Prajna Capital - An Investment Guide

It's time to visit your portfolio and weed out investments whose inflation-adjusted returns is low or negative On June 4, the central government announced a price hike of Rs 6 per litre of petrol, Rs 3 on diesel and Rs 50 per LPG cylinder, together with customs and excise duty cuts in an attempt to save the oil marketing companies from bankruptcy. Oil marketing companies buy crude oil from the international markets and distribute it in India. India imports 73 percent of its petroleum needs as the production of crude oil here is very little. The price of crude oil in the international markets has nearly doubled from a low of $60 per barrel in May 2007 to $130 a barrel in May 2008. The retail price of crude in India, administered by the government, has not been raised since 2004. Hence, these oil marketing companies have been running a very unprofitable business of buying crude at high prices and selling it to domestic consumers at low prices. In this process, they have accumulated m

The domestic markets will recover if there is a drop in oil prices. The volatility seen these days is expected to continue for some more time Watch for: Crude oil prices Global cues Policy Action Political scenario The stock markets are in a bear phase. In fact, the markets are witnessing one of the worst phases in the recent past. Last week, on Monday, the bourses were in the red by $50 billion. The markets lost all the gains of the current year in market value with a depreciation of close to $50 billion on that day, amidst a fall of over 500 points in the benchmark Sensex . The Sensex plunged 506 points to close at 15,066 points - it's the lowest in the current fiscal. The cumulative market capitalisation of all the listed companies fell below the Rs 50 trillion mark. Out of this, nearly half the loss, amounting to about Rs 1 trillion, was contributed by the 30 biggest blue chips, which constitute the Sensex. The Sensex has also shed close to 6,200 points from its all-time high o

Consumers have been feeling the heat of rising inflation for the last few months. Though the number seem to have come down marginally to 12.14 per cent (for week ended Sep 26), there seems to be little respite. Such times force the individual to take a relook at their savings strategy and monthly budgets. The basic idea is to do things smartly to save on costs. Of course, there is a rising interest burden as well that makes things worse. In such uncertain times, your investments need to deliver higher returns to break even. For instance, if the inflation is touching 12 per cent, you will have to earn 17-18 per cent pre-tax (for the highest income bracket) so that there is no capital loss. While keeping idle cash in banks may seem like a safe and secure strategy, it can never protect the purchasing power of your money and will lead to wealth erosion. But cash certainly has its uses. It can be used to retire or reduce high-cost loans. Also, make long-term investments in gold and equities

INDIA, like many other economies, has embarked on a long, difficult road to check runaway prices. It’s now evident that policymakers will hike interest rates till it hurts and pulls down demand. The central bank as well as the government are willing to sacrifice a bit of growth to douse inflation — an issue that has captured the collective imagination. On Tuesday, the Reserve Bank of India hiked the benchmark short-term rate by 50 basis points, about 25 bps more than what the market had expected. Bonds and equities reacted sharply. Soon, home loan seekers and corporate borrowers will feel the pinch, since borrowing money will now be far more costly. RBI has not only raised the benchmark repo rate — the rate at which banks borrow from the RBI — from 8.5% to 9% with immediate effect, but has also hiked the cash reserve ratio ( CRR ) for banks by 25 bps — a measure that will drain Rs 9,000 crore from the banking system. Given the outright hawkish policy stance, it’s clear that RBI will no

How you can fight back Review your emergency fund requirement . Keep six months' expenses as emergency funds, mostly in short-term debt funds such as inflation- and tax-efficient FMPs. Examine your health and life cover . With costs going up, you need to bump up your life and health covers. Go for low-cost, high-cover term plans and floating health covers to bridge the gap. avoid large idle savings and bank balances. Invest in short-term debt funds like FMPs. Defer large loan-based purchases. Avoid large EMIs that will stretch your finances more. Go for your first home if you can afford the down payment and EMI. Prepay high-cost loans. Start with your floating rate home loan. Remember, no investment option will provide guaranteed returns that equal the higher interest payout. Seek capital gains and dividend instead of interest. Interest income gets taxed at your income tax rate. Long-term capital gains and dividends from equity and equity MFs are tax-free, but taxed at 10 per ce

