok Agarwal said.

Analysts said that the surprise announcement of a bonus issue by RIL, will definitely act as trigger for the market tomorrow. "This comes as a big surprise to the shareholders of Reliance Industries and would propel investor sentiment. The scrip, which has been under-performing for the past few days, is likely to open strong. It is a move by RIL to win back ivestor confidence," SMC Global Vice President Rajesh Jain said. The last time Reliance Industries announced a bonus issue was in October 1997. "Both the bonus shares and dividend will accrue to the shareholders of RPL," RIL CFO Agarwal said.

Geojit BNP Paribas Financial Services Research Head Alex Mathew said, "The company had last announced a bonus issue way back in 1997, so this is good move in the interest of investors. However, after an initial surge some profit booking may come into the stock later in the day." The bonus issue could help regain flagging investor confidence in the scrip. RIL scrip has been on a downslide since October one and has plunged over four per cent to Rs 2,099 today from Rs 2,201 on September 30. Reliance Power, part of the other Reliance group led by Anil Ambani, had announced a 3:5 bonus issue in February 2008 after its disappointing debut at the bourses. "The proposal for bonus and dividend continue RIL's tradition of awarding shareholders on a sustained basis. If we look at our track record since we listed in 1978, our shareholders have got 25 per cent compounded return over these 31 years since it became a public company," Agarwal said.

"The announcement can act as a trigger point for the stock (RIL) which was mired in controversy. RIL management is convinced that it can serve the investor interest and so it is thinking about increasing the equity share capital. It can hold up the momentum and the counter can outperform the Sensex in the coming days," Unicon Financial CEO G Nagpal said.

Stock Market: What is an open offer?

AN OPEN offer can take place if any of the promoters of a company want to increase their stake or if non-promoters increase their stake to 15% or the company is going to delist from the stock exchange. An open offer is nothing but the exit route, which is given to the existing shareholders by the acquirer of shares through a public announcement.
AN OPEN offer can take place if any of the promoters of a company want to increase their stake or if non-promoters increase their stake to 15% or the company is going to delist from the stock exchange. An open offer is nothing but the exit route, which is given to the existing shareholders by the acquirer of shares through a public announcement.

What are the requirements for making an open offer?

For making an open offer, an acquirer is required to make a public announcement, which should include offer price, number of shares to be acquired from the public, purpose of acquisition, identity of the acquirer, future plans, details about target company, procedure of accepting the shares and the time period for this.

The acquirer is supposed to pay the consideration to shareholders within 15 days from the date of closing of the offer. For any delay, the acquirer is required to pay interest on the amount.

What is the difference between open offer and rights issue?

Rights issue is made to raise funds, while in an open offer there is a cash outflow. Generally, the rights issue price is lower than prevailing price in the secondary market. In an open offer, price is fixed based on the average price for the last six months and usually the price is higher than the prevailing market price, which is a motivation to current shareholders to sell their shares. Unlike the rights issue, shares bought in an open offer are not traded in the secondary market. Open offer decreases the holding of general shareholders while rights issue increases their holdings in terms of number of shares.

Tuesday, October 6, 2009

What is a Stock Dividend?

Some stocks, especially blue chips, pay dividends. This means that for every share you own, you are paid a portion of the company's earnings.

For example, for every share of AT&T you own, you will get sent $0.15 every year. Most companies pay dividends quarterly (four times a year), meaning at the end of every business quarter, the company will send a check for 1/4 of $0.15 for each share you own.

This may not seem like a lot, but when you have built your portfolio up to thousands of shares, and use those dividends to buy more stock in the company, you can make a lot of money over the years.

Monday, October 5, 2009

Well Defined SLAs -- A Must for Enterprises

A Service Level Agreement (SLA) is pivotal for any organization for bringing in more clarity in the communication between the user and the service provider, as well as to ensure effective engagements for any service or product delivery.

It provides meaningful information so companies can meet their key targets. Also, it clearly defines the level of services expected between 2 parties and ensures these targets are met within expected standards and budgeted costs.

Dissecting SLAs -- What a typical SLA should cover

An SLA should essentially have what is expected of each other (the 2 parties involved), the criteria to evaluate the success, the periodicity of the evaluation, etc.

An effective SLA must incorporate 2 sets of elements -- service elements and management elements. The service elements must clearly mention details such as the services provided (and perhaps certain services not provided, if customers might reasonably assume the availability of such services), conditions of service availability, service standards, such as the timeframes within which services will be provided, the responsibilities of both parties, cost in relation to service tradeoffs, and escalation procedures.

