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Finance & Stock Groups Forum Index » Mutual Funds » Investor Education
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| subbu |
 Posted: Fri Sep 12, 2008 3:52 am |
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what are benefits of mutual funds?
Of late there is an increase in awareness on various investment
products among investors and it goes without saying that mutual funds
have got its own share in 4% of Indian household savings.
So why is mutual fund preferred over direct investment in stocks?For a
first time investor who doesnt have much knowledge on investments,
mutual fund provides numerous advantages.
1. The most obvious reason in favour of Mutual Funds are that you can
make an investment even at Rs 100 per month via SIP. You need not be
blessed with huge sum of money to invest in mutual funds. Typical SIP
amount per month is 1000-2000 in most cases.
2. Professional management of money put in by investors is an added
advantage in mutual funds. Most of us do not have the time and
bandwidth to place buy and sell orders in markets in a regular basis.
It is always better to leave a job to professional fund managers than
we breaking our heads.
3. Another advantage is that a mutual funds invests in a good set of
stocks and it is not limited to 1 or 2 stocks. Typically a fund
invests in 30-50 stocks and hence there is diversification in
investment. It also reduces the risk associated with the failure of
single stock.
4.Mutual funds (except for ELSS) have no lock in period. They provide
ample liquidity to investors.
5.ELSS - a category of mutual funds which is eligible for tax benefits
and at the same time can generate better returns than traditional tax
saving instruments over a long period of time.
Keeping these in mind, for a beginner in investments, it is always
advisable to opt for mutual funds than directly jumping into stocks.
Subbu
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Sat Sep 13, 2008 2:44 am |
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What is ELSS?
Most of us during the month of march rush up to our auditors or
financial planners for tax planning to invest upto 1 lac which
qualifies for tax exemption under section 80 (c) . Most of us end up
in paying LIC premium,PPF,NSC,5 year bank FDs and other traditional
tax savings instrument. Let us go through one another option available
to us - ELSS
ELSS - Equity Linked Savings Scheme is a type of mutual fund which is
qualified for tax exemption under section 80 c. Lets dig into more
information on this scheme.
Features
1. It is a mutual fund with a lock in period of 3 years. The lock in
period of 3 years is much lesser than lock in period of 15 years in
PPF and 6 years in NSC or 5 years in bank FD.
2. It is a equity diversified fund and hence the returns over a longer
period of time is higher than the fixed income instruments like
PPF,NSC.
3. With high returns, comes high risk associated with the
investment.Hence if you are an investor who does not want to take any
risk with your investment, you can avoid ELSS.
4. You can invest upto 1,00,000 in ELSS for getting tax exemption.
5. You can invest periodically via SIP option and that brings in
discipline and cost averaging in your investment.
6. You can opt for dividend option and get some money out of the
scheme even during the lock in period. This is not possible in PPF or
NSC in a duration of 3 years from investment.
So start exploring the various ELSS schemes in the market and choose a
one with good track record and a good rating. You can refer
http://valueresearchonline.com/ for fund ratings
Subbu.
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Sun Sep 14, 2008 2:58 am |
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What are child insurance plans?
As most of us have plans on fulfilling our children's upcoming dreams
on their career, we are more vigilant in planning for their future
financial needs. As with any other financial needs, proper planning
will ensure that your child's future financial needs are catered to.
Most of you would have heard about "children's life
insurance plan". The very common misconception is that it insures
child's life, but it is not so. It is a policy which insures the
parent only but the child get benefited out of it. Lets see how it
works.
1. A children policy is taken by the parent as the policy holder.
2. The important feature of the policy is WOP(Waiver of Premium). In
case if the parent dies during the term of the policy, all the future
premiums are waived for the policy and the sum assured is paid
immediately to the child of the parent.
Eg. For a 25 years old with a kid of 1 year old, the child insurance
policy from hdfc for 20 years of sum assured of 1 lac have a premium
of 4900/month. In case of eventuality to the parent 5 years down the
line, the kid will get 1 lac immediately and all future premiums will
be cancelled. On the other hand, if policy matures 20 years down the
line, the kid will get 2.25 lacs when he/she turns 21.
3. There are quiet interesting child insurance policies. For eg LIC
has a child insurance policy gives the option of giving 10 half-yearly
installments on maturity instead of giving a bulk amount.
