Anand's Blog

Tax Planning Time For Financial Year 2011-2012

2012-01-31T20:18:00.000+08:00

January 2012 is over and there are just 2 more months left in the current financial year. It is time for us to plan for our Income Tax for this financial year.

Everyone is scampering around to make last minute investments to save taxes. Whenever we are in a hurry to do something, we get oblivious to the details and make silly mistakes. The purpose of this post is to give you some insight on the common mistakes people do during their quest to save taxes quickly.

First and foremost “Don’t treat Investments as Tax Saving Instruments”

Yes, you read me right. Investments is nothing but your hard earned money that you are using to buy something. Lets say, I were to come to you with a notebook with the image of Rajnikanth printed on it and ask you Rs. 1000/- for it, will you buy it? You’ll say “NO”. Ok, what if I say, if you buy this book, you will get Rs. 300/- as Tax Benefits and you may be able to sell it to another Rajnikanth fan in future. Would you be tempted? I am sure you would. But, did you really think someone will buy a notebook that is probably worth Rs. 50/- at max by paying so much?

This is what you will end up doing if you make investments with the Tax Saving part in mind. Never and I mean Never make an Investment just because it saves tax. Make an investment that will earn you money and profits. If it gives Tax Savings, then that is like killing two birds with one stone. Treat Investments with respect. After all, we all work hard to earn the money. No one is handing it over to us. Are they?

To know more about Lifecycle Based Tax Saving click here.

Plan your Tax Savings Ahead

According to experts, Tax Planning is not a one-time activity you can do in February for a few days. It is something that you must consider as part of your overall financial goals. You want to save money for your home, for your sons education abroad, your retirement etc. While trying to save tax, you end up investing Rs. 1 lakh or so every year. For someone who has a probably working career of atleast 30 years, imagine how much that would workout to, at even a 5% rate of returns per annum.

Get the picture? Always include your tax planning as part of your overall financial goals. Use this 1 lakh you invest to save taxes to achieve your financial milestones.

To know more about, how to save income tax click here.

Be careful with single-premium life covers

Does the title of this section sound familiar? In one of our earlier posts on Insurance, I had elaborated on this. Be cautious when you buy Single Premium Insurance Plans. You may be tempted to take up one single premium policy for 1 lakh and use it in one shot under Section 80C. unfortunately, the sum assured has to be atleast 5 times the premium you paid. Else, only 20% of the premium paid is eligible under Section 80C for tax benefits.

So, even if you pay 1 lakh for a policy, you can use only Rs. 20,000/- for tax benefits. Be cautious against insurance agents who may mislead you into taking such policies that don’t offer as much tax benefits as they propose.

To know more about Insurance policies and Income tax, click here.

Plan your PPF Investments

You might already know what PPF is and that investments of upto Rs. 70,000/- in every financial year are eligible for tax benefits under Section 80C.
The problem is, most of us invest the full amount in bulk during either February or March and claim tax rebates. Though this is easy and feasible, the money you invest into your PPF account earns an interest only if deposited before the 5th of every month. So, lets say you invest Rs. 50,000/- on 6th of February, you will be losing out on Rs. 333/- interest you would have got if you had deposited the same money on the 4th. A difference of 2 days cost you Rs. 333/- didn’t it?

Another important thing about PPF investment is that, investing Rs. 5000/- every month is much easier and earns you more interest in a year than Rs. 60,000/- invested in one shot. Not to mention, it is easier on your pocket too.

To know more about the various tax saving options available click here.

Make Use of Joint Home Loans

If you are a working couple, then this point is doubly beneficial for you. You already know that interest & principal paid on home loans are eligible for tax benefits with upper limits of Rs. 1.5 lakhs on the interest and Rs. 1 lakh for section 80C. What most people do not know is that, if a working couple take a joint home loan, they both can individually claim tax benefits on this Rs. 1.5 and 1 lakh respectively. This essentially means you are getting double the tax benefit by just taking a joint housing loan instead of an individual one.

Anyways, you and your spouse are going to pay the home loan EMI and plan your home expenses using both your salaries, then why not utilize the tax benefits it offers. Doesn’t it sound like a great idea?

To know more about buying a home, click here.

Don’t forget other Tax Saving Options

Everyone knows Section 80C and utilize the 1 lakh tax saving. But, many people forget the other tax saving options available to them. They are:

a. EPF and VPF Payments
b. House Rent Allowance (HRA)
c. Medical Expenses
d. Infrastructure Bonds
e. Children’s Education Fees
f. Your own Education Loan repayment
g. Etc

To know more about the Indian Income Tax Policies, click here.

We all work really hard to earn the money we get. So, it makes perfect sense to plan our taxes efficiently to minimize the tax we pay. The government has given us so many options to save taxes for a reason. It is perfectly legal to utilize all these tax saving avenues to reduce the taxes we pay. So, plan ahead and use the money wisely.

Happy Tax Saving!!!

Sectors That Will Outperform in 2012

2012-01-28T14:25:00.001+08:00

The Indian Stock Market is comprised of thousands of stocks, each of which is divided into their respective Sector. For ex: ICICI Bank, HDFC Bank etc. will come under the BFS Sector (Banking & Financial Services). Similarly, there are numerous sectors in the Indian Stock Markets.

As with any stock market, stocks from one sector may outperform or underperform their peers in the same sector. Also, one sector as a whole may outperform or underperform when compared to the other sectors in the market. This year 2012, promises to be an exciting and challenging year for the Indian Stock Market. The purpose of this post is to provide an outlook about some of these sectors that may outperform the others.

Caution: This is just a Sectoral Performance Outlook. Some Stocks that fall in the below mentioned sectors may perform poorly when compared to its peers. This is not an investment advice. Please exercise caution before investing in any stock in any sector.

The Following Sectors Might Perform Well in the year 2012:

1. FMCG
2. Pharmaceuticals
3. Information Technology
4. Textiles

FMCG – Fast Moving Consumer Goods

The FMCG Sector offers the most conservative or defensive options in the current market scenario. The consumption demand for FMCG products continues to be strong in both local and international markets. Also, the domestic consumption is growing irrespective of the interest rate cycle and the domestic economic scenario. As a result, the FMCG sector is expected to do well in the future.

Trivia:

If you are thinking, how the FMCG Sector can grow in such a volatile economy, think about this. “Right from the moment you wake up to the time you go to bed, you use some or the other FMCG product. Toothpaste, Mouthwash, Soap, Shampoo, Deodorant, Mosquito Repellent etc. and etc.” The list is endless. With growing populations in India as well as around the globe, do you really think the demand for FMCG products will come down???

Pharmaceuticals

Emerging Markets like India and China are densely populated. Even with the rapid industrialization in both countries, the penetration of advanced health-care is still not as far-fetched as in developed nations like USA, UK etc. Major Healthcare Providers and Pharma Manufacturers are looking to expand in Emerging Markets to tap the huge growth potential in the Healthcare industry. As India grows to be one of the best Nations in the World for Medical Care, the growth of the Pharma Industry is expected to be in line.

Over the past couple of years, some of the large Pharma Players have remained stable despite the broader market correction. And, this is expected to continue in the year 2012 as well.

Trivia:

If you are thinking, how the Pharma Sector can grow in such a volatile economy, think about this. “Everyone Needs Medical Care. Newer Diseases are being discovered now and then. Newer medicines, high-tech machines are being used in medical care throughout the nation. In the past decade or so, with the advancement in Medical Care, the mortality rate has come down significantly. Everyone wants to live a long and healthy life and that is being made possible by Medicines.” Do you really think that the Pharmaceutical companies that manufacture these medicines will not do well???”

Information Technology

The IT Sector has been the darling of the Indian Stock Markets for over a decade, up until the economic crisis a couple of year ago, of course. The good thing about this IT Sector is that, it is not sensitive to the Interest Rate Movements in India. Also, the Indian Rupee has depreciated significantly against the US Dollar and other foreign currencies. So, the revenue is bound to rise just by the sheer movement in the value of the Rupee.

Moreover, the whole world is reeling under severe economic stress. With rising costs and the ever present need to reduce costs, Large Company’s worldwide are looking at lower cost outsourcing locations like India and China. So, the IT Sector is expected to continue to grow well in the year 2012.

Trivia:

The IT Sectors Growth comes with its fair share of challenges. Rising costs, Rising Attrition Rates, Visa Restrictions, Lower Profit Margins etc. However, IT Cos are finding out ways to cope up with the situation and continue to post good profits and grow well.

Textiles

The Textile Industry, which was in dire straits over the past few years, has started its reviving phase. The formerly lacklustre demand for quality clothing materials is now on a gradual rise. If we consider the rising demand in the local markets (esp. in Cities) the major industry players have entered into an expansion mode. With a bulk of their revenues coming from exports, the rupee depreciation has brightened their prospects even further. So, the Textiles sector is expected to continue to grow well in the year 2012.

Trivia:

If you are even tempted to think “Will the Textiles Sector do well?” just ask yourself this question “Can I live without clothes?” Of course, you cannot. Are you someone who lives in a major city like Chennai, Mumbai etc.? Have you visited one of those huge shopping malls? Have you seen the kind of crowd that the Textile Showrooms have? Now, go back to your doubt and think again “Will the Textiles Sector do well?” and you will answer it yourself “I Think YES”…

Some Final Words:

Even though, the Indian markets are looking to get back on the bulls back, these are the times when investors must be cautious. We must not get carried away by the fact that the markets have bounced back and we can start buying anything and everything. At such times Investors must follow an Accumulative Approach. This means, you must gradually buy fundamentally sound companies with a consistent track record. The impetus is on “Gradually”. If you play on buying 1000 shares of some company, don’t buy it in one shot. Instead, split it up into 250 shares and buy it 4 times over a period of 8-12 weeks. This will give you ample time to revisit your decision or take advantage of price corrections that are bound to happen in such turbulent times.

Last but not least, done expect to make quick bucks in this market. It would be suicide. The best way is to invest in good companies and let the investment grow over a period of a year or so and then try to reap the rewards…

Happy Investing!!!!!

Top 100 Company's of India

2012-01-28T11:46:00.000+08:00

The past 1 year has been very difficult for the Stock Markets in India. Reliance Industries lost its No.1 Spot as the largest company in India and then regained its place. ONGC Gained that place and then lost it. Nonetheless, the top 100 company's in India have reshuffled themselves and gone up and down in the list. Below is the latest list of the Top 100 Company's in India.

Please note that the Market Capitalization is the criteria based on which the Top 100 are listed (In Descending Order). This list is as of the closing price of these shares in the Bombay Stock Exchange (BSE) as of Friday 27th January 2012. The order may change in future based on the price movement of their shares in the Exchange.

S.No	Company Name	Market Cap (In Crores)
1	Reliance Industries	2,67,733.3
2	Oil and Natural Gas Corporation (ONGC)	2,38,313.18
3	TATA Consultancy Services	2,17,026.45
4	Coal India	2,15,072.21
5	ITC Ltd	1,57,603.58
6	Infosys Technologies Ltd	1,56,222.05
7	National Thermal Power Corporation (NTPC)	1,43,264.94
8	Bharti Airtel	1,41,476.98
9	State Bank of India (SBI)	1,29,705.02
10	HDFC Bank	1,13,225.99
11	HDFC Corporation	1,03,081.91
12	Wipro Ltd	1,02,718.58
13	ICICI Bank	1,02,359.79
14	Larsen & Toubro (L&T)	84,532.45
15	Hindustan UniLever (HUL)	84,280.74
16	Minerals and Metals Trading Corporation of India (MMTC)	83,325
17	TATA Motors	76,142.78
18	National Mineral Development Corporation (NMDC)	72,494.83
19	Indian Oil Corporation	69,985.73
20	Bharat Heavy Electricals Ltd (BHEL)	66,978.57
21	Cairn India	66,960.02
22	Hindustan Zinc	56,513.64
23	Sun Pharma	54,771.93
24	Jindal Steel	49,476.08
25	Power Grid Corp	47,732.47
26	Gas Authority of India Ltd (GAIL)	47,345.92
27	Adani Enterprises	46,516.47
28	DLF Ltd	44,551.27
29	Bajaj Auto	44,510.44
30	Axis Bank	44,395.23
31	TATA Steel	44,003.96
32	Steel Authority of India Ltd (SAIL)	43,432.47
33	Mahindra & Mahindra	42,861.58
34	Nestle	41,305.46
35	Sterlite Industries	40,384.91
36	Hero Moror Corp	36,380.07
37	Kotak Mahindra	36,357.12
38	Maruti Suzuki	34,904.67
39	UltraTech Cement	33,684.84
40	Idea Cellular	31,175.53
41	Punjab National Bank (PNB)	30,771.96
42	Bank of Baroda	29,835.88
43	HCL Technologies	29,609.62
44	Adani Ports	29,530.03
45	Oil India Ltd	28,856.93
46	Asian Paints	27,986.99
47	Dr. Reddy's Lab	27,866.26
48	Cipla	27,680.71
49	Hindalco	27,662.46
50	Reliance Power	27,251.8
51	Hindustan Copper	25,781.2
52	Siements	25,690.56
53	National Hydro Power Corp (NHPC)	25,278.03
54	Ambuja Cements	24,803.08
55	TATA Power	24,691.82
56	Grasim	23,634.8
57	Bosch	22,952.6
58	ACC Cement	22,377.08
59	Power Finance Corp (PFC)	22,188.05
60	Lupin Labs	20,856.15
61	Bharat Petroleum Corp (BPCL)	20,844.71
62	Canara Bank	20,575.13
63	Reliance Communications	19,876.58
64	Rural Electrification Corporation (REC)	19,576.37
65	Bank of India	19,308.66
66	Infrastructure Development Finance Company (IDFC)	19,213.31
67	Ranbaxy Labs	18,727.66
68	Sesa Goa	18,577.04
69	Adani Power	18,345
70	Titan Industries	18,301.71
71	Abbot India	16,902.87
72	Dabur India	16,693.13
73	Oracle Financials	16,534.07
74	Glaxo Smithkline	16,514.55
75	National Aluminium Company (NALCO)	15,334.57
76	Jaiprakash Associates	15,055.15
77	JSW Steel (Jindal Group)	14,768.13
78	Neyveli Lignite Corp	14,721.9
79	Godrej Consumer Products	13,912.76
80	Reliance Infrastructure	13,892.74
81	Union Bank	13,688.18
82	Shriram Transport Finance	13,482.81
83	IndusInd Bank	13,462.75
84	Cadila Health	13,349.6
85	Colgate	13,270.18
86	Container Corp	12,452.35
87	Zee Entertainment	12,333.67
88	Petronet LNG	12,296.25
89	LIC Housing Finance	11,944.89
90	Cummins	11,760.21
91	Sun TV Group	11,722.05
92	Castrol	11,661.75
93	GMR Infrastructure	11,560.53
94	Bharat Electricals	11,498.8
95	YES Bank	11,471.16
96	Jaiprakash Power	11,325.83
97	Exide Industries	11,033
98	United Breweries	10,946
99	Divis Lab	10,851.13
100	Mangalore Refinery and Petrochemicals Limited (MRPL)	10,734.67

Lessons to Learn from the Stock Market to Make You a Better Investor

2012-01-26T21:36:00.002+08:00

The Stock Market collapse over the past couple of years, the uncertain global economic scenario and the losses that Investors were forced to make have made investors shy away from the Stock Market. There is an inherent feeling of Panic and Fear when it comes to Investing in the Stock Markets. A Good Investor is one that doesn't get bogged down by such setbacks. We must take this opportunity to learn lessons that this stock market volatility has taught us and make ourselves a Better Investor.

Shall we get on with the topic?

Lesson No. 1:

History Does Not matter; what matters is what you do with your present.