On the management side, it should mention how service effectiveness will be tracked, how information about service effectiveness will be reported and addressed, how service-related disagreements will be resolved, and how the parties will review and revise the agreement.

Sanjay Mehta, CEO of MAIA Intelligence echoes this opinion. Mehta points out that the success of the formal relationship between an Application Service Provider (ASP) and its customers fundamentally depends on a strong SLA. It's important because it sets boundaries and expectations for both the vendor and its customers.

The business benefits of SLAs

SLAs help businesses to easily analyze underlying factors and make corrections. They allow companies to optimize resources cost effectively and provide an edge in a highly competitive business environment, by allowing one to deliver business services consistently, at minimum cost.

However, to formulate a perfect SLA is no easy task as both the parties should be clear on the expectations and what can be delivered. Increasingly, the ability to govern and deliver according to pre-defined agreements is becoming a competitive requirement.

In spite of the fact that it's an excellent mechanism for managing expectations, it's important to understand what can be realistically accomplished beforehand. Unfortunately, some people view an SLA as a complaint-stifling mechanism or a quick fix to a troubled relationship; however, using it for such purpose creates more problems than it solves.

While defining an SLA, realistic and measurable commitments are important. Performing as promised is important, but swift and well communicated resolution of issues is even more important. A good SLA addresses key aspects like what the provider is promising, how the provider will deliver on those promises, who will measure delivery and how, what happens if the provider fails to deliver as promised, how the SLA will change over time.

To sum it, a well defined SLA should ensure ASPs promise only what is possible to deliver, while delivering what is promised.

It, an SLA should be 'SMART' – Where

S stands for specific,
M for measurable,
A for achievable,
R for realistic, and
T for time.

Sunday, October 4, 2009

What is a balance sheet?

A company’s balance sheet is essentially a statement of its wealth (assets) and what it owes to others (liabilities) at a particular point in time. The assets could be fixed assets like land, buildings, plant and machinery. They could be movables like cars or computers. They could also be liquid assets in the form of cash reserves or receivable payments due to the company from those it has sold goods to, for instance, or repayments on loans given. Liabilities are anything the company has to pay to others. Thus, they would include payments due to its suppliers. Loans taken from others as well as interest due on those loans would also be part of the liabilities. What is owed to the shareholders would also fall in this category.

However, balance sheets present this information not explicitly under the heads assets and liabilities, but rather as a statement that gives sources of funds on top and application of funds below. All sources of funds effectively constitute liabilities. Share capital and reserves and surpluses form liabilities owed to the shareholder, while loans are liabilities towards others. The application of funds segment is a listing of the assets, except for one entry, which is current liabilities and provisions. The gross value of assets, minus the current liabilities, gives the figure for net current assets. Net current assets must be equal to total figure at the end of the sources of funds segment. This also means that net assets and net liabilities are always equal, hence the term balance sheet.

Application of funds includes value of fixed assets, of current assets (like receivables or inventories) as well as investment. Entries in the balance sheet are explained in more detail in annexed schedules. In fact, to make the most of a balance sheet, it is important to look at these schedules closely.

If a balance sheet is always balanced, how does it indicate financial health?

To begin with, a balance sheet in itself cannot adequately tell us whether a company is in sound financial health or not. For that, we must also look at balance sheets for earlier years as well as profit and loss accounts of the company. This is because while a balance sheet presents the picture of the company’s finances at a particular point in time, the profit and loss account tells us how the company has performed over a period of time—a quarter, half-year or full year. Thus, a company may have considerable assets, but that may be a result of good perform a n c e in past ye a r s, while it may be doing badly at present. Or, it may have accumulated liabilities from bad performance in the past, but may have turned the corner and started doing very well.

Looking at the situation at one specific date will no tell us which of these is true. Looking at the current position (balance sheet) and the performance over a year (P&L account) will obviously tell us more. Subject to those caveats, a balance sheet itself can give significant pointers to the financial health of a company. For instance, while assets and liabilities will match in every balance sheet, a company whose liabilities are primarily to its shareholders is clearly better placed than one which owes a lot to the rest of the world.

What does the profit and loss account tell us?

The P&L account details the income and expenditure of the company over a quarter, half-year or year. Unlike a balance sheet, income and expenditure of course need not be balanced. Where income exceeds expenditure, the account will show a profit, where the reverse is true, we have a loss. Expenditure includes not just operating cost like inputs and wages, but also provisions that the company has to make for depreciation of its fixed assets, for interest on loans, dividend payable to shareholders and tax.

Thus, we have several different figures for profit. The first stage is operating profit that tells us whether the company is able to sell its products at higher than cost and by how much. Then, we have profit after depreciation or profit before tax (PBT).