4. There are few insurance policies, which gives a assured amount to
kid in various period of their life. (when kids turns 18, he/she
receives certain %age of amount, when he/she turns 21, she gets
certain %age and so on).
5. Child insurance policies comes in two flavours - ULIP and Endowment
type. Endowment offers fixed rate of return while ULIP returns depends
on the market. So you can make a decision after evaluating both the
options.
So as with any other investment products, there are variety of
child insurance plans available in the market. Have a good analysis of
the policies before buying it, BUT one should definitely give a
portion of insurance premium to child insurance policies.
Learn More :
* How to calculate your insurance cover?
Subbu.
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Mon Sep 15, 2008 2:39 am |
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Need for Health Insurance
Insurance is all about tackling unseen risks that might affect an
individual finance to a greater extent. In India, insurance is seen as
a savings instrument and not as a risk mitigator. Moreover health
insurance in india is less penetrated than life insurance.
So what is health insurance?
Health insurance reimburses the expenses of medical
treatment,hospitalization and other expenses related to the treatment
of your disease. There are various clauses with different health
insurance policies which defines the expenses which it covers.
Why is health insurance needed?
As medical emergencies do not come well planned and these are
completely unpredictable, when a person is diagnosed with a disease
and requires treatment, the immediate requirement of fund for
treatment takes a big toll on a person's finance and hence affects his
planned investments.
With health insurance, you can be least affected with your finance,
since the insurance companies takes care of all your expenses with
respect to the treatment. There are even cashless claims that
insurance companies offer when you get treatment from a network of
hospitals that the insurance companies has tied up with.
How costly is health insurance?
To your surprise, health insurance is very cheap compared to life
insurance. A health insurance policy of 5 lac in a public sector
insurance company costs you roughly 6,000 per year which is 500 rs/
month and very much affordable by most of us.
By spending 500 rs/month on health insurance, you are avoiding a risk
of paying 1 or 2 lacs when you go undergo treatment in case of any
medical emergency.
What is cashless claim?
If you are planning for surgery(bypass etc) and you are aware of the
schedule, you can inform the insurance company of the same and the
insurance will take care of all your expenses in the hospital and you
need not spend a single paisa for your treatment. This cashless claim
can be availed only at the network of hospitals that the insurance
company has tied up with.
What if my employer gives me health insurance?
In today's world, most of the employers offer free health insurance to
all its employees and their dependents. So people do not want to take
a personal health insurance plan,but WAIT, think of the following
scenario. When you have decided to leave your company and join the
next company in 10 days time and what if you have met with a medical
treatment during the span of those 10 days. In that case, you have to
pay for your treatment since you are not under any employer's health
insurance scheme during that span.
So don hesitate to take a health insurance plan, since you are
avoiding a huge risk of payment by minimal contribution per month
torwards health insurance
Subbu
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Tue Sep 16, 2008 4:13 am |
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What to look for in a fixed deposit?
Fixed Deposit is considered as a safe haven for the investors, but
there is some level of scrutiny to be done even in Fixed deposits.
Fixed Deposits are not offered only by public sector banks, they are
offered by large corporates, co operative banks and other financial
institutions. So the FDs in non psu banks are not "totally" secure.
They can technically default on payments if the financial institution
is caught in a trouble.
Though the occurence of such an event is very minimal, lets look at
some basic fundamentals to look at before putting your money in a FD.
Credit Profile
Check for the credit ratings of the instruments in which the bank FD
is depositing the money.The rating of AAA is of higher quality. The
higher the credit rating, the lower the return it delivers. Do not
chase for a FD which gives 2% extra than the other prevailing FDs,
because the risk exposure is higher in such a FD.
Rate of Return
Check the return on FDs prevailing in the market and choose an FD
which is relatively equal or slightly higher than the rest of FDs in
place.
Interest Payout
Check out the different interest payout options. Some banks provide
monthly,quarterly interest payout. Suppose you want a steady monthly
income, you can opt for monthly interest payout option. If you are
growth investor, you can opt for the interest to be accrued to the
prinicpal in the end of an year.
Duration
Find a FD which matches your requirement of fund down the line. If you
want fund 3 years down the line, go for a FD with 3 years duration.
You will get benefited from the compounded interest rate over 3 years.