This is a great lesson. Dont get unnerved or disappointed if some of your investment decisions were poor. Its ok. Everyone makes mistakes and especially when it comes to the stock markets, the number of people who make mistakes far outnumber the ones that are successful. So, a good investor is one that learns these hard lessons and uses those learnings to make wise investment choices in future. Don't buy stocks on an impulse or just because your colleague does so. Do your research, spend time finding out how good the stock is and then only invest.

Lesson No. 2:

Find yourself a mentor.

The best way to learn something is to find a good teacher/mentor. In all probabilities you may have a good colleage or friend who is a seasoned investor. Keep your eyes and ears open and learn from them.

Lesson No. 3:

If you are a Beginner/Novice Investor, Invest only in top-rated and successful companies/mutual funds.

A smart investor is one who can identify the best stocks or mutual funds. There are numerous stock market websites that rate the best performing mutual funds. Funds with an established track records usually perform better under difficult times and yield good profits. If you want to invest in stocks, select large company's that have years of history of profits under their belt and the chances are that you will make profits. Even if there are going to be losses due to economic events, they will be far lesser than what you will lose if you choose bad performing funds or junk stocks.

Lesson No. 4:

Stick with a few simple investment products in the early years.

Identify a few investment options that you easily understand and are comfortable with. Don't buy too many different financial products in the initial years of your investment. Only when you get a hang of the financial markets and have made some successful investments, should you consider investing in different products and upcoming companies. If you start with Futures/Options you will never become a successful investor.

Lesson No. 5:

Move to riskier and specialized products only after you become a reasonably successful investor.

This is a continuation of Lesson No. 4. Riskier investments like Derivatives and Commodities are extremely risky and are only for seasoned investors. There are numerous Novice Investors who are lured by super-duper profits and loose all their life's savings in get-rich-quickly kind of schemes. The likelihood of you too becoming a multi-millionaire would be determined by just how good you are at managing the resources you have. If you cant take wise investment decisions, the chances are that you will make very little profits.

Lesson No. 6:

Don't be GREEDY.

Good investments usually have a decent rate of returns which is around the 12-15% range. Any investment that promises exorbitant returns like Double your money in 2 years or Triple your money in 5 years is most probably a Bogus Propaganda. Practically speaking no investment can do that. Unless the stock market rockets upwards to 21000 in one year from its current 17000 levels, such kind of returns is impossible. Expect a decent rate of returns from your investments. A Good Stable investment that offers a good chance of 15% returns is on any day than a scheme that promises a 50% returns at a high risk. Remember the age old saying "A Bird in Hand is better than Two in the Bush"???

Last but not the least "Have a Positive Attitude". Someone who is level-headed and has a positive attitude towards investments has a better chance of success than one who is careless and impulsive.

Being Successful in the Stock Markets is not easy but it isn't Impossible Either. Be Wise and you will make profits easily!!!

Cheques Validity Cut Short

2012-01-24T22:34:00.003+08:00

We all know what a cheque is and how to use it. You can revisit the post titled “Using a Bank Cheque” to know more about the same. To revisit the post click here

Ok, coming back to topic, as you might already know, Cheques have a validity period after which it is worthless. Such a cheque is called a STALE cheque or an EXPIRED cheque. If you had read my previous post, you will know that cheques are valid for 6 months or 180 days from the date of cheque issue. However, with a recent RBI Ruling, this is set to change.

Reduction in a Cheques Life-Span

Starting 1st April 2012, all cheques and drafts issued by banks in India will be valid only for 3 months. This essentially means that, you can cash cheques or drafts only for 90 days from the date of issue (date on the cheque) and beyond the 3 month duration, the cheques are considered stale and would be worthless.

Why this sudden ruling?

The Reserve Bank of India (RBI) has said that, some people were taking undue advantage of this long (180 day/6 month) validity period and floating/circulating these instruments in the market like cash. So, in the interest of public safety, the RBI has reduced the validity of such instruments to 3 months from the date of issue.

From When is this Validity Ruling Effective?

All cheques and drafts issued in India dated 1st April 2012 or later will have this validity ruling. Banks will also have to mention this 3 month validity condition in all cheques and drafts issued by them.

How does this affect us?

If you are someone who uses cheques for making payments on your credit card or for an occasional transaction with a friend or a relative, this ruling has no effect on you. In almost all cases, we usually cash the cheque as soon as we get it. However, for people who accept post dated cheques for loan repayments or for any other reason, this ruling comes as a huge blow. They have to closely track the expiry date of these instruments and cash them on time in order to receive the payment.

Happy Using Cheques!!!

Get a 2 Crore Pension by Investing Rs. 8000/- per month

2012-01-19T22:44:00.001+08:00

The title sounds cool, doesnt it?

Yesterday, i received an email from an online Insurance Quotation website that said “Get Rs. 2 Crore Pension for just 8K pm“. As always, i was curious and opened the email.

Part of the email looked like below:

I clicked on the “Know More“ buttons for either option. Wouldnt you? As salaried individuals, A Crore is a hugeeeee sum of money and the prospect of becoming a Crorepati was more than Inviting. When i clicked on the buttons, the first shock hit me...

The Page which opened on clicking the “Know More“ button for the 1 Crore Pension said Total Returns = Rs. 66 lakhs

The Page which opened on clicking the “Know More“ button for the 2 Crore Pension said Total Returns = Rs.1.36 crores

Now tell me, wasnt the title totally misleading? The advertisement has offered a Return of 1 and 2 crores respectively, while the actual policy mentions projected returns as 66 lakhs and 1.36 crores respectively. The best part is, there is a disclaimer which says, the actual returns may not be that much. Where is 1.36 crores and where is 2 crores? The best part is, in either cases the 66 lakhs or 1.36 crores can be achieved only if we invest in the full Equity orinted fund option which is extremely high risk. If you chose a balanced or a debt oriented fund profile, the returns would be much lower than what is projected in the ad.

This is the kind of mis-selling of Insurance policies that I have always talked about. It was even one of our Financial Resolutions for 2012. To know more about the resolution click here

Ok. As the usual curious cat that I am, I proceeded to read the policy details to really see if the fund can atleast return the amount as promised in the website (I forgot the advertisement email)...

Both of these pension options were for the same Unit Linked Insurance Plan offered by a prominent Insurance Company.

Note: Guys, I am not taking either the name of the Insurance website or the Insurance company in this post. I dont want to criticize anyone. As Investors it is upto us to be vigilant and cautious. If someone fools us, it is our fault and not the other guys. If we were careful, it wouldnt have happened in the first place. Wouldnt it?

Lets take the 2 Crore Advertisement and Analyze it. The Plan is as follows:

1. I Invest Rs. 1 lakh per year for 5 years making a total investment of 5 lakhs
2. I can select from a variety of investment options that range from fully debt oriented to fully equity oriented (The Returns in the examples in the policy advertisement are based on a full equity oriented option which is extremely high risk)
3. I get an Insurance Coverage/Sum Assured of around 30 lakhs - In case anything happens to me in the next 30 years, my family will get a guaranteed amount of 30 lakhs or the existing Fund Value, whichever is higher
4. Partial Withdrawals are allowed after a full 5 years of paying the premium
5. Tax Benefits under section 80C for upto Rs. 1 lakh (Assuming you have no other investment that will give you benefits under section 80C)

At the outset, if I see, I am investing a total of 30 lakhs over a period of 30 years and at the end of which, they are projecting (Not Promising) Rs. 1.36 crores.

Below is a table that would show how our investment would progress if the Rs. 1.36 crores is to be reached by this policy.

Year No.	Invested Amount (In Rupees)	Rate of Interest(%)	Interest Earned this year (In Rupees)	Fund Value at the end of the year (In Rupees)
1	100000	12.5	12500	112500
2	212500	12.5	26562.5	239062.5
3	339062.5	12.5	42382.8125	381445.3125
4	481445.3125	12.5	60180.6640625	541625.9765625
5	641625.9765625	12.5	80203.2470703125	721829.223632812
6	721829.223632812	12.5	90228.6529541016	812057.876586914
7	812057.876586914	12.5	101507.234573364	913565.111160278
8	913565.111160278	12.5	114195.638895035	1027760.75005531
9	1027760.75005531	12.5	128470.093756914	1156230.84381223
10	1156230.84381223	12.5	144528.855476528	1300759.69928876
11	1300759.69928876	12.5	162594.962411094	1463354.66169985
12	1463354.66169985	12.5	182919.332712481	1646273.99441233
13	1646273.99441233	12.5	205784.249301541	1852058.24371387
14	1852058.24371387	12.5	231507.280464234	2083565.52417811
15	2083565.52417811	12.5	260445.690522263	2344011.21470037
16	2344011.21470037	12.5	293001.401837546	2637012.61653792
17	2637012.61653792	12.5	329626.57706724	2966639.19360516
18	2966639.19360516	12.5	370829.899200645	3337469.0928058
19	3337469.0928058	12.5	417183.636600725	3754652.72940653
20	3754652.72940653	12.5	469331.591175816	4223984.32058234
21	4223984.32058234	12.5	527998.040072793	4751982.36065513
22	4751982.36065513	12.5	593997.795081892	5345980.15573703
23	5345980.15573703	12.5	668247.519467128	6014227.67520416
24	6014227.67520416	12.5	751778.459400519	6766006.13460467
25	6766006.13460467	12.5	845750.766825584	7611756.90143026
26	7611756.90143026	12.5	951469.612678783	8563226.51410904
27	8563226.51410904	12.5	1070403.31426363	9633629.82837267
28	9633629.82837267	12.5	1204203.72854658	10837833.5569193
29	10837833.5569193	12.5	1354729.19461491	12192562.7515342
30	12192562.7515342	12.5	1524070.34394177	13716633.0954759

As of Now, the rate of returns, this policy would have to give in order to achieve the 1.36 crore target is 12.5% per year.

Do you reall think, any Investment can generate a nearly 12.5% rate of returns consecutively for 30 years? The Stock Market is known to offer returns in excess of even 20% or 25% but, consecutively for 30 years? Practically not possible isnt it?

Ok, lets get down to further details.

Fee’s Associated with the Policy:

The following Fee’s are applicable on the policy:

1. Premium Allocation Fee - 6% for the 1st year, 4% for year 2 to year 5, 0% from year 6 onwards (If premium is less than Rs. 1 lakh, there is a 2% premium allocation fee from year 6. But, in our case, we are going to pay premium only for 5 years. So there is no fee.)
2. Fund Management Charges – 1.35% of the fund value per year
3. Policy Administration Charges – 0.1% of Premium or Rs. 400 whichever is lower. In our case Rs. 100 every month.
4. Mortality Charges – Around Rs. 1.4/- for every Rs. 1000/- Sum Assured per year. In our case the Sum Assured is around 30 lakhs. So, this fee works out to Rs. 4200/- per year
5. Plus other fee related to Riders that you may choose
6. Service Tax and Educational Cess

So, if we factor in all the fee that we may have to pay for this policy, the net returns our policy has to generate will go much higher than the initial 12.5%.

Coming back to the title “ Can you Really Get a 2 Crore Pension by Investing Rs. 8000/- per month?“

No.

Even if we assume that the full1 lakh we invest is invested, the fund has to generate a returns of nearly 15% every year, without fail for 30 full years to achieve the elusive 2 crore pension mark. Unfortunately, there is a host of fee that will eat atleast 2-3% of your investment every year which means, your fund has to earn that much more extra interest to achieve the 2 crore mark.

Realistically speaking – any good fund manager will be able to generate an average returns of around 9 - 10% if we consider the market ups and downs. When the equity markets are good, the returns may go up to even 25% and when the markets are bad, the returns may fall to even 0% or worse, generate losses.

Are you thinking this? “Anand, in the initial paragraph, you have mentioned that there is an Insurance Coverage/Sum Assured of around 30 lakhs. So, what kind of returns must the policy generate to meet that number?“

Well, in the previous paragraph, I have mentioned that the realistic rate of returns we can expect is around 9 - 10%. In order to achieve the 30 lakh sum assured, the fund would have to generate a return of around 7% every year. This is a realistic number and quite possible if the equity markets perform well for atleast 15 of the 30 year investment period.

As a whole, the policy looks like a decent investment if we consider the realistic returns of 10%. At such a rate, this policy will grow to around 60+ lakhs at the end of 30 years. Considering that you only invest 5 Lakhs in the first 5 years, this is very good returns. But, if you are someone who dreamt of the 1 crore or 2 crore pension after seeing the Advertisement, this policy is not for you.

Some Last Words:

As I have always said, being vigilant and cautious should be your NUMBER ONE RULE when it comes to making investment/insurance decisions. Be Cautious, Do your Homework, Ask Experts and Expect Realistic Returns from your investments to avoid Disappointment...

Happy Investing Folks!!!!

Save Tax Through Infrastructure Bonds

2012-01-19T20:26:00.000+08:00

With the dawn of the new year, Saving Tax is something that is running on the minds of every individual in India. People are scrambling around to make investments to avail tax benefits under the various sections of the Indian IT Laws. Sec 80C is one of the most widely used tax saving section which offers tax relief on amounts of upto Rs. 1 lakh every financial year. To know more about the various investment options under which you can save tax using this sec 80C click here.

One of the less known and lesser used sections of the Indian Tax System is Section 80CCF. This section offers tax benefits for investments of upto Rs. 20,000/- every year in qualified Infrastructure Bonds. Infrastructure Bonds or Infra Bonds as they are shortly called are special Bonds that are issued by Banks in India to fund the rapid growth of the Infrastructure Industry in India. In one of my earlier posts titled “Should We Invest in the new Infrastructure Bonds that offer 80CCF Tax Benefits“ we had taken a detailed look at them. You can revisit that post to know more about these bonds by Clicking Here

What are the Current Infrastructure Bond Issues that are open now?

Currently there are 3 Infrastructure Bond IPO’s that are open. They are:

1. IDFC Infra Bonds
2. REC Infra Bonds
3. L&T IFC Infra Bonds

IDFC Infra Bonds:

IDFC Ltd has come up with an issue of Infrastructure Bonds of face value Rs. 5000/- with a minimum investment of Rs. 10000/- or 2 bonds. The issue is open between 11th January 2012 and 25th February 2012. They are offering an interest rate of 8.7% per annum. The lock-in period is 5 years, after which there is a buy-back option and the maturity period is 10 years. To know more about this issue click here.

REC Infra Bonds:

REC Ltd has come up with an issue of Infrastructure Bonds of face value Rs. 5000/- with a minimum investment of Rs. 5000/- or 1 bond. The issue is open between 19th December 2011 and 10th February 2012. They are offering an interest rate of 8.95% & 9.14% per annum for bonds of tenure 10 years and 15 years respectively. The lock-in period is 5 years for 10 year bonds and 7 years for 15 year bonds, after which there is a buy-back option. To know more about this issue click here.

L&T IFC Infra Bonds:

L&T IFC Ltd has come up with an issue of Infrastructure Bonds of face value Rs. 1000/- with a minimum investment of Rs. 5000/- or 5 bonds. The issue is open between 10th January 2012 and 11th February 2012. They are offering an interest rate of 8.7% per annum. The lock-in period is 5 years, after which there is a buy-back option and the maturity period is 10 years. To know more about this issue click here.

All the above issues offer tax benefits under section 80CCF and hence are great opportunities to save an extra amount of tax this financial year.

Happy Tax Saving!!!

Larsen & Toubro Long Term Infrastructure Bonds: 2011 – 2012 – Tranche 2

2012-01-19T20:25:00.000+08:00

L&T IFC – Larsen & Toubro Infrastructure Finance Company Limited has come up with new IPO of Long term Infrastructure Bonds that are available to the public between January 10th and February 11th of 2012. The purpose of this post is to raise awarness among people on these Infrastructure Bonds and the tax benefits they bring to us.

What are Infrastructure Bonds?

