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Friday, July 30, 2010

Income Tax Benefits Of Equated Monthly Instalments (EMI)


   Very often tax payers take loans either for the purpose of buying a house or a flat or a car or for some other personal purposes. They are required to pay equated monthly instalments (EMI) of interest and principal. In some cases both the interest and principal are deductible for purposes of income tax and in some cases it is not so deductible. Hence in this article we have discussed the benefits of EMI under the Income Tax Act mainly in relation to home loans. The section in this article pertains to the Income Tax Act, 1961.

(a) House should be ready for occupation:    

One of the most important aspects to be remembered by a tax payer is that the house or flat must be complete. If the house is not ready or is still under construction, then no deduction either on principal or interest would be allowable and permissible under the Income Tax Act.

(b) Bifurcate EMI into Interest and Loan:    

The next important aspect to be remembered by a tax payer is to bifurcate EMI into two parts. They are:

(i)                 Interest and

(ii)               (ii) Principal.


This is because the deduction of interest as well as principal is governed by different sections of Income Tax Act. Therefore, this is the most important aspect to be remembered by a tax payer.

(c) Interest on home loan for acquisition and repairs:    

Under the provisions of Section 24, a deduction of a maximum of Rs.1,50,000 every year is permissible in respect of interest on home loan if the house is Self-occupied. A loss up to Rs.1,50,000 of interest can be adjusted against salary income or business income or income from other sources. If a person has taken a loan for repair of house or flat, a deduction of maximum amount of Rs.30,000 is permissible and that too within the said amount of Rs.1,50,000.

(d) Full Interest deductible on letout house:    

If the house is let out by the tax payer, then the entire interest irrespective of the amount is fully deductible under Section 24 of the against income from house property. In case the interest amount is more than the net rent, the loss under the heading "Income from House Property" can be adjusted against other income. It can even be carried forward in the future years

(e) EMI instalment for acquisition also deductible:    

Under the provisions of Section 80C the amount of EMI pertaining to the payment of principal for acquiring the house is allowable within the overall limit of Rs.1,00,000. This is for the purpose of acquiring a house through DDA or other housing board like HUDA or any other housing authority. The overall limit in this case is Rs.1,00,000.

(f) Repayment of loan deductible:    

Under the provisions of Section 80C (2) (xviii) deduction up to Rs.1,00,000 in respect of repayment of loan is permissible. .The repayment of the amount borrowed for home loan by the assessee is deductible only if it is from Central Government or any State Government, or any bank, including co-operative bank, or the LIC, or the NHB, or a public sector company providing housing finance, or any co-operative society providing housing finance or where the employer is an authority or a Board or a Corporation or any other statutory body or the employer is a public company or public sector company or a university or an affiliated central government or a local authority or a co-operative society. Besides, stamp duty, registration fee and other expenses for the purpose of transfer of such housing property to the assessee is also deductible under Section 80C.


Medical Insurance: Insured may have to part-pay medical bills

Other proposals include grading of hospitals, expanding network

Here's some bad news for health insurance policy holders. Insurance companies may no longer foot the entire bill for your hospitalisation expenses.

Insurance companies have proposed that the insured should part-pay the bills during claims. The proposal was discussed at a meeting organised by the Confederation of Indian Industry (CII) here today. The meeting was held in the backdrop of the recent standoff between insurance companies and hospitals over inflated bills.

Among others, the proposals also included creation of six to seven categories of hospitals, based on their infrastructure, number of beds, speciality focus, and clinical and diagnostic capabilities. Health insurance companies will settle the claim based on a hospital's grade.

In other words, even the treatment cost in a small hospital for a particular illness could be similar to that of a bigger one with advance medical infrastructure and better facilities.

Fortis Healthcare CEO Vishal Bali, who attended the meeting, said: "The proposals, if implemented, will help in demarcating the charges of different hospitals, depending on the services and facilities provided. This will protect the interest of both hospitals, insurance companies, third party agents and consumers." At present, there is no set standard on the money a hospital can charge. This is largely a grey area, which led to a number of conflicts between hospitals and insurance companies in the recent past.

From July 1, public sector insurers had taken off over 100 hospitals from the list of the Preferred Provider Network (PPN). There were claims that hospitals were inflating bills exorbitantly leading to significant losses. The insurance companies have been making losses, as they claim many small hospitals inflate their bills if a patient has cashless medical insurance. Due to this, the industry ended up paying Rs 11,000 crore on the premium collection of Rs 8,000 crore.

Check company’s financial health before investing


   IT is that time of the year when investors start receiving the most critical communication tool from the company, namely the annual report. An annual report provides a summary of how a company has performed in the year that went by, and how it is likely to perform in the forthcoming year. For companies, it is mandatory to send a hard copy of the annual report to each and every shareholder. While a lot of shareholders merely keep annual reports aside or throw them away with old newspapers, there are important cues which savvy investors pick. In fact, for the general public, the annual report is the only financial document that they get to see. Hence, for existing shareholder, it could be the best source of information to determine the financial health of a company and to learn about any problems or opportunities in the business environment. Here are some important things that you could look for in a balance sheet.

Look And Feel Of The Annual Report

Balance sheets can be designed in any shape and size. Also, there is no mandatory rule which specifies the quality of paper to be used in an annual report. Hence, while some companies come up with a plain vanilla annual report with simple fonts, simple colours and pay little attention to page layouts and displays, there are companies which use high quality paper, take special efforts to design it and ensure that the annual report is really presentable to their shareholders. How the annual report looks and feels conveys its image and speaks volumes about the ability of a company to market itself in the corporate world. Quality of paper used in the annual report, many a time, is proportionate or signifies how well the company is doing. Sending the annual report by courier or speed post, as compared to ordinary post, could denote how important an investor is for the company.

Management discussion and analysis

This section is of prime importance for research analysts as well as fund managers. It gives you an overview of the previous year of operations and how the company performed. Besides this, most importantly, the management shares its vision for the coming year, updates on projects which are in the pipeline and thoughts on future projects. However, investors should keep in mind that unlike the numbers, this section is unaudited. Management discussion and analysis is very important to me in case of multinational companies, where there is less communication by way of conference calls or analyst meets during the year. This section gives you important clues as to the direction in which a company is thinking, how they think the year ahead is going to be for the industry and how the company will fare.

Financial statements and strength of balance sheet

Shareholders like to look at the income statement as it denotes how the company is performing in its business, how much profit the company is making and what is it earning from its core operations. Portfolio managers and analysts are concerned about the strength of the balance sheet. Look at things like inter-group loans, investments, cash and debt position in the balance sheet prior to making an investment decision. There are things like auditors qualification, or one-off expenditure which raise a red flag and need to be considered further by analysts. Then, there are things like cash flow statement which is sacrosanct for most analysts.