Premature withdrawal penalty
People often quit an lower interest rate FD and go for a higher
interest rate FD. In such a case, you need to pay a penalty for
breaking the FD. So you need to take into account the expense of
breaking the existing FD and opt for a new FD.
Subbu
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Wed Sep 17, 2008 3:35 am |
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What are exchange traded funds?
Of late ETF(Exchange traded fund) has gained more attention among the
Indian investors. So what is all about ETF?
What is ETF?
ETFs are mutual fund schemes whose units can be sold or bought in the
stock exchanges during the regular trading hours. They do not have cut
off timings like other mutual funds for buying or selling units. You
need a demat account to operate with ETF.
Types of ETF
Passive ETFs - These mutual funds mirror a index and invests in a same
set of stocks which comprimises an index. It is similar to index
funds.
Active ETFs - These funds invest in a set of stocks that pertain to
the mandate of the fund.
How ETFs work?
1. ETF units have two prices - market price and NAV. So usually market
price of ETF unit will be at discount or premium to underlying NAV.
2.Investor does not deal directly with mutual fund company for
purchase of units, he purchases the units via stock exchange.
3. Direct purchase of units from mutual fund company is done by high
net worth individuals or institutions, because the minimum number of
units to be purchased will be very high and not affordable by retail
investors.
4.By using arbitrage methods, mutual fund company tries to keep the
difference between NAV and market price to minimum.
Advantages of ETF
1.ETFs are cheaper than index funds. They have a expense ratio of 0.5
to 1% compared 1.5% of index fund.
2.They can be bought or sold during any time of the trading hours
unlike mutual funds where u can purchase only at a NAV which is
calculated at end of day.
3. They mimic the performance of underlying index better than the
index fund.
Disadvantages
1. You need to have a demat account and trading account to operate in
ETF whereas in mutual funds you just need a pan card to invest.
2. You have to pay a brokerage of 0.5%-1% for trading via broker like
icici direct,sharekhan etc.
Who can invest?
1. Investors who want to mirror the performance of benchmark indices.
2. Investors who want to invest in asset classes like gold.
Subbu
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Thu Sep 18, 2008 3:48 am |
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Famous Investment Myths
Though there is more participation from retail investors in Indian
investments, but still most of us have not changed our perception on
some investment myths although the awareness about investment has
increased in the recent past. Let us go through some of the famous
beliefs/myths that people still give importance.
1. I am very young to think about retirement
In today's world, a youth in early 20's having a good job at hand will
most likely not even think about retirement planning. He is more
inclined to spend on modern accessories. Nothing wrong in spending but
it should not happen at the cost of "retirement planning". Its never
early to start for retirement planning. Early planning will give the
benefit of compounded annual return on your retirement investment.
2.Investment should be made only for 80(c) limit of 1 lac.
Most of us think about tax only in the month of march and collect
funds upto 1 lac to be invested in tax instruments to save tax. People
don plan tax early in the financial year. Investment should not be
limited only to 1 lac of 80(c). If you have a positive net worth , you
should consider investment with the positive net worth.
3.You can take higher risk in rising markets.
This is the most glaring mistake that investors commit in a bull
market. When stocks are on the rise, they violate their asset
allocation, invest more than needed in equities and when the market
crashes they realize that they had invested more money in equities
than actually required.If you are risk averse investor, you should be
the same irrespective of market changes.
4.Invest only in equity since it gives higher returns.
One should not concentrate all his investments in a single asset
class. It should be a diversified investment portfolio. Take the
current situation, if you had invested all your money in equities, you
would be suffering big loss now.
5. Invest once in a year and forget it
Investment is not a one time activity,it should be constantly tracked
in a regular interval and evaluated once in a year. If your investment
is not doing well over a prolonged period, you should consider exiting
and moving to a different investment channel.
As a educated investor, try to avoid giving importance to these myths
and also spread a word to your friends on the same.
Subbu
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Fri Sep 19, 2008 3:53 am |
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What are Gold ETFs?
As a country, India is the largest consumer of gold and Indians value
gold very high than anyone else in the world. In the past few years,
apart from physical gold, other channels of gold investment have
opened up. One of the most interesting option is Gold ETF. So what are
GOLD ETF?
Gold ETFs are mutual funds which listed and traded in the stock
market.All you need is a demat account to buy and sell Gold ETFs. The
advantages of ETF as explained in the previous article holds good for
Gold ETF too.