Why oil prices fluctuate and result in volatility in the stock markets Crude oil is one of the most basic global commodities . Fluctuation in the crude oil prices has both direct and indirect impact on the global economy. Therefore, the prices of crude oil are tracked very closely by investors the world over. Crude oil prices have gone up to record levels of USD 100 per bbl after reaching a high of USD 145 per bbl (rise of around 70 percent from previous year's levels). The price variation in crude oil impacts the sentiments and hence the volatility in stock markets all over the world. The rise in crude oil prices is not good for the global economy. Price rise in crude oil virtually impacts industries and businesses across the board. Higher crude oil prices mean higher energy prices, which can cause a ripple effect on virtually all business aspects that are dependent on energy (directly or indirectly). There are many factors that influence the global crude oil prices including tech

Prices on fire Why inflation rose to a record high... Rising oil prices . At an all-time high of $140 per barrel, oil prices have more than doubled from $64 a barrel in April 2007, fuelling inflation. Rising food prices . A global shortage of food grains, such as wheat and rice, has made the food prices index shoot up by about 10 per cent, pushing up inflation. High commodity prices. High prices of commodities such as steel and cement due to their less-than-adequate supply has made industrial production, housing, roads, airports and other crucial infrastructure more expensive. High cost of funds. To combat inflation, the central bank is sucking out excess money from the economy by increasing cash-reserve ratio and increasing repo rates so that less money chases the limited supply of goods and services. This, however, is also driving up the cost of existing funds, that is interest rates, adding to inflation. Rupee's eroding purchasing power. Rising prices are eroding the value of

Some global factors that have a bearing on the domestic economy The sharp rise in oil prices was the last straw for the market that was trying to cope with lower GDP growth, higher inflation and flight of foreign institutional investor ( FII ) funds. Indeed one can wonder whether the economic scenario can get any gloomier than what it is today. Oil prices remain high It all started with the oil prices shooting up. They touched all-time highs of $145 per barrel. Crude oil prices had corrected to $100per barrel only to go back to higher levels. There are several theories attributed to this recent increase in the crude oil prices. Some say that cost of production has increased while others say that more speculative money is invested in crude for quick speculative returns. Usually, investors buy commodities such as oil as a hedge against inflation when the dollar falls. A weak dollar makes oil less expensive to investors dealing in other currencies. Hence, analysts are of the opinion that

The inflation fire is now an inferno. It singed wallets on its way from 4.7 per cent in July 2007 to 8.86 per cent in May 2008. It did not stop there, but shot up to a 13-year high of 12.64 per cent for the week ended July. Much of this recent rise is being attributed to the pervasive impact of the increase in the state-administered prices of oil products on 5 June. That looked inevitable after international oil prices rose to an all-time high, up to $140 a barrel last month. Worse, this inflation is not expected to go south anytime soon. Why high inflation is here to stay - Oil aftershock. With little chance of increasing global supplies, higher extraction costs, production cuts and export taxes in some oil producing countries, and speculative investments in oil by large international investors has buttressed price pressures due to continuing high demand for oil. Rising food prices - A worldwide shortage is driving up food prices. In India, oil seed prices are 20 per cent higher than

Rough weather Among the cyclical factors that have been at work are random adverse weather conditions that have reduced harvests in key producing countries. World wheat production declined in 2006 because of a 60% reduction of output in drought-hit Australia. Flooding in parts of South Asia and pest infestation and cold weather in Vietnam reduced harvests as well in 2007, particularly for rice. Depreciating rupee Depreciation of the US dollar against currencies of major Asian rice exporters had the effect of raising dollar prices. The steep decline of the US dollar against all major currencies in the past one year and its declining to record lows have contributed to increase in the prices of ‘soft’ commodities including wheat, whose prices are denominated in US dollars. Hoarding of food grain Precautionary demand for food stocks in many countries is contributing to food grain price increases. Public food grain agencies and private traders in many countries are replenishing their deplet

Fixed deposits ( FDs ) are a safer investment option when compared to debt funds. Debt funds are sensitive to interest rate fluctuations unlike an FD which offers a fixed interest rate for a fixed tenure. But the most important difference between these two is the tax treatment on gains. The interest earned on a fixed deposit is to be added on to your income irrespective of the term of the FD. Further, there is no distinction between short or long term capital gains tax in FDs. This overall reduces the yield of a fixed deposit, especially if you fall in the 30 per cent tax bracket. What makes debt funds a better choice is the tax treatment on its gains. Just like FDs, if you redeem a debt fund within one year then you need to add the gains to your income (Short term capital gains). In case you redeem the investment after one year (long term capital gains) you can avail the indexation benefit.

