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Sunday, February 28, 2010

LIC to invest Rs 10k cr by March 2010

The country's largest insurer LIC on Tuesday said it will pump in about Rs 10,000-crore in the stock markets by March-end, taking its annual equity investment to Rs 60,000 crore this fiscal. LIC's investment in the equity market so far has already crossed Rs 50,000 crore and expect to close the fiscal (2009-10) with an investment of Rs 55,000-60,000 crore. During 2008-09, LIC invested Rs 40,300 crore in the equity market, Mr Mohanraj said. This fund infusion in the market by the country's biggest domestic financial institution boosted the sentiment at bourses, which witnessed volatility, especially after the collapse of Lehman Brothers in America in 2008.

Saturday, February 27, 2010

Basics of Stock Markets - 3

How much Amount to Invest?
There is no fixed rule as such which says the minimum amount to invest. Ideally if you are able to start with 100K also it would be good but there are small investors who cannot afford that. If you have even 25K or 10K you can start investing but remember that the returns will not be significant.

If you invest 100K and if you make 20% profit then you get 20,000 Rs where as for 10K investment the return is only 2000 Rs. However you can start with 25K and then slowly increase the amount.

How much money can we make?

At present stock markets are giving great returns. Some stocks have returned even 100% in one month time. However you should be happy if you get 25% returns per annum. Contentment is important and if you try to make fast bucks remember that you can loose money also quickly.

Many investors would like their investment to become 10 times in one year. Remember that this kind of returns are rarely possible and so one should have contentment and should be happy with a set target of 25% or something similar to this.

When to Buy and Sell? Concept of Zero Cost Portfolio

We cannot predict the exact top and bottom for a stock. However the best method is to try making your portfolio zero cost. Apply this strategy for all stocks and then you can be risk free. However you need good amount of money for this.

Example : You buy a stock A of 100 shares at 100 Rs. If stock moves to 125 Rs, you can sell 80 shares to get back your capital. The remaining 20 shares will be zero cost for you. If you build your portfolio in this, you can enjoy good returns and it will be risk free for you.

However you should try to read the situation and then sell. You can sell the same stock at 200 Rs and make 50 shares free of cost. However see the market conditions and then sell.

You should also select stocks which have good growth story for long term and then keep making zero cost shares in those at every fall and rise.

Friday, February 26, 2010

Basics of Stock Markets -2

Primary and Secondary Markets, How to do trading ?

Buy and Sell.Primary and Secondary Markets

Shares which are bought in IPO are called primary market shares. Once IPO is over and shares are listed in stock exchange and if you buy them, they are called secondary market shares.

Opening a Demat Account :

A person should open a demat account ( dematerialised account) with any of the brokers available so that trading can be started. ICICI direct, Reliance Money, Share khan, India Bulls, Geojit, 5 Paisa, HDFC securities are few of the brokers available with whom you can do online trading.

Pan Card is must for opening demat account. You should also have address proof and Id proof so that the demat account can be opened. It takes upto 15 days to open a new online trading account.

Your broker will create an online account for trading, demat account for your shares, bank account for your cash transactions. ICICI direct offers 3 in one account but brokerage is bit high.

Reliance Money has flat amount as brokerage which will be useful for those who trade in huge volumes.There are some brokers who open only a demat account but you cannot do online trading. You need to place orders through phone in this case.

How to do Trading? Buy and Sell.

Once you get your account, you can login to your account and the menu you see their should be easy to navigate. You can click on "Buy" option to buy shares. You will be required to enter stock code, the quantity you want to purchase and the price you want to pay.

You need to allocate money from your account to the trading account. Most of the brokers have some feature called modify allocation or allocate amount for trading purpose.

If you do not know stock code, you can search for the code by entering first few letters of the company.

There are two types of prices ie limit price and market price. Market price is the price that is prevailing when your order reaches the exchange and is executed.

Limit price is the maximum price you are willing to pay to buy a stock.

Example : Reliance is quoting at 2400 and you want to pay only 2390. If you put limit price as 2390, your order will be executed only if the price reaches 2390. If you put market price then the price prevailing at the time your order reaches will be taken. If the price moves to 2420 by the time your order reaches, you will get at 2420 or if the price moves down to 2380 you will get at 2380. Market orders are risky for high fluctuating stocks. Always put comfortable price limit price for executing orders.

You can check your limit available for trading after each transaction that you make.You can sell the stocks in the same way by selecting "Sell" option.

Once you buy a stock, the shares will be credited to your account in 3 days. They will be in your demat account. You can view them by selecting "demat account". In case you are not able to see them , click on "demat allocation" and then allocate the shares.

Investing in debt instruments

Here is the analyses of potential of various debt instruments this year

   As the global economy slowly pushes itself out of recession with the help of extensive stimulus programmes and records an impressive growth, the process of normalisation of key policy rates and gradual withdrawal of the stimulus can be expected during the year. Some countries such as Australia have already raised the key policy rates and others are expected to follow suit in 2010. The emerging markets such as India, China and Canada can be expected to hike rates in the first half of the calendar year. 

   The domestic economy grew at an impressive 7.9 percent in the second quarter backed by huge government spending and improvement in consumption and investments. The downer, however, has been the inflation numbers which have been rising steadily on account of increases in prices of food products. The annual Whole Price Index (WPI) inflation which stood at 1.34 percent in October rose to 4.78 percent in November, and it is expected to rise up further this fiscal. 

   In order to control inflation, there will be some tightening of key policy rates and a gradual exit from the easy monetary policy by the Reserve Bank of India (RBI). It is likely that the RBI will hike the cash reserve ratio (CRR) - funds to be kept by banks with the RBI - in order to curtail liquidity in the market. The expectation of a rate hike has already led to the hardening of bond yields. This is showing in the negative returns of gilt funds and long-term income funds. 

   For an average investor in debt, the popular debt investments are bank fixed deposits (FDs), small savings instruments, corporate fixed deposits and debt mutual funds. 

   It is advisable to not enter into FDs with longer maturities at this stage since banks are expected to raise the deposit rates in line with the monetary policy changes. Some banks have already started raising the deposit rates in order to attract investors. A slew of corporate fixed deposits are currently available in the market. Investors need to check the rating of these companies as also their reputation the market since high interest being offered is to compensate for the higher risk that these instruments carry as compared to bank FDs. 

   Debt mutual funds invest in debt instruments such as corporate bonds, government securities and money market instruments through income funds, gilt funds and liquid funds, or may have a small exposure to equity as in monthly income plans. As regards debt mutual funds, investors would do well to stick to funds having securities with shorter maturities such as short-term debt funds, and liquid and liquid plus funds. 

   Income funds and longterm gilt funds with relatively longer maturities should be avoided at this stage. The short to medium-term future of these would depend upon the policy stance of the RBI. Hence, a call on these funds can be taken once the monetary policy is out of the way and there is more clarity on interest rate movements. Hence, short-term funds with a maturity of 3-6 months would be safer bets in the current scenario. Floating rate funds and actively-managed debt funds which are quick to align to interest rate movements could be considered for investments. 

   For investors with a low risk appetite, hybrid products which combine debt and equity may offer a good investment opportunity. A monthly income plan of a mutual fund is one such product which invests 10-30 percent of the corpus in equity while the balance remains in debt. With equity markets set to remain buoyant, these products may bring better returns for investors at a relatively low risk appetite. 

   No changes are expected in the small savings instruments such as post office schemes, PPF, NSC etc. The Direct Tax Code which is expected to be implemented in year 2011 may bring about some changes which could affect these. However, these changes are not expected this year.


Thursday, February 25, 2010

Basics of Stock Markets - 1

What are shares?

Shares are the number of units that indicate the ownership you own in a company.

If you and your freind together would have started a business then you would have 50% partnership in the business as you both are equal partners. Here since there are only two persons involved the number would be in terms of percentage. The profits earned would be divided equally.