While investing in Gold ETF, take into account the following
information.
1. Avoid buying Gold ETF funds during the NFO. The reason is during
NFO Gold ETF charge 1.5-2.5% as entry load. However when these Gold
ETFs are listed in the stock market, you can buy them without entry
load but with a marginal brokerage of 0.2-0.5%.
2. Check the expense ratio of Gold ETFs. Currently they are in the
range of around 1% for most Gold ETFs.
3. Gold ETFs cost includes cost of annual fees for demat account and
online trading account. Remember you need demat and trading account to
operate in Exchange Traded Funds.
What should investors do?
Though Gold ETFs reduces the risk of holding gold in physical format,
you should take into account the cost(Expense ratio,brokerate,annual
fees for trading and demat account) of holding a Gold ETF. After
considering both scenarios, make your investment call.
Subbu
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Sat Sep 20, 2008 4:19 am |
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What is Dividend Yield?
Continuing on the series of explanation of technical parameters of
stock analysis, let us now get to know about one another important
ratio known as "Dividend Yield".
Dividend yield of a company indicates the annual dividend paid by the
company relative to its share price.
Dividend Yield % = (Annual Dividend Per Share / Price per share)*100
If a company A pays dividen of rs 10 and its stock price is 100 rs,
then dividen yield is (10/100)*100 = 10%
Dividend yield indicates how much cash flow is generated for each
rupee invested in the company by the investor.Dividend yield mutual
funds are category which invests in stocks which has higher dividend
yields.In general FMCG stocks have a higher dividend yield.
Who can invest in dividend yield stocks?
It is suitable for investors who wanted minimum cash payouts on a
regular basis from their investment.
Subbu
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Sun Sep 21, 2008 3:54 am |
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Things to know about mutual funds
In a previous article , we have seen about famous investment myths
about investments in general. There are also misconceptions about
mutual funds prevailing among the investors. Let us dig through them
and understand how they are misconceived.
1.Diversified funds invests across all sectors.
Ideally an investor would expect the fund to be invested
in all sectors . However the funds usually have a bias towards large
cap or mid cap or small cap. They have significant exposures in one or
two sectors as they take sectoral bets. So investor should not go by
the label "diversified fund". One should look at the funds past track
record and identify what are the funds major bets over the past. So
long term funds are a better option than new funds.
2. Mutual fund dividends are same as stock dividends.
Investors tend to believe that mutual fund's dividends
are same as stock dividend. However it is not true. When a mutual fund
declares dividend in a scheme, the dividend is deducted from the
fund's NAV and it does not come free to investors.
Eg. A fund with 40 rs nav, when declares a dividend of 3
rs , the nav of the fund reduces to 37.
So an investor can opt for dividend-yield funds if he
intends to generate minimum cash flow from his investment on a regular
basis.
3.SIP always scores over lumpsum investing.
Though it is true that SIP(Systematic Investment
Planning) would bring in discipline in investment and would lead to
regular contribution, SIP does not beat lumpsum investing in a rising
market. The major benefit of SIP - cost averaging does not hold good
in a long term rising market. SIP works best when market has upward
and downward cycles alternatively.
4. Lower NAV is cheap to buy
It is advisable to go for a old fund with a good track
record rather than buying a new fund offer at a lower NAV. A detailed
analysis of this given here.
5.FMP returns are fixed
Though the name Fixed Maturity Plan suggests fixed
returns, in mutual funds, as per SEBI , no fund can assure the
investor of fixed return. Hence even FMP's return can turn negative if
the interest rate scenario changes during the tenure or inflation
rises during the tenure.
So as an investor you should know all features of asset
class (pro's and cons) before making your investment. So i hope this
series of information is educating you in your investment journey.
Subbu
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Mon Sep 22, 2008 3:38 am |
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What is short selling?
Most of us are taken back with the stock market crash of late eroding
our investment value, but you would be surprised to know that you can
make profits even in a crashing market. Want to know how is that
possible at all? To know how to make money in a bear market, we need
to understand the concept of short selling.
What is short selling?
Short selling is selling of a stock which is not owned by a seller.
When a trader feels that the stock price of a particular company will
fall in the near future, he indulges in short selling. Let us see how
it works with a simple example.