Infrastructure Bonds or Infra Bonds as they are shortly called are special Bonds that are issued by Banks in India to fund the rapid growth of the Infrastructure Industry in India. In one of my earlier posts titled “Should We Invest in the new Infrastructure Bonds that offer 80CCF Tax Benefits“ we had taken a detailed look at them. You can revisit that post to know more about these bonds by Clicking Here

Coming back to the topic, lets focus on these new Infrastructure bonds issued by IDFC now.

Details of the Issue:

Issue Start Date: January 10, 2012
Issue End Date: February 11, 2012
Issue Size: 570 Crores (Max)
Bond Face Value: Rs. 1000/- per bond
Minimum Purchase Amount: Rs. 5,000/- (5 Bonds)
Type of holding: DEMAT (You can only Apply online through your DEMAT website like icicidirect)
Rate of Interest: 8.7% p.a
Interest Payment Options: Annual or Cumulative
Maturity Date: 10 years from the Date of Allotment
Maturity Amount: Rs. 2303.01 per Bond at the end of 10 years
Lock-in Period: 5 years
Buyback Facility: Available at the end of 5 years One day from the Date of Allotment and at the end of 7 years and One day from the Date of Allotment

First things first – What are the Tax Benefits of Investing in these Bonds?

These long-term infrastructure bonds are useful to claim tax relief of up to Rs. 20,000/- under the Section 80CCF of the Indian Income Tax. i.e., If you buy 20 bonds of Rs. 1000/- each, that Rs. 20,000/- you invested in these bonds is exempt from your taxable salary.

So, for people in the highest tax slab the tax benefit they get is: Rs. 6,180/-

About L&T IFC Ltd:

Larsen & Toubro (L&T) is one of India’s largest Infrastructure & conscturctions. L&T IFC is a part of the L&T group and finances the funding of Infrastructure Projects around India. It was established in the year 2006 with their head office in Mumbai India. It is one of the Fast growing Infrastructure financing company’s in India.

About this Bond Issue:

This Bond Issue by L&T IFC has been rated as “AA+“ by ICRA and CARE India. As you might already know, AA+ is a very good rating any Issue can get and this Infra Bond’s issue by L&T IFC has got the same. So, this makes it an Excellent Investment Option.

Interest Payment Options:

This Bond Issue has two modes of Interest Payment.
1. Annual Interest Payout
2. Cumulative Interest Payout

In the Annual option, the Interest amount earned in the year (Rs. 435/- on a Rs. 5,000/- Investment) will be paid out every year to the Investor. At the end of 10 years, your initial investment of Rs. 5000/- will be returned.

In case of the Cumulative option, the Interest is compounded every year and the total cumulative amount will be paid out at Maturity. The amount in this case for a Rs.5000/- Investment would be Rs. 11,515/-

About the Buy-Back Facility:

L&T IFC has indicated that Buy-Back Facility will be available after the day when 5 years and 1 day or 7 years and 1 day from the date of allotment of the bond completes. At that time, L&T IFC will buy-back these Bonds at the below mentioned prices if you are willing to sell.

Cumulative Interest Payout Option: Rs. 7587.85/- per bond at the end of 5 years
Cumulative Interest Payout Option: Rs. 8965.55/- per bond at the end of 7 years

Annual Interest Payout Option: Rs. 5000/- per bond

Dont forget the fact that L&T IFC has paid you an Interest of Rs. 435/- every year whereas for the Cumulative Interest Payout Option, nothing was paid to the Investor. So, his amount is bound to be highers than the amount for the Annual Interest Payout Investor.

Note: The amount above is if you surrender your bond for buy-back at the end of exactly 5 years and 1 day or 7 years and 1 day. If you wish to surrender anytime later, the amount might vary based on the duration.

Salient Features of the Issue:

1. Investments of upto Rs. 20,000/- are exempt from Income Tax under Sec 80CCF thereby saving Rs. 6180/- for Investors who fall in the highest tax slab of 30%. For someone in the 20% tax slab it would be Rs. 4120/- and for someone in the 10% tax slab the tax saving would be Rs. 2060/- respectively
2. Interest Rate of 8.7% applicable for both annual and cumulative interest payout options
3. Buy-Back available after 5 years & y years. So, if you have better investment opportunities at the end of 5 or 7 years, you can sell them to L&T IFC and use the money to invest somewhere else
4. Minimum Investment is only Rs. 5,000/-
5. AA+ rated Issue which means very good Safety & Security.

Some Questions that Might Arise in your mind about this issue – Answered:

1. Is the Annual Interest Payout better or the Cumulative one?

I would say Cumulative because, the total interest earned in case of the cumulative payout (due to the interest compounding) will be superior to the annual payout option

2. How Safe is my Money if I invest in this scheme?

Your money is very safe. As per the bond issue details, the company (L&T IFC) will maintain an asset cover of atleast 75% of the outstanding bonds in the market up until all the bonds are fully redeemed. So, even in the case of the company going bankrupt, the Supervisory bodies will have assets to liquidate and payout atleast 75% of the money to all the investors. That is why the AA+ Rating. However, considering the size of the company and the size of the issue, the chances of this are very low.

3. What will this money be used for?

The money raised through this bond IPO will be used to fund and finance Infrastructure Projects in India.

4. Is Buy-Back the only option for me to sell these bonds after the lock-in period of 5 years?

No. The bonds will be listed in the BSE at the end of 5 years and can be bought and sold in the exchange

5. Can NRI’s Invest in these Bonds?

No. This issue is available only for Resident Indians. NRI’s cannot invest in these Bonds

Final Verdict:

In terms of the Issue, it is AA+ rated, so safety is not a big problem. It is issued by one of India’s large financial institutions that is backed by one of India’s largest Infra company‘s. So, it looks like a sound investment decision. But, The Final Verdict depends on which Tax Slab you are in.

For someone in 30% Tax Slab: Excellent Opportunity to Save an Extra Rs. 6180/- Tax and enjoy good returns that work out to roughly 15% if we include the Tax Benefit earned along with the 8.7% interest offered by L&T IFC. So STRONG BUY.

For Someone in 20% Tax Slab: Great Opportunity to Save an Extra Rs. 4120/- Tax and enjoy good returns that work out to roughly 12% if we include the Tax Benefit earned along with the 8.7% interest offered by L&T IFC. So GOOD BUY.

For Someone in the 10% Tax Slab: Good Opportunity to Save an Extra Rs. 2060/- Tax and enjoy good returns that work out to roughly 10% if we include the Tax Benefit earned along with the 8.7% interest offered by L&T IFC. So BUY.

Happy Tax Saving!!!

REC Long Term Infrastructure Bonds: 2011 – 2012 – Tranche 2

2012-01-19T20:23:00.000+08:00

REC – Rural Electrification Corporation Limited has come up with new IPO of Long term Infrastructure Bonds that are available to the public between December 19th 2011 and February 10th of 2012. The purpose of this post is to raise awarness among people on these Infrastructure Bonds and the tax benefits they bring to us.

What are Infrastructure Bonds?

Infrastructure Bonds or Infra Bonds as they are shortly called are special Bonds that are issued by Banks in India to fund the rapid growth of the Infrastructure Industry in India. In one of my earlier posts titled “Should We Invest in the new Infrastructure Bonds that offer 80CCF Tax Benefits“ we had taken a detailed look at them. You can revisit that post to know more about these bonds by Clicking Here

Coming back to the topic, lets focus on these new Infrastructure bonds issued by REC now.

Details of the Issue:

Issue Start Date: December 19, 2011
Issue End Date: February 10, 2012
Issue Size: 100 Crores (Max)
Bond Face Value: Rs. 5000/- per bond
Minimum Purchase Amount: Rs. 5,000/- (1 Bonds)
Type of holding: Physical & DEMAT (You can Apply online through your DEMAT website like icicidirect)
Rate of Interest: 8.95% p.a for 10 year Bonds and 9.15% for 15 year Bonds
Interest Payment Options: Annual or Cumulative
Maturity Date: 10 years from the Date of Allotment or 15 years from the Date of Allotment
Maturity Amount: Rs. 11,783/- for 10 year Bonds and Rs. 18,592/- for 15 year Bonds
Lock-in Period: 5 years
Buyback Facility: Available at the end of 5 years One day from the Date of Allotment for 10 year Bonds and at the end of 7 years and One day for the 15 year Bonds

First things first – What are the Tax Benefits of Investing in these Bonds?

These long-term infrastructure bonds are useful to claim tax relief of up to Rs. 20,000/- under the Section 80CCF of the Indian Income Tax. i.e., If you buy 4 bonds of Rs. 5000/- each, that Rs. 20,000/- you invested in these bonds is exempt from your taxable salary.

So, for people in the highest tax slab the tax benefit they get is: Rs. 6,180/-

About REC Ltd:

Rural Electrification Corporation Ltd (REC) is one of India’s largest institutions. It is fully owned by the Government of India and is responsible for electricity transmission throughout the country. It is listed in the NSE and BSE exchanges.

About this Bond Issue:

This Bond Issue by REC has been rated as “AAA“ by ICRA, CARE and CRISIL India. As you might already know, AAA is the best possible rating any Issue can get and this Infra Bond’s issue by REC has got the same. So, this makes it a Prime Investment Option.

Interest Payment Options:

This Bond Issue has two modes of Interest Payment.
1. Annual Interest Payout
2. Cumulative Interest Payout

In the Annual option, the Interest amount earned in the year will be paid out every year to the Investor. At the end of 10 years, your initial investment of Rs. 5000/- will be returned. The interest paid will be as follows:

Rs. 447.5/- per Rs. 5000 Invested in the 10 year Bond
Rs. 457.5/- per Rs. 5000 Invested in the 15 year Bond

In case of the Cumulative option, the Interest is compounded every year and the total cumulative amount will be paid out at Maturity. The amount in this case for a Rs.5000/- Investment would be Rs. 11,783/- for 10 year Bonds and 18,592/- or the 15 year Bonds

About the Buy-Back Facility:

REC has indicated that Buy-Back Facility will be available after the day when 5 years and 1 day from the date of allotment of the bond for the 10 year Bonds and after the day when 7 years and 1 day for the 15 year Bonds. At that time, REC will buy-back these Bonds at the below mentioned prices if you are willing to sell.

Cumulative Interest Payout Option: Rs. 7677/- per bond for the 10 year Bonds at the end of 5 years
Cumulative Interest Payout Option: Rs. 9231/- per bond for the 15 year Bonds at the end of 7 years

Annual Interest Payout Option: Rs. 5000/- per bond for both 10 and 15 year Bonds

Dont forget the fact that REC has paid you an Interest of Rs. 447.5/- & 457.5 every year respectively for the 10 and 15 year bonds whereas for the Cumulative Interest Payout Option, nothing was paid to the Investor. So, his amount is bound to be highers than the amount for the Annual Interest Payout Investor.

Note: The amount above is if you surrender your bond for buy-back at the end of exactly 5 years and 1 day or 7 years and 1 day. If you wish to surrender anytime later, the amount might vary based on the duration.

Salient Features of the Issue:

1. Investments of upto Rs. 20,000/- are exempt from Income Tax under Sec 80CCF thereby saving Rs. 6180/- for Investors who fall in the highest tax slab of 30%. For someone in the 20% tax slab it would be Rs. 4120/- and for someone in the 10% tax slab the tax saving would be Rs. 2060/- respectively
2. Interest Rate of 8.95% for 10 year Bonds and 9.15% for 15 year bonds applicable for both annual and cumulative interest payout options
3. Buy-Back available after 5 years & 7 years. So, if you have better investment opportunities at the end of 5 or 7 years, you can sell them to REC and use the money to invest somewhere else
4. Minimum Investment is only Rs. 5,000/-
5. You can hold the Bonds in both Physical as well as DEMAT form
6. AAA rated Issue which means superb Safety & Security.
7. Interest rate offered is very good and if we club the tax saving we get out of this investment, the returns are the best in the markets for debt instruments

Some Questions that Might Arise in your mind about this issue – Answered:

1. Is the Annual Interest Payout better or the Cumulative one?

I would say Cumulative because, compounding of the Interest earned during each year increases the net effective returns and thereby making the cumulative option better

2. How Safe is my Money if I invest in this scheme?

Your money is fully safe. The Company is fully owned by the Government of India and hence our money is fully secure. That is why the AAA Rating.

3. What will this money be used for?

The money raised through this bond IPO will be used to fund and finance Infrastructure Projects in India.

4. Is Buy-Back the only option for me to sell these bonds after the lock-in period of 5 years?

No. The bonds will be listed in the NSE or BSE or both at the end of 5 years and can be bought and sold in the exchange

5. Can NRI’s Invest in these Bonds?

No. This issue is available only for Resident Indians. NRI’s cannot invest in these Bonds

Final Verdict:

In terms of the Issue, it is AAA rated, so safety is not a problem. Also, the rate of interest offered is higher than the other Infra Bonds available at the same time. It is issued by one of India’s largest company‘s. So, it looks like a sound investment decision. But, The Final Verdict depends on which Tax Slab you are in.

For someone in 30% Tax Slab: Excellent Opportunity to Save an Extra Rs. 6180/- Tax and enjoy good returns that work out to roughly 15% if we include the Tax Benefit earned along with the 8.7% interest offered by REC. So STRONG BUY.

For Someone in 20% Tax Slab: Great Opportunity to Save an Extra Rs. 4120/- Tax and enjoy good returns that work out to roughly 12% if we include the Tax Benefit earned along with the 8.7% interest offered by REC. So GOOD BUY.

For Someone in the 10% Tax Slab: Good Opportunity to Save an Extra Rs. 2060/- Tax and enjoy good returns that work out to roughly 10% if we include the Tax Benefit earned along with the 8.7% interest offered by REC. So BUY.

Happy Tax Saving!!!

IDFC Long Term Infrastructure Bonds: 2011 – 2012 – Tranche 2

2012-01-19T20:20:00.000+08:00

IDFC – Infrastructure Development Finance Company Limited has come up with new IPO of Long term Infrastructure Bonds that are available to the public between January 11th and February 25th of 2012. The purpose of this post is to raise awarness among people on these Infrastructure Bonds and the tax benefits they bring to us.

What are Infrastructure Bonds?

Infrastructure Bonds or Infra Bonds as they are shortly called are special Bonds that are issued by Banks in India to fund the rapid growth of the Infrastructure Industry in India. In one of my earlier posts titled “Should We Invest in the new Infrastructure Bonds that offer 80CCF Tax Benefits“ we had taken a detailed look at them. You can revisit that post to know more about these bonds by Clicking Here

Coming back to the topic, lets focus on these new Infrastructure bonds issued by IDFC now.

Details of the Issue:

Issue Start Date: January 11, 2012
Issue End Date: February 25, 2012
Issue Size: 4400 Crores (Max)
Bond Face Value: Rs. 5000/- per bond
Minimum Purchase Amount: Rs. 10,000/- (2 Bonds)
Type of holding: Physical & DEMAT (You can Apply online through your DEMAT website like icicidirect)
Rate of Interest: 8.7% p.a
Interest Payment Options: Annual or Cumulative
Maturity Date: 10 years from the Date of Allotment
Lock-in Period: 5 years
Buyback Facility: Available at the end of 5 years One day from the Date of Allotment

First things first – What are the Tax Benefits of Investing in these Bonds?

These long-term infrastructure bonds are useful to claim tax relief of up to Rs. 20,000/- under the Section 80CCF of the Indian Income Tax. i.e., If you buy 4 bonds of Rs. 5000/- each, that Rs. 20,000/- you invested in these bonds is exempt from your taxable salary.

So, for people in the highest tax slab the tax benefit they get is: Rs. 6,180/-

About IDFC Ltd:

Infrastructure Development Finance Corporation Ltd (IDFC) is one of India’s largest financial institutions. It was established in the year 1997 and got listed in the Indian Stock Exchanges in August 2005. RBI classifies IDFC as an Infrastructure Financing Company and they are one of the premier institutions that finance Infrastructure Growth in India.