While depreciation does not actually involve any cash outgo, the reason it is counted as if it is expenditure, is because depreciating assets will ultimately have to be replaced. Companies are happy to have high depreciation rates, since it saves them tax the profit that is taxable is profit after depreciation. Next comes the provision for tax, giving us the profit after tax (PAT), which is also normally known as net profit, though in some cases there might be some other extraordinary provisions which give a lower figure for net profit.

Are large reserves a good sign?

Not necessarily. They might indicate a company that has not very bright prospects in future. Normally a highly profitable company that sees the prospect of future growth would be using its reserves to invest in expansion rather than letting cash idle in bank accounts. However, this is only a thumb rule, since investment tends to be lumpy. So it could be that cash reserves are huge at the moment, because the company is building up to a big investment sometime soon.

Saturday, October 3, 2009

Stock Market: Types of Trading

There are several types of trading styles that persons seeking to profit from short term trades in the market may wish to use. Here is a brief description of the most widely used short term trading styles.

  • Day Trading

Day traders buy and sell stocks throughout the day in the hope that the price of the stocks will fluctuate in value during the day, allowing them to earn quick profits. A day trader will hold a stock anywhere from a few seconds to a few hours, but will always sell all of those stocks before the close of each day. The day trader will therefore not own any positions at the close of any day, and there is overnight risk. The objective of day trading is to quickly get in and out of any particular stock for a profit anywhere from a few cents to several points per share on an intra-day basis. Day trading can be further subdivided into a number of styles, including:

Scalpers: This style of day trading involves the rapid and repeated buying and selling of a large volume of stocks within seconds or minutes. The objective is to earn a small per share profit on each transaction while minimizing the risk.

Momentum Traders: This style of day trading involves identifying and trading stocks that are in a moving pattern during the day, in an attempt to buy such stocks at bottoms and sell at tops.

  • Swing Traders

The principal difference between day trading and swing trading is that swing traders will normally have a slightly longer time horizon than day traders for holding a position in a stock. As is the case with day traders, swing traders also attempt to predict the short term fluctuation in a stock's price. However, swing traders are willing to hold stocks for more than one day, if necessary, to give the stock price some time to move or to capture additional momentum in the stock's price. Swing traders will generally hold on to their stock positions anywhere from a few hours to several days.

Swing trading has the capability of providing higher returns than day trading. However, unlike day traders who liquidate their positions at the end of each day, swing traders assume overnight risk. There are some significant risks in carrying positions overnight. For example news events and earnings warnings announced after the closing bell can result in large, unexpected and possibly adverse changes to a stock's price.

  • Position Trading

Position trading is similar to swing trading, but with a longer time horizon. Position traders hold stocks for a time period anywhere from one day to several weeks or months. These traders seek to identify stocks where the technical trends suggest a possible large movement in price is likely to occur, but which may not be fully played out for several weeks or months.

  • Online Trading

Online trading is not really properly described as a trading style. Rather, online trading is simply a term that refers to the medium used to enter and execute trades. Online traders, which can include long term investors, as well as day, swing and position traders, use either an Internet connection or a direct access online trading platform to access and execute trades with Web based brokers.

Friday, October 2, 2009

Investment Principles: Value investing to the fore in stock market

Bear market bottom or not, one thing is abundantly clear. Whether things get worse or not, there is a lot value available in the stock markets. Stock prices of strong companies have fallen along with those of overpriced ones. Hence, bargains abound.

Benjamin Graham, father of value investing, believed in buying stocks that were quoting at their liquidation values. Liquidation value means the price you pay for a company that is not operating any more. Having invested at near liquidation values, value investors wait patiently for the value to emerge and make handsome returns. Investing at the time of the Great Depression, Graham got many such opportunities.

Today, despite the sharp fall, the share prices are quoting much higher than their liquidation values, but definitely below their fair values. Taking a leaf from Graham's book, you can look for companies whose book values and market capitalisation are equal. In fact, there are instances of companies whose market capitalisation is slightly above the cash in hand. These are attractive bargains that you get very rarely. Regardless of the fact that the markets may go down further, investing in these companies may be worthwhile as you may miss the opportunity in an attempt to find the rock bottom prices.

Individual investors are having a tremendous advantage now. Institutional investors are preoccupied with redemptions and survival. Many stocks are available at attractive bargains. The best time to buy a company is when it is significantly undervalued, regardless of what the rest of the market may be doing. So, individual investors should brush up their accounting knowledge and start searching for that undervalued stock to adorn their portfolio with, which will be a multibagger a few years from now.

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