Eg. Suppose say, trader Ram feels that stock price of company XYZ
currently trading at 1000 rs will go down significantly in the near
future due to market correction or any other reason. Ram borrows
certain number of stocks,say 20, of company XYZ from his broker for
1000 rs/share.The commitment is that he will have to return back 20
shares to the broker on a specified date in the future say in one
month's time.
After purchasing the stock at 1000 rs, Ram immediately sells the stock
at 1000 rs and gets 20,000. As expected the stock price of the company
XYZ falls by say 100 rs and is at 900 rs at the end of one month. So
Ram buys back 20 shares of XYZ at 900/share thereby spending 18,000
and gives back the shares to the broker.
Hence Ram has gained 2,000 from short selling of company XYZ.
Risk Involved
Making money is not that easy. So once you buy the stocks assuming
that it's price will go down, what if the price begins to rise due to
the overall market sentiment and in these days, where the market
volatility is very high the markets can go up and down in a days time
and hence there is significant risk involved in short selling.
So should we not indulge in short selling at all? If involved how to
trim our losses? The answer is short covering. Let us digg on that in
the upcoming posts.
Subbu
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Tue Sep 23, 2008 3:41 am |
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What is short covering?
In the previous article, we have seen about short selling and what are
the risks involved. As promised in the last article, let us see how to
mitigate the risk associated with short selling. We shall look at this
with an example.
Trader Ram, borrows 50 stock of company XYZ at Rs 100 and promises to
give back the stocks to the lender in a months time. Ram anticipates
that the stock price of the company would go down to 80 rs and he is
planning to buy back the share at 80 rs. Unfortunately , due to
external and market conditions, the stock price of the company XYZ
rallies to Rs 120 and there is only 3 more days for the month end and
Ram has to buy back the shares and deliver it to the lender.
So Ram is in a loss of 20 rs/share and he has only 3 days to go and
the market sentiment is very bullish and the stock price of company
XYZ can appreciate further. Hence Ram decides to trim his loss at 20
rs/share and buys the share at 120 rs. Share market is not a place
with only Ram as a short seller. There are numerous short sellers in
the market and say 500 people had short sold the stock of company XYZ.
All of them would be trimming their losses and all of them would be
buying at higher stock price of 120 rs.
When 500 people places buy order for company XYZ at 120 rs, the
company's stock price will eventually go further up and this increases
the stock price of the company. This entire process is called "Short
Covering". Short covering will lead to a rally in the overall market
and these are called short covering rallies. When most of the traders
had predicted that the market will touch lower levels, due to some
global cues or other factors if the market rises, we tend to see the
short covering rally.
The practises of short selling and short covering only suits traders
and investors should try to stay away from risky practises.
Subbu
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Wed Sep 24, 2008 7:56 am |
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How to reduce your home loan EMI?
In the period of high interest rates,people are now trying to reduce
the EMI burden of their respective home loan.One way of reducing the
EMI burden is to shift the loan from a higher interest rate to lower
interest rate loan.
Of late, there has been a significant 1-2% interest rate diff between
private bank home loans and PSU bank home loans. So one way to reduce
ur EMI(if you are a private bank customer) is to shift your home loan
from private to PSU banks.
Scenario:
Private Bank:
Home Loan Amount : 20 lacs
Home loan Rate : 12%
Tenure : 20 years
EMI : 22000
PSU Bank:
Interest Rate : 10.5%
EMI : 19970
Savings in EMI : 2000
Savings in Total Interest paid for the loan : 4,80,000
Penalty(usually 2% of outstanding loan amount) : 40,000
Processing charge of new home loan (0.5% of loan amount) : 10,000
So Total Savings = 4,80,000 - (50,000) = 4,30,000
The saving of 2000 in EMI can be used for good investment purpose.
So analyze the current rates in the PSU and try to shift your home
loan.
As per latest fact,PSUs offer floating home loan rate at 11% while
private banks offer at 13%.So you can then save your money if you act
aptly.
Thanks,
Subbu
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Thu Sep 25, 2008 2:54 am |
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What is P/E Ratio?
"Company XYZ is available at a cheaper PE and is a good buy". You
would have come across this phrase many a times in NDTV Profit or CNBC-
TV18 or in the business newspapers. Most of us make an investment on
recommendations from either friends/newspaper/TV channels and overlook
technical parameters. Let us understand about these parameter and let
me tell you it is not rocket science to learn these.