If there are 4 partners then the percentage would be 25% each. If there are 10 partners then the percentage would be 10%. If there are say 100 partners then each one would get 1%. Imagine the case where the number of partners involved is say 1 crore. It will be difficult to give the partnership in terms of percentage.

For this sake, shares or stocks are created in units.

Each Stock has a face value with 10 Rs as being the common. Face value of a stock will be useful for calculation of dividend and for stock splits.

Now a company ABC wants to raise say 1 crore. It will then issue 10 lakh shares of 10 Rs face value. The issuing price can be different depending on the company financials.The company floats an IPO ( initial public offer) where common public can participate and acquire shares in IPO market.

If some one is alloted 100 shares then the person becomes the owner of 100 shares. These shares are in Dematerialised form ( or Demat as it is simply called) and they will be traded in Secondary market.In olden days the share certificates used to b issued in form of paper indicating the owner name, number of shares held etc but we have almost all the stocks moved to Demat form.

Pension regulator hardsells new scheme

The Pension Fund Regulatory Development Authority (PFRDA) is taking ing various measures to increase the number of subscribers under its New Pension Scheme (NPS). It is in discussions with the General Insurance Council, various industry bodies and companies to offer the plan to their employees. Under the recent deal between the Indian Banks' Association (IBA) and the pension regulator, all new recruits of banks will join the defined contribution system from April 1, 2010. Already 20 nationalised and 12 private sector banks have joined the new system.

National Aluminium Co (Nalco) was the first public sector entity to join NPS. While 24 per cent of Nalco employees' salary will go towards Employees Provident Fund, 6 per cent will be invested in NPS. PFRDA has written to the department of public enterprises to enable all central public sector undertakings (PSUs) to bring their 1.5 million workers into the NPS fold. Sources said BHEL, NTPC and DVC are next in line to join NPS.

Currently, the scheme has 6.7 lakh subscribers, of which close to 3,000 investors are from the unorganised sector. It has Rs 3,500 crore as assets under management from these subscribers, of which the contribution of the unorganised sector is at Rs 5 crore.

The pension regulator may also provide online application facility from next year. "We are trying to make it available on the central record-keeping agency's website, where investors can log in and make contributions," said a PFRDA official.

In yet another move, post offices will now be able to sell NPS. Recently the Department of Posts was given recognition as one of the points of presence (PoPs).

PFRDA will soon invite bids from other agencies for recordkeeping. Currently, National Securities Depository (NSDL) is the central record-keeping agency and charges Rs 470 per account. Inspite of keeping other charges such as fund management and PoP quite low, the present CRA charges are quite high, a reason why the regulator seeks to bring competition and reduce costs.

SBI Pension Fund, one of the fund managers under NPS posted the highest net asset value (NAV), followed by UTI Retirement Solutions and LIC Pension Fund. PFRDA had asked the pension fund managers to disclose NAVs on a daily basis from December 1 this year. Of the total Rs 3,700 crore corpus under NPS for government employees, SBI PF manages around Rs 1,700 crore. At present, the allocation of funds among the three fund managers is decided by PFRDA.

However, this may change once the PFRDA Bill gets passed in Parliament after which each government employee will have the option of selecting his own pension fund manager.

PFRDA is also launching a small-ticket pension scheme called CRA Lite. The new scheme is mainly aimed at helping self-help groups invest their money in NPS. Under CRA Lite, the minimum annual investment limit would be Rs 2,000, which is lower than the Rs 6,000 per annum for the unorganised sector. The annual record-keeping charges have been brought down to Rs 6570 for CRA Lite.

It recently introduced a savings account Tier-II account where investors can enter and exit at will. The account will be available only to those who have subscribed to Tier-I, which an investor cannot exit till the age of 60.

Currently, the scheme has 6.7 lakh subscribers, of which 3,000 investors are from the unorganised sector. Of the scheme's total asset under management at Rs 3,500 crore, the contribution of the unorganised sector is at a mere Rs 5 crore

How about graduating to sectoral investment?

   IN A bull market, there are certain sectors that outperform broader markets. If you are overweight on such themes or sectors, it may give added drive to your portfolio. The attempt is to outperform the broader market by increasing the weight of a sector or theme over and above the weight allocated by the diversified equity fund portfolio. Of course, there are tradeoffs. If the call goes wrong, there is a risk of capital loss in the worst case. Given the higher risk, sectoral investing is only for those who have graduated from investing in diversified equity funds that investors invest across sectors. 

   Clearly, 2010 is going to be a year of stock pickers as none of the experts are betting on a rally as broad based as in 2007. Picking stocks is one thing and needs intricate analysis. However, the smarter mutual fund investors want to identify sector bets and leave the stock picking within the sector to fund managers. Here are some savvy choices:


As the government completes one year in early 2010, it is highly likely that the infrastructure investments would gather pace. This will benefit companies in core infrastructure, capital goods, equipment financing, power, cement and other ancillary service providers. Infrastructure has been limping and the government is likely to give a fillip to infrastructure during the year. This could mean good days for investors in infrastructure funds. Infrastructure funds are expected to deliver handsome returns, as the companies' topline and bottomline surge in sync with the infrastructure boost. Any slowdown in government investments in domestic infrastructure, or an unfavourable policy change is the risk to watch out for.


Post elections, the domestic consumption theme on the back of reforms story became popular. Going forward, the fruits of GDP growth are expected to percolate down and boost consumption. "Domestic consumption theme will unfold over a long period of time as India continues on the economic growth path" says Vinod Ohri, president — equity, Gupta Equities. FMCG, organised retail, telecom, media and entertainment are some of the sectors that would benefit from this buzz.


Though the world was rather cautious about the US and other developed economies in early 2009 on account of recessionary trends, in the recent months, IT and other export-oriented sectors have shown a good move. The markets are willing to discount the possible growth in FY11 as the IT budgets of corporates in developed nations swing back to normal. The second candidate in the segment is pharma. Indian pharma companies earn a good amount of revenue from exports. Pharma is a good investment bet during volatile times. Any economic slowdown in the US and currency risk are key risks faced by export-oriented companies.


If you believe that emerging economies will record high growth and also that the US and other developed economies will get on the road to recovery, commodities will invariably benefit. As the commodity consumption goes up, prices of commodities shoot up. One way to play the commodity boom is to invest in the commodity-producing companies. There are commodity funds available. Economic slowdown is a risk that commodity producers face. On the back of infrastructure spending in emerging markets, commodities are expected to do well. However, investors have to be selective in their approach.


Asia and Latin America are expected to drive the global growth. India and China are expected to lead the world growth from the front. Commodities should do well during the second half of the next year and hence, I would recommend investment in emerging markets and Latin American Funds

   Asian and Latin American economies compliment each other as Asian countries are primarily commodity consumers whereas the Latin American companies are commodity producers. Currency risk and geo-political risks are key risks one should bear in mind while looking at such opportunities.

Wednesday, February 24, 2010

Portfolio diversification is a time-tested method

At no time in recorded financial history has the benefit of portfolio diversification been so evident as today. The expression “don’t put all your eggs in one basket” is most apt for investing, and diversification is one of the most important principles to keep in mind when constructing an investment portfolio. We are in a truly global investment environment and the definition of portfolio diversification too is constantly changing. It used to be just equities, bonds and cash but over the last few years, partly due to increased risks as well as opportunities, the list now includes commodities, currency, art, foreign market investments and a host of other options which were once termed exotic or ‘alternative’.

An ideal diversified portfolio should contain different asset classes, investment styles, and mixed assets from different geographic regions. Studies have conclusively shown that a diversified portfolio of non-correlated investments reduces risk and improves overall return.
Your typical equity fund manager may have told you that you should diversify — but in different equity sectors such as infrastructure, telecom, pharma and so on. But as recent experience shows, investing in market sectors that tread in the same direction will not help much. I’m not saying that other assets’ prices haven’t fallen, but they don’t and they won’t move in tandem with equity prices.