About this Bond Issue:

This Bond Issue by IDFC has been rated as “AAA“ by ICRA and Fitch India. As you might already know, AAA is the best possible rating any Issue can get and this Infra Bond’s issue by IDFC has got the same. So, this makes it a Prime Investment Option.

Interest Payment Options:

This Bond Issue has two modes of Interest Payment.
1. Annual Interest Payout
2. Cumulative Interest Payout

In the Annual option, the Interest amount earned in the year (Rs. 435/- on a Rs. 5,000/- Investment) will be paid out every year to the Investor. At the end of 10 years, your initial investment of Rs. 5000/- will be returned.

In case of the Cumulative option, the Interest is compounded every year and the total cumulative amount will be paid out at Maturity. The amount in this case for a Rs.5000/- Investment would be Rs. 11,515/-

About the Buy-Back Facility:

IDFC has indicated that Buy-Back Facility will be available after the day when 5 years and 1 day from the date of allotment of the bond completes. At that time, IDFC will buy-back these Bonds at the below mentioned prices if you are willing to sell.

Cumulative Interest Payout Option: Rs. 7590/- per bond
Annual Interest Payout Option: Rs. 5000/- per bond

Dont forget the fact that IDFC has paid you an Interest of Rs. 435/- every year whereas for the Cumulative Interest Payout Option, nothing was paid to the Investor. So, his amount is bound to be highers than the amount for the Annual Interest Payout Investor.

Note: The amount above is if you surrender your bond for buy-back at the end of exactly 5 years and 1 day. If you wish to surrender anytime later, the amount might vary based on the duration.

Salient Features of the Issue:

1. Investments of upto Rs. 20,000/- are exempt from Income Tax under Sec 80CCF thereby saving Rs. 6180/- for Investors who fall in the highest tax slab of 30%. For someone in the 20% tax slab it would be Rs. 4120/- and for someone in the 10% tax slab the tax saving would be Rs. 2060/- respectively
2. Interest Rate of 8.7% applicable for both annual and cumulative interest payout options
3. Buy-Back available after 5 years. So, if you have better investment opportunities at the end of 5 years, you can sell them to IDFC and use the money to invest somewhere else
4. Minimum Investment is only Rs. 10,000/-
5. You can hold the Bonds in both Physical as well as DEMAT form
6. AAA rated Issue which means superb Safety & Security.

Some Questions that Might Arise in your mind about this issue – Answered:

1. Is the Annual Interest Payout better or the Cumulative one?

I would say Cumulative because, the total amount earned at the end of 10 years for a Rs. 5000/- bond in case of Annual payout is Rs. 9350/- (Including the 10 time payment of Rs. 435/- every year) whereas in case of Cumulative payout it is Rs. 11,515/- As you can see, in case of cumulative payout the amount earned is high (due to compounding of interest)

2. How Safe is my Money if I invest in this scheme?

Your money is fully safe. As per the bond issue details, the company (IDFC) will maintain an asset cover of atleast 100% of the outstanding bonds in the market up until all the bonds are fully redeemed. So, even in the case of the company going bankrupt, the Supervisory bodies will have enough assets to liquidate and payout all the investors. That is why the AAA Rating.

3. What will this money be used for?

The money raised through this bond IPO will be used to fund and finance Infrastructure Projects in India.

4. Is Buy-Back the only option for me to sell these bonds after the lock-in period of 5 years?

No. The bonds will be listed in the NSE or BSE at the end of 5 years and can be bought and sold in the exchange

5. Can NRI’s Invest in these Bonds?

No. This issue is available only for Resident Indians. NRI’s cannot invest in these Bonds

Final Verdict:

In terms of the Issue, it is AAA rated, so safety is not a problem. It is issued by one of India’s premier financial institutions. So, it looks like a sound investment decision. But, The Final Verdict depends on which Tax Slab you are in.

For someone in 30% Tax Slab: Excellent Opportunity to Save an Extra Rs. 6180/- Tax and enjoy good returns that work out to roughly 15% if we include the Tax Benefit earned along with the 8.7% interest offered by IDFC. So STRONG BUY.

For Someone in 20% Tax Slab: Great Opportunity to Save an Extra Rs. 4120/- Tax and enjoy good returns that work out to roughly 12% if we include the Tax Benefit earned along with the 8.7% interest offered by IDFC. So GOOD BUY.

For Someone in the 10% Tax Slab: Good Opportunity to Save an Extra Rs. 2060/- Tax and enjoy good returns that work out to roughly 10% if we include the Tax Benefit earned along with the 8.7% interest offered by IDFC. So BUY.

Happy Tax Saving!!!

Do Insurance Policies Really Help Save Tax?

2012-01-17T22:32:00.000+08:00

The title is misleading, isnt it? We all know that Insurance Policies help us save tax. You might be wondering, hey Anand, what silly question is this???

Well my dear readers, there is a purpose to this post. Lets take a look at the synopsis of an email I received from one of the readers of my blog a few days back.

Hi Anand,
I had taken a LIC Policy in 2011 in the name of my Minor Brother who is dependent on me. However, the finance department in my office refused to accept the premium paid against the policy for tax deductions under Sec 80C. Can they do that? Please help.

Regards,
Victor

So tell me, was the finance department correct in refusing the premium receipt submitted by Victor on a policy he had taken on his brothers name?

Unfortunately, the Finance Department was correct and Victor mis-understood the Indian Taxation Laws.

Now, go back and read the title again. Does it make sense?

The purpose of this post is to throw some light on the “*Conditions Apply“ aspects of Insurance Policies with respect to the Indian Income Tax Laws.

In my earlier post in “Insurance & Indian Income Tax“ we had taken a look at how Premium paid on insurance policies can provide tax benefits under section 80C. Unfortunately, the whole situation isnt all black and white. There are few catches on the tax benefits you can get from policy premium paid.They are:

1. Name of the Person on whom the Policy is Taken
2. % of Premium Amount that is Eligible for Tax Deduction
3. Mandatory Holding Period

Lets take a look at them one by one in detail.

Name of the Person on whom the Policy is Taken

As per the Indian IT Laws, Premium paid against Life Insurance Policies are eligible for tax deduction only if the policy is registered in the name of:

a. The Tax Assessee (You)
b. Spouse & Children (In case of Married People)
c. Parents (Only if both Mother & Father are Retired/Unemployed/Have No Income)

Premiums Paid in the below cases are not eligible:

a. For a Brother or Sister – Even if they are not earning any income
b. For Parents (If either the mother or the father is still earning)
c. For Uncles, Aunts, In-laws etc

As you can see from the above list, Mr. Victor did not know that premium paid on a policy taken on his Brothers name, eventhough the brother is a Minor and dependent on Victor, he is not eligible to claim tax deductions on that payment.

% of Premium Amount that is Eligible for Tax Deduction

You might be thinking, section 80C has an upper limit of 1 lakh. So, any insurance premium paid upto Rs. 1 lakh is eligible for Tax Deductions. Whats the big deal about it?

Did you really think that?

Unfortunately my friend, its not that simple. The actual premium paid is considered fully for tax exemption (with a higher limit of 1 lakh, of course) only if the amount does not exceed 20% of the Policy’s Sum Assured.

This is something, many of us do not know. In one of my earlier posts, I had written about Insurance Agents mis-selling policies. You may want to be cautious if an Insurance agent tells you something like below:

An Insurance Agent is telling his client that, he has this great One Time Premium policy, wherein if he pays 75000 this year, he will get 2 lakhs at the end of 5 years. Since he can use the full 75000 for tax rebate @ 30% tax rate, he is effectively paying only Rs. 52,500/- and getting 2 lakhs in 5 years. Which is 4 times the money invested.

You must remember that, if the Sum Assured (Maturiy Amount) is 2 lakhs then, the maximum premium you can pay and claim tax rebate in a single financial year is only 20% of it, which is Rs. 40,000/-. The remaining Rs. 35,000/- is not eligible for tax calculation purposes.

Curious Cat Kind of Question:
My Agent tells me that LIC declares a loyalty bonus for all policy holders when the policy matures. So, if i consider a nominal loyalty bonus addition to the policy maturity amount, my premium falls under the 20% slab. Can i claim the whole amount for tax rebate?

Answer: No. The IT Laws do not consider any loyalty bonus or any additional amounts your insurance company could pay you at maturity. Since such amounts are not guaranteed, the IT Laws only consider the policy maturity amount and nothing more.

Mandatory Holding Period

As per the Indian IT Laws, any Tax Payer, who claims tax deductions under Sec 80C using life insurance policies, is expected to pay his/her insurance premium for a minimum period of 2 full years. For a single premium policy if the contract is terminated within two years of the commencement of insurance then the benefit already taken would have to be reversed. The consequence of not fulfilling the holding period is that there is no benefit for the current year for the premium paid and all the previous benefits are reversed with the amounts being considered as income.

For ex: Lets say Mr. Sharma used his premium paid receipts to avail tax benefits in the financial year 2010-11 and for some reason, missed his premium payments in the whole of the year 2011, the IT Department has the right to revoke the tax benefits he claimed in the financial year 2010-11 and ask Mr. Sharma to pay the tax applicable on the deducted amount.

So, if you are someone who is in the habit of forgetting Insurance Payments, do remember that if you miss your payments and the policy lapses, you may end up paying extra taxes on the amounts you claimed tax rebate...

Curious Cat Kind of Question:
For Annual Premium Payment policies, if I pay 2 premiums (2 years) would that suffice?

Answer: No. Since the first premium is paid while taking the policy, you have to pay the annual premium atleast twice (two years) in order to satisfy the mandatory holding period. This means, you must pay a total of 3 premiums, the first while taking the policy and two more in the subsequent two years in order to avail tax benefits.

Since the Jan-March period of the year is considered the “Save Tax“ quarter where people scramble to invest money in tax saving instruments, it would be a nice idea to remember the above mentioned points while taking Insurance Policies that are aimed at saving tax.

Happy Insuring & Tax Saving!!!

Company’s that Comprise the NSE Nifty

2012-01-15T16:21:00.001+08:00

The NSE Nifty or Nifty as it is more commonly called is one of two premier Indices in India. It is the index that depicts the movement of the National Stock Exchange or NSE. In one of our earlier posts, we had taken a look at what the NSE is. To read that post, “click here”.

In this post, we are going to take a look at the 50 company’s that comprise this Nifty Index.

To Recap:

Nifty is the weighted average of the price movement of the 50 largest company’s that are listed in the National Stock Exchange. This list of company’s may change from time to time and the Exchange will always release the news of replacement of any company in the Nifty to the public beforehand.

Below is the list of 50 company’s that comprise the BSE Sensex along with their Industry and Weightage.

Note: A company with 1% weightage will have to increase twice as much as one with a 2% weightage in order to move the index up or down by the same number.

Company Name	Industry	Weightage
ACC	Cement - Major	0.64
Ambuja Cements	Cement - Major	0.71
Axis Bank	Banks - Private Sector	1.18
Bajaj Auto	Auto - 2 & 3 Wheelers	1.26
Bharti Airtel	Telecommunications - Service	3.87
BHEL	Engineering - Heavy	1.99
BPCL	Refineries	0.56
Cairn India	Oil Drilling And Exploration	1.95
Cipla	Pharmaceuticals	0.83
Coal India	Mining/Minerals	6.62
DLF	Construction & Contracting - Real Estate	1.02
Dr Reddys Labs	Pharmaceuticals	0.86
GAIL	Oil Drilling And Exploration	1.44
Grasim	Diversified	0.69
HCL Tech	Computers - Software	0.84
HDFC	Finance - Housing	3.06
HDFC Bank	Banks - Private Sector	3.35
Hero Motocorp	Auto - 2 & 3 Wheelers	1.09
Hindalco	Aluminium	0.78
HUL	Personal Care	2.58
ICICI Bank	Banks - Private Sector	2.77
IDFC	Finance - Term Lending Institutions	0.48
Infosys	Computers - Software	4.52
ITC	Cigarettes	4.92
Jaiprakash Asso	Construction & Contracting - Civil	0.39
Jindal Steel	Steel - Sponge Iron	1.43
Kotak Mahindra	Banks - Private Sector	1.07
Larsen	Engineering - Heavy	2.19
Mah and Mah	Auto - Cars & Jeeps	1.3
Maruti Suzuki	Auto - Cars & Jeeps	0.86
NTPC	Power - Generation/Distribution	4.18
ONGC	Oil Drilling And Exploration	6.77
PNB	Banks - Public Sector	0.86
Power Grid Corp	Power - Generation/Distribution	1.44
Ranbaxy Labs	Pharmaceuticals	0.6
Reliance	Refineries	7.3
Reliance Comm	Telecommunications - Service	0.55
Reliance Infra	Power - Generation/Distribution	0.33
Reliance Power	Power - Generation/Distribution	0.76
SAIL	Steel - Large	1.16
SBI	Banks - Public Sector	3.44
Sesa Goa	Mining/Minerals	0.49
Siemens	Electric Equipment	0.75
Sterlite Ind	Metals - Non Ferrous	1.06
Sun Pharma	Pharmaceuticals	1.62
Tata Motors	Auto - LCVs/HCVs	2.02
Tata Power	Power - Generation/Distribution	0.7
Tata Steel	Steel - Large	1.22
TCS	Computers - Software	6.48
Wipro	Computers - Software	3

The list above is ordered Alphabetically based on the company name :-). Also, the list above is correct as of 15th January 2012. If there are any updates to the Index, I will try to update this post accordingly...

Company’s that Comprise the BSE Sensex

2012-01-15T16:15:00.001+08:00

The BSE Sensex or Sensex as it is more commonly called is one of two premier Indices in India. It is the index that depicts the movement of the Bombay Stock Exchange or BSE. In one of our earlier posts, we had taken a look at what the BSE is. To view that post "click here".

In this post, we are going to take a look at the 30 company’s that comprise this Sensex Index.

To Recap:
BSE Sensex is the weighted average of the price movement of the 30 largest company’s that are listed in the Bombay Stock Exchange. This list of company’s may change from time to time and the Exchange will always release the news of replacement of any company in the Sensex to the public beforehand.
Below is the list of 30 company’s that comprise the BSE Sensex along with their Industry and Weightage.

Note: A company with 1% weightage will have to increase twice as much as one with a 2% weightage in order to move the index up or down by the same number.

Company Name	Industry	Weightage
Bajaj Auto	Auto - 2 & 3 Wheelers	1.51
Bharti Airtel	Telecommunications - Service	4.63
BHEL	Engineering - Heavy	2.38
Cipla	Pharmaceuticals	0.99
Coal India	Mining/Minerals	7.91
DLF	Construction & Contracting - Real Estate	1.22
GAIL	Oil Drilling And Exploration	1.73
HDFC	Finance - Housing	3.66
HDFC Bank	Banks - Private Sector	4
Hero Motocorp	Auto - 2 & 3 Wheelers	1.3
Hindalco	Aluminium	0.93
HUL	Personal Care	3.09
ICICI Bank	Banks - Private Sector	3.32
Infosys	Computers - Software	5.41
ITC	Cigarettes	5.87
Jindal Steel	Steel - Sponge Iron	1.71
Larsen	Engineering - Heavy	2.61
Mah and Mah	Auto - Cars & Jeeps	1.55
Maruti Suzuki	Auto - Cars & Jeeps	1.03
NTPC	Power - Generation/Distribution	4.99
ONGC	Oil Drilling And Exploration	8.1
Reliance	Refineries	8.73
SBI	Banks - Public Sector	4.11
Sterlite Ind	Metals - Non Ferrous	1.27
Sun Pharma	Pharmaceuticals	1.94
Tata Motors	Auto - LCVs/HCVs	2.41
Tata Power	Power - Generation/Distribution	0.83
Tata Steel	Steel - Large	1.45
TCS	Computers - Software	7.75
Wipro	Computers - Software	3.59

Participants in a Derivative Market

2012-01-15T10:10:00.001+08:00

In our previous articles on Derivatives, we learnt “What Derivatives Are?” and “The Derivative Categories”. In this post we are going to take a look at all the entities/people who would be involved in a derivatives market.

