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Thursday, March 31, 2011

Mutual Fund Review: DSP BLACKROCK MICRO CAP FUND

DSP BlackRock Micro Cap Fund is a small cap fund launched in June 2007 with an objective to seek long-term capital appreciation by substantially investing in a portfolio of stocks that are not part of the top-300 companies by market capitalisation. The fund was initially launched as a close-ended fund, but was subsequently made open-ended in June 2010. The fund, which is jointly managed by Apoorva Shah, Vinit Sambre and Mehul Jani, had assets under management of Rs 437 crore as on January 2011.

The fund has been ranked Crisil Fund Rank 1 (top-10 percentile of the peer set) in the Small & Midcap equity category for the last three quarters till December 2010. The fund's superior risk adjusted performance is complemented by good scores on company concentration, industry concentration and liquidity parameters.

Performance

The fund has outperformed its benchmark (BSE Small Cap) and peers in the last 1-, 2- and 3-year timeframes. The fund has given the highest returns in the Small & Midcap category for a two-year period. Though the volatility in the smallcap space is higher than the largecap and midcap segments, the fund has successfully managed the risk by outperforming its benchmark with high margins. In the last one year, the fund delivered 15.62 per cent returns vis-à-vis the benchmark delivering negative 0.7 per cent returns.

Although the fund has underperformed the peer category (based on average performance) in the three- and six month periods (as on February 23, 2011), given the volatile nature of the category, gauging the fund on longer time periods is desirable, wherein the fund ranks higher both on returns and Crisil's Mutual Fund Ranking.

Since its inception (June 14, 2007), the fund has outperformed its peers. An investment of Rs 1,000 in DSP BlackRock Micro Cap Fund since inception would have grown to Rs 1,419 on February 23, 2010. The same amount invested in the peer group would have returned Rs 1,181 and in the benchmark would have returned Rs 1,098.

AUM growth cycle

After the global downturn in 2008, the assets under management (AUM) of the fund have grown three-fold from Rs 144 crore in January 2009 to Rs 437 crore in January 2011. This growth is jointly attributed to fresh inflows in the fund after its conversion as an open ended fund in June 2010, as well as market recovery.

Portfolio diversification

The fund has maintained a well diversified portfolio currently holding 47 scrips. In the Crisil Mutual Fund ranking, the fund has a high score on concentration analysis, indicating low portfolio concentration. In January 2011, the top-5 sectors in the portfolio constituted 35 per cent of total net assets and top-5 companies constituted 20 per cent of total net assets. In comparison, the peers accounted for 43 per cent as top5sectors and 26 per cent for top-5 companies.

Over the last quarter, the fund manager has raised equity exposure to reap the benefit of market volatility and reduced cash holding to 7 per cent in January 2011 from 13 per cent in October 2010. On an average, the fund has maintained cash holdings of approximately 13 per cent in the last one year.

Portfolio analysis

Industrial manufacturing, fertilisers & pesticides and pharmaceutical are the top-three sectors in the fund's portfolio and constitute 37 per cent of total net assets. When compared with the average sectoral exposure in the last one year, the allocation to fertilisers & pesticides, financial services, IT and energy has increased. In the last three months, the fund manager has added investment companies, fertilisers — speciality and bearings and exited from leather and steel sectors.

Risk analysis

DSP BlackRock Micro Cap fund, being smallcap in nature, may experience greater volatility and lower liquidity when compared with largecap funds.

At a given level of risk, the fund manager has been able to generate an alpha of 0.21 in the last one year, against the peer average of 0.02. The risk-adjusted returns of this fund are higher than its peer average.

 

The Contrarian Rules of Investing & Managing Money

How often have you followed investing principles to the hilt only to fall short of expected returns? How many times have you imbibed investing logic to rue over its failure?

While rules decidedly set you on the road to success, it's foolhardy to snub your own rationality. Often, our hard-earned money fails to multiply at the rate we want because of the knowledge base we have built over the years and our blinkered approach to investing.

 

Sometimes, adopting a different approach to the norm can be more profitable. Here are some strategies that are contrarian to the ones popularly espoused. These can work for you, but keep in mind that just as with other strategies, these too require study and due diligence.

Concentrate on your portfolio: Most readers think of portfolio diversification as a wealth creation technique. Actually, it's a risk reduction tool utilised to preserve wealth.

This doesn't diminish its importance. In fact, diversification is essential. However, some of the largest fortunes in the world have been created by 'focused' investing. Azim Premji, Ratan Tata and Bill Gates have all increased wealth by concentrating their funds, not by diversifying them.

So, if your portfolio is doing well, it's a good reason to buy more stocks of the companies that you own. Suppose you had bought 100 shares of Tata Power in 1995, the consistent performance of the company can be an incentive to add more of the same.

Ignore some rules: Most finance students have been taught the '100 minus age' thumb rule to calculate the amount that should be invested in equities. However, aggressive investors often ignore it. They usually have a set percentage of debt amount in their portfolios.

Though they keep putting in small amounts and rebalancing their portfolios to maintain this figure, they invest heavily in equities. For instance, an investor can put an amount equivalent to his expenses for the next 10 years in debt instruments. Any money invested after this can be routed to the stock market.

Get rid of niche plans: Specific policies, such as child plans, pension plans, etc, are, at best, sub-optimal. For instance, if you want to build a corpus for your child's higher education, instead of putting money in a child plan from ICICI Prudential Asset Management Company, invest it in the ICICI Prudential Dynamic fund, which will deliver better returns.

Get an adviser: This is probably the most important investing approach you can adopt. Many people believe that taking financial advice from parents is enough. It's also natural as we've turned to them for their opinion throughout our lives.

However, if your parents haven't managed to amass a lot of wealth through their investments, they are probably not the best people to approach in this regard. What you need is a competent and unbiased person to help you plan your finances. So, get an adviser and ensure that he understands your financial goals.

Don't prepay the home loan: Most of us prefer to opt for a 20-year home loan while buying a house so that we can pay the equated monthly instalment (EMI) comfortably. When our income increases subsequently, we tend to be in a hurry to repay the loan.

This is not a good strategy. If the long-term returns from equities are much higher than 8% a year, why should we prepay the home loan? It makes more sense to keep paying the EMI and, at the same time, investing in equity SIPs. In the long run, this can make a surprising difference to your portfolio.

Avoid the Public Provident Fund: The PPF isn't a profitable avenue for everyone, especially young investors. If they want to invest in a secure long-term instrument, a better option would be an index fund. Over 16 years, the fund would deliver much higher returns than the PPF.