Portfolio diversification can also be in terms of timing. Research has shown that individual asset classes perform well over a few years at best. Therefore, you could be investing in equities at one time and commodities the next. For example, many HNIs who exited equities in January this year, jumped on the commodity bandwagon for the next several months, making handsome profits. This particularly suited those who have a long-only fixation with markets. Since it’s not possible to predict which asset class will excel in any year, therefore diversification allows you to participate in the best-moving asset class of the time.


Commodities have low to negative correlation to traditional asset classes like stocks and bonds which means that investment in commodities is a real portfolio diversifier leading to lower risk. International experience shows that while stocks and mutual funds are closely related to each other (since mutual funds typically invest in stocks anyway) and tend to have positive correlation with one another, commodities are a bet on inflation and have a low to negative correlation to other asset classes and are therefore a well-advised addition to almost every long-term investment portfolio.

As far as the financial nature of commodity futures markets are concerned, they are as much or as less risky as equity markets. International information flow, liquidity, long trading hours and an impossible-to-rig global market make commodities irresistible to fund managers of all hues. Long term commodity investors like the idea that prices can’t really decline beyond a point — much unlike equity, where the floor is virtually zero.

We feel that commodity investing is easier and more logical than other investment forms because commodity prices move due to actual or perceived demand/ supply factors and are therefore simpler to price rather than equities which have earnings, management quality and company cash flows as issues for pricing in which add to the ambiguity. For example, in the first quarter of 2009, steel prices rose but prices of steel companies fell due to sector re-rating in the face of a global slowdown. Knowing that steel prices were firming up, you would have made money if you took a long position in steel but lost pots of money if you took a long position in the very steel companies which were benefiting from the price rise!


There are several investment options in commodity business. Typical long-only investors find comfort that buying and holding is just like equities — you can buy commodities and hold them in demat form till the time you sell.

Conservative investors may choose safe products like spot — futures arbitrage in which your broker buys a commodity for you from the ‘Mandi’ or spot market and simultaneously executes the second leg by selling the same commodity in the same quantity in the futures exchange locking in the profit. The returns work out best for agricultural commodities. Similarly, spread-trading is a popular strategy in commodities as is inter-exchange arbitrage. There are other exciting and novel ideas being floated such as buying gold, hedging it immediately and simultaneously using it as margin in commodity/equity trading, an idea whose time has come.

Commodity prices are falling today. So if there is no guarantee that prices will go up quickly, then where is the guarantee of returns? Aggressive investors know that commodities markets globally are futures based and you may be just as likely to short a commodity as long. For traditional investors, this comes as a paradigm change but the best fund managers and largest funds access commodity markets in this manner. This is also the reason why volumes in commodity futures exchanges remain firm even though prices have crashed. In other words, investors do not ignore chances for profit but depending on the mode of investment can be classified as either aggressive or conservative. Therefore aggressive investors may simply take futures positions and operate on both sides of the market — up and down.

So how does one diversify? The trick is to add asset classes with zero or negative correlation between them. Since most portfolios contain equity, bonds and cash, we need to add assets, which have no correlation with these.

Public Provident Fund (PPF)


Besides being an ace tax-saving tool, PPF provides a disciplined and steady approach to savings. For those who have missed it, it's not too late to start investing in a PPF

   JANUARY calls for the revelries in the new year but it also reminds one about the investments to be done to avail tax benefits before the financial year comes to an end. The most commonly known options for tax planning are equity linked schemes of mutual funds, home loans, tax-free bank deposits, public provident fund (PPF) and national savings certificate (NSC), among others. However, there are certain instruments that need to be looked at schemes that go much beyond just being a tax shield. For example, PPF not only provides tax benefits but also serves as a retirement planning tool for those private sector employees and self-employed who don't have the advantages of an employer-provided retirement benefits such as employee provident fund (EPF), gratuity and pension. In an endeavour to help our readers choose between various investment options that would provide them tax incentives as well, we at ET Intelligence Group decided to explore the Public Provident Fund in detail.

   "The most powerful force in the universe is compound interest," said Albert Einstein, and PPF woks on the same principle. A systematic and orderly approach to investment in PPF can build a large retirement corpus. PPF is a government-backed scheme, which can be started with a minimum yearly subscription of as low as Rs 500 to as high as Rs 70,000. This comes easy on the pocket, as one does not need to deposit a huge chunk of money at one go. Infact no lender can claim an individual's PPF money even in the event of bankruptcy.
   The interest earned on the PPF subscription is compounded and is calculated on the lowest balance between the fifth and the last day of the calendar month and is credited on 31st march of every year. The entire balance that accumulates over time is exempt from tax at maturity. However, under the new tax code, which is yet to be approved, it is taxable on maturity.

A flip side is that PPF is an extremely illiquid investment instrument. Its long lock-in period works out to 16 years since the last contribution is made in the 16th financial year. However, one gets the facility to withdraw money from his PPF account only after the fifth financial year. Withdrawal is allowed up to 50% of the balance in the fifth year or the year preceding, whichever is lower.

   After the end of the 15-year period (actually 16 years), the PPF account can be extended for 5 years, as long as the individual wants to stay invested. In fact, one can also take a loan from the PPF account from the third year of opening the account to the sixth year. So, if the account is opened during the financial year 2009-10, the first loan can be availed during financial year 2011-12 (the financial year is from April 1 to March 31). The loan amount will be up to a maximum of 25% of the balance in the account at the end of the first financial year. One can make withdrawals from the sixth year.

   To understand the advantage of compounding interest in the scheme, let us take a case where a 25-year-old individual starts investing Rs 5,000 every month in his PPF account. At 8% compound interest, his balance at the end of the first year would be Rs 62,664 and at the end of the fifteenth year it will swell up to Rs 17.4 lakh. This money could either be used to repay home loan or can continue to earn interest till the account is closed. He can even continue to extend the account for another five years and the amount received at the end of that time would be Rs 29.6 lakh. If he goes for another extension of five years, it will take the final account balance to Rs 48 lakh at the end of the stipulated period. The individual will be 51 years old at that time with nine more years of working life left before he retires.

   Thus, PPF not only provides tax benefits but also helps develop a disciplined approach to saving. Therefore, it is never too late to start investing in PPF.

Tuesday, February 23, 2010

Manage multiple Credit Cards as great saving instrument

Keeping multiple credit cards can be a great saving instrument, if used wisely and timely

Young people thrive on credit cards. He has as many as seven credit cards of different banks and uses all of them very extensively. Apart from doing regular shopping, many pay for their electricity bill and all other sundry expenses using their cards. For all the cards they uses, he has not paid any interest on the credit availed of, thereby not allowing himself/herself to be harassed by banks for payment. And that’s why banks hate customers like them. Actually, credit card companies hate two types of customers — those who pay before due date of payments and those who don’t pay at all.

So how do they actually manage free credit every month to finance his purchases. There is surely no magic working for him. It’s just that he knows the art of managing multiple credit cards efficiently. What he does is simple. He meticulously makes a purchase a day after his statement is generated. For example, if his statement is generated on 20th of every month and the payment due date is on 11th of the next month, he will make sure that his next purchase is made on 21st. By doing this, he not only gets his next statement after a month, but also avails an additional 21 days to clear his dues. In all, it allows him to carry forward credit purchases for around 52 days.

And that’s not all. By having multiple credit cards, he is also able to transfer the balance due on other cards. In simple terms, the amount due on one credit card can be transferred onto your other card. But for this, you will have to pay a minimum amount due (5% mostly plus processing free) to the bank offering you balance transfer. This may not be a hefty price to pay, especially when you are short of cash and have to make heavy or expensive purchases such as jewellery or electronic goods on special occasions like weddings and others. Well, that’s not too heavy a price to pay to avail of a further interest-free period of three months!

So in all, if you do balance transfer, you can have interest-free credit for almost five months! In simple terms, due to different billing cycles, your purchases on cards can be planned better if you have multiple cards. Card-holders, however, should not get into the mode of paying 5% minimum amount due without

realising that they are actually paying around 40-45% interest p.a. on rotation.