Derivatives have a very wide range of application in business as well as in finance & banking. There are four main types of participants in any Derivatives Market. They are:

1. Dealers
2. Hedgers
3. Speculators and
4. Arbitrageurs

A point to note here is that, the same individuals and organizations may play different roles under different market circumstances. Let us take a look at each one of them in detail…

Dealers:

Derivative contracts are bought and sold by dealers who work for banks and other security houses. Some contracts are traded on exchanges while others are OTC Transactions.

In a large investment bank, the derivatives function is now a highly skilled affair. Marketing and sales staff speak to clients about what they want. Experts help to create solutions to those customer requirements using a combination of forwards, swaps and options. Any risk the bank assumes as a result of providing such tailor-made products is managed by the traders who run the banks derivatives books. In the meantime, risk managers keep an eye on the overall level of the risk the bank is running. Mathematicians, also known as “Quants” devise the tools required to price the new products created by the experts.

Initially large banks tended to operate solely as intermediaries in the derivatives market, matching the buyers and the sellers. Over time, however, they have assumed more and more risk themselves.

Hedgers:

Corporations, investors, banks and governments all use derivative products to hedge or reduce their exposure to market variables like interest rates, share prices, bond prices, currency exchange rates, commodity prices etc (We have covered almost all categories of assets over which derivatives can be placed, haven’t we??)

A simple and classic example would be a farmer who sells a futures contract to lock into a price for the crop he will deliver in a future date. The buyer might be a food processing company that wishes to fix the price for taking delivery of the crop in the future or a “Speculator”

Another typical case is that of a company due to receive a payment in a foreign currency on a future date. It enters into a forward contract to sell the foreign currency to a bank and receive a predetermined quantity of domestic currency. Or, it purchases an option which gives it the right but not the obligation to sell the foreign currency at a set rate.

Speculators:

Derivatives are nicely suited to speculate on the prices of commodities and other financial assets or on market variables like interest rates, market indices etc. Generally speaking, it is much less expensive to create a speculative position using derivatives than by trading the underlying commodity or asset. As a result, the potential returns are that much greater.
A classic case is the trader who believes that the increasing demand or reduced supply is likely to boost the price of oil. Since it would be too expensive to buy and store actual oil, the trader buys exchange traded futures (ETFs) contracts agreeing to take delivery of oil on a future delivery date at a fixed price. If the oil prices rise in the market, the value of the futures contract will also rise and they can be sold back into the market at a profit.

In fact, if the trader buys and then sells a futures contract before they reach the delivery date, the trader never has to take any delivery of actual oil. The profit from the whole trade is realized in cash without buying anything.

Arbitrageurs:

An Arbitrage is a deal that produces risk-free profits by exploiting a mispricing in the market. A simple example is when a trader can buy an asset cheaply in location and simultaneously arrange to sell it at another location for a higher price. Since such opportunities are unlikely to exist for a long time, and since arbitrageurs would rush to buy the asset in the cheap location, the price gap will close very fast.

In the derivatives business, arbitrage opportunities typically arise because a product can be assembled in different ways out of different building blocks. If it is possible to sell a product for more than it costs to buy the constituent parts, then the risk free profit can be generated. In practice, the presence of transaction costs often means that only the large market players can profit from such opportunities.

In fact, many of these so called arbitrage deals constructed in the financial markets are not entirely risk free. They are designed to exploit differences in the market prices of products which are very similar but not completely identical. For this very reason, they are also called as “Relative Value” Trades

As an ending note to this post, Derivatives are complicated financial products and are partly responsible for the global economic crisis. Of course, you can’t blame the bomb for a blast and must actually blame the person who placed it in the first place. Similarly, derivatives were used inconsiderately and carelessly and the end result is for all of us to see. So, novice and risk averse investors must stay away from derivatives. Though the prospects of profit are very high, the chances of losses are also equally high.

Documents Required by an NRI for Buying a House

2012-01-14T20:09:00.002+08:00

Buying a House is an important decision both for Resident Indians and Non-Resident Indians or NRIs. There is a lot of clarity about the documents required by Resident Indians for buying a house. Since they are India, they can easily make multiple trips to the bank branch where they are requesting the loan and sort out the problems. But, for an NRI things are not so easy.
The purpose of this post is to throw some light on the basic documents that Banks would ask from NRI’s when they apply for a home loan with them. A Copy of all the below mentioned documents need to be submitted to your bank when you apply for a home loan.

This article is split into Two sections depending on what the NRI is actually doing abroad.

1. Salaried Individuals
2. Self-Employed Individuals

One type of Document that all categories of home buyers will need to submit with their respective banks is “Documents related to the Property”. The Builder will provide a full booklet that you can submit to your bank while you apply for the loan.

For Salaried Individuals

Almost 95% or more of the NRI’s would fall into this Category and they would comprise a huge chunk of the population that apply home loans from banks in India. The documents required would be:

1. Employment Proof – Offer Letter or Contract Letter or Agreement Letter
2. At least 3 months’ Salary Slip (Some banks may ask for up-to 6 months’ payslips)
3. At least 6 months Bank Statement – Statement from the bank where your employer credits your salary
4. Latest Foreign Identification Copy (Ex: NRIC in Singapore and equivalent identification for other countries)
5. Passport (All non-blank pages)
6. VISA/Work-Permit
7. Residence Address Proof in the Country of Residence/Work – Electricity/Gas Bill, Telephone bill etc
8. Passport Size Photographs (The number may vary from bank to bank. They will atleast ask one photo)
9. Latest Credit Bureau Report (Wherever applicable. For country’s like US, Singapore etc this will be required)
10. A Cheque favouring your bank for the Processing Fee

For Self-Employed Individuals

The remaining small % of people who conduct their own business abroad will require the following documents while applying for a home loan:

1. Company Profile, Brochure and Registration Details
2. Last 3 years Income Tax Assessment
3. Bank Statements for the last 6 months (The official bank account that is used for transactions)
4. Latest Credit Bureau Report (Wherever applicable. For country’s like US, Singapore etc this will be required)
5. Latest Foreign Identification Copy (Ex: NRIC in Singapore and equivalent identification for other countries)
6. Residence Address Proof in the Country of Residence/Work – Electricity/Gas Bill, Telephone bill etc
7. Passport Size Photographs (The number may vary from bank to bank. They will atleast ask one photo)
8. Passport (All non-blank pages)
9. VISA/Work-Permit
10. A Cheque favouring your bank for the Processing Fee

Note: The above is a list of the most common & important documents that banks ask from NRI’s while they apply for a Home Loan to buy property in India. However, banks alter their processes from time to time and may ask for extra or fewer documents as compared to the list above. The list is only an indicative list of documents that you will need before you apply for the loan. It is not a complete or exhaustive list. Please contact your respective bank to get a full list of the exact documents they will require to grant you a loan.

Happy Home Buying!!!

Indian Real Estate Market Outlook for 2012

2012-01-14T19:35:00.000+08:00

Real Estate is one of the most buzzing words in India for every man. Yes, you read it right. Any man, even one who has just got an offer letter from a company, dreams of buying a home someday. A home which will shelter him and his family.

Buying a home is probably the single biggest decision (Financially) that a Man takes in his life. Buying a home is not an easy decision. It not only involves a lot of time and effort in short-listing a prospective house but also involves a huge investment. With real estate prices booming over the past 5 to 10 years in India, especially in cities like Chennai, Mumbai etc. buying a house involves an investment that runs into Lakhs. Believe me or not, for most people in the working class (you and me of course) lakhs is still a large sum of money. I wouldn’t blame you if you are saying “Come on man, I am not a politician to treat crores like hundreds!!!”

Ok, coming back to the topic, this article is about the Market Outlook for the Real Estate Sector (Residential Properties) in India.

The year that has been – 2011:

2011 has been a significant year for the Residential Real Estate Market in all aspects. All of the below aspects have increased:

a. Cost of Land
b. Cost of Construction Materials (Cement, Sand, Iron etc)
c. Cost of Loans (Rate of Interest)
d. Cost of Labour

Because of this four-fold pressure, cost of residential property has gone up significantly in 2011. However, the looming world financial crisis, Eurozone problems and inflation have struck a dent in this growth towards the second half of 2011. Though prices of properties by top realtors in prime locations haven’t come down, prices in other localities have corrected by around 5% or so towards the last quarter of 2011.

Outlook for the year – 2012:

2012 promises to be an exciting year and property prices (esp. residential properties) are expected to go up this year too. The following are some reasons why the residential property prices will head northwards this year too…

1. Demand for Affordable Housing
2. Growth in Tier II and Tier III Cities/Metro Suburbs
3. Interest Rate Movement

Demand for Affordable Housing

Owning a House is still a dream for a majority of the working class population in our country. With rapid industrialization and growth throughout the country, the demand for houses is bound to increase. Realtors who can build cost-effective homes in good localities are bound to reap big rewards in terms of high customer interest. Everyone needs a house to stay and owning a house is a decision everyone wants to make, provided they get a good deal. So, the demand is going to be there and whenever there is a demand for a certain product, its price is bound to go up. Isn’t it???

Before we begin, by Tier II and Tier III cities I am referring to the cities like Coimbatore, Vishakapatnam, Kochi etc that have been growing at a very rapid pace over the past few years. Though they are not metros, industries have been favouring these cities due to lower costs (in all aspects) than Metros. By Suburbs I am referring to the areas surrounding a Metro City and not the actual city itself.

Growth in Tier II and Tier III Cities/Metro Suburbs

With cost of land sky-rocketing in Metros Real Estate Developers are turning their attention to Tier II & III Cities and also Suburban areas of Metros. This is because, the cost of land in these areas is comparatively cheaper than Metros and prime locations in Cities. Also, most home buyers look for cost-effective homes and cant really afford property at the heart of the city. So, this is the area where the real estate buyers market is and that is what the construction company’s are trying to tap into.

With Major Industries and company’s opening up offices in Tier II & III or Suburban areas, the demand for residential properties in the surrounding areas is bound to rise.

A simple example: In Chennai, when I was in School, areas like Guduvanchery, Urappakkam etc were considered remote places. At that time, price of one ground (2400 sq feet) land there was only as much as what realtors expect us to pay for a single square feet now. That is the kind of growth property prices has seen.

Interest Rate Movement

Loan Interest Rates have been altered by the RBI numerous times since 2012. To be exact, the RBI has changed it 13 times since March 2010. That is roughly once every two months and most of these have been a Northward Movement (Increase). But, over the past few months the rates haven’t changed much and experts forecast that the Interest rates are expected to have a Southward Movement (Decrease). A decrease in interest rates will ease the liquidity condition of not only buyers but also the builders. This will definitely help the housing demand.

Overall, the year 2012 is going to be an interesting and exciting year for the Residential Market in India. If you are someone who has been wanting to buy a home “Now is the Time, my Friend”…

Happy Home Buying!!!

Where to Invest our Money Now?

2012-01-14T10:57:00.001+08:00

With Stock Markets reeling under a lot of volatility, and the Indian Rupee depreciating against most major foreign currencies (esp against the US and Singapore Dollars) the outlook for the Indian Markets is not so green right now. As of now, the big question that is in peoples minds is “Where can I Invest my Money Now?“ Should I take a risk with the stock market or should I go for bank deposits? If you are someone who has had these questions pop-up in your mind over the past few months, this article is just for you...

Before We Begin

Before we begin answering the question, where to invest our money, we have to decide a few key aspects...

1. Decide How Much You Can Invest
2. Decide When you want the Money Back

Rationale: With the knowledge of when you want the money back, a wise decision can be taken

Point No. 1 is just a technicality to try to understand how much money we have to invest. It is not going to affect our investment decision much. But, Point No. 2 is going to be the key player in our decision.

The rest of this article is going to be about where to invest based on the timeframe as to when you want your money back. The details are split into four sections:

1. Ultra Short-Term (Less than 6 months)
2. Short-Term (6 months to 1 year)
3. Medium-Term (1 to 3 years)
4. Long-Term (More than 3 years)

Ultra Short-Term (Less than 6 months)

When you need your money back in the immediate future i.e., within the next 6 months, safety and security of the money invested takes highest priority. Lets say, you have some money that you have saved up for your Son’s Engineering College Admission in June of 2012 (It is January 2012 now) the most important consideration for you is, will the money be available for me when it is time to pay my Son’s college admission and fees. So, at such a scenario, investing in the stock market would be suicide and you may or may not be able to pay his fees using this money. So, the best Investment Options for an individual who plans on using the invested funds in the near future are:
1. Liquid Cash in your Savings Account – This is a wise choice if you need the money in a time period of less than 3 months. The whole hassle of opening a fixed deposit, breaking it a few days before you need the money, paying a penalty for premature withdrawal etc can be avoided. You can withdraw the money anytime you want. The Rate of Interest you earn is only going to be around 4%.

Justification: Even though your money is earning only 4% interest, your money is fully secure and available whenever you need it. So, this is the best choice for someone who needs cash in the immediate future.

2. Bank Fixed Deposits – This is a wise choice if you need the money in a time period of anywhere between 3 to 6 months. Your Money does not stay idle. With the current high interest rates offered by banks on fixed deposits, your money is going to earn a good income eventhough the duration is only around 6 months or lesser.

Justification: Your money is going to be safe because, banks in India are very safe and strictly regulated by the RBI. Moreover, your deposits will earn an interest of around 6-8% which is very good considering the kind of returns the stock market has offered over the past few years.

Short term (6 months to 1 year)

When you need your money in a time duration of between 6 months to 1 year, your choices of investment are a bit more diverse because, apart from capital preservation, the rate of returns the instrument earns is going to be a key criteria (unlike the ultra short-term where capital preservation was our main goal)

1. Fixed Income/Debt/Bond Mutual Funds – These days, there are a whole bunch of Debt and fixed income MF’s that are available in our market. These are MF’s that invest only on debt instruments (like bonds) and so, the principal invested is almost 100% safe. Moreover, since they invest in bonds from Corporations & other large organizations, the rate of returns is going to be greater than what is offered by Bank Fixed Deposits of equal tenure.

Justification: Even though these MF’s invest only in Fixed Income/Debt Instruments, default risk is a very real probability. But, the chances of that are less than 1 or 2%. Since as an investor you are bearing this 1 or 2% risk, the returns are usually an equivalent 1 to 2% higher than what Fixed Deposits yield us. So, this is a good choice for people planning to invest their money for a duration of between 6 to 12 months.

To know more about Debt Mutual Funds Click Here

2. Bank Fixed Deposits – The rates of interest offered by banks these days for deposits between 6 to 12 months timeframe are in the range of 6 to 10%. To add on, the deposits are 100% safe.

Justification: Safety, combined with good returns of around 8% makes these a very good choice. This is for the totally risk averse investor. If you are someone willing to take a small risk for a better reward, then option no.1 would be a better choice.

Medium term (1-3 years)

When you need money in a time duration of between 1 to 3 years, you have the opportunity to take a decent amount of risk to take advantage of the good returns offered by the Stock Market. Even if the markets remain volatile in the short term, they will recover and once they do, the returns will definitely be better than the other asset families.

1. Balanced Mutual Funds – These are Mutual Funds that Invest in both Debt and Equity Instruments. Well managed balanced funds move their assets between equities and debt to provide the best possible returns to the investor. They usually invest around 60% of their assets in debt instruments to provide capital preservation and invest the remaining 40% in the equity markets to provide far better returns than traditional debt instruments like bank deposits or debt MF’s.