Reliance Life Insurance introduces Mobinsure

RELIANCE Life Insurance has announced the launch of unique mobile-based insurance initiative — 'Mobinsure' — a mobile portal offering a range of insurance related services on mobile phones. This service would make it easier for the policyholders to track their policies and premiums, do fund switches, pay insurance premium and resolve policy-related queries instantly using their web-enabled mobile handsets. It would be available both on CDMA and GSM platforms, the insurance company said in a statement.

   Customers can log on to their Reliance Life Insurance accounts on their mobile handsets and get important information on policies, applications, funds, profile, advisors and also activate online transactions, including premium payments, future allocations and change of address, free of cost. Customers are required to register first time and key in their policy and personal details which will be validated against customer details submitted at the time of new business for security reasons.

It makes sense to invest in stock market through SIPs

SINCE you have a three-year time horizon, and are willing to take risks, I suggest you consider investing in equity mutual funds," I told him last week. "But is this the right time to invest?" he queried. "Anytime is a good time to invest," I said, tongue-in-cheek, especially since I believed that these were indeed long term funds.

From a three-year perspective, I would be happy to jump in, but would my prospective client be able to ignore the bumps and volatility along the way?

You don't have to go all in

Investing in equities is not like a game of poker. Equities are an asset class to build long term wealth, though it may be difficult to ignore the noise and clutter from the glut of television channels and publications that implore you to try your "luck" at this game to change your fortunes overnight. Successful investing requires discipline - imagine what would happen if you planned to grow a tree by pouring all the water that was needed for the next month at one time.

Systematic investing

There is always a debate between financial planners who suggest a staggered approach to investing, and impatient investors who want a quick fix: they feel miserable if they miss a 150-point rally in the Sensex (less than 1% at today's levels); and much worse if an equal fall occurred the next day after they invested. So I decided to dig into some data over recent and not so recent past, and came up with results that supported investing through the systematic investment route.

Flat market, but steep results

The BSE Sensex rose 2% from October 1, 2009 to March 31, 2010, or below 5% p.a. During this same period, had I invested on a weekly basis, my investments would have generated a return of over 15% p.a. during the same period. (See Table)

   During this period, the markets have largely been range-bound (16000 to 18000 on the Sensex) and we may be in for a further period of 3 to 6 months during which time these conditions may continue to prevail.

Taking a step back

I did not want to stop only at this six month data, and decided to go back to January 2008 when the markets peaked at 21000 Sensex levels and moved down for nearly 15 months before perking up during March to September 2009. The BSE Sensex at 17700 levels in end June is down 15% from early January 2008. However, my weekly SIP in a large cap equity fund is up 48% against a Sensex growth of 28% during this time. While we all know that midcap stocks fell more sharply during 2008, the results of SIP (systematic investment plans) investment in midcap schemes are even more startling. A basket of midcap funds have risen 50% to 65% during this same time frame. But the benefits of these returns would obviously have been available only to those investors who were strictly disciplined and kept their faith going during 2008. Were you one of them?


Thursday, July 29, 2010

HOME LOANS: EMIs now, benefits later

Home loan repayment for an under construction property will get tax benefits only after the buyer takes possession

Looking to buy a property? It involves long-term financial commitment and you have to be in a position to afford the investment. And if you are not in hurry, a property under construction could be a good option. For one, it is cheaper than readymade ones. Also, builders might allow you to make changes in the house.

The price difference can be substantial. The difference between a property-under-construction and a completed project is 10-15 per cent per square feet.

Banks have tie-ups with builders and that helps one to get pre-approved loans. But the banks release loan payment according to the stage of construction of the house - in a staggered fashion.

How does it work? For instance, the total cost of the property you have booked is Rs 50 lakh. The bank will release around 80-85 per cent of the loan amount, in most cases. The remaining amount (margin) is to be funded by the property buyer.

Out of the approved Rs 40 lakh, the bank will release the money in tranches, at different stages of construction. The bank appoints a surveyor, who inspects the site of construction and the payment is made as per his assessment of the project completion. Remember, the amount paid need not necessarily be the same as the demand made by the builder.

During the construction phase, the bank may release small amounts and pay the remaining amount on possession of the house. Say, in the first year, the bank pays 15 per cent of the sanctioned amount (Rs 6 lakh) for the first instalment. In the next two years, till the house was completed, the bank will pay 10 per cent of the remaining amount each year (Rs 3.40 lakh and Rs 3 lakh).

The remaining amount (Rs 27.54 lakh) will be disbursed to the builder when the buyer gets possession of the house on completion.

Interest repayment: Banks provide two options to the borrower –

Repayment can start as soon as the bank disburses the first tranche

Repayment can start once the buyer has possession If you choose the first option, some banks give the flexibility of choosing the amount you want to repay during the construction phase. For under construction properties customers can choose the monthly installment they wish to pay, till the time the property is ready for possession. Anything paid over and above the interest rate by the customer goes towards principal repayment.

The benefit for starting payment earlier is that the tenure gets reduced, at least by a couple of years. Also, if you pay on getting the possession of the house, the interest amount keeps mounting because of compounding, thereby increasing your liability.

Taxation: You only start enjoying the benefits of interest repayment on a home loan only once the property is completed. That is because once the house is completed, any payment made towards interest and principal are considered for tax benefits.

But there is a benefit. The repayment of the home loan – both principal and interest payments – will qualify for tax benefits once you take possession. The earlier payments will be clubbed with the existing payments and tax benefits will come to you for the next five years. The existing limit for interest payment is Rs 1.50 lakh and the principal repayment will be included in the Rs 1 lakh investment limit under Section 80C of the Income Tax Act.

After completion, if the property is self occupied, the municipal rate of the area will be considered to be the rent earned from the property. This income will get two deductions - property tax paid and interest repayment.

If there is a loss post these two parameters are considered, the loss can be carried forward for the next eight years. But it can be offset only against any gain made on a property transaction. In case, you wish to set-off the loss in the same year, it can be done against any other gains.

In case the property is being rented out, the income will get two deductions – Property tax paid and interest repayment. The rest of the income will be added to your 'income from other sources' and taxed, according to the applicable tax slab. There is no cap on the limit of exemption for interest repayment of a second property.