Although it is known that you must clear your dues by the payment due date to avail of interest-free credit, there could be times when you may fall into a debt trap. Do remember that in case you do not clear the amount due by the due date, you are charged interest on a daily basis for every day since your purchase. This whopping charge would reflect in the next statement and you would actually end up with no credit-free period — not even a single day. The annual interest rate is over 30% in most cards. Additionally, non-payment of minimum amount due (MAD ) by stipulated date also results in heavy penalties and charges being levied. And if you are the one who has a pay-cheque-to-pay-cheque existence, then you might as well have to pay for cheque bounce charges and late payment fee, which could further leave you poorer by several thousand bucks. As a way out for the people caught in the debt trap. Convert your credit card dues into a bank loan. By doing this you can repay your dues at 14 or 15% instead of paying 35-40% to credit card companies. He also observes that Indians are not used to using credit cards and they should not treat it as 'free money'. According to an official from Citibank dealing with credit cards who did not wish to be named, You could be headed for trouble if you have no idea about what your total debt adds up to, adding that consumers should not hesitate to call their creditors asking the due amount. This way they can have some control over their borrowing.

In fact, having multiple credit cards is a good idea only if you are ready to devote half-an-hour every week to keep a track of all your purchases. Other major advantage of having multiple credit cards is that if any of your card is not working, others may come in handy to save you the embarrassment and inconvenience.

Another good benefit of having multiple credit cards is that if you have to buy high value goods and the limit is almost full in one card, then the amount can be split in two cards. The other advantages on purchases made on credit cards such as cash-back on shopping and petrol purchases, all translate into savings.

In a nutshell, multiple credit cards can be a great saving instrument when used wisely. Otherwise they can land you in a soup.

Monday, February 22, 2010

Mastering the art of asset reconstruction

ASSET reconstruction was evolved as an answer to the distressed debt management problem faced by banks and financial institutions in this country. So, has the experiment succeeded?

Going by the improvement in non-performing assets (the all banks’ gross NPA ratio declined to 2.3% in 2008 from 4.6% in 2002) and the number of players it has attracted, the experiment has certainly succeeded.

But what needs to be emphasised is that no other country in the world operates an ARC (asset reconstruction companies) model like we do. Internationally, ARCs were set up as centralised government agencies for tackling the bad-debt problem in a banking crisis. Funded by the government, ARCs generally enjoyed special powers to cut short legal procedures and engaged in wholesale purchase of banks’ bad loans.

By contrast, Indian ARCs are private sector entities that operate under a tightly-controlled regulatory regime and enjoy no special powers. They acquire NPAs through a transparent bidding process and pay for their acquisitions either in cash or through security receipts (SRs).

ARCs face four challenges: Debt aggregation (in case of corporate loans) so as to be able to put pressure on the borrower; sourcing funding from co-investors so as to be able to make acquisitions in cash; working out the acquisition price to be paid; and finding a way to speed up the resolution/recovery process.

The first one is actually not a challenge but a value addition that ARCs can and must make and finding a long-term solution to the second is imperative. The third and fourth are core asset reconstruction challenges and the way they are addressed pretty much determines whether the ARC’s gamble in a given case will pay off or not, since the law does not grant any special powers to them.

In terms of the price paid, the private sector ARC model has delivered far better results than its counterparts elsewhere. Thus, whereas IBRA, the Indonesian ARC, acquired assets at practically zero value and KAMCO, the Korean ARC, at an average discount of 64% to the appraised value (or, at 3% of the face value), the acquisition price-to-face value ratio for Asset Reconstruction Company of India (ARCIL) works out to 25.7%.

But the pendulum may have swung to the other extreme. With banks auctioning mainly portfolios and allowing less-than-full due diligence on them, it is pertinent to ask: Are the ARCs getting compensated appropriately for the risks they are taking? Earning sub-8% internal rate of returns is not enough; ultimately, their survival will depend on their ability to earn a decent return on investment.

ARCs must look beyond cleaning up banks’ balance sheets. One area they may turn their attention to is corporate restructuring or rehabilitation. Some time back, RBI issued draft guidelines in respect of one of the two asset reconstruction measures (out of a total of six stipulated under the SARFAESI Act) that can be taken only by ARCs — “proper management of the borrower’s business by effecting a change in, or takeover of, its management.” (Guidelines for the second one — sale or lease of a part or whole of the business of the borrower — are still awaited.)

These two measures can be powerful tools in the hands of ARCs for tackling difficult, going concern cases. A case of successful rehabilitation/revival, to which the first measure applies, could add much greater value than, say, seizure & sale action. The right to sell or lease business under the second can be an effective antidote to recalcitrant management.

Together, these two measures have the potential to reconstruct asset reconstruction. But that will happen only when objective conditions for successful rehabilitation are created.

Corporate restructuring invariably needs infusion of fresh funds (debt and equity) and conversion of a part or whole of the borrower company’s debt into equity. It is imperative that the final RBI Guidelines contain explicit enabling provisions for both. Certain legal cobwebs — such as precipitate action by a statutory authority after action for revival has been initiated, long-winded procedure for debt-equity conversion, etc. — also need to be cleared.

Reconstructing asset reconstruction will involve making progress on two fronts — one, correcting the balance in case of portfolio auctions; and two, facilitating corporate restructuring/rehabilitation and opening up the opportunity for equity upsides.

Man Infraconstruction IPO

MAN Infraconstruction is coming out with its maiden public offer of around 5.63 million equity shares of the face of value of Rs 10 each. The issue is being made through a 100% book-building process in the price band of Rs 243 to 252 per share. The issue includes 9.72 lakh equity shares reserved for anchor investors, which has already been subscribed by a clutch of institutional investors at the upper price band. The issue represents 11.4% of the post-IPO equity capital of the company and the promoter's stake in the company will decline to 63.5% after the IPO. The main objective of issue is to raise funds for augmenting the company's equipment bank. Access of in-house construction equipments is a key competitive advantage in the construction sectors and the issue proceeds will help the company more than double its stock of equipments. This in turn will significantly increase its project execution capabilities and the gains will visible from the second half of the next financial year. 

   At the offer price, the issue price works to be around 16-18 times the company's estimated earning per share for FY10 and is expensive compared to the current valuations of its listed peers, such as Ahluwalia Construction, J Kumar and Supreme Infrastructure among others.


The company provides construction services to four sectors namely, port infrastructure, residential and commercial real estate, industrial projects and road and highways infrastructure. During the first nine months of current financial year, port projects account for 30% of the company's contract revenues and balance coming primarily from real estate projects. Going forward, the company's business is expected to get
skewed towards the real estate sector even more as residential projects accounts for 83% of the its outstanding order book with another 10% coming from commercial projects. As of December 31, 2009, the company has a total order book of Rs 2,020.9 crore. The order book is around four times its estimated revenues for FY10 and will provide good earning visibility for the next two-three years. In the residential sector, over a quarter of the order book is accounted for by residential projects under Slum Rehabilitation Authority in Mumbai. 

   Among individual clients, DB Realty, which recently came out with its IPO, is its single largest customer accounting for nearly one-third of Man's order book. Such a high client and sectoral concentration makes it a riskier bet than its listed peers most of whom have a fairly diversified customer base across various verticals. Real estate projects face much greater interest rate and finance risk and are prone to getting delayed. 

   The company counters this and says that most of its real estate clients are large reputed developers with a track record of completing projects on time. Second, real estate projects enable it to earn substantially higher operating margin —30% in FY10 — nearly double that of EPC contractor focussed on infrastructure sectors.


In the past three years, the company's net sales and net profit jumped five times to
reach Rs 500 crore and Rs 74 crore, respectively in FY09. In the first nine months of FY09, the company reported a 21% decline in revenue, which, the management claims, is due a shift to material free contracts that reduces the rupee value of the contract. The IPO proceeds will enable the company to bid for bigger contract and help diversify in the infrastructure sector including BOT projects.