Justification: Though Balanced MF’s have lost some value (In NAV) over the past year due to the turbulent markets, they havent done as bad as the Equity Diversified category of funds. This is because of the healthy allocation to debt instruments. So, if you are an investor with a medium term timeframe of 1 to 3 years, these would be a good bet. Even if the markets remain turbulent in the near-time future, it will definitely recover over the next few years and you can reap the benefits of the equity allocation of such funds.

Trivia: Last month we had taken a look at one of the best Balanced Mutual Funds in India "HDFC Prudence Mutual Fund". To know more about this fund Click Here

Long term (3 years or more)

When you are planning for a long term investment, you have the opportunity to take calculated risks to take advantage of the good returns offered by the Stock Market & Other Asset Classes. Even if the markets remain volatile in the short term, they will recover and once they do, the returns will definitely be better than the other asset families.

1. Diversified Equity Funds – These are Mutual Funds that invest directly in the Equity/Stock Markets. They invest predominantly in blue-chip or large cap stocks and also select a few good mid-cap or small-cap company’s to provide the best possible returns to the investor.

Justification: Diversified Equity MF’s have taken a significant beating over the past year due to the volatility in the stock markets. Experts suggest that, this is the best time to enter the market due to the cheap valuations. Fund Managers of well managed funds are using this opportunity to rejig their portfolio to best suit the investors. Considering our timeframe of 3 years or more, equities are our best bet and as always, no other asset class has outperformed equities on overall returns over the past decade. So, investing in Equities is a wise choice for the long-term investor.

2. Gold – Gold, the shining yellow metal has been increasing in value for the past few years and is expected to do so in the future as well. Though, the price may be volatile in the short term, overall the price of gold will only go upwards because of the supply-demand parity. So, gold too would be a good addition to your long term investment portfolio

Tip: If you decide on investing in Mutual Funds (Balanced or Equity Diversified) Systematic Investment Plans (SIP) are the best way to go. Since the markets are very volatile these days, investing regularly helps average out the high’s and low’s of the market and get the best returns

There have been numerous articles in my blog about investments & forming an investment portfolio. You can read them by clicking here

Happy Investing!!!

Financial Resolution No. 3: I will not blindly trust my Insurance or Investment Advisor

2012-01-14T10:50:00.002+08:00

Let me begin this article with an incident that happened to me during my recent trip to India over the New Year’s time. My Uncle who is an LIC Agent was talking to me about some new policy that would be very useful for me and my future. Since he is a well-wisher, I spent some time and listened to him. The policy details were as follows:

• We pay Rs. 50,000 every year for 20 years.
• At the end of 20 years, LIC will pay us around 10 lakhs when the policy matures
• Subsequently, every year they will pay us around 50,000 rupees (For as long as we are alive)
• And, when we actually die, our survivor (wife or kids) will get a lumpsum which will be more than 10 lakhs.

Note: The exact number will vary based on your age, no. Of years of policy duration etc. The above is just an illustration.

I told him that I will think about it and get back to him. When I thought about it, it looked like a good deal. Assuming i will live until 70 years, below is my expected returns from this policy.

• 10 lakhs at the end of 20 years (Since this is LIC, my capital/investment is guaranteed. So, first good thing)
• Am gonna get around Rs. 50,000 for nearly 20 years, which will work out to nearly 10 lakhs
• When something happens to me, my survivors will get an additional 10 lakhs or more

So, for an Insurance Policy where I am paying 10 lakhs to LIC, they are repaying us nearly 30 lakhs over the next 40 odd years. Sounds like a good deal, doesnt it?

Unfortunately, the story doesnt end here. During my vacation, I met a close friend who was contemplating on taking the same policy from a different agent. I was like WOW!!! And by the “Curiosity Killed The Cat“ philisophy, both of us wanted to know the benefits offered to the other guy... I was astonished to hear the following from my friend:

• We pay Rs. 50,000 every year for 20 years. (Same as Me)
• At the end of 20 years, LIC will pay us around 20 lakhs when the policy matures (Double of our Investment)
• Subsequently, every year they will pay us around 1 lakh rupees (For as long as we are alive)
• And, when we actually die, our survivor (wife or kids) will get a lumpsum which will be more than 25 lakhs.

Can you guess what my initial reaction was?

As expected, it was “WTF!!! How is this possible? “

Then I called up my uncle and told him how can this be possible? Two people paying the same premium, for the same policy must get the same benefits right? Thats what I asked him. My Uncle coolly asked me, ask your friend if his agent wanted him to take a Medical Test. I did and my friend said, Yes. My uncle said, my dear nephew, medical tests are not required for Engineers & Doctors for Insurance Policies of upto Rs. 12 lakh value. Since in this case, your friend is being asked to undergo a medical test, I am sure that he is offering him a policy of value much higher than yours. Just double your premium and the benefits will roughly match the numbers that your friend told you. During signing of the policy, the agent may tell your friend that he mis-heard him about the policy premium part. Moreover, I will give you a signed document from me that, whatever numbers I proposed would be paid for by LIC at the stipulated timelines. Ask the other guy if he can do the same. After saying this he cut the call.

When I explained all this to my friend (He is a well educated Engineer with over 6 years of Experience in the IT Industry) he said that, maybe my uncle doesnt know much about the policy and maybe the other guy wasnt lying to him. After a long struggle, I convinced him to call up his agent and inquire about the written agreement part. Can you guess what the Agent said?

“Sir, you mis-heard me during our discussion sir. The policy premium is Rs. 95000 per year. Also, returns from Policies cannot be Guaranteed by me. LIC decides what money it pays you. Investments carry an inherent risk which may affect the returns. So, I cannot give any written commitments“.

My friend was disheartened when he heard this. There are multiple flaws in what this agent told my friend:

1. He misinformed my friend with benefits pertaining to a 95000 rupees premium as being available for a 50000 rupee premium
2. All LIC Policy Premiums that we pay (Unless it is an ULIP that states that it will invest in the Indian Stock Market) are used by LIC to grant loans. The rate of returns on the investments are on an average around 7-8% per annum. If the loan rates are high in a few years, the bonus that gets accrued against the policy holders name may go up, but the returns guaranteed by LIC are in the range of around this 7-8% mark and it will not go up or down. LIC does provide a minimum guarantee as returns for each policy and that can be provided by the agent as proof of returns to the policy holder
3. Debt Instruments always carry the risk of default by the borrower. But, since LIC is owned and backed by the Government of India, all money is 100% safe and hence there is actually no risk on the returns

As you can see, the agent mislead my friend into thinking that the returns of a simple policy would be equivalent to that of a stock market related instrument thereby trying to gain extra business. He suppressed the facts and refused to divulge the details as well.

If I hadnt gone to india for the New Year of 2012, I wouldnt have met my friend and he would have been conned into taking up this policy on the back of incorrect information. And my gullible friend wouldve got the surprise of his life 20 years down the lane when the policy actually matures and it is time for LIC to pay-up...

Ok, now that story is over, I would like to apologize for this long story. Unfortunately, this is required to depict the kind of misselling that is rampant in the Indian Insurance Industry.

What is the Cause of all this Mis-Selling?

Well, my dear readers, the reasons are multifold.

1. Lack of Implmentation of the Enforcements from the IRDA (Insurance Regulatory & Development Agency) of India. Even though laws are very clear on this kind of misselling and states that it can lead to fines and cancellation of Insurance Agent’s license, agents still happily missell products to customers.
2. Greed on the behalf of the Insurance Agent – An Agent is someone that we trust when take the insurance policy or investment decision and he/she is bound to consider our interests as priority while suggesting products. Unfortunately, agents consider the commission/fee they will receive from the insurance company if they complete the deal and sell only those products that are profitable for them. The investors interest takes a back seat
3. A policy is usually 15 or 20 years in tenure. So, by the time the policy matures and the policy holder receives his shock, the agent would’ve either retired or even moved out of town. Even if they are in town and the policy holder manages to catch hold of them, no action can be taken because, the policy document clearly explains all the details and the agent will say “You must have read all the terms and conditions carefully, it is not my fault“

What can we do to avoid this kind of situation?

Finally we have come to the section which is the whole purpose of this article. As investors we must be more diligent and careful while taking investment/insurance decisions. Below are some tips to help you in this regard:

1. Always read all the terms and conditions clearly and fully
2. Never Assume Anything. When in doubt use google. In this Internet Era, almost everything is available in the internet. Just google the name of the policy or investment on the web and check out what others have to say. In all probabilities you will find useful information that may help in your decision
3. Never believe everything your agent says. After all, it is a business for him and he is going to earn a fee/commission based on the policy/investment product he sells you. So, he is going to care more about the money he is going to make out of the transaction and care less about the benefits you are going to get. Hence, it is our responsibility to ask for all relevant details and validate the same
4. If something sounds too good to be true (like you will get your money doubled in 3 years or get 50 lakhs at the end of 20 years for an investment of 10 or 15 lakhs) it is probably not true
5. Ask all things in writing with the signature of the agent. If the agent promises you exorbitant returns (which surpass the average 7-8% returns offered by normal insurance policies) then ask him to sign a document and guarantee/confirm that, this is actually what the insurance company will give you. If the agent is telling the truth, then he will have no problems doing it. But, if he is trying to mis-sell something that isnt as good as he is saying, he may find a reason to avoid this topic
6. Ask experts. There are hundreds and thousands of financial experts in the web. If you ask around, you may find out that a close friend or associate is an expert and may guide you in the right path. Always identify and locate such experts and request their guidance when in doubt regarding an investment or insurance decision.

You can always leave a comment in my blog if you have any such queries and i will try my best to search and advise you. After all, the purpose of this blog is to help the investor population of this great nation...

Happy Investing & Insuring yourselves!!!!!

Financial Resolution No.2 for 2012: I will save atleast 10% of my Salary Every Month

2012-01-11T21:37:00.000+08:00

Well, the new year 2012 has begun and hope it has started on a positive note for everyone. Our first resolution was to “Stay on Top of our Credit Card“

The second financial resolution is going to be “I will Save atleast 10% of my Salary Every Month“. Yes, thats what our resolution is going to be. This is easier said than done, but lets strive towards it.

Before we begin, you would be astonished to learn that the average saving rate in India in this generation (as a % of their monthly income) is only around 5-6%. Whereas our fathers and grandfathers saved more than 10% of their monthly income. The concept of Credit Cards and a million other types of loans have depleted the concept of “Saving for a Rainy Day“. Sad, but true!!!

If you were someone who was surprised by the above paragraph, you would’ve had this question in your mind “What is an ideal Savings Rate for an Individual?“

The answer my friend is “It Depends“. Yes, it depends on your situation. If you are a bachelor with no dependants and a dad who is also earning, there is practically no savings required. Whereas, if you are a married man with a wife and child to take care of, you need to save some money for your retirement as well as your kids education, marriage etc. So, the true answer to this question is It Depends

But, the rule of the thumb is “Around 10-15%“.

An Interesting Point:
Financial experts suggest that any individual who works for a salary must have liquid cash equivalent to atleast 3 months of his/her monthly salary for any emergencies. What if you suddenly lost your job? What if you met with an accident and cant attend work for a few months? There are a hundred other “What If’s“ that can be added to this list. Lets hope and pray that, such what if’s dont have to be answered by us in real life, but frankly speaking the saying “Better Safe Than Sorry“ cant be more apt at this juncture.

If you were a curious person you would ask me “Why 3 months?“ Did this question come up in your mind? Well, the fact is that, 3 months is a comfortable amount of time for you to get a different job or to recover from most major illnesses. So, a 3 month salary cushion in your bank account means that, your family is going to be well taken care of in the 3 months that you will spend hunting for a job or recuperating from an illness. Now, do you think the 3 months concept makes sense?

Can I Really Save 10% of my Salary Every Month?

Yes, you can do it my friend. 10% may sound a huge chunk but, nothing is impossible. Think this way.

Lets say you are someone who earns Rs. 50,000/- every month. If you save Rs. 5000/- every month, you will have enough money to make the initial payment for a small car. Wouldnt it be cool to own a car?

This was only a very crude example. The fact of the matter is, the benefits of saving money cannot be emphasized much. “CASH HAS AND ALWAYS BE THE KING“

Some Tips to Spend Less and Save More:

1. I will keep aside 5% of my salary on the 1st day of the month as savings for the month as a mandatory activity. I will move this money to a different bank account and lock the Debit Card in my cupboard.

Reason: You can only spend what is there in the bank account you use on a regular basis. If the money isnt in your bank account, you wont spend it. Moreover, this 5% will go a long way in your future plans

2. I will not touch the back-up bank account

Reason: What is the point of saving money, if you scratch into it every now and then. Forget the fact that you have a back-up bank account. Use it only for emergencies. For all other purposes try to use your regular bank account or other cash sources.

3. Whatever money I have in my bank account on the 30th day of the month (The day before Salary Credit), I will move it to my back-up bank account

Reason:Moving any left-over money from your previous month’s salary into the other account will ensure that, you will not overspend this month. After all, you spent only so much this month and you wont actually need this surplus next month. Wouldnt you?

4. I will try to cut my unwanted spendings and try to save atleast 2-3% of my monthly salary or even better beat the amount of money I saved last month on the 30th.

Reason: It is a good idea to set saving targets and try to achieve them. If you see that last month you saved 2500 rupees and target to save atleast 3000 this month, you will be amazed to know that, you will actually save more than 2500 this month (unless there was an emergency or you went astray on your saving goals)

You might be wondering, the title says 10% and the first point in the above section starts with a 5%. Are you???

The reason for that is, you would’ve been used to a certain lifestyle considering your current salary. 10% cut on it is huge and will take quite a dig at your lifestyle but 5% is manageable. 95% of your salary is good enough for you to survive without compromising your lifestyle. Moreover, we are targeting the money that remains at the end of the month in your bank account (another 2-3% of your salary) and are planning to beat this every month. So, if you sincerely follow this resolution, i am sure you will reach the 10% saving target within the next 6-12 months.

Isnt that great? After all, who doesnt want a better home or a great education for our kids or a fantastic marriage for our daughter? Dont we all?

I am sure you will say, “Of course I do...“

Happy Saving Money!!!

Financial Resolution No.1 for 2012: Stay on top of your Credit Card

2011-12-21T21:41:00.001+08:00

This is the first of the series of financial resolutions for the new year 2012. Everyone is making resolutions for the new year and its time we too hop on that train. After all, its a good habit to take sound financial decisions. Isnt it?

So, lets get started!!!

Few years ago, a Credit Card was just a hi-fi piece of plastic that was the possession of just a few rich and powerful people in India. Today, the Credit Card is a part and parcel of life for even the common man. With banks aggressively marketing their cards and offering awesome deals for customers, everyone is tempted to get one and utilize the benefits. Well, it is all not that simple as it sounds.

Have you ever stopped to wonder, why banks are offering so many gifts to make you buy their card? If not, can you just close your eyes for one minute and think "How can the Bank afford it?"

Don’t worry, if you couldn’t answer it. Just read on and you will know pretty soon.

How Can a Bank afford so many benefits & perks along with your credit card?

Well, here is why

1. Every shop/merchant who has a card swiping machine (a Point of Sale or POS device) in his establishment has to pay a yearly fee to have the machine at his place
2. Every time you swipe your card at a shop, the bank retains a small percentage of the amount you swiped as a fee and credits only the remaining to the shopkeeper. This is why some shopkeepers charge you an extra fee if you offer to make the payment via Credit Card (This fee is usually around 4% and varies from bank to bank)
3. Every time you withdraw cash from your credit card, the bank charges a fixed fee of around Rs. 250 or 2-3% of the withdrawn amount as transaction charges. Plus, the interest is payable right from the moment you took out the money. And, the interest rate for cash withdrawals is usually more than purchases and may be around 5% or even more. For ex: If you take Rs. 10000/- from your credit card today and want to repay it tomorrow, you have to pay at least Rs. 10,267 (250 for transaction fee and 17 rupees interest for 1 day)
4. Every time you do not pay your full statement due amount, the bank charges you an interest rate on the whole amount (Usually around 2-3% per month) until you finish the payment

Example: Let’s say you Swipe your card and buy a LCD TV for Rs. 40,000/-. The month end credit card statement says “Total Amount Outstanding = Rs. 40,000/-“. Assuming you don’t have that much money with you and choose to pay Rs. 10000 instead and think of repaying the money as Rs. 10,000 every month, do you think you can repay the whole amount in 4 months? Unfortunately it doesn’t work that way. This is how it will work out.