Direct Tax Code: Mutual Funds

Currently as per Section 80C of the Income-Tax Act, an individual can claim a deduction of Rs 1 lakh for a wide cross section of investments, including equity linked mutual funds. As per the new tax regime, this is proposed to be raised to Rs 3 lakh per annum. Added to this, till now this investment could go only in equity linked mutual funds, however, in the new Direct Tax Code, you can invest this amount in debt-oriented mutual funds also. This flexibility will help financial planners recommend debt products also to investors who do not have an appetite for equity products. Above all, this is a positive move for the mutual fund industry, which could witness higher fund flows.

   In terms of capital gains, there is one change. Capital gains will be calculated for the asset held for a period of more than one year from the end of financial year in which asset is acquired. While earlier long-term capital gains would be 366 days, now it could be from 366 days to 730 days, depending on the period when the purchase was made in the financial year. Capital gains will be included in the total income and taxed at the applicable rate.

   Capital gains arising from sale of units of an equity-oriented fund, which are held for more than one year, shall be computed after allowing a deduction at a specified percentage of capital gains without any indexation. Therefore, if the "capital gains" before the deduction at the specified rate comes to Rs 100, it would stand reduced to Rs 50 (if the specified deduction rate is 50%). This capital gains would then be included in taxpayers' total income and taxed at the applicable rate. While those in the lower tax bracket will benefit, since short term capital gains currently stands at 15%, those in the uppermost tax bracket will not gain. However, as there will be a shift from nil rate of tax on listed equity shares and units of equity-oriented funds held for more than one year, an appropriate transition regime will be provided, so that the markets are not disturbed.

Mutual Fund Review: Birla Sun Life Frontline Equity


HIGHER than average returns and lower risk makes this large cap-oriented fund a sound proposition for any equity investor.

Launched in August 2002, the fund underperformed its category for the first three years.
But ever since Patil took over, the fund has surpassed the average performance every single year starting 2006. Mahesh Patil holds an engineering as well as an MMS degree.

Patil must be credited with excellent sector calls. This helped him deliver superior returns in 2006 and 2007. In 2008, Patil cut exposure to construction and engineering, which were among the worst hit. Along with aggressive cash and debt calls, he contained losses to a lower level. Ironically, his lowest equity allocation in the past two years was in January and February 2009 (average 73%), just before the market began to rally.
Nevertheless, he moved quickly to beat the category average by a margin of 10 per cent in 2009, despite a large cap bent (71% by December 2009).

Though the fund manager is not fixated on any market cap, he has been tilting towards a large cap orientation. In 2007, large cap allocation dropped to 55 per cent by December. In 2008, it began to gradually increase, peaking at around 82 per cent by February 2009. By the end of the year it stood at 71 per cent.

The fund has evolved from a concentrated offering of around 25 stocks to around 60. In the recent years, apart from Reliance Industries, no other stock has exceeded 7 per cent of the portfolio. The portfolio targets the same sectoral weights as its benchmark -the BSE 200. However, it does have the flexibility of selecting stocks within a particular sector from a wider investment universe.

Debt Mutual funds offer a good alternative to bank FDs


Short-term, long-term debt funds outperform liquid, liquid plus funds

MOST investors have investments in fixed income instruments no matter how much they fancy the potential of high returns in equities. Bank fixed deposits (FDs) are the most popular. But investors stand a better chance of getting higher post-tax returns from debt funds compared with bank FDs.

However, debt schemes are not as popular with retail investors as they are with institutional and corporate investors.

A retail investor in our country typically prefers investing in equity or hybrid funds. For fixed returns, they have an impression that debt funds do not provide returns higher than bank FDs or other small savings schemes such as public provident fund.

Besides perceived returns, there are other complexities involved in debt funds investment. There are at least eight different types of debt funds one can invest in. Choosing the right scheme, and particularly the high-return ones, is not an easy task.

For instance, as of July 9, the five-year average annualised pre-tax return of short-term debt schemes of various AMCs was higher, 7.49 per cent, than the average pre-tax return of 6.43 per cent on medium-term debt schemes (see table).

The risk element varies across debt fund categories.

Every debt fund is exposed to two risks — interest rate risk and credit default risk.

Credit default risk can be easily gauged from a debt fund's portfolio by looking at the credit rating of the instruments invested in.

Liquid funds and liquid plus funds are the right choices for investors who look at debt funds for riskfree fixed income.

These schemes are considered very safe thanks to their short tenures of investments, ranging from 15 days to six months.

Fluctuations in interest rates do not alter yields of these schemes as much as they do to longer tenure debt funds. Short-term debt funds usually invest in debt instruments with residual maturity of between six and 12 months. Medium-term and long-term funds have investments in debt, whose maturities are more than a year.

A drop in interest rates raises the yield of debt investments of these funds and vice-versa. In a rising interest rate scenario, the net asset values (NAVs) of medium-term and long term funds are affected adversely.

But that does not necessarily mean there is no case for investing in them, particularly if your intention is to park a part of your investible surplus in them for three to five years or more.

An analysis of five-year returns reveals (see table) except for short-term gilt funds, other short-term, medium-term and long term debt funds have outperformed liquid and liquid plus funds.

Taxation benefits do not change for different types of debt funds. The tax liability depends on the length of time one holds a debt fund before redeeming it. You could sell a liquid fund after holding it for more than a year and pay a 10 per cent tax with indexation or 20 per cent without indexation.

Inversely, if you held on to a long-term debt fund for less than a year before selling it off, you are liable to add the capital appreciation to your total income and pay the highest tax rate applicable to you.

The world of debt funds seems a tricky one. To average out the risks and benefits from different types of debt funds, investors can also choose to invest equal amounts across each of them.

This will happen, provided your investment time horizon is more than a year.
If your surplus funds are available to be parked for six months or less, then liquid and liquid plus funds are the best bet.


Wednesday, July 28, 2010

Remove CVV code, prevent Credit Card misuse

All leading banks advise clients not to disclose their credit card number or automated teller machine (ATM) password to anyone. There is also one other number that needs protecting, since online transactions have become very common – the Card Verification Value (CVV) number.


The CVV number is three-digit, typically imprinted at the end of the signature panel on the reverse of credit (or debit) card. It especially comes handy during online transactions like booking tickets or paying bills, as the transaction is not complete without CVV. It serves as the authorising code for the transaction.

All leading banks warn cardholders to be careful when revealing their CVV numbers on various sites. Preferably, transact on sites which mandate validation of card verification code (CVC2) or those that are certified by Verified-byVisa or MasterCard SecureCode.

Last year, the Reserve Bank of India (RBI) directed all banks to send notifications to customers (either via mail or text message) of every transaction worth Rs 5,000 or more. The RBI also asked banks to provide additional authentication to deter frauds. In most cases, it is an extra password or code, asked for after the CVV number.