Staying invested may not be the best option if you have chosen wrong funds or poor script If you were to take a look at the performance report of the mutual fund industry, you won't find too many impressive performers in the last couple of quarters. While the stock market in general has lost over 30-35 percent in the last two quarters, the scenario is even more ghastly in the case of mutual funds. Many aggressive funds have lost as much as 40 percent and most new funds are sitting on a loss of nearly 50 percent. The current scenario is bound to make the investor worry. For those who made an entry into equity a few years, ago, the current scene is bound to be more painful as they are faced with negative returns for the first time. The uninterrupted Bull Run from 2004-08 had made many forget the realities of risk associated with equity . In fact, many dabbled in mutual funds too like stocks . Some even thought that with mutual funds, there was no risk as the fund manager was expecte

MARKETING isn’t just an expense; it's an investment. The key is to market smarter and fully utilize your marketing budget. Here are 7 ways to stretch your marketing rupees and increase your bottom-line profits: Use free publicity: It costs you nothing and builds credibility and awareness. So look for opportunities to be involved with community activities. Speak at local organizations: Every organization is looking for speakers for their monthly meetings, so offer to share your knowledge with them. You'll get exposure to groups as an expert and meet lots of new people who might be potential clients. Write articles: Contribute to newsletters, newspapers, industry journals and your own Web site. Sharing information builds name recognition, which helps bring in clients. Create a Web site: Websites are a must. You're missing a great opportunity if your business doesn't have a presence on the web. It’s a very cost-effective way of letting people know about you and your produ

Looking for ways and means to insulate your investment from rising prices? Here are some strategies to stay tight and right CHECKED your transport, grocery and utilities bills recently? You’d sure be losing sleep over ever-increasing prices. What’s worse, inflation figures look alarming and have already notched new peaks, fuelled by the recent hike in crude oil prices. The spiralling affect of inflation can not only derail your investment approach but also dwindle your returns. Here’s an investment guide on how you can insulate your portfolio against the menace of inflation. CHANGE STANCE In the current scenario of rising prices, analysts feel there is a need to review your financial plans and investment portfolio as the expenses and corpus required to achieve financial goals may increase. You need to shuffle your portfolio in such a manner that it can generate better inflation-adjusted returns. Also, you should avoid investments in illiquid assets with fixed returns as these restrict

An increase in the repo rate has put small businesses on the back foot yet again. How will they cope this time? IT is well known that small and medium enterprises ( SMEs ) are among the worst affected, when interest rates rise rapidly. Accordingly, these companies have been starved of funds of late, with the surge in interest rates in the last few months threatening to cripple their growth. In such a scenario, further rise in interest rates was the last thing these companies were expecting. But, contrary to such hopes, the Reserve Bank of India ( RBI ) early in June hiked the repo rate—the rate at which banks borrow from the central bank for short-term—as part of its attempts to contain inflation. The hike at 25 basis points raised the repo rate to 8% has resulted in the banks’ lending getting costlier. This has left SMEs fuming as it comes at a time when they are coping with rising raw material costs and an uncertain business outlook. Domestic apparel supplier Bang Overseas is among

CRUDE oil prices in recent times threatened to breach the $150 per barrel mark, and later fell to $123 levels, clocking an appreciation of almost 30% in the year. In fact, higher oil prices have been sending shivers down the stock markets worldwide, as if the recent global financial crisis was not enough to unnerve them. Back home, Indian stocks are down by around 30% in the current year. Inflation has already reached double digits at 11.98% and is showing no signs of respite, adding fuel to the fire. I would start with an interesting conversation I heard recently. I happened to be at an oil trader’s dealing room. I asked the chief dealer, “What’s happening to oil? It is down 20% from its peak. Will you buy now?” He answered: “Oil’s down due to speculative unwinding of long positions and a growth scare in developed countries, which might result in lower demand for the scarce commodity.” He then called someone in Iran, a member of OPEC , an association which controls around 40% of the g