What is P/E Ratio?
P/E Ratio = Price of one share of a company/Earnings Per Share of the
company.
Usually, EPS of the last four quarters is taken into consideration and
the resultant P/E is called trailing P/E.If the expected EPS for the
next few quarters is taken into account, we arrive at Forward P/E.
How to use P/E Ratio?
P/E Ratio can help investor take their decision to buy a stock. P/E
indicates how much Rs is needed to generate a earning of Rs 1.
Eg. If P/E of company XYZ is 20, then it indicates, an investor is
willing to pay Rs 20 to generate Rs 1 as earnings for the company.
P/E value varies across sectors. Banks have a lower P/E whereas the
tail sector may have a higher P/E. Investors are willing to pay more
for a retail company to generate earnings than they want to pay for
Banks.
How to use P/E ratio along with other parameters?
As stated in one of the previous article, any technical parameter
should not be considered alone to take a buy/sell decision. They
should be analysed in conjunction with other parameters.
P/E ratio should be analyzed along with the growth rate of the
company. If a company has a higher P/E ratio and but the future growth
of the company is not very encouraging, then one should rethink on his
decision to buy the stock. P/E of a company should be compared only
with its peers. For eg, Infosys P/E should not be compared with SBI's
P/E.
To reiterate, P/E should not be the only guiding factor to make your
buy/sell decision. One should consider all factors affecting a stock's
price before taking a call.
Subbu
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Fri Sep 26, 2008 3:15 am |
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How inflation affects your investments?
Come every friday morning, you get to see inflation numbers in bold
figures in the newspapers and television channels. So how does
inflation affect a common man and its investments?So lets understand
inflation and its impacts.
What is inflation?
To put it in simple terms, inflation is nothing but an increase in
cost of living for a person on a yearly basis.
Eg. If inflation is 8%, then theortically a good which was sold for
100 rs an year back is now costing Rs 108. So inflation is not a very
tricky and difficult to understand , it is as simple as the above
example.
How does inflation affects investments?
Inflation reduces the purchasing power of money. 100 rupees can
purchase you more last year than what it can purchase as per the last
example.
Inflation also erodes investment. Lets see this with an example.
Eg. Ram invests Rs.1,00,000 in a bank FD fetching him 11% interest
rate on yearly basis. Ram is in a income tax bracket of 20%.At the end
of one year, he gets back Rs.1,11,000 and he pays 20% of 11,000 as
tax.
Amount Invested = 1,00,000
Maturity Amount = 1,11,000
Interest Earned = 11,000
Tax on Interest @ 20% = 2,200
Amount in Hand = 1,08,800
Interest Earned = (8,800/1,00,000) * 100
= 8.8%
If the inflation prevailing is 7%, then
Real rate of return/Inflation adjusted return = 8.8% - 7%
= 1.8%
This implies value of money at your hand has increased only by 1.8%
and not by 11% or 8.8%.
As we can see in the above example, inflation erodes the return from
our investments significantly.
How to reduce the impact of inflation?
We should choose a mix of investment instruments, so that the
collective return out of our investment should beat inflation by a
good margin of (8-10%) so that real value of our money increases in a
significant manner.
Lets rework the same example above by splitting across two investment
instruments - debt and equity invested for 12 months or 1 year.
Amount to be invested = 1,00,000
Amount invested in equity = 50,000
Amount invested in debt = 50,000
Interest earned in debt = 11% (0r) 5,500
Tax on interest = 20% (or) 1100
Interest - tax = 4,400
Interest earned in equity = 20% (or) 10,000
Total Interest Earned = 14,400 (or) 14.4%
Inflation = 7%
Real rate of return = 14.4% - 7% = 7.4%
So the inflation adjusted return has increased from 1.8% to 7.4% by
reallocating the amount in two different modes of investment. The
returns mentioned are assumptions, you need to reallocate the %age of
amount in each asset class based on interest available during your
investment period.
Subbu
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Sat Sep 27, 2008 3:01 am |
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What is fundamental analysis?
When it comes investing in stocks, there are two schools of thoughts -
Fundamental Analysis and Technical Analysis. Fundamental analysis
focusses on company economic factors to make an investment decision
whereas technical analysis focus on stock price movements to determine
the investment. Let us get started with fundamental analysis and what
are the various factors affecting fundamental analysis.