The CVV number of a card can be easily obtained when a credit card is swiped for making transactions. Since it is a small number, it can be easily remembered and other important details such as the card number, etc come in the receipt when swiping the card, enabling one to misuse the card.


Hence, experts advise removing the CVV number from the card because other important details (card number or card expiry date) cannot be removed from it. CVV being a small number, it can always be memorised or written in a safe place.

But, frauds related to CVV are most common during online transactions and not when it is swiped. Most of us use our credit and debit cards very regularly without protecting the CVV number, which can be taken from the card, while other card details come to the person swiping it automatically through the point of sale (POS) machine. Mostly, what happens is that if someone has managed to know your card details, he or she will use those details for online transactions by changing the password

Importantly, though RBI has come out with the mandatory additional password norm, it is still in the implementation process for many banks, say industry experts, and it is giving way to many fraud cases

All new financial world


MEASURE: Insurers cannot front load costs
IMPACT: Policyholders who have to exit early (after the 5th year) will not lose a large chunk of their investment to charges as they did in the past. MEASURE: Three-year lock-in period for all Ulips increased to five years EFFECTIVE DATE: September 1 IMPACT: Insurers cannot sell Ulips as short term plans MEASURE: Minimum cover doubled on all life ulips EFFECTIVE DATE : September 1 IMPACT: Out of every Rs 100 invested in Ulips, a larger component will go towards life insurance. MEASURE: Stipulation of 4.5% guaranteed return on pension and annuity plans EFFECTIVE DATE: September 1 IMPACT: Insurers will direct major part of the investments to safe avenues like government securities, reducing the scope for earning higher return from equityoriented products. MEASURE: All limited premium unit-linked insurance products, other than single premium products, shall have premium paying term of at least 5 years EFFECTIVE DATE: September 1 IMPACT: Insurers cannot position Ulips as mutual funds. Policyholders can look forward to better returns as regular premium payment with the cap on charges will compound returns better.


MEASURE: NFO (new fund offer) subscription period reduced from 30 days to 15 days, except for equity-linked saving schemes).
IMPACT: The time taken to process applications will decrease. The truncated subscription period will mean that unsuccessful applicants will get their refunds faster.
MEASURE: Ban on distribution of dividends out of unit premium reserve

Already in operation

IMPACT: Earlier, fund houses did not hesitate to dip into fresh funds from new investors for distributing dividends, instead of realised gains. This directive will put an end to this practice.

MEASURE: Extension of Application Supported by Blocked Amount (ASBA) facility to NFO investors.
IMPACT: Since, under ASBA, application money is debited from the applicant's account only after allotment is finalised, the tiresome task of waiting for refund is eliminated. Also, investors do not stand to lose out on the savings bank interest to be earned during the period.

MEASURE: Valuation of money market and debt securities with maturity of over 91 days, on marked-to-market basis
IMPACT: Those investing in liquid-plus schemes, which invest in such securities, could see volatility in returns going forward. However, since such schemes predominantly attract institutional investors, retail investors' portfolios may not see a major upheaval.


Implementation of Base Rate – the new benchmark below which banks cannot lend
IMPACT: The aim is to bring in more transparency in pricing of loans and also, ensure that benefits of any rate cut by banks are passed on to existing home loan borrowers too, and not just new ones, as was typically the case until now. Banks will offer existing home loan borrowers an option to migrate to the new structure. Those who have availed of loans under teaser schemes will see their rates being linked to the lending bank's Base Rate once the fixed-rate period expires. Several banks have announced their Base Rates, ranging from 7.5-8.25%.

MEASURE: Dishonouring of cheques with alterations. The directive is applicable only to cheques cleared under the cheque truncation system (CTS)
IMPACT: CTS is currently operational only in New Delhi, with the Chennai project set to become functional soon. The RBI has similar plans for Mumbai and Kolkata in future, which means account holders across the country will have to get used to exercising caution while entering details on the cheque leaves or ordering additional cheque books, over a period of time.


Decoding Base Rate




How does the new base rate matter to you?

Any loan you take from a bank will be at an interest rate linked to the base rate.
The rate will be fixed by adding a certain borrower-specific charge to the bank's base rate. The base rate will also be the reference benchmark rate for floating interest rate loans that you take from a bank. Individual borrowers who have home loans on floating rates, the base rate will matter a lot. RBI has mandated that banks do not lend below their respective base rates after July 1.

How will it be calculated?

Individual banks will calculate their base rates by factoring in

(1) The interest rate on retail deposits (for amounts below Rs 15 lakh) with one-year maturity,

(2) The negative impact of RBI's prescription of cash reserve ratio or the proportion of cash that a bank needs to keep with RBI and statutory liquidity ratio or the minimum reserve that a bank needs to keep in cash,

(3) Unallocatable overhead cost for banks, and

(4) Average return on the bank's net worth.

What is the benchmark rate at present?

The base rate regime kicks off on July 1.
The previous benchmark for pricing loans was benchmark prime lending rate or BPLR. Till now, BPLR mattered for borrowers of loans up to Rs 2 lakh. It served as the RBI-mandated ceiling for these loans. Also, interest rates of many banks' floating rate home loans used to be benchmarked to BPLRs. BPLRs.

Why is BPLR being replaced?

A 13-member working group, constituted by the Reserve Bank of India last year, said in a report in October 2009, "The BPLR system was expected to be a step forward from the PLR system, which more or less represented minimum lending rates, to that of one which stood as a benchmark or a reference rate around which most of the banks' lending was expected to take place. However, over a period of time, several concerns have been raised about the way the BPLR system has evolved. These relate to large quantum of lending below BPLR, lack of transparency, downward stickiness of How cross-subsidisation took place?
The RBI group itself noted that "there was widespread public perception that the BPLR system led to cross-subsidisation in terms of underpricing of credit for companies and overpricing of loans to agriculture and small and medium enterprises." So, when you went to a bank to take a loan, you were charged at BPLR that will be pegged at a high level even though interest rates in the market were coming down. But if a large company went to the same bank, it would get a loan at a big discount to the BPLR, referred to as `sub-BPLR lending'.

How will the base rate be better?

In addition to the problems mentioned above, that affected you directly or indirectly, the BPLR system was also backward-looking. It factored in elements from loans already disbursed by a bank and ignored present market conditions. The base rate will include cost elements, which are clearly identifiable and common across borrowers. And you will be charged for a loan at base rate plus a charge that will be based on the bank's variable or product specific operating expenses, your credit risk and the premium for the tenure you are taking the loan for.

Should you blindly trust the base rate?