Given its risk profile, the issue looks expensive compared to its listed peers and risk-averse investor may give it a miss. There are cheaper and more juicer options available in the secondary. Bulls may, however, bid for the issue given that the company is debt-free, has strong cash flows and a dominant presence in the fastgrowing Mumbai-Pune real estate market.

IPO details
Price Band: Rs 243-252
issue size:
Rs 137-141.75 crore
Date: Feb 18 - 22

Income Tax deduction on interest makes home loan cheaper

   Under the Income Tax Act, interest paid on a home loan is deductible from your total income, provided the conditions specified are complied with. The deductions are available while computing your income under the Head 'Income from House Property'. The deduction on interest paid is available even if the house is not rented out, and is either vacant or self-occupied. The loan can be for construction, acquisition, repair or reconstruction of property.

   The main condition is that you should acquire property on borrowed money, and the interest should be payable on the borrowed capital. Interest paid on a home loan is allowed as a deduction on accrual basis i.e. on due basis. It need not have been actually paid during the year.

   The deduction on home loan interest paid can be claimed subject to an upper limit of Rs 1.5 lakhs in a financial year. The interest on a loan taken for repair or reconstruction also qualifies for this deduction.

   For the purpose of computing income or loss under the head 'Income from House Property' for a self-occupied house, a deduction of Rs 30,000 is allowed on interest on borrowed capital. However, a deduction on account of interest up to a maximum limit of Rs 1.5 lakhs is available if the loan has been taken on or after 1.4.1999 to construct or acquiring a house, and the construction or acquisition of the house has been completed within three years from the end of the financial year in which the amount was borrowed.

   There is no stipulation regarding the date of commencement of construction. Consequently, the construction of the house could have commenced before 1.4.1999 but, as long as it is completed within three years, from the end of the financial year in which capital was borrowed the higher deduction would be available on capital borrowed after 1.4.1999.

   The higher deduction is not allowed on interest on capital borrowed for repair or renovation of an existing house. To claim the higher deduction you should furnish a certificate from the bank to whom the interest is payable on the capital borrowed, specifying the amount of interest payable and the purpose for which loan was taken.

   It is to be noted that there is no stipulation regarding the construction or acquisition of the residential unit being entirely financed by capital borrowed on or after 1.4.1999. The loan taken prior to 1.4.1999 will carry a deduction of interest up to Rs 30,000 only. However, in any case the total amount of deduction of interest on borrowed capital will not exceed Rs 1.5 lakhs in a year.

   In case a property has been acquired or constructed with borrowed capital, the interest payable on the amount borrowed for the period prior to the previous year in which the property was acquired or constructed is also eligible for deduction. The interest is deductible in five equal instalments commencing from the previous year in which the house has been acquired or constructed. The first installment is deductible in the year in which the construction of the property is completed or acquired. The balance four instalments are deductible in the four subsequent years.

Sunday, February 21, 2010

Income Tax: Medical insurance premium qualifies for tax deduction

This article explains how medical insurance is tax deductible under Section 80D of the IT Act

With increasing medical costs, mediclaim policies are a good option to hedge medical costs. Mediclaim policies are offered by almost all insurance companies - both in the private sector and the public sector. These policies provide insurance cover for the treatment of most of the ailments and hospitalisation. In addition to the basic coverage, add-ons are available on payment of extra premium. You should go through the coverage and exclusions clauses carefully.

In some cases, pre-existing ailments are also covered on payment of 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 check-ups as well.

Mediclaim insurance is a good investment avenue offering tax savings and medial cover. You can insure against medical expenses for yourself or for your dependents. Mediclaim cover provides security to meet unanticipated medical expenditures.

The premium paid for mediclaim policies is tax deductible. Under the Income Tax Act, exemption is available on the amount contributed towards medical insurance premium. This is provided under Section 80D of the Income Tax Act. According to these provisions, premium paid towards mediclaim insurance can be deducted from the total income of an assessee. The deduction is available only to individuals and Hindu Undivided Family members.

In case of an individual, the amount deductible includes any sum paid to effect or keep in force an insurance policy on the health of the assessee, spouse, dependent parents and dependent children. The dependence of parents will have to be proved by the assessee in order to claim the exemption. 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 to effect or keep in force an insurance policy on the health 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 income chargeable to tax. The insurance policy should be approved by the General Insurance Corporation of India. Also, the insurance should be in accordance with a scheme framed and approved by the central government.

The limit has been enhanced with effect from the year 2007. The deduction on medical insurance premium under Section 80D has been increased to a maximum of Rs 15,000. In the case of a senior citizen, the maximum amount is Rs 20,000. Previously, till March 31, 2007, the lower of these amounts was eligible for deduction - if the sum does not exceed Rs 10,000, the whole sum, and, in any other case, Rs 10,000.

However, now, enhanced deductions are available. A point to be kept in mind is the new changes with respect to insurance claims. Insurance companies have set limits on the amount of claim eligible for different types of medical treatments. These also vary depending on the city where the premium has been paid and where the treatment has been taken.

Saturday, February 20, 2010

Stock Futures Versus Traditional Stocks

The chief advantage of stock futures is the ability to buy on margin.

Investing on margin is also called leveraging, since you're using a relatively small amount of money to leverage a large amount of stock. For example, if you have $1,000 to invest, you can by 10 shares of IBM stock. But with the same $1,000, you can buy a futures contract for 50 shares of IBM stock.

It's true that you can also buy traditional stock on margin, but the process is much more complicated. When buying stock on margin, you're essentially taking out a loan from your stockbroker and using the purchased stock as collateral. You also have to pay interest to your broker for the loan. The difference with stock futures is that you're not buying any actual stock, so the initial margin payment is more of a good faith deposit to cover possible losses.

I­t's also much easier to go short on a stock future than to go short on traditional stocks. To go short on a futures contract, you pay the same initial margin as going long. Going short on stocks requires that you sell the stock before you technically own it. To do that, you need to borrow the stock from your broker first. You'll incur broker loan fees and dividend payments.

Stock futures offer a wider array of creative investments than traditional stocks. Hedging with stock futures, for example, is a relatively inexpensive way to cover your back on risky stock purchases. And for high-risk investors, nothing is as potentially lucrative as speculating on the futures market.

But stock futures also have distinct disadvantages. The high risk factor of a stock future can be just as dangerous as it is lucrative. If you invest in stock, the worst thing that can happen is that the stock loses absolutely all of its value. In that case, you lose the full amount of your initial investment. With stock futures, since you're buying on margin, the potential exists to lose your full initial investment and to end up owing even more money.

What's more, since you don't actually own any of the stock you're trading with futures contracts, you have no stockholder rights with the company. Because you don't own a piece of the company, you're not entitled to dividends or voting rights.

Another disadvantage of stock futures is that their values can change significantly day to day. This isn't the type of security that you can purchase in January and check the price once a month. With such a high-risk security, there's a possibility that the value of your futures contract could drop like a hot potato from one day to the next. In that case, your broker might issue a margin call, which we discussed earlier. If you don't respond fast enough to the call, the contract will be liquidated at face value.

Friday, February 19, 2010

Financial Planning: Magic of investing - Patience & Strategy

There’s no secret or magic to investing. Ignore the fads, and keep your eye firmly on your goals

IF YOU dig in the same spot long enough, you’ll eventually find water, goes an old saying. But a lot of people dig in one place for a while, and then get impatient or distracted and start digging in another place, and then another... When they don’t find water in any of those, they blame their luck. It’s surprising that more people haven’t figured out the simple trick. Of course, there’s no denying the importance of choosing the best place to dig in the first place!

In my line of work, I often encounter people who seem to dart in a new direction randomly. Many get caught up in the latest investing fads. There are broad trends like equity and mutual fund investing. Then, real estate, commodities, gold. And then there are micro-trends—read “fads”—like going overboard on midcaps, banking stocks, the communications sector, and infrastructure. In pursuit of the latest trend, investors churn their portfolio. These are the people you find glued to the TV, watching business channels, where post-mortems and predictions are doled out incessantly to viewers who wait with bated breath for the latest, as if they could get the news and act on it before anyone else. But what’s on the TV channels is news only to the retail investor; the rest of the investing world usually not only knows about it, but has often also acted on it. The result is that retail investors are often the last to rush in last, and get the empty shell, after the kernel has already been eaten by those higher up in the investing food chain.