Fundamental analysis of a stock should answer the following
questions related to the stock.
1. How is the company growing in terms of revenues and earnings over
the past?
2. Has the company been able to maintain healthy profit consistently
over the past?
3. How good is the company placed with respect to its competitors?
4. How good is the management of the company?
5. How transparent are the company's operations and decisions?
These are only few , more questions on the similar note needs to
be answered to fulfill a fundamental analysis of the company.
Factors affecting Fundamental Analysis:
Quantitative factors - The factors which can be measured
in numeric terms like net profit growth,revenue growth, equity:debt
ratio, EPS, P/E Ratio etc.
Qualitative factors - Quality of management of the
company, brand value of the company etc.
Both these factors are equally important and should be
considered in conjunction while choosing a stock. For eg, Coke has a
good track record of financials and also a great brand value which
also contributes to its sales. Some of Warren Buffet's(Richest person
on earth) investment are shining examples of fundamental analysis. He
invested in coke for a simple reason that people will not ditch coke
no matter how many times they drink it, coz it has a brand value
associated with it.
Fundamental analysis will help in identifying the "intrinsic
value" of the company. For eg a company trading at Rs 100 may have a
intrinsic value of 200 rs which can be identified by fundamental
analysis. In the long run stock markets will reflect the fundamentals
of the company.
Lets look into the factors affecting fundamental analysis
in deep in the coming posts.
Subbu
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Sun Sep 28, 2008 4:16 am |
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How to reduce tax in fixed maturity plan?
Finance minister Mr P.Chidambaram in one of the award function asked
the recipient of the award "What is your wish list in this year's
budget" and the recipient "he din want to pay more taxes" and the
recipient is none other than India richest person Mr Mukesh Ambani. In
return FM commented that "India is a country where a normal person as
well as the richest person does not want to pay taxes".
If Mukesh Ambani himself is more conscious about paying taxes, aam
aadmi like you and me should be trying to save taxes in a judicious
manner. So lets see how we can reduce taxes on Fixed Maturity Plan by
double indexation.
How is the profit taxed from debt mutual funds?
Debt mutual funds have a long term capital gain tax which is taxing
the interest if the investment is held for more than a year. There are
two methods of taxation.
1. 10% on the interest gained without indexation.
Taxable amount = Amount Returned - Amount Invested
2. 20% on the interest gained without indexation.
In the second gain, the taxable amount is calculated by
Taxable amount = Amount Returned – (Amount Invested * Inflation Index
for Redemption financial Year/ Inflation Index for Investment
financial Year)
Inflation index for every year is released by the govt.
Lets understand this concept with an example.
Assuming an FMP of 15 months returning 11% and Rs 10,000 is invested.
Inflation index for 2006-2007 100 and inflation index for 2007-2008 is
105 and for 2008-2009 is 111. s Tax is calculated using indexation at
the rate of 20%.
Scenario 1:
Amount invested in sep 2007.
Amount redeemed in Dec 2008 = Rs 11,000
Taxable Amount = 11000 - (10000 * (inflation index for 2008-2009 /
inflation index for 2007-2008))
= 11000 - (10000 * 111/105)
= 11000 - 10571 = 430
Tax @ 20% = 20% of 430 = 86
Amount redeemed = 10914.
Scenario 2:
Amount invested in Mar 2007.
Amount redeemed in Dec 2008 = Rs 11,000
Taxable Amount = 11000 - (10000 * (inflation index for 2008-2009 /
inflation index for 2006-2007))
= 11000 - (10000 * 111/100)
= 11000 - 11100 = -100
Net Loss = 100 and hence no tax.
Amount redeemed = 11000
So in this case we have totally avoided tax.
Hence while planning an FMP investment, we should plan it in such a
way that it spans two financial years to get the advantage of double
indexation.
Subbu
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Mon Sep 29, 2008 3:30 am |
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Importance of Fixed Income
In the period of falling markets, many are now concerned about capital
protection and not about sky rocketing returns which was the story an
year back.
Fixed income investment instruments provide capital safety and also
assurance in returns unlike stock markets.
Scenarios when fixed income investment is needed
1. Need for constant monthly income which is the case for most senior
citizens. This can be achieved by post office senior citizen deposit
scheme.