Surrender policies: For some people, it's anathema to admit they've made the wrong decision and bought a bad policy. So they continue to suffer. In most cases, it's better to take the losses, mentally and physically, and reinvest in another option.

Don't go for gold: Reduce participation in the futures and options market, realty market and gold. These are good avenues for investors who are highly experienced, traders who are willing to take high risks or professionals in these fields.

They know the tricks of navigating and profiting in these markets. Retail investors should avoid these complicated areas, including property speculations. However, if they are keen to build a commodity portfolio, they can invest in a couple of products.

 

Saving on Health Insurance Premiums

Smokers get insured!

The health of a smoker is always at danger, thus people who are excessively into smoking would end up paying more premium than non-smokers. Thus, in order to trim down on the premium, one must do away with smoking.

Keeping a control on High BP

Suffering from high BP is simply not a fine sign and one must keep it under manageable levels. Keeping a check on high blood pressure will help you in lessening the premium cost.

Good health is the key

If an individual is in his or her best of health, then obviously your premium expense will be quite cheaper than the individuals who suffer from various kinds of health ailments.

Concession in claim free years

One must avail for their claim benefits as there are discounts on it in the claim free years. This will assist in reducing your premium at the occasion on renewal.

Evaluate the quotes

Comparing and evaluating the quoted price from numerous insurers is an imperative step in order to save on your health insurance premium. One needs to choose a policy based on his needs, requirements and the best bargain deal that one can lay their hands on.

Evaluate the benefits

Comparing and evaluating the advantages and related benefits of various available health insurance plans is a must. One must execute profound research in order to find out what kind of discounts one can ask for.

Set your requirements right

One must make their choices for cover extremely cautiously in order to opt for coverage that they need. Randomly selecting any sort of coverage can end up making you pay more than the amount you actually want to invest. Thus, an appropriate decision making must be your utmost priority.

 

What are the financial instruments in India?

We took a look at the players in the financial markets earlier. Let us now look at the Financial Instruments these players have. They can be braodly classified into

Ø      Government securities and

Ø      Industrial securities

 

Government Securities (G-Sec):

In India G- Secs are issued by the Central Government, State Governments and Semi Government Authorities such as municipalities, port trusts, state electricity boards and public sector corporations.  The Central and State Governments raise money through these securities to finance the creation of new infrastructure as well as to meet their current cash needs.  Since these are issued by the government, the risk of default is minimal. Therefore, interest rates on these securities often serve as a benchmark for the level of interest rates in the economy. Other issuers may price  their offerings by `marking up' this benchmark rate to reflect the credit risk specific to them.

These securities may have maturities ranging from five to twenty years.   These are fixed income securities, which  pay interest every six months.  The Reserve Bank of India manages the issues of the securities. These securities are sold in the primary market mainly through the auction mechanism. The RBI notifies issue of a new   tranche of securities. Prospective buyers submit their bids. The RBI decides to accept bids based on a cut off price.

The G -secs are primarily bought by the institutional investors. The biggest investors are commercial banks who invest in G-secs to meet the regulatory requirement to maintain a certain percentage of Statutory Liquidity Ratio (SLR) as well as an investment vehicle. Insurance companies, provident funds, and mutual funds are the other large investors. The Primary Dealers perform the function of market makers through buying and selling activities.

The Government of India also borrows short term funds for up to one year.  This is through the issue of Treasury Bills which are sold at a discount to the face value and redeemed at the full face value. 

Industrial Securities:

These are securities issued by the corporate sector  to finance their long term and working capital requirements. 

The Major Instruments that fall under Industrial Securities are
• Debentures,
• Preference Shares And
• Equity Shares.


Debentures

Debentures have a fixed maturity   and pay a fixed or a floating rate of interest during their lifetime.  The company has an obligation to pay interest and the principal amount on the due dates regardless of its profitability position.  The debenture holders are not members of the company and do not have any say in the management of the company.  Since these carry a predefined rate of return, there is no scope for any major capital appreciation.  However, in case of fixed rate debentures, their market price moves inversely with the direction of interest rates. The debenture issues are rated by the professional credit rating agencies regarding the payment of interest and the  repayment of the capital amount. Apart from the `plain vanilla' variety of debentures (periodic payment of interest during their currency and repayment of capital on maturity), a number of variations have been devised. For example, zero coupon bonds  are issued at a discount to their face value and redeemed at the full face value. The difference constitutes return for the investor.

Preference Shares

Preference Shares   carry a fixed rate of dividends.  These carry a preferential right to dividends over the equity shareholders.  This means that equity share holders cannot be paid any dividends unless the preference dividend has been paid in full.  Similarly on the winding up of the company, the preference share   holders   get back their capital before the equity share holders. In case of cumulative preference shares, any dividend unpaid in past years accumulates and is paid later when the company has sufficient profits. Now all preference shares in India are `redeemable', i.e. they have a fixed maturity period. Thus, preference shares are sometimes called a `hybrid variety' – incorporating features of debt as well as equity.

Equity Shares

Equity Shares are regarded as high return high   risk instruments.  These do not carry any fixed rate of return and there is no maturity period.  The company may or may not declare dividend on equity shares. Equity shares of major companies are traded on the stock exchanges. The major component of return to equity holders usually consists   of   market appreciation. 

Call Money Market:

The loans made in this market are of a short term nature – overnight to a fortnight .  This is mostly   inter-bank market.  Those banks  which are facing a short term cash deficit, borrow funds from the cash surplus banks.  The rate of interest is market driven   and depends on the liquidity position in the banking system. 

Commercial Paper (CP) and Certificate of Deposits (CD) :

CPs are issued by the corporates  to finance their working capital needs.  These are issued for short term maturities.  These are issued at a discount and redeemed at face value.  These are unsecured and therefore only those companies who have a good credit standing are able to access funds through this instrument.  The rate of interest is market driven and depends on  the current liquidity position and the creditworthiness of the issuing company. 

The characteristics of CDs are similar to those of CPs except that CDs are issued by the commercial banks.

 

Mutual Fund and dividend

The last three months of a financial year witnesses a lot of dividend declaration by mutual funds. This results in a lot of investor attention.

A lot of excitement is generated among investors as the dividend is declared. But the declaration of the dividend does not actually provide any benefit, as it involves just the payout of the gains already earned. It is only the rise in the value of the fund that actually gives the investor a gain in their investments. Here is a look at some aspects of the dividend declaration process.

Rate: The first aspect related to dividends that an individual investor will come across is the rate of the dividend.

This is important as it determines the amount of dividend that will actually be paid by the mutual fund.