The investing topography also has its share of whirlpools and quicksand. These feature things like rumors floated by vested interests, and often aimed at retail investors. Trusting investors follow the trail laid out for them. Then the cowboys who floated the rumours unwind their positions and move on to the next pasture, leaving trapped investors bleating plaintively. But memory is short. Investors lick their wounds for a while, and then fall in line behind another pied piper.

Retail investors are fascinated by day trading. Who hasn’t heard a story about someone’s neighbor or cousin who makes money hand over fist on a daily basis? Isn’t it remarkable that one hardly ever hears stories about the losses made by these legends? Many investors have great faith that there exist failproof methods to become really rich really quick. They underestimate the risks they take, and rely too heavily on the instincts of themselves and of others, often at the expense of plain logic. The tide of optimism exposes their gambling streak, and they end up making bets that may not be as sound as they first appeared. Fact is, it’s very difficult to predict equity markets, because there are simply too many variables involved.

For those who want to get rich fast, investing time frames are measured in days rather than years. All that talk about wealth creation over time—how boring! What could be more tame than returns of 12-15% a year? The hot-blooded investor will settle for nothing less than doubling his money in six months. But the fact is that risk and return normally have a direct correlation: the higher the risk, the higher the returns. However, the chances of good returns increase—while risk does not—when one gives one’s investment time to perform.

When investors burn their fingers, they leap to the conclusion that investing is dangerous, and swear they will never return to it...until the next fad comes along—perhaps land, or gold, or something else. I’m not suggesting these are bad investments. My point is that it’s just drifting from one investment, to another, to another, without any strategy, will not help anyone reach their long-term goals. It amounts to digging in too many places for water.

If there’s no strategy for achieving goals, it may never happen. Most of us simply chase money. But that money is required for achieving certain milestones, fulfilling aspirations and meeting goals. Making money is fine—who could argue against that! But just chasing money, and letting oneself be led in any direction that seems appropriate at a given moment, will render the whole exercise futile.

Investors need to work with goals in mind, and work towards reaching them in the appropriate time frame, which is what financial planning is all about. There is no compelling reason to arbitrarily gun for some high-threshold of return (say 40% a year) which will only drive the investors towards riskier options. Responsible investments made over a period help in achieving goals, even if they give modest returns. Investors need to give them time. Like everything else in life, it takes time for an investment to bear fruit.

Less is more. There’s no need to keep moving one’s money around. If you have invested in good options in a diversified manner, just let it be. That way you can keep your sanity, and not have to constantly look around for options to shift to. This approach is good for your peace of mind and your blood pressure.

Remember, if something seems too good to be true, it probably is. Schemes which promise stratospheric returns deserve your skepticism. So do those who claim to be sure about which way the stock market will turn, which stock will do well this year, and the like. When someone is that sure, take their views with a proportionately big pinch of salt.

As for knowing where to dig for water, well, you’d consult a hydrologist, engineer, or some other professional, wouldn’t you? Why should it be different with money? Find a consultant you can trust, who will guide you responsibly.

How would the price of a stock be affected by its dividend?

Paying a dividend costs the company and as such will decrease the value of the company and the stock.

If all other factors are equal, a buyer would prefer a stock that is expected to pay the higher dividend. If Company A is expected to pay $10 per share annually and Company B $8, an investor who wants to make 8% would be willing to bid $125 for a share of Company A but only $100 for Company B. On the date that a dividend is effective, a company's stock will drop by the amount of the dividend because that amount will be paid to the person who owned the stock at the beginning of that day.


National Saving Certificate (NSC)


NOW is the time to work out the best tax-saving schemes. Equity Linked Saving Schemes (ELSS) and ULIPs (Unit Linked insurance Plans) have had been the flavour for past couple of years and all traditional saving instruments were relegated. But the things sound different this year. The retail investors are still cautious about investment in equities as revealed by MF industry's AUM (assets under management) composition in the past few months. Obviously, investors are looking for alternative tax-savings instruments, which are safer and steadier than high volatile equities.
   Most of such assured returns on tax-saving products are offered by schemes floated by the Indian Postal department. One such product is National Saving Certificate (NSC). This scheme is specially designed for IT (Income Tax) assessees. The amount invested under NSC (maximum up to Rs 1 lakh per annum) is exempted from tax liability. Such invested amount fetches a fixed rate of interest at 8% compounded half yearly. Thus, the scheme combines growth in money with reduction in tax liability. 

   Buying NSC is very easy. Any individual can purchase NSC in the denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000 from any post office in the country. Payments can be made in cash, cheque or demand draft (DD) drawn in favour of the post master. However, the issue of certificate will be subject to the realisation of the cheque, pay order, DD. To make things easy, one may facilitate the whole process through an authorized agent free of cost. 

   NSC is a long-term investment option offering assured returns. NSC is issued for a maturity period of six years. Also, the rate of return is fixed at 8% per annum compounded half yearly. This 8% is not sensitive to interest rate cycle. It means the rate offered on NSC does not fluctuate like deposit rates offered by banks on fixed deposits. Unlike the bank FDs, there is no option for periodical interest payment. Rather the interest paid annually gets reinvested every year and the accrued interest is paid along with the principle at the time of maturity. 

   If someone buys NSC worth Rs 50,000 today, he/she is entitled to get around Rs 80,000 at the end of 6th year. Instead if someone parks the equivalent amount in bank deposits for six years at present, the maturity proceeds will be around Rs 77,000 (interest + principle). It is because the deposit rate offered by banks is lower around 7-7.5% (It differs from bank to bank). Obviously investment in NSC at this juncture looks attractive than bank deposits. 

   The added advantage is that NSC can also be transferred from one post office to another. The important thing to note that there is no upper limit on investment in NSC. However, investment up to Rs 1,00,000 per annum qualifies for IT Rebate under section 80C of IT Act. 

   All these may tempt one to go for NSC, but there are a few disadvantages too. Firstly, NSC is not liquid instrument. Once the NSC is purchased, one cannot withdraw money from it. The premature withdrawals can be done under specific circumstances only, such as death of the holder, forfeit by the pledge or under court's order. Another major disadvantage is interest paid at the time of maturity is not tax-free. Only the soothing factor in that the interest accrued on NSC does not attract TDS (no tax deduction at source). 

   In short, considering the lower deposit rates offered by banks, NSC could be an ideal investment for those investors who are seeking tax benefits on a long term basis and are not bothered about liquidity.

Thursday, February 18, 2010

ASBA facility fails to catch up with investors

Collection Of Applications Via ASBA Route Is Just 13%

THE merits of Application Supported by Blocked Amount (ASBA), splashed across public issue advertisements, have done little to popularise the facility among retail investors.

Lack of investor awareness, non-availability of forms and the tussle between banks and brokers are said to be the main reasons for the tepid response towards ASBA.

Collection of retail application through the ASBA route has been around 13-15%, despite primary market intermediaries and capital markets regulator Sebi striving to make the option more popular. ASBA refers to an application mechanism for subscribing to initial public offers (IPO), which ensures that the applicant’s money remains in his bank account till the shares are allotted. The mechanism requires the applicant to give an authorisation to block his application money in the bank account. The bank account is debited only after the allotment is finalised, or the IPO is withdrawn or fails.

Going by Prime Database data, retail application through the ASBA route in public issues of companies like Mahindra Holidays, Excel Infoways, Raj Oil Mills and Adani Power have been below 2% of total retail collection. Medium-sized issues, especially in bullish market conditions, are attracting more applications through the ASBA route; retail applications (through ASBA) in IPOs like Godrej Properties, JSW Energy and Globus Spirits have been in excess of 20%.