The base rate can be trusted. RBI has made it compulsory for banks to reveal all information on base rates and also disclose its maximum and minimum lending rates compulsorily. This will make the base rate figures reliable. But the complex factors that the base rate is based on could lead to erratic rates among different banks. Also, the final lending rate that a bank can charge may still throw up nasty surprises. You can be charged very high product costs and be told that your credit risk premium is high.


Mutual Fund Review: AIG India Equity


Though its start was not at all impressive, AIG India Equity is beginning to get noticed and now shows potential


Though around for just two years, if one looks at its performance, there is a clear demarcation. In all its six quarters till December 2008, the fund underperformed its category average every time, barring one quarter where it equalled it. It began to put its best foot forward only from 2009. In all the five quarters since then, it has outperformed. Further, if one takes a look at the portfolio, another clear cut distinction emerges in June 2009. Here the transformation was the result of Huzaifa Husain replacing earlier fund manager Tushar Pradhan.Husain wasted no time in significantly revamping the portfolio. Fourteen stocks were offloaded which never made an appearance after that (barring HDFC) and 19 new entrants featured. The portfolio reshuffle was based on the premise that domestic recovery would be stronger than global recovery. Hence, stocks dependent on global economic cycles, such as commodities, were given less attention as the focus shifted to domestic stocks, especially in the consumption and investment space.


This resulted in a dramatic alteration of the sector allocations. Energy saw its allocation move from 15.26 per cent (May 2009) to 2 per cent (June 2009) with RIL and ONGC exiting. "This was based on our view that global recovery, on which oil price movement is dependent, was weaker than domestic recovery. Also, the under-utilisation of energy producing infrastructure globally was a concern as this has a negative impact on margins. Hence, we decided to avoid the sector," Husain explains. Increased allocation to Auto took place on the back of Hero Honda. Exposure to Services also began to rise.


Another significant change was in the market cap tilt. Allocation to large caps was lowered by 15 per cent and small caps by 7 per cent. Mid caps began to corner 46 per cent of the portfolio. Since then the fund has tilted towards mid caps with a decent exposure to large caps. As mid- and small-cap stocks rallied in 2009, the lowering of the large-cap exposure helped.


The fund has completely exited Healthcare and Communications. Currently, the top sectors of the fund are Auto, Services and Metals while the top three of its peer-set are Financials, Energy and Technology. This throws up the question of whether Husain is by nature a contrarian investor and a top-down one at that. But his demeanour indicates that he is totally against such branding. In his case, the sector allocations are simply a result of the process of bottom-up stock picking, which he swears by. "No active sector allocations are done. Typically, we may invest in one or two companies in any sector but we then take a big position once we are convinced of the stock. This individual stock allocation perhaps, at times, makes it look like a sectoral allocation. For example, the weightage of Media in the index is very small but if we like a particular stock, our allocation can be significant and, thereby, the sectoral allocation looks large."


His underweight stance in Infotech was probably a drag on last year's performance and the increased allocation this year is noticeable, especially since it is on two stocks. But going in line with how he describes his investing stance, he says it is not a sector bet. "This is a call on investing in companies which have either strong execution abilities or a good product and can gain market share profitably," he says.


This is a fund that would probably complement the other equity diversified funds in your portfolio. Unlike others, there is no Reliance Industries, ICICI Bank, HDFC Bank or Axis Bank as the top five holdings. The fund manager tries to generate out-performance by investing in select few quality picks, not by investing in risky small caps. So though the portfolio is a bit compact at around 26, it would be wrong to classify it as aggressive. In fact, when talking of his stock selection process, Husain does have a more cautious slant. "We prefer companies with conservative accounting policies. This typically reduces near term profits but provides consistency in profits which are rewarded by the market in the long term. Among our top 10 stocks for example, at least four of them have much faster depreciation policies than their peers," he says.


By and large, Husain managed to impress in 2009, despite managing the fund for just around half the year. While it can be debated that the timing of his takeover helped, since the rally began in March 2009, there is no arguing with the numbers. Thanks to the changes that he implemented, its 1-year performance (April 30, 2010) speaks wonders; a return of 78 per cent (ranked 7 out of 69) while the category average stands at 64 per cent.


While the change at the helm looks promising, one would have to see how he performs in a downturn. But we are willing to go with the view that this fund is in safe hands.


Tuesday, July 27, 2010

Gratuity and tax exemption

RECENT enhancement in limits of gratuity payment has generally been cheered by employees although some worry that these limits for nongovernment employees are applicable prospectively and not retrospectively. A lot of queries have been received as to the taxability or otherwise of the gratuity received by different category of employees. In this context, it is important to note that all gratuity received by an employee is not exempt from tax per se, except up to limits specified under the provisions of the Income-Tax Act, 1961. Therefore, it is important to take a note of the relevant tax provisions in this regard.

Government Employees

The government had earlier enhanced the limits up to which gratuity could be received by the employees covered under the government pension/gratuity scheme, in line with the recommendations of the Sixth Pay Commission. As per the provisions of the I-T Act, 1961, any death-cum-retirement gratuity received under the Pension Rules/Scheme of the Central government or state government or Regulations applicable to the members of defence services, is not taxable.

Gratuity Received Under The Gratuity Act

In respect of employees receiving gratuity under the payment of the Gratuity Act, 1972, any gratuity received to the extent that it does not exceed an amount calculated in accordance with the provisions of the Gratuity Act, is not taxable. Recently, the government had enhanced the limit for payment of gratuity under the Gratuity Act from Rs 3.5 lakh to Rs 10 lakh. The exemption limits in this case would apply accordingly.

Other Employees

In respect of employees receiving gratuity other than under the government pension/gratuity scheme and also other than under the Payment of the Gratuity Act, the computation mechanism in respect of exemption limits has been specified under the I-T Act. It is pertinent to note that recently the Central Board of Direct Taxes (CBDT) has issued a notification enhancing the overall tax exemption limit to Rs 10 lakh. Though this is a welcome step, in case of other employees, the following points merit attention while claiming exemption: The gratuity received by an employee is not taxable if it is received on his retirement, his becoming incapacitated prior to such retirement, termination of employment or if such gratuity is received by his widow, children or dependants on his death.

   Further, such gratuity does not exceed one-half month's salary for each year of completed service, calculated on the basis of the average salary for 10 months immediately preceding the month in which such retirement/death etc takes place, subject to the limits prescribed by the Central government.




What are the key policy rates used by RBI to influence interest rates?

The key policy or 'signalling' rates include the bank rate, the repo rate, the reverse repo rate, the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR). RBI increases its key policy rates when there is greater volume of money in the economy. In other words, when too much money is chasing the same or lesser quantity of goods and services. Conversely, when there is a liquidity crunch or recession, RBI would lower its key policy rates to inject more money into the economic system.