The dividend rate is applicable for all investors in the dividend option of the fund and it does not impact those who have selected the growth option.

While all investors look for a higher dividend rate, it is just not the rate that determines the amount of dividend that they receive. The base for the calculation is important and when the base for the calculation is the same then the investor would prefer a higher rate of dividend.

Face value: The dividend payout will be based on a specific value and this will be clearly specified by the fund when it declares the dividend. When it comes to most funds the dividend is declared as a percentage of the face value of the fund.

This does not involve net asset value (NAV), and hence, this will end up as a different percentage of the current value as compared to the face value.

Consider an example where the NAV of a fund is Rs 40 and the face value is Rs 10. If the dividend is declared at 60 per cent then this will be Rs 6 per unit. In percentage terms, it is just 15 per cent of the current value. For an investor who has bought the units at Rs 10, the dividend will be the actual 60 per cent. For someone who has bought the units at Rs 20, the dividend will be 30 per cent of their cost even though they receive Rs 6 per unit.

Distributable surplus: Another aspect of dividend that confuses a lot of people is when dividend is declared as the distributable surplus. In case of various funds, especially debt-oriented ones such as fixed maturity plans that are close-ended in nature, there has to be a final dividend paid at the time of the closure of the fund.

In such a situation, the fund will not know before the final date of operation as to what is the exact earning of the fund. If the fund wants to pay out the entire amount to the investor then there can be uncertainty that can arise in the matter.

This is the reason why funds announce 100 per cent of the distributable surplus. When this is the case then the entire earnings made by the fund till the date of the dividend will be considered as the figure for the payout.

Some amount of confusion arises for investors who think that this means there will get 100 per cent dividend. This is not the case, and hence, they need to be careful when they are comparing various percentages.

This figure might turn out to be less than a smaller figure elsewhere, because the distributable surplus might be quite small in terms of percentage of the face value of the fund.

 

Wednesday, March 30, 2011

Are You A Stock Trader Or An Investor?

INDIVIDUALS, both salaried and those in business, invest a portion of their income in bank deposits, mutual funds and shares. There are people who buy and sell securities on a regular basis while another category comprises those who continue to hold on to their investments for a longer period. There are a few others who do both — invest in shares and earn dividends besides buying and selling securities on a daily basis. People who deal in securities listed in a stock market can broadly be categorised as traders and investors. So, how does one find out which category he fits into?


   The tax department has issued a circular to help in this process. One of the scenarios given in the circular is where a person deals in securities with an intent to earn profit; he would be termed a "trader". A trader plays with the short-term swings in the stock market to make profits. Such a person does not tend to retain his securities for long. The circular could serve as a guide though the final decision on whether a person would qualify as a trader or investor would depend on individual fact patterns and events surrounding the securities transactions. In some instances such as the one cited earlier where a person does both, he could be a trader as well as an investor. Such individuals would do well to have a clear demarcation between their investment portfolios and trading securities to avoid any tussles with the taxman. So where does tax come into picture in all this and how does it impact?


   Let's try and understand.


   In the case of an investor, only the profit arising out of a securities sale is taxable in his hands. This profit is taxable as capital gains — short-term if the security is held for less than one year and long-term otherwise. An investor has to pay taxes at the rate of 15% in the case of short-term gains on which Securities Transaction Tax (STT) has been charged while long-term gains are completely exempt when the trans-actions are subject to STT. The Income-Tax Act does not allow for deduction of STT while computing gains in the hands of an investor.


   On the contrary, income from purchase and sale of securities is taxable as business income for a trader. Besides, it is the net income that is taxable. In other words, a trader can reduce all expenses incurred in the course of and incidental to the trading activity though these have to be duly supported by documentary evidence. This includes STT paid on taxable securities transactions. An individual trader's net business income will be taxed at progressive rates with a maximum slab rate of 30%. Consequently, individuals who are in the minimum slab rate may find it beneficial to declare the income from investments as business income since their average tax rate may be lower than the 15% for short-term gains. However, this may not be suitable for the higher income category. Besides, people who sell shares which are held for more than one year will prefer to avail complete tax exemption rather than the same being treated as business income. The trader is also subject to additional compliance requirements such as maintenance of books of account and obtaining a tax audit report when the income crosses a particular threshold level.


   So, wouldn't it be worthwhile to spend some time understanding how you will be taxed on your investments before the taxman knocks at your door?

 

Product Review: ING Market Shield



Net Yield 7.98%
THIS is a type I scheme that guarantees the highest NAV over the policy tenure. This plan offers a minimum guarantee of 80% of the highest net asset value by the scheme. The striking difference of this scheme is that it offers guarantee all the time including surrender or demise. Also, the scheme allows for a longer policy tenure of 15-20 years, providing the option to investors to stay invested for long. Market shield also claims to invest a higher percentage of the premium in equity funds than in debt, unlike other schemes, offering a chance for higher upside returns.

What should you expect from your wealth manager?

Managing wealth is primarily about asset allocation. The basis for choice of assets and the proportion that should be held in each investor's portfolio depends on his/her objectives and constraints. It is the core proposition of financial planning. While the markets may move up or down, the investor's portfolio has a specific return requirement and risk profile. A professional wealth manager is expected to manage allocations in a way that the return is closer to achieving the investor's goal and the downside risks are well within the stated preferences of the investor. To achieve this, a wealth manager needs proficiency in asset class performance, so that he/she is able to read the macro trends and advise clients to modify their allocations accordingly. That is, the expertise a wealth manager should bring to the table.

There are several investors who think that investment managers should make asset allocation decisions. They would have liked the fund manager to move into cash and protect the portfolio before the stock markets crashed. They would like a midcap fund to hold largecaps, if markets corrected. Many financial advisors and wealth managers also believe that since fund managers are investment specialists, they should manage asset allocations. It is an uninformed expectation.

A fund is useful in asset allocation only if it is managed with a specific objective, and remains true to its stated focus. A largecap fund that also invests in midcap muddles up the choice to use it to take an exposure to a specific asset class. The fund manager's tasks are selection of securities and management of the portfolio, so that the returns are superior relative to a benchmark. The benchmark represents the asset class that the fund focuses on. An equity fund moving into cash will harm the investor's allocation, since to the investor holding the fund means exposure to equity, and not equity and cash. The investor can also redeem his holdings to achieve a lower allocation to equity and higher allocation to cash. It also makes no sense to pay a two per cent fee to a fund when it holds 30 per cent in cash.