“Applications in most public issues have been from smaller cities which are not widely (or seriously) covered by self-certified syndicate banks (SCSB). ASBA forms are not available in the rural branches of most SCSBs,” said Haresh Hinduja, vice-president-IPO, Link Intime Spectrum Registry Services, adding, “Lack of awareness is one of the main reasons for ASBA not becoming popular among retail investors.”

Echoing Mr Hinduja’s view, Sharad Rathi, merchant banking head of Almondz Global says: “Investors have concerns (investing through the ASBA route) as to whom will they approach in case of nonreceipt or wrong allocation of shares. Banks are also not doing much to promote ASBA as it yields them only meagre commissions,” he added.

According to merchant bankers, banks feel shortchanged, as they receive lesser brokerage than brokers, who are instrumental in marketing the issue and making clients apply through ASBA. Self-certified syndicate banks (SCSBs) are required to collect ASBA application forms, block, unblock and unlock investor money and data processing. Data processing (or entry of investor data) was earlier done by registrars to the issue. As per ASBA rules, apart from handling share allotment, registrars are only required to fill up certain fields in the application form, check DP code and mark allotment money and the sum to be returned to investor. Broking commission for handling public issues generally range between 0.5 and 1.5%. In the case of ASBA applications, banks get just about 30-40 bps on the total amount mobilised. Brokers, on the other hand, pocket about 20-60 bps of money mobilised from retail and HNI investors. Brokers, at times, are also remunerated on the basis of application forms received, sources in merchant banking circles said.

How to attain financial freedom?

If we can be disciplined to do that — prioritise our needs over our wants — we would be on the way to achieving financial freedom as well as peace of mind. Here then is a primer on setting of your goals so that you can provide the same in a meaningful manner to your financial planner.

Preparing A Laundry List    

The first step in financial planning is communication. That's within the family first, so that a laundry list of all objectives is prepared. Your spouse surely needs to be involved, as much as your children, if they are at least teenagers. Let each one write all that they aspire for or dream about; reminding them not to forget their basic needs.
   Against each of the desires, write down the amount and the time (year) when you wish to fulfil them. If you cannot estimate the future value of the objective, write the current value — make sure that is uniformly done for all items on the list.

Separate The Needs And Wants    

Next, ask each one to bifurcate these desires into needs and wants. After that is done, let each rank the order of importance of these desires. I am sure your son or daughter will insist that he 'needs' the Ferrari, but you have to highlight that his higher education should get higher priority. This will also provide an opportunity for the family to identify a common list of priorities.

List Liabilities/ Commitments    

Your current commitments and liabilities need to be listed with the current amount outstanding, the frequency and amount of payment and when the commitment comes to an end. If you have listed a personal loan as one of the liabilities, make sure that the interest payments, if they are to be met separately, are also listed.
   Further, any personal borrowings from the family also need to be listed, though there may be flexibility in repayment of both principal and interest.

Track Of Expenses?    

Even the most meticulous individual seems to falter when it comes to determining expenses incurred on a regular basis. It is also extremely important to classify these expenses, so that it is possible to determine the scope available for reducing expenses, should a need arise. For example, school fees will be fixed, but the budget for eating out can be adjusted.


We are aware that the official rate of inflation now published by the government on a monthly basis may not reflect the increase of the cost of goods and services that are consumed by me. We also realise that some items like education costs rise at a faster pace than others, and hence, applying a uniform inflation rate may not reflect an accurate future value of the goal.
   So now we have three key components for a financial plan in place: your financial objectives, your liabilities and your expenses. Next week, we shall focus on how your assets and the income fit into your financial plan. Till then, don't forget to do the homework stated above.


Tax Planning: Income tax and Section 80C

In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act. Investments made under such schemes are referred to as 80C investments. Under this section, you can invest a maximum of Rs l lakh and if you are in the highest tax bracket of 30%, you save a tax of Rs 30,000. The various investment options under this section include:


Provident Fund (PF) & Voluntary Provident Fund (VPF)

Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer's contribution. While employer's contribution is exempt from tax, your contribution (i.e., employee's contribution) is counted towards section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5% per annum and interest earned is tax-free.

Public Provident Fund (PPF)

An account can be opened with a nationalised bank or Post office. The current rate of interest is 8%, which is tax-free and the maturity period is 15 years. The minimum amount of contribution is Rs 500 and the maximum is Rs 70,000.

National Savings Certificate (NSC

These are 6-year small-savings instrument, where the rate of interest is 8% and is compounded half-yearly. The interest accrued every year is liable to tax but the interest is also deemed to be reinvested and thus eligible for section 80C deduction.

Equity-Linked Savings Scheme (ELSS)

Mutual funds offer you specially-created tax saving funds called ELSS. These schemes invest your money in equities and hence, return is not guaranteed. Money invested here is locked for a period of three years.

Life Insurance Premiums

Any amount that you pay towards life insurance premium for yourself, your spouse or your children can be included in section 80C deduction. If you are paying premium for more than one insurance policy, all the premiums can be included. Besides this, investments in unit-linked insurance plans (ULIPs) that offer life insurance with benefits of equity investments are also eligible for deduction under Section 80C.

Home Loan Principal Repayment

Your EMI consists of two components, namely principal and interest. The principal component of the EMI qualifies for deduction under Section 80C.

Stamp Duty and Registration Charges for a home

The amount you pay as stamp duty when you buy a house, and the amount you pay for the registration of the documents of the house can be claimed as deduction under section 80C. However, this can be done only in the year in the year of purchase of the house.

Five-year bank fixed deposits (FDs)

Tax-saving fixed deposits (FDs) of scheduled banks with a tenure of five years are also entitled for section 80C deduction.


Apart from the above, things like children's education expenses that can be claimed as deductions under Section 80C. However, you need receipts to claim the same.     

DSP BlackRock Equity

It's difficult not to like DSP BlackRock Equity fund. Ever since 2003 it has beaten the category average every year. Its charm lies in the fact that it impressed in both favourable and unfavourable market conditions.


The fund's performance in 2007 was impressive at 70 per cent (category average: 59%). A high mid- and small-cap exposure along with considerable allocation to Energy helped. What's even more impressive is that fund manager Apoorva Shah managed this return despite being heavy on Technology. In the crash that followed, he resorted to defensives and cash, though not abnormally high.


Ever since Shah took over (June 2006), its performance in declining quarters improved considerably. In the bear phase spanning January 8, 2008 to March 9, 2009, it shed 49.5 per cent (category average: 55%).


But when markets started rising in March 2009, Shah was not quick in lowering cash allocation and did so mainly in May. "We were caught unaware by the sharp rise," he admits. Neither did he go heavy on Construction, Metals or Financials, which boomed during that time. "The risk was not justified at this point in time," is Shah's explanation. As a result, the fund delivered 79 per cent (category average: 89%) when the market rallied from March 9, 2009 to August 31, 2009.


Right now he is focussing on Oil & Gas downstream and top quality IT Services. He is also positive on auto and consumer stocks. In Real Estate, Shah is focussing on "companies that have been able to raise funds which have helped them de-leverage, improve their balance sheet and have launched new projects at cheaper prices and got rid of their inventory of land."


If erring on the side of caution is typical of Shah's style, so is his rigorous diversification. Exposure to the top 10 holdings is generally capped at 35 per cent and allocation to the top three sectors remains below the category average. Under Shah's management, single stock allocation has not crossed 5 per cent, barring a few large-caps. The number of stocks too has gone up considerably, peaking at a high of 90 (August 2008), while it has averaged at 73 in the past one year.


The fund does take short term bets (nearly 40% of the stocks are held for less than 6 months) and in the long-term holdings, intermittent profit booking does take place.  

Wednesday, February 17, 2010

Auto Loans - A step-by-step guide to garner the best car loan

Want to buy a new car in 2010? Well, the process itself is not very arduous. But you certainly need to take the right steps to garner a good deal.

For starters, get in touch with as many lenders as possible. Once they have made the offers, negotiate for the best interest rate. If there are any special offers, go through them carefully for the fine print.