What is repo rate?

Repo rate, or repurchase rate, is the rate at which RBI lends to banks for short periods. This is done by RBI buying government bonds from banks with an agreement to sell them back at a fixed rate. If the central bank wants to make it more expensive for banks to borrow money, it increases the repo rate. Similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate. The current repo rate is 5.50%.

What is reverse repo rate?

Reverse repo rate is the rate of interest at which the central bank borrows funds from other banks in the short term. Like the repo, this is done by RBI selling government bonds to banks with the commitment to buy them back at a future date. The banks use the reverse repo facility to deposit their short-term excess funds with the central bank and earn interest on it. RBI can reduce liquidity in the banking system by increasing the rate at which it borrows from banks. Hiking the repo and reverse repo rate ends up reducing the liquidity and pushes up interest rates.

What is Cash Reserve ratio?

Cash reserve Ratio (CRR) is the amount of funds that banks have to park with RBI. If RBI decides to increase the cash reserve ratio, the available amount with banks would reduce. The central bank increases CRR to impound surplus liquidity. CRR serves two purposes: One, it ensures that a portion of bank deposits are always available to meet withdrawal demand, and secondly, it enables that RBI control liquidity in the system, and thereby, inflation by tying their hands in lending money. The current CRR is 6%.

What is SLR? (Statutory Liquidity Ratio)

Apart from keeping a portion of deposits with RBI as cash, banks are also required to maintain a minimum percentage of deposits with them at the end of every business day, in the form of gold, cash, government bonds or other approved securities. This minimum percentage is called Statutory Liquidity Ratio. The current SLR is 25%. In times of high growth, an increase in SLR requirement reduces lendable resources of banks and pushes up interest rates.

What is the bank rate?

Unlike other policy rates, the bank rate is purely a signalling rate and most interest rates are delinked from the bank rate. Also, the bank rate is the indicative rate at which RBI lends money to other banks (or financial institutions) The bank rate signals the central bank's long-term outlook on interest rates. If the bank rate moves up, longterm interest rates also tend to move up, and vice-versa.


Employees Provident Fund (EPF) interest rate likely to be fixed at 8.5% for 2010-11

The Employees Provident Fund (EPF) is expected to retain the interest rate for its six crore account holders at 8.5% in 2010-11, with a formal announcement likely to be made in August. "I hope that the recommendation of 8.5% by the finance and investment committee of the EPFO will be retained," Central Provident Fund Commissioner S Chatterjee said. "The EPF rate will hopefully be finalised in the next EPF Board meeting, which is expected in August," he said. Asked if there was any shortfall in return from the current payout of 8.5%, Chatterjee said there was no deficit.

Credit/Debit cards protection services


Theft and misuse of credit/debit cards have seen a dramatic rise in recent times. Here is why you must enrol for card protection services

   THANKS to the growing popularity of plastic money, maintaining more than a couple of cards has become more the rule than the exception. While the increasing reliance on this mode of payment has indeed given a boost to convenience, it has also meant that the security-related risks users are exposed to have gone up considerably. Misuse of stolen cards, skimming etc continue to be cause of concern for cardholders.

   Though the Reserve Bank of India's directive making two-factor authentication mandatory for transactions carried out online has made the process more secure, the threat lives on in the offline world.


Some insurance companies and banks offer protection against misuse of credit and debit cards. For instance, Tata AIG General Insurance offers protection that covers identity theft and fraudulent charges. Under the former, expenses related to resolving the issue as well as expenses the holder has to pay for any resultant unauthorised credit are covered. The latter extends protection — up to 12 hours prior to loss reporting — against fraudulent use of your debit or credit card.

   Several banks, too, have taken steps towards providing their customers access to a protection plan that offers cover in the event of their stolen card being misused. HDFC Bank offers this facility to its debit card holders, where protection is provided against fraudulent Point of Sale transactions.

   In addition, over the past few months, a clutch of banks and credit card companies — including Citibank, Axis Bank, ICICI Bank, HSBC and LIC Cards — have jumped on to the bandwagon by teaming up with card protection service provider CPP Assistance Services. For availing of this service, one needs to get in touch with his/her bank, and enroll for the scheme by registering all the cards — including credit, debit and loyalty rewards cards — you wish to cover. If you lose your cards or discover later that cards have been misused, you need to dial the toll-free number provided at the time of enrolment and report the same, in order to block the cards. Since the facility is issuer-agnostic, customers maintaining cards of more than one bank need not intimate all card issuers, in case they lose their wallet.

   The programme provides cover up to seven days prior to the user informing the contact centre. Depending on the plan selected, the cover could go up to Rs 1 lakh prior and Rs 20 lakh post intimation. The cover is provided through a group insurance policy from Bajaj Allianz General Insurance.

   The biggest risk that card users face is that of realising the loss a couple of days later. In this case, you can inform the call centre even if the loss/fraud comes to your notice up to seven days later. It is beneficial for those who travel frequently and use plastic as their primary form of payment.


The features offered by various card protection plans may vary and you need to take a close look at the exclusions. For instance, HDFC Bank's Zero Liability scheme for its debit cards does not extend the cover to ATM transactions and the liability is restricted to a maximum of Rs 1 lakh per card. In case of Tata-AIG's covers, fraudulent transactions made more than 12 hours prior to first reporting the loss of the card and the ones conducted after reporting the loss are not covered.

   In case of the service offered through CPP Assistance, you need to bear in mind that under the basic plan, the total cover pre-notification amounts to Rs 50,000 (Rs 1 lakh in case of the premium version), even if more than one card has been misused. Within the limit, the maximum pre-notification cover provided for each card under the two plans is between Rs 20,000 and Rs 40,000.

   Another key limitation of this scheme is that the protection gets activated only after your card is lost, and not if the fraudulent transaction has taken place because your password or other security details are compromised. Besides, since the offering is in the nature of a group insurance policy, the reimbursement is subject to the insurance company being satisfied about the validity of the claim made. The bank and the protection service provider have no role to play during this investigation process.

   The fact that process involves three entities — the card issuer, the service provider and the insurance company, with each having limited responsibilities, may be a source of discomfort for individuals wishing to avoid dealing with multiple agencies.


Monday, July 26, 2010

Pension Options - Mutual Funds, EPF and PPF

IRDA's new guidelines for pension plans guarantee returns, but the rate is too low to beat inflation

Those buying pension plans from insurance companies may soon find the returns are too low. The minimum guaranteed return — 4.5 per cent (subject to change) —is unlikely to beat inflation. This is not comforting for someone looking at building a retirement corpus through a pension plan.