If active fund management is about managing sectors and stocks, active wealth management is about managing allocations to asset classes. A wealth manager's fee should be a function of his/her expertise in asset allocation. We seem to be far from this proposition. We have variously christened intermediaries such as financial advisors, relationship managers, private bankers and wealth managers, bringing investment products. Some operate at the basic level of enabling transactions, filling up forms and completing tasks. Some operate at the next level of distributing investment products, with no competence in managing asset allocation.

A small minority takes on the asset allocation mandate. The debate about 'fee-based' and 'commission-based' advisory needs to recognise these differences in competency and quality of service. The armies of bank relationship managers and independent financial advisors that reach out to clients are unable to seek fees because they operate at a lower level. They also advocate 'lazy' allocation strategies such as systematic investment and transfer, hoping that risks will even out with time. A fresh look at competency building for wealth management is needed, before we debate about fraud, fees and mis-selling.

Income Tax exemption under Section 80C of the Income-Tax Act

Are you desperately searching for the right tax-saving instrument? Pause for a moment. See if you really need one. Under Section 80C of the Income-Tax Act, the maximum you may save is Rs 1 lakh in a year. There could be an investment made in the previous year(s) that requires regular commitments each year, or an expense that qualifies for tax exemption. You might not have to undertake any fresh investments because if you invest more than the limit of Rs 1 lakh, it's not going to fetch you any additional exemption. Let's see what such existing commitments are.

Employees' Provident Fund (EPF) –

If you are a salaried employee, each month you contribute 12 per cent of your basic pay towards EPF. An equal amount is contributed by the employer, out of which 8.33 per cent goes towards EPF, and the rest towards the Employees' Pension Scheme. Calculate 12 months' outgo to get your total EPF contribution. Remember, only the employee's contribution qualifies for a tax break. You may increase the contribution even up to 100 per cent of the basic pay. The rate of interest for the current fiscal has been proposed at 9.5 per cent per annum; however, the prevailing rate is 8.5 per cent.

Life insurance or pension plans –

 Calculate all your commitments towards premium payments for life insurance policies of your own, your spouse and children (including dependent, independent, minor, major, married or unmarried) for claim purposes. Request the insurer to provide you premium paid/dues certificate for the year. Buying a new policy may add to your costs, so you can use the top-up option to park additional savings.

Tuition fees –

 Take into account the amount paid as tuition fees to any educational institution, university, college or school in India for any full-time course. It includes even play schools,  pre-nursery and nursery classes. However, you can claim tax benefits on tuition fees for two children only and up to Rs 1 lakh.

Home loan principal repayment –

If you are servicing a home loan, ask your lender to provide you the home loan certificate as it shows the total interest paid during the year. This payment allows tax exemption under Section 24 with an upper limit of Rs 1.5 lakh. Principal repayments up to Rs 1 lakh qualify for exemption under Section 80C.

Deduct the total outgo under Section 80C from Rs 1 lakh; the remaining amount, if any, should be invested for fuller utilisation of tax breaks. Before you make any investment, figure out if there are any short-term goals to be met or any upcoming expenses that may land you in a fund crunch. Also, take stock of your needs—whether you need an additional life cover, or funds to meet expenses such as children's education or marriage. You may need funds to build a house or create a corpus for your retirement. Before you invest, keep in mind these factors as well as your risk profile. But don't forget their taxability on returns and maturity.

 

Debt Planning - Make Bank fixed deposits flexible and more liquid

You can either opt for a sweep-in account or use an overdraft facility

Fixed deposits (FDs), a risk-averse investors' investment avenue of choice, has become more attractive after the recent interest rate hikes by banks. However, the choice of an FD is not a simple one, given many variants.

There are choices between regular FDs, recurring deposits, flexi deposits and sweep-in deposits. Sweep-in deposits are convenient because they are linked to your savings account. An accountholder can also take advantage if there is a temporary surplus and are unsure of the period for which the amount will stay in the account.

Typically, any amount over and above double your minimum average quarterly balance, is 'swept-into' a fixed deposit in pre-specified multiples. However, this would be different for each bank.

Sweep-in deposits: The savings account balance would earn you interest at 3.5 per cent per annum.

The interest rate attracted by the sweep-in deposit would depend on the tenure of the deposit. So, say your account balance is `20,000 and the amount in your sweep-in deposit is `10,000, held for six months. While, your account balance of `20,000 will attract interest at 3.5 per cent, the interest earned by your sweep-in deposit amount of `10,000 would depend on the interest being offered by the bank on a six-month sweep in deposit.

The interest rates offered on sweepin deposits are usually lower than the regular fixed deposits. For instance, Kotak Mahindra Bank offers interest on 1-year, 1-day sweep-in deposits at 6.6 per cent. But, for the same period, the bank offers interest at 8 per cent on standalone deposits.

Most customers opt for a sweep-in facility because of the liquidity it offers. If you draw a cheque on the account and the balance is insufficient to clear it, the bank pulls the deficit money from the deposit. The rest of the amount continues to be in the deposit.

A temporary surplus may be invested in a sweep in deposit. But, if one is sure about the investment tenure, he/she must opt for a standalone FD.

But sweep-in deposits has drawbacks. Apart from lower interest rates, some banks offer this facility for a limited tenure. For example Axis Bank's sweepin deposit product, known as Encash 24, has a maximum maturity period of 181 days (about six months), earning annual interest of 6.25 per cent (or close to 3.13 per cent for six months) for deposits below `15 lakh. On maturity, the bank automatically renews the deposit for the same tenure.

You can make your standalone FD, that fetches higher interest liquid by opting for overdraft facility.

Overdraft: This facility is offered against the standalone fixed deposit.

It is a loan, wherein bank charge 1-2 per cent more than the interest rates offered to you on your fixed deposit.

If you opt for this facility, banks transfer an amount, 75-80 per cent of the fixed deposit, in to your savings account. The overdraft is valid for the entire term of the deposit.

Suppose, you are looking at depositing money for short-term goals such as, say payment of your insurance premium after three months or your child's school fees after six months. If you keep the money in a sweep-in deposit, there is a risk that the money may get used if your savings account balance dips. Instead if you invest the amount in a regular FD, the funds are locked. In addition, could even attract a higher interest rate depending on your bank.

In case you want to avoid OD and paying interest to bank, you can also opt for fixed deposit that allows partial withdrawal. This is bank-specific and investors must check if their bank gives this option.

Part withdrawals of the fix deposits is possible for several private and public sector banks such as Axis Bank, ING Vysya, Kotak Mahindra Bank, Punjab National Bank and others in pre-specified multiples.