Balance at the end of Dec 2011: Rs. 40,000/-
Payment made on 1st Jan 2012: Rs. 10,000/-
Interest charged by the bank in Jan 2012: Rs. 1000/- (@ 2.5% per month on Rs. 40000)
Balance at the end of Jan 2012: Rs. 31,000/-
Payment made on 1st Feb 2012: Rs. 10,000/-
Interest charged by the bank in Jan 2012: Rs. 1000/- (@ 2.5% per month on Rs. 40000) (See, here the bank doesn’t care if you repaid 10000, they still charge you interest for the full 40000 you swiped)
Balance at the end of Feb 2012: Rs. 22,000/-
Payment made on 1st March 2012: Rs. 10,000/-
Interest charged by the bank in Jan 2012: Rs. 1000/- (@ 2.5% per month on Rs. 40000)
Balance at the end of March 2012: Rs. 13,000/-
Payment made on 1st April 2012: Rs. 10,000/-
Interest charged by the bank in April 2012: Rs. 1000/- (@ 2.5% per month on Rs. 40000)
Balance at the end of April 2012: Rs. 4,000/-
Payment made on 1st May 2012: Rs. 4000/-

As you can see, Mr. Ramesh paid the bank, an interest of 4000 rupees for a period of 4 months for borrowing the 40000 rupees he needed for the LCD TV.

A point to note here is that, I have not considered any further transactions done by Mr. Ramesh on his card during this 4 month period. If he had done so, the bank would have charged an interest of 2.5% on any further amounts he borrowed because, he has not yet settled the full amount and the bank has the right to charge an interest on all outstanding amounts irrespective of the time you swiped the card.

5. If the cheque you pay the bank bounces (by any chance, be it any overwriting in the cheque or a mismatch in signature or for any other reason) the bank will charge you a one-time penalty of around Rs. 500 as cheque bounce charges plus interest on the outstanding amount as explained in point no. 3
6. If by any chance your payment gets delayed and you don’t make the payment by the due date, the bank will charge you a late payment fee of around Rs. 250 plus interest on the outstanding amount as explained in point no. 3

As you can see, there are 5 golden reasons why banks offer such great rewards for getting their credit card.

Important Note:
All the numbers mentioned above (Interest Rates, Late Payment Fee, Cheque Bounce Charges etc. are all indicative numbers and they vary from bank to bank)

After reading the Important Note above, the next question in your mind will be “Where in the world will I find all these charges?”

Well, the package that came along with your credit card would have contained a bunch of booklets that say “Card Member Agreements” or “Card Usage Terms & Conditions”. All these can be found in them.

If you were one of those eager card holders, who just ripped the package, picked up the card and all those reward vouchers and threw away the booklets, it’s high time you stopped the practice and visit the bank website for these details. Every credit card issuing bank must display these details in their bank website and also mention them in the monthly statement they send you every month. So, it’s not too late. Just visit your or take some time out to read your credit card bill properly.

New Year’s Financial Resolution No. 1:

Make this your New Year’s Financial Resolution No. 1:

“I will Stay on Top of my Credit Card Spending’s”

Now that the resolution is made, below are some tips that can help you stay on top of your credit card spending’s.

Tips to Stay on Top of your Credit Card Spending’s:

1. Try to use your debit card for all purchases

Reason: It is cash you have and nobody can charge you any fee for it. Spending cash you have is always better than borrowing money to spend

2. Never Withdraw Cash from your Credit Card

Reason: Banks charge a fixed fee per transaction plus an exorbitant interest rate. Withdrawing cash from your credit card must be a last resort option and must be utilized only for emergency situations. If you can afford to wait a few days for the cash, think about borrowing from a friend or a family member or go for a Personal Loan

3. Make your Credit Card bill payment “In Full”

Reason: Paying the full statement amount due is a good habit and the best way to stay away from finance charges

4. Make your Credit Card bill payment “On Time”

Reason: Paying the credit card bill before the due date is a good habit and the best way to stay away from late payment charges. Always give at least 2 days for the cheque to clear. So, if your due date is 5th of every month, make sure you drop the cheque in the drop box on or before the 3rd of the month

5. If you are not able to pay the full statement due amount, pay as much as possible. Do not pay the minimum due amount unless you are in a dire financial situation

Reason: Though the bank is going to charge you an interest on the whole borrowed amount, paying as much of the borrowed money as possible helps minimize the interest you pay the bank. Go back to Mr. Ramesh’s example a paragraph before. If he had paid Rs. 20,000 each month, he would have paid only Rs. 42,000 instead of the Rs. 44,000 he ended up paying.

6. If you are not able to pay the full statement amount due, don’t use your credit card any more.

Reason: If you have an outstanding balance on your credit card, any subsequent purchases too attract interest charges. So, the best idea is to keep your card in your locker until you settle your dues against the credit card in full

7. Always read your statement carefully

Reason: Sometimes bank charge late payment fee or interest rate charges by mistake. They wouldn’t mind such mistakes because; you are the one who is paying the money. So, it is your responsibility to review your statement and call up customer care and have them revert such incorrect fees or charges

8. Always check the Statement Due Date

Reason: Sometimes banks change their billing cycle or the payment cycle. You may be used to making the payment every month on or before the 10th and overlook the fact that the bank changed the due date to the 5th instead of the usual 10th. You may happily drop the cheque on 7th of the month and receive the shocker in the bill which will include a “Late Payment Fee”. There have been many instances like this due to oversight and if the statement mentions a due date, the bank will not accept to revert the late payment fee even if you argue that, last months due date was the 10th and not 5th.

9. If by any chance you have a lot of credit card dues outstanding, think about taking a personal loan and paying them all off in full

Reason: Interest rates on personal loans are currently around 15% or more per annum but the interest rate on credit card outstanding is 2.5% or more per month and it works out to more than 35% or more per annum. Example: If you had an outstanding of Rs. 10000 as of Jan 1st 2011, and paid just the minimum balance every month, the interest amount alone would amount to nearly Rs. 3500/- which is nearly 35% of the amount you borrowed. A Personal Loan is definitely much cheaper than this. Isn’t it?

If you are an impulse spender who just buys stuff as when they want, the best option is to use your debit card and keep your credit card locked away to ensure you don’t mess up your financial situation.

Happy Saving & Less Spending this New Year!!!

Sensex is no longer a Trillion Dollar Market

2011-12-21T21:37:00.000+08:00

At the outset, I am really sad to write this article, but unfortunately the reality is that the Indian Stock Market (BSE-Sensex) is no longer a Trillion Dollar Market.

Before we proceed any further, some of you may ask, "Was India a Trillion Dollar Market?"

Oh YES. India was a member of the elite group of country's whose market share is over a Trillion US Dollars. The Indian market had first achieved a trillion-dollar size about four and half years ago on May 28, 2007. It was a historic landmark, but about a year later on July 1, 2008 it lost its tag of "A Trillion dollar market". However, India again joined this elite club of markets with trillion-dollar valuation about a year later on June 3, 2009. The Indian market was, in fact, seen inching towards the two-trillion dollar mark at least twice in the past; first in early 2008 and then at the beginning of 2011 when our Market Size was as high as USD 1.9 trillion.

What is a Trillion Dollar Market?

A Trillion Dollar Market is one, where the total value of the shares listed in the exchange (Market Capitalization of the Exchange) is worth over 1 Trillion US Dollars. This is calculated by taking the Market Capitalization of every single share that is listed in the exchange and summing them all up. The value in terms of Indian Rupees is then converted into US Dollars at the prevailing exchange rate and the Market Value in US dollars is calculated.

1 Trillion USD at todays exchange rate = Rs. 52800000000000. Dont try to convert this into words, this is over 52 lakh Crores Indian Rupees

Note: 1 USD as of End of Trading Day 20th December 2011 is 52.801

Why did this happen?

The causes are many fold

1. Global Economic Scenario - The Economic Scenario world over is very volatile and as a result stock markets world wide have lost significant ground. The Indian market is no exception. The Indian Stock Market (BSE Sensex) closed at around 15175 which is nearly 2000 points down from what the Sensex was last year in December. (Sensex was around 17000 points in December 2010)

2. Foreign Investors (FII's) Pulling Out Funds - Again, this is a direct result of the previous point "The Global Economic Scenario". Due to turbulence in the markets world wide, foreign investors have pulled out lakhs of crores worth money from the Indian Stock Markets, which has not helped the Indian Markets.

3. Local Investor Sentiment - Again, this is also due to the "Global Economic Scenario". Due to the turbulents in the markets world wide, Indian Investors have panicked and begun selling off their investments and moving over to more secure investments like Bank Deposits, Gold and Real Estate. This coupled with the FII's pulling out funds, has made the BSE Sensex tank over 2000 points when compared to the same time last year (December 2010)

4. Indian Currency Depereciation - As you may have read in my previous post Is the Indian Currency Rupee Depreciation against the US Dollar Good or Bad? the Indian Rupee has depreciated significantly against the US dollar over the past few weeks. Just 6 months ago, One USD was worth around 45 Indian Rupees and now it is worth more than 52 rupees. Though the Indian market capitalization in terms of rupees has fallen, the fall in value of the Indian Rupee has further aggravated the situation because, the market capitalization has to go up by a further 7 rupees to catch up every dollar to meet the 1 Trillion Mark.

What is the Current Market Capitalization?

As of 20th December 2011, the Market Capitalization of BSE Sensex was Rs 5260441 crores. As you can see from just a few paragraphs away, the total market cap must be atleast 5280000 crores in order to touch the 1 Trillion Mark.

Will the Indian Market Regain the Prestigious 1 Trillion Dollar Tag?

Yes. This is not the end of the road. The Indian Stock Market has lost over 20 lakh crores (2000000 crores) over the past year. If you add this to the current market capitalization of 5260441 crores we get over 72 lakh crores and that is more than sufficient to regain the Trillion Dollar Tag.

Due to the year end bull run (Yes, this happens almost every year. During christmas & new year, markets worldwide go through a rally that see's a hike in market value due to the holiday sentiment) which may happen this year too, if the stock market regains around 500 odd points, I am sure the Indian Market will regain its tag of "A 1 Trillion Dollar Market".

Lets keep our fingers crossed and hope for the best.

Happy Holidays Everyone!!! Lets hope that the New Year will bring in good news for the markets worldwide and bring a smile in the face of every investor!!!

Indian Rupee Depreciation against the US Dollar - Your Questions Answered

2011-11-25T22:22:00.001+08:00

In the previous post "Is the Indian Currency Rupee Depreciation against the US Dollar Good or Bad?" we had taken a look at the reason why the Indian Rupee is getting beat up by the US Dollar in terms of value and why is the rupee going down so drastically. However, after the post, you might've had some questions about the whole phenomenon. Some readers posted their questions as comments.

Below are some questions that might arise in your minds about the Depreciation of the Indian Rupee against the US Dollar. Have tried to answer them as best I could. Do, drop a comment if you aren’t satisfied with the answer :-)

Thanks to Manish & Anonymous for the questions. I have included your questions too in the list below. Here we go!!!

1. Why is the Rupee Depreciating So Badly?

Because of many factors that are occurring in a simultaneous fashion. The crucial ones are:
1. Due to Risk Aversion on the part of Currency Investors, the Demand for the US Dollar has gone up world over
2. Uncertain Economic Situation around the globe
3. FII’s turning Net-Sellers and withdrawing funds from the Indian Market

2. In 2008, we saw a similar/drastic Rupee Devaluation against the USD. Is the current scenario similar?

Well, not really. Last time around, the devaluation was driven mainly by rise in Oil Prices. The price of oil reached USD 147 per barrel and was one of the key contributing factors. However, Risk Aversion was also a part which affected the value of the Indian Rupee.
Though the effect is the same, the combination of causes is different. Risk Aversion is the common culprit if you want to identify the common cause…

3. Has the Risk Aversion among the Investor Public changed when we compare the times in 2008 to now?

The concept of Risk Aversion is the same irrespective of what timeframe you are talking about. But, the current situation is much more riskier & pronounced than what was in 2007-08. Back then, the problem was localized to debt problems (loans & mortgages) in USA and had only a ripple effect across the globe. Right now, the problem is more profound and markets world-over are in a crisis and some countries are on the verge of Default. So, people are much more risk averse than what they were in 2008 and hence the situation is much worse than during the mortgage economic crisis.

4. How long do you think this economic crisis is going to last?

Well, frankly speaking I don’t know… speaking optimistically maybe a year or so. But, as more and more data comes out regarding the mess that the world economies have pushed themselves into, the timeline gets blurred. Practically speaking, nothing major can happen in short term (3 to 6 months). Any recovery can be felt or realized only after a year or so of sustained efforts from government’s world over.

5. Could the Reserve Bank done anything to protect the value of the Indian Rupee?

Yes, the RBI could have taken steps to protect the value of the Indian Rupee. But, unfortunately they did not. That is why Rupee is dangling at over Rs. 52 per US Dollar.

6. Why didn’t the RBI do anything?

The Central Bank of any country is entrusted with the responsibility of protecting the value of its home currency. They usually kick into action when they suspect any speculative attack on their currency by external forces (Intentional attempts to devalue a country’s currency)
In this case, the devaluation of the Indian Rupee was not due to some intentional attempt by anyone. It was due to the global economic scenario and any steps they take might backfire if the global economic situation worsens.
The RBI just let the economy take its course with the exchange rate between US Dollar and Indian Rupee because there was no foul play suspected.
A point to note here is that, the RBI is closely monitoring the situation and may intervene if they feel the depreciation is too much.

7. What can the RBI do to curb the depreciation of the Indian Rupee?

They can sell US Dollars. Last time around when there was such a problem, the RBI sold US dollars worth nearly 18 billion. This time around, they would have to cough up an even larger number to prevent the depreciation. Most importantly, this will be only temporary. The RBI selling dollars alone cannot fight the global dynamic risk and hence will not have any long term effect on the exchange rate. That is exactly why the RBI isn’t doing anything explicit to protect the rupee value.

8. What do you think the Indian Rupee will value against the US Dollar by next year (2012)?

Maybe around 46 or 47 Indian Rupees per US Dollar. To substantiate my claim, if the economic scenario recovers, there will be a lot of FII inflow of funds into India that will give a lot of strength to the Indian Rupee. And hence, it should come down below the 50 rupee mark and settle down between 46 to 48 Indian Rupees per US dollar.

9. Will all IT company’s post stellar profits due to the Rupee going down?

No. Not really. IT company’s in India have the concept of Hedging their foreign exchange income. They usually hedge against a particular value and project earnings/profit numbers for the subsequent quarters. So, the profit they make due to this rupee depreciation may not be as stellar as one might expect, but nonetheless, IT Majors will most probably post impressive numbers this quarter.

10. Will the Indian Rupee depreciate further against the US Dollar?

Maybe… This is not something that we can predict right away. But, by the look of things it looks like it may go up by another one or two rupees. Maybe 53 or 54 is realistic and possible.

11. If investors take out their investment from European countries to invest in US, would it have any effect on the exchange rate of rupee?