2. To meet short to medium term goals(3-5 years). In order to meet a
financial commitment 3 years down the line,you need the capital to be
safe and also have an assured return over time.In this world of
volatile markets, equity investments should be chosen only for periods
greater than 5 years.
3.To Rebalance your portfolio. Based on financial needs and risk
tolerance, a good balance between equity and debt needs to be
maintained.
Thumb Rule : Debt %( One's age) : Equity % (100 - one's age)
Eg : for 25 years old , debt:equity ratio is 25:75
The portfolio rebalancing should be done in a regular basis to meet
your risk tolerance.
Fixed Income Instruments
1. Bank Fixed Deposits.
2. Post Office Deposits.
3. FMP mutual funds.
So start reviewing the fixed income component in your portfolio.
Subbu
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Tue Sep 30, 2008 3:20 am |
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How to calculate your PF balance?
There are some savings that we make without our knowledge. Sounds
surprising? but thats what is the reality. An employee in an organized
sector have mandatory savings like PF,Employer Pension
Scheme,Superannuation,Gratuity. From our monthly gross salary, we make
a significant contribution to all four of these. Lets see how much we
are saving each month unknowingly in a provident fund.
Provident Fund
For all employees who work in an organized sector, following is the PF
contribution every month.
PF contribution by Employee = 12% of basic salary.
PF contribution by Employer = 12% of basic salary.
Employer Pension Scheme
Out of 12% contribution from employer, 8.33% of the contribution
(subject to maximum of 541 rs/month) is invested in employer pension
scheme.
Lets take an example and understand this.
Ram's basic salary per month = 15,000
Ram's contribution to PF = 12% of 15,000 = 1,800
Ram's Employer contribution = 12% of 15,000 = 1,800
Employer's contribution to EPS = 8.33% of 15,000 = 1250
This 1250 is higher than the max limit of Rs 541/month and hence
Employer's contribution to EPS = 541
Employer contribution to PF = 1800-541 = 1259
So Total PF contribution to Ram's PF account per month = 1800 + 1259
= 3059
How to calculate your PF balance?
Lets say Ram worked in a firm from April 2007 to March 2008.Let us
find out what is his balance as on April 1st 2008.
Interest Rate on PF account = 8.5% (fixed by central govt)
So monthly contribution of 3059 for one year @ 8.5% =~ 40,000 (not
exact figure)
So in this way you can calculate your return for 'n' number of years
for your PF contribution, provided you know your monthly contribution.
I would insist on the readers to get to know their monthly
contribution towards PF from your payslip and also collect your PF
account statement every year.
Happy Investing!
Subbu
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Wed Oct 01, 2008 3:14 am |
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What is Super Annuation?
As explained in the previous article, employees like you and me , make
another hidden savings by means of super annuation. So what is super
annuation and what are its benefits?
What is super annuation?
Now a days, corporate have two sections in the
compensation package. One of them is Gross Annual Income and the other
is Cost To Company(CTC). Super Annuation is a fund maintained by the
employer on behalf of all its employees. An employee needs to stay for
more than 3 years in an organization to get the full benefit of super
annuation fund.
Amount invested in super annuation fund per year by employer for
employee = 10% of basic sal.
Duration of employment and super annuation benefits:
IF employee stays in a company < 1 year, he get no amount
from super annuation.
IF employee stays in a company for 1 -2 years, he gets 50% of
amount + interest earned on his super annuation contribution.
IF employee stays in a company for 2-3 years, he gets 75% of
amount invested + interes earned on his superannuation contribution.
IF employee stays in a company for > 3 years, he gets full
amount invested + interest earned.
When an employee leaves a company to another one, he can get
his super annuation fund balance transferred to the new company. The
interest earned per year on super annuation fund varies from company
to company. Each company can choose from a bunch of group super
annuation policies offered by insurance companies to employers.
When an individual stops working, he gets 33% of his
super annuation fund in lumpsum and the rest of the amount will be
given as monthly payments to the employee.
So this explains the reason for being in a company for a
longer period. In today's world, people shift companies very often
which is not advisable from career perspective as well as monetary
perspective.
In the next article, lets see how gratuity also rewards
long term employees.
Subbu
http://investorskool.blogspot.com/ |
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