Tax saving along with equity linked saving schemes (ELSS)

During this time of the year, taxpayers find themselves flooded with mails and SMSes goading them to invest in Section 80C instruments. Both insurance companies and mutual funds pitch their life/medical policies or equity linked saving schemes (ELSS).

Investing in ELSS, however, might soon be passé. If the Direct Taxes Code is implemented next year in its present form, this year would be the penultimate year in which you will get benefits from investing in ELSS under Section 80C.

A mutual fund scheme has to invest at least 65 per cent of its corpus in equities to get benefits under Section 80C. ELSS comes with a mandatory lockin of three years.

But, this period is much lesser than that of other instruments such as the Public Provident Fund of 15 years (six years for partial withdrawal), National Savings Certificate (six years) and unit-linked insurance plans (Ulips) of five years. Over a three year period, ELSS returned 1.30 per cent as against equity diversified funds' 1.27 per cent.

Besides the benefit in the first year, returns from these schemes have been quite good. According to mutual fund tracking agency Value Research, the ELSS category has returned 13.07 per cent annually, as compared to equity diversified funds' 12.48 per cent, as on January 25 this year.

Financial experts feel the main advantage of investing in ELSS is that it ensures forced investment in equities. ELSS gives the dual benefit of tax saving and equity investment. However, the allocation to ELSS should be decided only after calculating the amount spent for purchasing a term insurance and contribution made towards the Employee Provident Fund. It is because if one has already exhausted the limit by investing in these instruments, an equity-diversified fund can be a better option because of its liquidity — one can enter or exit the scheme when one wants.

Like any equity scheme, ELSS offers both dividend and growth options. The growth option gives better returns as the interest income gets reinvested and compounded. Those in need of cash or pensioners should opt for the regular payouts or dividend option.

The interest income is tax free because you hold the units for over a year. But you have to pay the securities transaction tax of 0.25 per cent at the time of maturity.

It is advised to invest a lump sum in ELSS. A systematic investment plan (SIP) works only if the tax benefits are to continue in the next financial year. Also, if you are already late, starting an SIP will not make much sense. Opt for an SIP in ELSS from the start of the financial year, if you want to have a disciplined approach.

However, the lock-in period can be a deterrent, according to many financial planners. Equities can be volatile. And, if the fund value erodes over three years, you cannot do anything. A three year period may not be sufficient for your equity investments to appreciate significantly either.

Stock Splits


Stock splits are a relatively new phenomenon in the Indian context. It is important that investors understand the reasons that companies may split their shares and how a stock split is different from a bonus issue. In a stock split, the capital of the company remains the same whereas in a bonus issue the capital increases and the reserves decrease. However, in both actions (a stock split and a bonus) the net worth of the company remains unaffected.

Let's take the HDFC 5 for 1 stock split. This means following the stock split, the company's shares will start trading at one-fifth the price of the previous day. Consequently, you will own five times the number of shares that you originally owned and the company in turn will have five times the number of shares outstanding.Consider the following example.

The question that arises is if there is no difference to the wealth of the investor, then why does a company announce a stock split? Generally, stock splits are announced to make a scrip more liquid, more affordable to the average investor — since post the split, the share price adjusts proportionately to the split ratio.
Here, it has to be reiterated that the shares only appear to be cheaper, it makes no difference whether in the above example you buy one share for Rs 3,000 or five for Rs 600 each. However, earlier the minimum ticket size was Rs 3,000, now it is a more affordable Rs 600.

As far as the tax implications for stock splits are concerned, well, there aren't any. A stock split, like a bonus issue, is tax neutral. However, when the shares are sold, the capital gains tax implications are different that what is applicable for bonus issues. Here, the original cost of the shares also has to be reduced. For instance, in the above example if the cost of the 100 shares at Rs 1,500 per share was Rs 1,50,000, after the split the cost of 500 shares would be reduced to Rs 300 per share, thereby keeping the total cost constant at Rs 1,50,000.

Tuesday, March 29, 2011

How HNIs should guard against high-profile frauds

THE wealth management industry, though nascent, is growing at a fast pace in the country. As per a Karvy Private Wealth Report, wealth in India held by individuals will double from the present . 73 lakh crore to . 144 lakh crore by 2012-13. HNIs are defined as individuals having an investible asset of $1 million (4.5 crore). No wonder, the recent Citibank fraud, where investors are estimated to have lost around . 400 crore due to a fraud allegedly committed by a relationship manager, has been attracting a lot of attention. Due to the high value of the HNI portfolio, every intermediary is trying to woo this segment.
Be it an independent financial planner, or a brokerage house's private client group, the wealth department of a bank or boutique investment advisory firm,
all of them want a share of the pie. While the regulator will do things to tie up the loose ends, what is it that you, as an HNI investor, can do to ensure that your portfolio is in the right hands?

Choose the right financial advisor:

The wealth management industry is fragmented and highly unregulated in India. Hence, it is very difficult to check the credentials of any wealth manager. The first thing that investors must do is choose the right financial advisor. Investors should select reputed wealth managers who are client-centric and are aligned to the client's long term goals. Simply put, it is important that you know the certifications and qualifications of your advisor. Also, you should check his capabilities and credentials and actively question before engaging a person. "In countries like the US, Securities Exchange Commission (SEC) regulates advisors and each advisor has a registered number. So, it is very easy to track the past credentials, and things like if there are any complaints against the advisor. However, in India, there is no such agency tracking wealth managers. Therefore, investors have no other option but to do their own homework. "Ask for references from your investment advisor, and see whether he has demonstrated capabilities across bull and bear markets. If necessary, you could also insist on meeting seniors in the organisation to gain that extra comfort.

Select the right product:

Many a time, banks or wealth management firms devise or manufacture certain products exclusively for HNIs. These may sound exotic and the threshold limit for investment may be as high as . 25-50 lakhs, depending on the bank. So, your relationship manager may peddle you products such as private equity funds, real estate funds, structured products, overseas properties or even investment in art. Investors should convince themselves before opting for any such product.


   Be very clear before investing in any such product. Understand the timeframe required to invest in the product and invest accordingly. Be careful of any product that promises a guaranteed return. As per Sebi laws, no one can offer guarantee on any market-linked product.


   So, if your advisor comes to you with a product which promises or indicates high returns, it should strike an alarm bell. It's time for you to dig further in such a scenario. If you do not like exotic products, make it very clear to your wealth manager that you would like to invest only in products that are simple to understand and execute.

Take control of your finances:

Typically, HNI clients are busy people. They do not have the time and energy to manage my finances, hence I entrust it to a wealth manager. Typically, he is travelling about 15-20 days a month, and does not have the time to track his finances. But such a casual attitude to your portfolio could invite trouble.