After finalising the lender, you will need to provide a whole lot of supporting documents. These would include identity proof, proof of income and residence proof. You will be required to produce copies of your I-T returns, salary slips, bank statements, passport, driving license and other relevant documents. These vary from lender to lender.

As proof of identity, you can furnish acopy of your passport, drivers license, voter ID or PAN card. Any one of these documents (with your photograph) is proof that you are indeed the person you profess to be. A document is considered valid if it bears the address of your current residence. If you stay as a tenant at a place different from the one mentioned on your ration card, passport or voter ID, you can produce utility bills (electricity or telephone) of the place as proof of residence.

For income proof, salaried people need to submit their latest salary slip, Form 16 for the last financial year, and their bank statement for the last six months. Self-employed people need to provide their I-T returns for the last two years as proof of income. After submission of documents, it is time for the field investigator to visit your home to double-check the facts provided in the documents, such as your place of residence, tenure at work place, and so on.
It is essential that you are present during this visit to clarify any query that the investigator may have. Otherwise, the investigator might not get all the facts clearly and could report that the facts you provided do not actually add up, forcing the lender to reject your loan application.
The loan is approved only after the lender is satisfied with your documents. The lender then disburses the amount through cheques or demand drafts (DDs).

While the loan process is complete, there are still a few things that you need to keep in mind before you drive away in your new vehicle. Ideally, you should have two checks on the vehicle — the pre-registration check and the pre-delivery check. Both consist of the same check points. The idea is to ensure that the car you choose is the car you drive out of the dealership.

Read the papers properly. Make sure all the blanks in the contract are filled in. Your paperwork should include: Sales certificate, all payment receipts and registration certificate (RC) or temporary registration certificate. Check if the insurance is adequate, valid and active. Also, check for original pollution under control (PUC) certificate (valid for one year). And of course, check the spelling of your name on all the papers.

In the owners manual, check the warranty card for the car, free service coupons, warranty card for the battery, tyres and all other accessories and extended warranty details (if opted for). Check roadside assistance contact details, dealership and service personnel business cards.
If any payment formalities still remain, carry along the relevant post-dated checks (PDCs) or cash or a credit card. If you have a preference for a particular day/time for the delivery (for auspicious reasons), inform the dealer well in advance. Always take delivery in broad daylight, since artificial lighting or insufficient lighting at night can be misleading.

HDFC Mutual Fund lets you register 5 accounts for redemption pay

HDFC Mutual Fund has started offering its investors the facility to register up to five bank accounts in the folio for receiving redemption payouts. The investor needs to specify any one bank account as the 'default' account and register a maximum of four additional bank accounts. They can opt to receive future redemption payouts into any one of these registered bank accounts of their choice.

Kotak Smart Advantage Plan

Insurer Promises A Guaranteed Return Of 275% Of The First Year Premium, But An FD Will Earn More In Similar Period

KOTAK Smart Advantage plan is a ULIP plan launched by Kotak Life Insurance. The unique selling points of the plan is the insurer promises a guaranteed return of up to 275% of the first year premium.


As per the policy wordings, the first year's premium does not get allocated to your fund. Instead, it will contribute towards the fixed return, which you earn at maturity. This fixed return could be from 100% for premium payment term of less than 10 years to up to 275% for 30 years. The premium payment terms are 3, 5, 10, 15, 20, 25 or 30 years for this plan.
   The plan rewards customers with long-term commitment as shorter premium payment tenure would reduce your fixed return. Financially disciplined customers would be rewarded with this guarantee. If you miss out on the premium payments, the fixed return would be reduced proportionally as mentioned in the policy document.


   You easily earn more than 300% by investing this money in an FD for 30 years against 275% of the first year premium, which is the guaranteed element of this plan. The assumption here is the post-tax rate on a FD would be around 5-5.5%. The absolute return at maturity would be like any other ULIP plan, depending upon the performance of the fund. If you are planning to stay long in this ULIP, say up to 30 years, it could be a viable option.


This plan gives you an option to invest in three funds depending upon your risk appetite. The opportunities fund, which targets an aggressive investor, would have 75-100% exposure in equities/stocks. The dynamic floor fund, which targets cautious investors, would have 0-75% exposure in equities. The conservative investor can opt for a dynamic bond fund with 100% exposure in debt-related instruments.


   The ULIPs allows partial withdrawal after the third year. If you withdraw more than 10% of the fund value, it affects your fixed return at maturity. Either at maturity or in case of the death of the policyholder, the plan gives the option of lump sum settlement or an equal instalment over a period of up to five years. The equal instalment option is a good one, especially if the market is bearish at the time of the policyholder's death.


   The cost structure of this plan is comparable to any other ULIP. The fund management charges are between 1.2% and 2.0% of the fund value, depending on the type of the fund. The administrative charges work to Rs 780 per year. The mortality charges also differ depending upon the age of the policyholder. The surrender charges are applicable only if the policy gets surrendered within eight years. These charges fall in the range of 5-1%. The first four switches in a year are free. For every additional switch thereafter, Rs 500 will be charged.


Loyalty bonuses are provided every five years after the tenth year.


The family gets an income stream for five years in case of a policy holder's death if they opt for equal instalment stream. This can be useful if the stock market has been bearish.


It's like another ULIP, which is subjected to vagaries of the stock market. Don't read too much into the guaranteed return.


Stock Market: Go for value picks and stick to basics

Here are some tips for investors for the new year

   New Year eve always brings in hope in addition to excitement. It is time for retrospection, resolutions and perhaps making new road maps. Among other things in life this is true for your investments too. It is time to review your portfolio and plan for the new year ahead to achieve even higher ground.

Tax planning investments    

The first quarter of the calendar is incidentally the last one for the financial year and hence it is usually heavy with investments in tax-saving instruments such as specified mutual funds, provident funds, tax-saving bonds etc. However, if you are going to do most of your tax-related investments in the last three months then you should resolve for the change in this habit next year. 

   It is prudent to plan your tax-related investments right from the start of the financial year. For instance, provident fund investments should be made before fifth of every month to reap maximum interest and compounding benefit. In the same way, mutual fund investments can be made through a systematic investment plan (SIP) to average out the market ups and down and keep the cost low. 

   Hence, doing it evenly throughout the year not only keeps you off the last minute burden but also helps you reap much higher returns.

Equity investments    

With the economy showing signs of revival, there is definitely going to be lot of buzz in the stock markets. We are most likely at crossroads when change in due. But, change is always uncertain and slow to occur. All you need to do is to stick to the basics with this asset class in these times. 

   What this means is that you will have to work harder to dig deep, do your due diligence to find the value picks. Prudence would demand that you stick to core sectors such as infrastructure, auto and pharma where you can monitor the growth and all you need to do is spot the value picks in the sectors. 

   A lot would depend upon how factors such as the monetary policy, union budget, monsoons, and inflation here, as well as the US interest rates and foreign institutional investor (FII) inflows behave, and that will determine the direction of the markets. So watch these windows as the action unfolds in the next 12 months.

Mutual funds    

One good thing about mutual funds is the fundamental advice of sticking to the systematic investment route remains unchanged irrespective of the investment climate and time. So, it is the advice this time too - to stick to this fundamental principal to reap the best benefit of this asset class.
   However, stay away from any exotic theme funds and even the new fund offers unless they provide good reasons. There is a plethora of existing funds to choose from.


All that glittered in the past few months was indeed gold. However, it may not continue to do so forever. One must treat investments in gold primarily as hedging simply because of its impeccable track record of over 2,000 years as a store of value. 

   Any attempt to go overboard and treat the asset like equity to make money in the short term would be a hasty move. Do not forget that it has given good returns in the past few months because other assets haven't, and that is its primary job as a hedge in your portfolio. Any move to divert higher funds to gold at the expense of other assets would also mean bigger opportunity loss. Hence, resist the temptation and stick to the basic rule of keeping gold to about 15 percent of your portfolio.


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