The new-look pension plans, according to the Insurance Development and Regulatory Authority (IRDA) guidelines, will be launched from September 1. "This will protect investors' lifetime savings from adverse fluctuations at the time of maturity," Irda had said while issuing the guidelines.

The only section that feels this guaranteed return — higher than the 3.5 per cent that savings deposits offer— is too high is the insurance community itself. According to reports, insurers plan to approach the regulator to reduce this rate.

"Due to the regulation, companies will have to channelise their strategies to ensure guaranteed returns on regular premium plans. Investments in equity instruments will become limited or even nil. This product will lose appeal," said G N Agarwal, chief actuary, Future Generali India Life Insurance Company. Agarwal said a person needed prominent equity investments to get returns that could beat inflation.

While the guaranteed return is quite low, the regulator has also taken other steps that will result in forced savings for the buyer. For one, the policyholder will not be allowed partial withdrawals during the tenure of the policy.

On maturity, the pensioner can commute up to one-third of the corpus in hand. For the remaining two-thirds, Irda said: "The insurer shall convert the accumulated fund value into an annuity at maturity." The same applies even to a person who surrenders the policy midway.

"All other guidelines for Ulips apply to retirement products, too. These include distribution of overall charges evenly during the lock-in period, a cap on charges and a lock-in for five years," said the head of product development at a life insurance company.

In comparison, there are other pension products that offer better returns. For example, UTI Mutual Fund and Franklin Templeton Mutual Fund have one pension scheme each. Both have a debt-equity ratio of 60:40. Templeton India Pension has returned 13.85 per cent annually since its launch over 13 years ago. UTI Retirement Benefit Pension has given returns of 11.53 er can also make partial withdrawals.

The three options the rest will have to be used to purchase an annuity. Moreover, annuity plans have their own drawbacks. For example, if a person opts for a plan where the spouse should continue to get money after his demise, the payout will be lower.

"Someone who wants the same comfort earlier pension plans offered can look at the New Pension Scheme (NPS)," said Malhar Majumder, a certified financial planner. NPS is equally tax effective and offers life-stage investing – the equity-debt allocation changes with age.

The Ulip rejig and what it means for your investment



Cap on charges from fifth year


If you have paid five annual premiums, then the insurer will not be allowed to charge you a net reduction in yield of more than four per cent. For every consequent year of premium paid, this will keep coming down further. On completing 10 years, the maximum reduction in yield will be three per cent. While all this capping is good and smoothens out the disparities among Ulips of different insurers or among multiple Ulips, it does not really bring down the burden of high charges.

Whether four or three per cent, the charge is still very high compared with mutual funds where Sebi permits a maximum investment management charge of 2.25 per cent.

Surrender charges

The capping of surrender charges is a welcome move. The maximum surrender charge, also called discontinuance charge, in the first year will be the lower of 20 per cent of the premium amount or net asset value, subject to a maximum of Rs 3,000. Every additional year will reduce the charge by 5 per cent. The capping of this charge is good, but the cap allowed is still on the higher side, considering the high incidences of misselling of Ulips. Individuals may realise their mistakes of choosing an inappropriate Ulip soon, but will be penalised heavily for wanting to rectify such a mistake.

Minimum mortality cover

All Ulips will have a minimum mortality cover (or life cover). In single premium plans, it will be 125 per cent of premium, compared with earlier norm of 50 per cent. In case of regular premium plans, minimum life cover will be 10 times the premium compared with five times earlier. It will ensure higher life cover to policyholders for the same premium paid.

Increase in lock-in period to 5 years

A five-year period does not make the insurance aspect of an Ulip any long-term in nature, contrary to Irda's belief that it does.

From an investor's perspective, a longer lock get the money back for a longer term even if one is dissatisfied with the insurer and wants to discontinue before five years. They will not get their surrender value till the five-year lockin period is over, nor will any interest accrue on the fund. Insurance agents are not expected to alert investors about the implication of this longer lock-in period and that makes the Irda move investor unfriendly.

Loan against Ulips

The maximum loan amount that can be sanctioned under a Ulip policy shall not exceed 40 per cent of the net asset value (NAV) with more than 60 per cent equity exposure and 50 per cent of NAV in case of Ulips with more than 60 per cent debt exposure. Earlier the maximum loan allowed against a Ulip was 40 per cent of the surrender value. This is no major change, except that policyholders with more debt exposure can now take higher loan due to less voltality in debt market.

Premiums to be uniform

Non-uniform premiums created complexities that investors could not fathom. A uniform premium policy will make it easier for investors to understand the investment and insurance aspect of the policies better. limited premium products will benefit investors only if agents do not try to downplay the fact that premiums in limited premium Ulips will be required to be paid for at least five years.

Charges to be distributed evenly

This is a good move, as it will prevent bunching up of expenses in the first and second years. If one discontinues a policy in a year or two, one pays for charges apportioned for that period and not the entire charge that insurers were levying till now.

4.5% returns on pension, annuity plans

A great move, as it will prevent reckless investments by insurance companies in these long-term investment products. It will ensure they have a larger dose of debt instruments in their portfolios which will act as a protection against the fluctuations in the equity component of the portfolios.

No partial withdrawal in pension plans

In the case of unit-linked pension or annuity products (pension plans), no partial withdrawal shall be allowed during the accumulation phase. Earlier, partial withdrawal was allowed after three years.

This will result in policyholders blocking the money for a longer period.

Mutual Fund Review: Kotak Opportunities



DESPITE a portfolio of around 57 stocks, a large-cap tilt and exposure to derivatives, debt and cash, it is not a fund for the cautious. True to its calling, it scouts for opportunities and doesn't hesitate in taking concentrated sector and stock bets. This leads to extreme returns.

In the bull phase (June 15, 2006 to January 8, 2008), it delivered 91.26 per cent against the 81.29 per cent average of other opportunity funds. Unsurprisingly, it shed higher in the bear hug of 2008. While in the recent run up (March 9, 2009 to June 30, 2010) it delivered 85 per cent against its peers 87 per cent.

Its charm lies in its capability to identify sector trends ahead of time. In 2005, it rode the FMCG wave and the move paid off. In the first quarter of 2006, it focused on metals. In 2007, its exposure to construction and metals that resulted in a superb performance. In 2008, it was overweight on the least-hit FMCG sector, which helped it get away with an average fall. More recently, it played its cards well in the auto boom. The category average to the auto sector was around 2.44 per cent, while this fund's exposure stood at 4.58 per cent in the first quarter of 2009.