   Often HNIs find the process for offline investing cumbersome. They have to fill up forms and sign cheques, which then have to be collected by the relationship manager and subsequently lodged with the AMC or mutual fund. Many a time, such HNIs would be travelling or are too busy with their day-to-day work to take care of these transactions. Hence, they end up signing blank forms, or even blank cheques, in anticipation of a future transaction. If the market moves down as they anticipated, they telephonically inform their relationship manager to do the necessary transaction. Do not sign blank instruction slips or blank letter of instructions. In the past, there have been cases where blank instruction slips have been misused by relationship managers. As an investor, you should be involved in your portfolio.


Often investors tell their relationship manager to buy and sell stocks, since they are busy in their work, trusting them. Depository participants and brokers give you SMS alerts. So, whenever shares move in and out of your account, you get an SMS alert. Most big brokerages today give you a web login. Even if as an HNI you are busy and travelling across the globe, whenever you get time, log on to the web and check your statements. Any inconsistencies should be pointed out immediately.


   At the end of every month, investors should do simple things like reconciling their equity statement with the depository participant or the mutual fund statement with the registrar. He suggests HNIs have a monthly meeting with their relationship manager, in which they should also reconcile their holdings. Another way, in which HNIs can derisk themselves from their broker in the case of equities, is appoint a custodian. While portfolio management services (PMS) providers are mandated to have a custodian for assets above . 500 crore, there is no custodian mandated for wealth management despite the assets running into thousands of crores. While the broker merely buys and sells stocks for you, the trade settlement is done by the custodian. So, this acts as a double check. When you buy shares, the custodian, on your behalf, makes two payments — one to the exchange for the shares bought and second to the broker for his brokerage charges.


   HNIs need to take control of their wealth and go through their transaction statements at least once a month. Ultimately, it's your personal wealth, you have worked hard to earn it, take some time off to grow and preserve it as well.

CHECK LIST


Question your relationship manager when he asks for a signature. Do not sign blank documents, forms or cheques or things that you do not understand

Signing a power of attorney that grants broad authority is very much like signing a blank check — so make sure you understand the laws that apply to the document

Do not invest in Ponzi schemes or schemes that promise you a very high return

Stay in tune with your asset allocation

Understand that products like real estate funds, PE funds are long-term investments with tenures of 5-7 years

Structured products could be risky as one is not aware of the debt portfolio


 

Ready reckoner of various tax saving investment options

AS THE fiscal end comes closer, it is time for investing to save tax. Apart from the regular investment options under Section 80C of the income tax act, this year investors have an added advantage of investing in infrastructure bonds and enjoy an additional deduction in tax under section 80CCF of the Income Tax Act.

SECTION 80C DEDUCTIONS:


Investment options under Section 80C can be broadly categorised as market linked, fixed income and insurance. The fixed income category includes investment options such as the Public Provident Fund (PPF), Employee Provident Fund (EPF), tax-saving bank fixed deposits, National Savings Certificate (NSC) and senior citizens savings schemes. While it is the most popular tax saving category, market-linked instruments including tax-saving equity mutual funds (ELSS) and unit linked insurance plans (ULIPs) are gradually catching up.

PUBLIC PROVIDENT FUND (PPF):

One of the oldest investment options, PPF scores on all grounds as it is one of the very few investment options that fall under EEE (exempt - exempt-exempt) tax regime. This implies that not only the investor can enjoy deduction on the amount invested in this scheme but the interest received on maturity is also exempt from tax.


   PPF offers an interest rate of 8% compounded annually, with the maximum investment restricted to 70,000 a year and mandatory investment tenure of 15 years. An investment of 70,000 every year in PPF for 15 years will amount to a tax free maturity sum of 20.5 lakh at the end of the 15 year tenure.

EMPLOYEE PROVIDENT FUND (EPF):

Under the current norms, 12% of the employee's salary is contributed towards EPF, which is exempt from income tax. Any contribution over and above the 12% limit by the employee towards EPF is consider as voluntary provident fund (VPF) and the same is also exempt from tax, subject to the overall 80C limit of 1 lakh per annum.


   Like PPF, EPF, also falls under the EEE tax regime wherein the interest received (on retirement from service) is tax-free in the hands of the investor.


   The interest payable on EPF is determined each year by the Employee Provident Fund Organisation (EPFO). After having maintained a steady interest rate of 8.5% per annum for quite some time, the EPFO has enhanced the rate of interest to 9.5% for the financial year 2010-11. While it is still not sure whether such an attractive interest rate will continue in the following years, those who have been contributing to EPF for quite some time now and have accumulated a large corpus are bound to benefit immensely with this year's higher interest as interest is compounded annually.

NATIONAL SAVINGS CERTIFICATE:

Similar to PPF, NSC also earns an interest rate of 8% per annum and investment up to 1 lakh is exempt from tax under section 80C. However, unlike PPF, interest received on NSC, at the time of maturity, is taxable in the hands of the investor which makes it comparatively less attractive. On the positive note, however, NSC has a relatively shorter lock-in period of just about 6 years and the interest here is compounded half yearly. Thus, every 100 invested into NSC will grow to 160.10 on maturity.

TAX SAVING BANK FDS:

Investment up to 1 lakh in these special tax saving bank fixed deposits also entails an investor tax deduction under Section 80C. These fixed deposits mandate a lock-in period of five years and interest is compounded quarterly, just like any other ordinary bank fixed deposit. The drawback is taxability of interest income upon maturity. As most banks are currently offering attractive interest rates, tax-saving bank fixed deposits are currently offering interest rates as high as 8.5% to its investors.

SENIOR CITIZENS SAVING SCHEME:

Indian citizens who have attained 60 years of age or those who have attained at least 55 years of age and have opted for voluntary retirement scheme are eligible to invest in senior citizens saving scheme, which offers a fairly attractive interest rate of 9% a year, payable on quarterly basis. While investment in this scheme is eligible for tax deduction under Section 80C, interest earned shall be taxable in the hands of the investor.

EQUITY LINKED SAVINGS SCHEME (ELSS):

These tax saving mutual fund schemes do carry an embedded market risk and calls for investor prudence before making an investment decision. However, their returns are equally rewarding and tax free in the hands of the investor.


   As ELSS has a mandatory lock-in period of three years, they are positioned as long-term equity assets and thus returns are tax free in the hands of the investor. And though these schemes mandate a three year lock-in period, investors are likely to be better off if they continue to stay invested for a longer term as equities generate best returns over a longer time frame.