The fund increased its allocation to large caps from January (58 per cent) to March 2009 (71 per cent), while again brought it down to 60 per cent in December 2009. The equity allocation has averaged at around 94 per cent in the past six months. Yet the broad diversification across sectors has been maintained. The fund manager actively churns the portfolio and books profits regularly, so it's not surprising to see 78 stocks

make an appearance for just five months or less. The quarterly returns show that it's not a consistent out performer. There have been times when it has been on a roll and when it failed to deliver average returns.

Medical Insurance: Private insurers cashless facility continue with


WHILE public sector general insurance companies are fighting a battle with hospitals and nursing homes over `inflated rates', their private sector counterparts continue to provide cashless claim settlements, albeit cautiously.

Private general insurance companies have a 30 per cent to 35 per cent share in the health insurance market.

Private general insurers Financial Chronicle spoke to said it is business as usual on their part.

TA Ramalingam, head of underwriting at Bajaj Allianz General Insurance, said the insurer had not stopped cashless facility in any of the network hospitals.

"We have exclusive arrangements with our network hospitals as we do not have a TPA. In case of admissible claims from hospitals, which are not in our network, we have a turnaround time of 14 days from the date of submission of all documents," said Ramalingam.

Higher claims ratio has hit the private sector insurers too. For many companies, health insurance business is turning unviable, but they are forced to carry on with the business without hiking premia because of stiff competition.

According to a senior official at ICICI Lombard, the biggest private general insurance company by market share, fraudulent claims and inflated bills are a cause of worry to it too. "We tackle these on a case to case basis and do not plan to withdraw the service all together," the official said.

Rahul Agarwal, CEO of Optima Insurance Brokers, said the no-cashless problem in mediclaim is limited to PSU insurers alone.
"Private sector insurers are in wait and watch mode.
We don't see the row being resolved anytime soon as the insurers have insisted on a roll back of rates at hospitals, which is unlikely to happen."

Standalone health insurers, too, have stayed out of the row. "We operate on a no-TPA model and this is to ensure hassle-free claim settlement. We ensure that our network hospitals advertise their cash rates, regular room charges and even doctor's fees and there is total transparency in the system," said Neeraj Basur, director of finance at Max Bupa.


Saturday, July 24, 2010

Tune trading strategy in the stock makrket for news


   EVERY once in a while, in the life of a company, there comes an event which makes investors wonder — should I review my holdings? We take a look at some such events and suggest how you should react as a retail investor to come out a winner.

Mergers And Acquisitions

Generally, when a company is going to be acquired, its stock price rises. This is because the acquirer typically pays a premium over the market price for acquiring the company. Price of the company being acquired goes up, while that of the acquiring company goes down. The premium paid over the market value sweetens the deal and attracts traders with short-term profit motives. Take the recent case of ICICI Bank (ICICI) taking over Bank of Rajasthan (BoR). When ICICI announced it is going to acquire BoR, share price of BoR moved up more than 50% over just three sessions. The stock that benefits the least in the short term is the company doing the acquisition. In most cases, the stock price of the acquiring company falls as it is exposed to greater risk. If there are rumours of a company in your portfolio being up for acquisition, you should be happy and hold on to the stock since there are chances that the buyer would pay a premium.

Strategic Investor

Often, companies raise funds by issuing shares to private equity investors or mutual funds. Such strategic investors, at times, buy a 5-10% stake in a company. A recent example of such a placement is Shiv Vani Oil placing shares with Templeton Strategic Emerging Markets. Similar placement was done by Everest Kanto Cylinders with Reliance Mutual Fund. Most investors think that the price at which these placements are made is a floor price and the stock price cannot go below this. However this could not necessarily be true. Different investors have different perspectives and time frames. These may not match with that of small investors' perspective. Hence, retail investors should buy into stocks after doing their own homework and looking into their own time frame. There are umpteen instances where share prices have fallen below levels at which equity has been allotted to strategic investors. Some of the real estate sector companies have earned dubious fame in placement business.

Bonus And Stock Split

Bonus shares are issued to the existing shareholders by converting free reserves or reserves from the company's share premium account to equity capital without taking any consideration from investors. Generally, a company would issue bonus shares if its business is doing well to reward its shareholders for being with it. Hence, it makes sense to hold on to shares of companies that have good fundamentals and have declared a bonus. Though the price adjusts immediately on the ex-bonus date, the bonus shares take time to arrive in the demat account of the shareholders. If you do not receive such bonus shares in the due course, better to approach the investor relations department of the company. At times, companies split the stock into a lower face value of maybe Rs 5, Rs 2 or even Re 1. This helps create higher liquidity in the stocks, so that a higher number of investors can participate in the same. Long term investors should merely ignore such actions, as such an announcement makes no change in the fundamentals of the company's performance. Like bonus shares, split shares take time to appear in demat account. If you do not receive them, contact the investor relations department of the company.

Special Dividend

Piramal Healthcare is now seen to reward the shareholders with distribution of the cash they will receive towards the consideration for the generics business sale. A special dividend cannot be ruled out. Asset sale leads to such special dividend. Recently, blue chip companies like Hero Honda and Engineers India were in limelight for such a one-time dividend. Post the ex-dividend date, the stock price falls to the extent of the dividend payable. Hence investors must have a good understanding of the business and the fair value of the company. If you are not really upbeat about the company's future, it makes sense to sell in the secondary market, as the cum-dividend price also factors in special dividend.

Rights Issues

Rights shares are those sold by a company to existing shareholders often at a discount to market price. It is very important that the investors keep track of the ex-right date. If you do not intend to participate in the rights issue, better sell the stock before the record date. As the stock goes ex-right, the price adjusts and the investors are mailed the rights form along with the prospects. If you do not receive the rights form, you should get in touch with the manager for forms. Timely submission of the form, along with the consideration, makes you eligible for receipt of the shares.

Delisting Offers And Buyback By Tender

Changing listing norms that demand for at least 25% of public ownership has made many consider delisting. Bright prospects of Indian economy have also accelerated the process. So, no wonder the number of delisting offers goes up. Recent examples here are HSBC Investsmart, broking arm of financial behemoth HSBC. If you get delisting offer, do keep a track of price discovery process. If the share is available in derivatives, you may choose to hedge your position once the price move up in sync with price discovery process. But, if there is no futures market available, be doubly careful. If the delisting attempt is not successful and the company rejects the discovered price, the stock price may simply dive down.

   From taxation point of view too it makes sense to sell shares in secondary market than tendering them to the company. For buyback by tender, it makes sense to estimate the possible acceptance ratio by taking into account institutional holding and active investors willing to tender shares. If the secondary market price closes in into the tender price, better sell in the secondary market.


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