   For instance, on an average, ELSS category of funds has returned about 22% compounded (CAGR) returns per annum over the past 10 year period.


   Some of the better performing schemes in this category include DSPBR Tax Saver, Fidelity Tax Advantage, Reliance Taxsaver and HDFC Taxsaver for investors to choose from.

LIFE INSURANCE PREMIUM:

Any premium payable by an investor to provide cover to his life is also eligible for deduction under Section 80C, subject to a maximum of 1 lakh. The life insurance policy may be purchased either from LIC or from any other private player in the insurance industry. Investors should, however, make sure that premium payable is not more than 20% of the sum assured (amount of life cover) in order to avail Section 80C deduction.

UNIT LINKED INSURANCE PLANS (ULIPS):

Ulips, or market linked insurance schemes, are also eligible for deduction under Section 80C. As these schemes provide investors the benefit of both life cover and investment in equity and debt markets, these are highly popular with investors. Investors would, however, do well to check the premiums charged by these schemes before making an investment decision as most Ulips charge high premiums.

SECTION 80CCF DEDUCTION:

A new Section 80CCF has been inserted in the Finance Bill 2010-11, which provides an additional deduction of 20,000 to investors for investing in infrastructure bonds issued by notified organisations. This deduction is over and above the 100,000 deduction available under Section 80CIn the latest tranche, infrastructure bonds offer an attractive interest rate of about 8% to investors with a minimum lock-in period of five years.

 

 

Four steps to be free from credit card debt trap

 

 

While your credit card is a useful tool in several ways, it is also an easy way to fall into a debt trap . Easy because swiping a card costs nothing and paying the minimum 5% of the bill seems manageable. But if you roll over the balance on your credit card bill for more than 2-3 months in a row, it's a sign that you are in a debt trap. Here is a four-step strategy to get you out of the situation.

1. Freeze your spending:

The first thing to do is stop spending on the card. Use cash instead, which will force you to think twice before you spend. If you don't like carrying cash around, use a debit card. But just don't use the credit card till you are out of the debt trap.

2. Convert bill into EMIs:

Call up your bank and tell them that you are finding it difficult to repay the amount and that it should be converted into EMIs. The interest rate is lower at 14-16 % than the 36-42 % payable on rolling over the balance. Banks are usually willing to do this because they see a better chance of recovering their dues. Some offer this facility even before the customer asks for it.

3. Liquidate assets:

You could also consider redeeming some investments. Even if an investment is earning you 10-1 % in a year, it will be more beneficial to liquidate it and use the money to eliminate debt that costs you 2-4% per month.

4. Start with the costliest:

If you have three of four credit cards and each charges a different rate of interest on rollover, start repaying the card with the highest interest. This way, the rollover cost will progressively get reduced.

 

Insurance cover for nuclear accidents likely

Insurance regulator IRDA is in the early stages of drafting a regulation for covering nuclear accidents.

The move assumes significance as India is expected to be a major player in this sector after its nuclear deal with US is operationalised.

"We are in early stages (of the regulation). This thing involves large amount of risks. We will have to first constitute a pool which will be a member of the larger global pool (of nuclear accident insurance). That is yet to be figured out," Irda Chairman J Hari Narayan said.

Speaking to reporters on the sidelines of the IBAI summit here, he also said that the reinsurer General Insurance Corporation (GIC)) is working on the details to provide insurance protection to such accidents.

It is felt that the ambitious program expected under the Indo-US nuclear deal may not materialise to the desired extent unless there is insurance protection for nuclear accidents.

According to US-India Business Council (USIBC) the Indo-US nuclear deal could open up investment opportunities to the tune of USD 500 billion over the next decade.

As of now, nuclear power accounts for just three per cent share of the total power produced in India from different sources. However, by 2020 this source is expected to provide 20,000 MW of power against little over 4,000 MW currently.

Public Provident Fund (PPF): FAQ

Can an Non Resident Indian (NRI) open a Public Provident Fund (PPF) account?

Yes, there is no objection to Non Residents Indians opening PPF accounts out of monies held in their non-resident account in Indian banks.

 

What is the process of PPF account transfer from a bank to a post office?

Read to know the process of PPF account transfer from a bank to a post office

The State Bank of India/its subsidiary will issue an Account Payee cheque or a demand draft for an outstation transfer. The Account Payee cheque will be in favor of the transferee post office with a certified copy of the ledger and other concerned original records, such as the application for opening the account, signature cards, and nomination forms.

 

The cheque/draft will be drawn by designation and will indicate that it relates to PPF account number 'so-and-so. On receipt of the PPF account-on-transfer along with the cheque or draft from the bank, a PPF account will be opened at the transferee post office. The process is similar to that of the opening of a new account. The transaction will not be included in the credit transfer journal but will be entered in the list of transactions like other new accounts opened by cash.

 

Do I have to contribute every year to my PPF account?

Yes. Your account will be defunct if you do not deposit the required minimum of Rs. 500 a year. The amounts already deposited will continue to earn interest, which will be paid to you at the end of the term (15 years), but you can't take loans or make withdrawals.

 

What happens to a PPF account in event of the depositor's death? If a PPF account holder dies and there is no nomination, who gets the deposited amount?

If the amount is up to Rs. 1 lakh, the accounts office will pay it to the legal heirs of the deceased on receipt of application in prescribed form, supported with necessary documents without production of succession certificate. If the balance is more than Rs. 1 lakh, it is necessary to produce a succession certificate.

 

 

For how many years can a PPF account be extended beyond its initial 15 years of operation?

After the PPF account has been in operation for 15 years, it can be extended for five years at a time. There is no limit on the number of such extensions.

 

Can a PPF account be transferred from one branch of a bank to another branch, or one post office to another post office? What is the process?

Yes, a PPF account can be transferred from one branch of a bank to another branch, or from one post office to another. Just fill in the PPF account transfer forms available with the postmaster or the bank.

 

Can NRIs who wish to avail of tax benefit in India consider opening a Public Provident Fund (PPF) account?

NRIs who wish to avail of rebate on their income in India are also eligible to open a PPF account. Subscriptions, however, will have to be made from their NRO account on a non-repatriable basis.

 

What is the maximum tenure for a PPF account?

The maximum operating tenure for a PPF account is 15 years.

 

Can I claim tax benefits on my PPF account?

The interest credited to your account, as well as withdrawals from it, are exempt from income tax. The balance held is fully exempt from wealth tax, without any limit.

Managing Cash Flows in financial planning

Cash flow management is the core of financial planning. It needs to addressed comprehensively, if the financial plan has to work.

Liquidity: The first principle in cash flow management is maintaining liquidity to the extent of approximately three months expenses. In certain cases, where the income flows are uneven, we may even suggest up to six months' salary or expenses as a liquidity margin. It is a good idea to keep this in the form of actual cash in the bank account, sweep-in deposits (which is near-cash) or in debt mutual funds. This is maintained to ensure there is no problem even in case of disone is changing jobs, has medical conditions due to which one is on loss of pay and so on. Then, the liquidity margin will come in handy. This will be especially useful for people who have monthly instalments to clear, like a house loan, which need to be paid over and above the regular expenses.

Additional provision: It is always better to have liquidity over and above that provided by regular income sources. Additional sources are those which could be liquidated when the need be, like in bank fixed deposits. Investments in stocks and mutual funds (equity or debt) could also come handy, as they can be liquidated as and when required. Investments in Public Provident Fund, Employees Provident Fund, National Savings Certificate are illiquid as they come with a mandated lock-in period.

Contingencies: You would like to provide for unforeseen times. Like, for your aged mother's health requirements. Contingency is for unknown situations or emergencies, for holidays or guests, insurance premiums, and so on, in a particular month. When such expenses come up together, they disrupt surplus available. It is a good idea to be prepared and invested for appropriate tenures.

Example: If holiday expenses are coming up in seven months, invest in a 180-day FMP and use the proceeds on maturity. If the amount is not available upfront for investment, you can accumulate it through a systematic investment plan (SIP) in a mutual fund scheme. Provisioning can also be done from maturing investments. For instance, investments maturing between now and the time required can be moved to a debt fund and be redeemed when required.

Handling investment inflows: Maturing investments need to be reinvested or put to use, as per your budget or upcoming expenses. It is important to have information regarding all the investments due to mature in the next one year. Plan for investing these amounts in the interim, after considering upcoming or sudden expenses. Ideally, chalk out which amounts are going to be invested, in what kind of products and how much need to be consumed. Sometimes, the amount expected to be received may be big, like a annual bonus. Since the actual amount may not be known, having a rough investment plan would be needed. There could be investments or money from insurance that we would have redeemed in a particular month. Such inflows also need to be considered for deployment.

Managing improved inflows: There are points when the monthly cash flows would improve. For instance, you may get an increment in six months of approximately eight per cent, then the increased cash needs to be deployed. Decide the investment avenue in advance. For instance, an SIP or recurring deposit is recommended for parking this fund. Sometime, it may be used to augment the liquidity to the required level, if it was dipped into due to sudden rise in expenditure. Once this is done, revert to investments in SIP or recurring deposit.

Cash outflows contingent on inflows: When planning, we sometimes suggest individuals incur an expense which is contingent on an inflow. For instance, a foreign holiday may be suggested only if they receive a bonus of a certain amount. Or, consider renovating your house only on receiving a raise or a bonus. Apart from easing the cash flows, it also brings discipline and commits cash inflows for cherished goals, especially not very important ones.

While planning your cash flow, it is necessary to choose the appropriate investment options based on the end-use of that money. When planning this, apart from the tenure, the choice of investment instrument would also be based on the returns, risk, liquidity requirements and tax liability. Appropriate choices, here, would help in improving the returns. And at the same time, provide for smooth management of your finances. Financial planning itself and cash flow management in particular, are easy to understand and mostly intuitive. Thinking through the whole thing and executing these over time is the key to success.

 

Just remember: God is in the details.

 

Should you sell stocks or buy them now?


   It appears volatility is here to stay and investors have to get used to it. The less aggressive investor is shaken by the market turbulence and abandons it for the more stable debt instruments. The risk-taking investor fishes in the volatile markets hoping to reap gains. Let us explore if it is time to buy, hold or sell your stocks.


Is it time to sell your stocks?
   

Here are some pointers:    

Sell when over-valued:


This strategy assumes that when a stock's price shoots beyond its true values it is time to sell it off. You can wait for a market correction to buy it back after its price plummets.


   Buy low, sell high:


Investors buy stocks of companies that are soaring upwards in anticipation of further gains. They seldom have the heart to part with stocks that are faring well. However, buying low, selling high is the key to successful investing.


   You should book profits when they are soaring high, rather than selling laggards.


   Sell to prevent further loss:

 

Set a lower-bound for the stock based on its fundamentals and growth potential. Sell the stock when it drops by a certain percentage. This enables you to exit with minimal loss rather than enduring heavy loss.


   Sell when you rebalance your portfolio:


Suppose you have allocated 70 percent to equity and 30 percent to debt in your portfolio. The markets fare well and your equity exposure goes up to 90 percent. Rebalance your portfolio by selling off some of your stocks and bringing the percentages back into the original alignment.


   Personal reasons:


Investors may require cash for exigencies. They might have reached their retirement savings goal or for funding their children's education. Then it is time to systematically liquidate the stocks before the markets fall.


   Company's future bleak:

 

Increased competition from peers could leave a company grappling for market space. Sell the stock if the company's future appears gloomy and its quarterly results are not so favourable.

Is it time to buy stocks?    



Here are some pointers:    

Buy at fair value: A stock trading above fair or intrinsic value is considered expensive. On the contrary, if you buy below its fair value you could end up with good profits. Research analysts arrive at a company's true intrinsic value by forecasting its future financial performance based on projections on the company's income statement, balance sheet, cash flow statement, supply-demand and growth estimate.


   Techniques like discounted cash flow analysis (DCF) allows analysts to arrive at a fair value of a company.


   Buy and hold: This is a passive investment strategy where the investor buys and holds his basket of stocks for a long term, irrespective of price fluctuations. The investor must make shrewd stock purchases based on the companies' future earnings and growth potential, and underlying financials and business prospects. Since this strategy is employed for long investment tenures, investors can buy the right stocks despite market volatility.


   Market timing strategy: Experts swear by their ability to predict future stock price movements, and buy stocks at the right time using this strategy. Both fundamental analysis and technical analysis is used by analysts to time the markets.


   Fundamental analysis evaluates a business at the basic financial level. It attempts to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative dynamics, macroeconomic and company-specific indicators including percentage of available market, management, debt structure, asset allocation, sales, growth potential and earnings.


   Technical analysts use statistical charts to determine uptrend, downtrend and horizontal trends. In conjunction with historical prices of stocks of specific companies, analysts use other variables before making trading decisions.


   Buy at dips: This strategy involves buying a certain stock when it has already fallen to a level from where it is less likely to fall further. Using this strategy, investors could end up with good companies at discounted rates.

 

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