Not much. US Dollar investments made in India only will affect the exchange value between US Dollar and Indian Rupee. US Dollar investment in Europe will not affect the exchange rate in India

Is the Indian Currency Rupee Depreciation against the US Dollar Good or Bad?

2011-11-22T19:01:00.001+08:00

All of us who read news would’ve seen the fact that the exchange rate between the Indian Rupee and the US Dollar has gone over the roof. In 2009 – 2010 the exchange rate was hovering around the 43 – 45 rupees per US Dollar level. Over the past one year, the rupee has consistently depreciated against the dollar with the last quarter of 2011 (calendar) being one of the worst in terms of Rupee Value Depreciation. The US Dollar is currently worth over Rs. 52.50 (as of this writing on 22-Nov-11 evening) and experts expect it go up.

The purpose of this post is to:
1. Understand why this happened in the first place
2. What this means for us – Is this Good News or Bad News?

So, lets get started!!!

Why would the Rupee Depreciate against the US Dollar?

Well, this is not something that can be answered in a single sentence. But to give an overall picture without getting into the deeper details, the reason would be:

“Exchange Rate is nothing but the price of a Currency in the International Market. If the demand for the dollar is higher than its supply, the Rupee should depreciate. If it is the other way round, it should appreciate”

The Key reason for this would be the global economic scenario. The economic situation, world over is very volatile. People are worried about the safety of their investments. Because of risk aversion on the part of people, US Dollar regained its place as a Safe Haven. People still believe that the US Dollar is much safer than any other currency in the world and hence are accumulating the US Dollar. This effectively means that, the demand for the Dollar is going up which essentially means the price of other currencies (Exchange Rate) may be affected.

Why did the Rupee Depreciate so much?

As suggested in the previous paragraph, the availability or rather the supply of the US Dollar in the Indian markets is pretty limited. Because of uncertainty in the global economic scenario, foreign investors (especially from USA) have turned net-sellers and USD Inflows into the country has fallen sharply. The US dollars into the Indian economy by the FII’s (Foreign Institutional Investors) not only guides the movement of the Indian Stock Markets, it also is a potent force that can determine the exchange rate movement of the Indian Rupee. The synopsis of this FII situation is as follows:

“If there is a net inflow of money (USD) from FII’s the rupee strengthens or appreciates against the US Dollar. When there are net outflows, it depreciates“

For Example: During 2010, there were record inflows of funds from FII’s into the Indian system and hence the Rupee was very strong. Remember the days when the Rupee was around 42-43 rupees per US Dollar??? Now in 2011, FII’s are withdrawing their funds and hence the value of the rupee is depreciating.

Is this Good News or Bad News?

Well, the answer is differnet depending on who you are.

Good News If:

1. You are an IT company like Infosys or TCS. Most of your revenue comes from USA and is in US Dollars. So, if the Rupee Depreciates, you earn more in terms of Indian Rupees even though, the US Dollar amount you get paid is the same.
2. You are someone working in United States of America. You send money to India for your family or investment. So, you are going to get more rupees for the same amount. For example, if you send USD 1000 every month to your parents, the would have got around Rs. 45000/- every month last year and now they will get Rs. 52000/-
3. You are a Manufacturer who exports stuff to USA or any other foreign country and get paid in US Dollars. (Reason, same as mentioned in the above two points)

Bad News If:

1. You are an Oil Company like Indian Oil or Bharat Petroleum. Since the price of oil is determined on a per barrel basis in USD, for the same barrel of oil, you end up paying more in terms of rupees
2. You are a manufacturer who imports stuff from other countries for your manufacturing. Not all stuff you want for your production is available in India. If your work has importing stuff from abroad, you might incur extra expenses in procuring the stuff you want

What’s the Verdict?

On the whole, this is more Bad News for the General Public. The price of oil and other materials which are imported from foreign countries are going to go up. This essentially means that Petrol, Diesel and other items are going to cost more. Already Petrol has crossed the Rs. 70/- mark per litre and the rupee depreciation may affect the situation further and drive the prices of petrol & diesel even further. This will mean that all items like vegetables, fruits, any and all items that are transported from one place to another before they are sold will get costlier. The cost of moving stuff from place to place is going to go up and the manufacturer/producer is going to pass on the extra cost to the end customer – “You and Me”. So, as a whole this is

REALLY BAD NEWS!!!!

Note: You might have a lot of questions about the Rupee Depreciation. So, if you have any, feel free to drop a comment and I will include the answer to your question in the next post, which is going to be about the various questions about the Rupee Depreciation…

Children & Money – Can We Teach Our Kids about Finance & Money Early?

2011-11-16T20:45:00.001+08:00

When was the first time you spent some money, on your own? Am not asking about when you earned it, am asking about when did your mom or dad or any of your elders give you some pocket money for the first time and what did you buy?

I remember a bit vaguely but I think I was around 10 or 11. It was ten rupees that my grandma gave me and I got those WWF Action Cards. The cards where Hulk Hogan was Rank 1 and Undertaker Rank 2. Those were the good days!!!

Coming back to topic, we all work; we all earn and want to set up a happy family. Family means having a wife/husband and most importantly “Children”. The arrival of a baby in a family is cherished by every couple and involves a lot of fun and happiness. Most couples start saving money for their children’s future, for their education, for their marriage etc. Well, this article isn’t about that… It is about a question that many of us may have thought of, "Can we teach our kids about Finance & Money early?"

Children & Money:

In India, children aren’t allowed to learn much about money until they are in their teens. They aren’t allowed to carry money by themselves and they don’t know much about money until their parents teach them. This article is about how we (as Parents) must teach our kids about money and its value/worth.

Every responsible parent has almost the same dream. A dream to provide the best education to their children. They want them to progress in every field, whether it is related to studies, sports, music or any other activity.

A child will be able to be really & truly successful in his/her life only if they have the financial knowledge and wisdom required to survive in the current competitive world. Experts say that children who learn about money and finance early in their life are usually better at managing their finances in future. A kid, who knows the value of his pocket money and knows how to save it, will be able to earn more and invest it efficiently in future.

Does the Indian Education System teach our kids Money & Finance?

Unfortunately, NO. The current school education doesn’t do much to impart the monetary wisdom to children. There is a pre-defined syllabus and all kids are expected to study and pass subjects in order to finish their education. And sadly those subjects don’t include anything about money or finance until they are old enough to learn about it themselves. Though it happens, it doesn’t happen at the right age and kids are left wanting for monetary education until they actually get some money to spend after they grow up.

Was the Indian Education System always like this?

Unfortunately, NO. Our ancient education system had many things to teach children about money from their elementary education itself. The children were supposed to complete their education in the ashram. For a complete education term, they had to work hard and in return, they were provided with education. During the final pass-out, students had to pay guru-dakshina (in other words fees) to their gurus (in other words the teacher) from their own earnings. This process was very encouraging for children as it made them partially financially independent.

Some Ways to Impart Finance Education to Children

Teaching kids how to save money and how to manage their money is not such a difficult task. Kids these days are pretty smart and sharp. They will learn it very easily, provided you are willing to spend some time with them, teaching them and nurturing them to learn more about money.

Some things you can do, to inculcate finance education into your kids are:

1. Teach children about money from the day they learn numbers and counting. Educate them about its importance through stories and games.
2. As children grow, they tend to demand more. Gradually teach them about the value of money. Tell them stories of your struggle and what difficulty you faced while started earning. Teach them about importance of saving and spending wisely.
3. A lot of demands by the children are not genuine. Teach them to understand the importance of their demand. Let them decide about the importance of a demand being need or want.
4. It is easy being impulsive and want to get anything your son or daughter wants. Well, that’s what fathers are for, but think before you buy everything. There may be things that are pretty costly. Use that as an opportunity to teach your child the value of money and explain them that need is fine but greed isn’t.
5. For their every requirement, provide a fix amount of money and try to give them a choice, so that they can select the one that suits them best, while saving some money. For example, if they want to buy shoes. Give them Rs. 500 for purchasing the shoes and tell them that whatever they will be able to save; they can keep it as pocket money. Your kid will probably keep aside some money and buy shoes only for around Rs. 400 or so. Having pocket money is cool, even for kids at school…
6. As children grow, start giving them allowances for their monthly expenses. Keep strict watch on how they spend it. Tell them to make details of expenses every month. If your kid can control his/her expenses well, reward them with gifts. Try to motivate them to save more.
7. Sometimes borrow money from children for their motivation and repay with some interest on the amount. This way, they will learn about interest and investment. They will be encouraged to save more.
8. If children ask some question about money, don’t just ignore them. Answer them for all their queries until they are satisfied. Groom them to use their mind as they grow and not just follow instructions.
9. It is very important to allow children to experience the loss and profit on themselves. The loss will increase their risk assessment ability, and profit will motivate for better performance. In case your child gets dejected in case he suffers any losses, you are there as the caring parent to motivate him. Cheer him up, take him out and teach him how to be careful in future.
10. When the kid is old enough to make a career choice, sit with him. Talk over the various earning opportunities in the career choices he wants to make. Explain him the pro’s and cons of choosing each career and ask him to take a decision after taking into consideration all the requisite aspects
11. Well, this list could be potentially endless. A lot of things are mostly common-sense. Remember that, your child’s bright future is directly dependent on how well he can save and spend money and that is entirely dependent on how well you teach your kid.

Our elders have had this opinion “Money can make children money minded, selfish, and even they can slip into wrong hands”. Unfortunately the saying or rather opinion isn’t entirely true. If money can so easily change your kid, what exactly are we doing as Parents? I am sure that, if you spend proper time and care on your kid, there is no doubt that your kid will grow up to be a noble and responsible citizen of this society. Teach him early about money and how to handle it, and he will be a successful person just like his proud mom or dad…

Happy Teaching folks!!!

Mutual Fund of the Month – HDFC Prudence Fund

2011-11-10T20:49:00.001+08:00

Well Folks, this is the first time I am writing an article like this. Starting now, we will be picking out one Top-Rated/Top-Performing Mutual Fund in India and will be analyzing them in detail. To begin with, we are starting with one of the best funds available in India right now, a fund that has been the darling of Investors in India for years.

HDFC Prudence Fund

Details of the fund – HDFC Prudence

Below are the key details of the HDFC Prudence Mutual Fund Plan.

Fund Name	HDFC Prudence
Asset Management Company	HDFC Mutual Funds
Fund Type/Category	Open-Ended/Balanced Fund
Scheme Options	Dividend Plan & Growth Plan
Launch Date	16-December-1993
Minimum Investment	Rs. 5000 for One time Investments (first time) Rs. 500 for SIP (Monthly) Rs. 1500 for SIP (Quarterly)
Fund Manager	Mr. Prashant Jain
Entry Load	0%
Exit Load	1% (If Redeemed within 1 year since purchase)
Assets Under Management	HDFC Prudence Dividend Plan – 3131.3165 Crores HDFC Prudence Growth Plan – 3224.85 Crores
Address of Fund House	Ramon House, 3rd Floor, 169, Backbay Reclamation, Churchgate, Mumbai
Email Address	cliser@hdfcfund.com

Fund Objectives – HDFC Prudence Fund

The investment objective of the Scheme is to provide periodic returns and capital appreciation over a long period of time, from a judicious mix of equity and debt investments, with the aim to prevent/ minimise any capital erosion.

Investment Pattern

The fund aims to have an equity exposure of between 40-75% and debt exposure (Debt & Money Market) of between 25-60%

During times when the interest rates are high, investment in debt would be more attractive versus equities and accordingly the Fund is likely to increase the debt component in the Scheme's portfolio. Similarly in times when the interest rates are low and the equity valuations are cheap, the Scheme is likely to reduce exposure to debt and increase exposure to equities. In addition to debt and equities the scheme will also invest in money market instruments. The exact proportion in money market instruments will be a function of the liquidity needs and the attractiveness of the debt/ equity markets. At times when neither the debt market nor equities are attractive for investment, more resources may be temporarily invested in money market investments to be invested in debt/ equities at a more appropriate time.

The Scheme may also invest upto 25% of net assets of the Scheme in derivatives such as Futures & Options and such other derivative instruments as may be introduced from time to time for the purpose of hedging and portfolio balancing and other uses as may be permitted under the Regulations and Guidelines.

The Fund Manager strives to minimize risks and maximize returns for investors who invest in the fund.

About the Fund Manager

Mr. Prashant Jain has been the fund manager of this fund since June 19th 2003. He is one of the most respected fund managers in the Mutual Fund Industry in India. He is also the Fund Manager for some other funds from the HDFC Mutual Fund Family that have been considered the Industry’s top performers. Some of the top performing funds he manages are:
1. HDFC Top 200 Fund
2. HDFC Equity Fund
3. HDFC Infrastructure Fund

Note: HDFC Top 200 & HDFC Equity have been two of the top performing Equity Diversified Mutual Funds for many years. We will probably take a look at them in subsequent MF Review posts in future.

Asset Allocation % of HDFC Prudence Fund

HDFC Prudence Fund is a Balanced Fund that invests a healthy portion of its assets in Debt and other Fixed Income Instruments. The Asset Allocation % on the various asset categories for this fund is as follows:

Equity – 61.36%
Debt – 20.85%
Others – 14.13% (This includes Equity related products like Derivatives & other Instruments)
Money Market – 2.3%
Cash – 1.35%

Sector Weightage for HDFC Prudence Fund

HDFC Prudence fund invests over 60% of its assets in Equities (shares) and has a diversified asset allocation spanning the various sectors of company’s available. The Sector Weightage (%) for this fund is as follows:

Sector Name	Weightage %
Banking & Financial Services	13.89%
Information Technology	8.09%
Manufacturing	6.63%
Oil & Gas	6.23%
Pharmaceuticals	4.86%
Metals & Mining	3.76%
Telecommunication	2.79%
Engineering & Capital Goods	2.46%
Automotive	2.12%
Media & Entertainment	2.04%
Consumer Goods Non-durables	1.80%
Cement & Construction	1.45%
Chemicals	1.39%
Food & Beverages	1.06%
Consumer Goods Durables	0.86%
Others	1.93%

Top Stocks in HDFC Prudence Fund's Portfolio

HDFC Prudence Fund invests in a number of large-cap and blue-chip company stocks. Some of the top stock holdings of this fund are as follows:

Stock Name	Weightage (As a % of their Overall Assets)
State Bank of India	4.16%
Infosys	4%
TATA Consultancy Services (TCS)	3.35%
ICICI Bank	3.21%
Page Industries	3.01%
Bharti Airtel	2.79%
Bank of Baroda	2.38%
TATA Motors	2.12%
TATA Steel	2.08
Coal India Ltd	1.68%
Crompton Greaves	1.49%
Jaiprakash Associates	1.45%
Cipla	1.40%
Pidilite Industries	1.39%
Reliance Industries	1.37%
Oil India Ltd	1.37%
Bharat Petroleum Corporation	1.20%
Axis Bank	1.18%
LIC Housing Finance	1.18%
Ipca Laboratories	1.13%
Zydus Wellness	1.08%
Zee Entertainment	1.06%
Procter & Gamble	1.06%
Info Edge India	1.01%
HT Media	0.98%

This is not the full/consolidated stock holdings of HDFC Prudence Fund. Only the top 25 stock holdings that are held by HDFC Prudence Fund are available here.

Debt Holdings of HDFC Prudence Fund

As you might have seen in the Asset Allocation section, the HDFC Prudence Fund invests a healthy 20% of their assets in Debt Instruments. As you might already know, debt instruments are bonds and other debt obligations that are held by HDFC Prudence and will have to be paid-back by the debt issuer at maturity. The Top Debt Holdings of HDFC Prudence Fund are as follows:

Debt Category	Weightage (As a % of their Overall Assets)
Government of India Bonds	9.76%
Other Bonds	11.10%

About the Government of India Securities Owned by HDFC Prudence Fund

The Government of India Securities held by HDFC Prudence are long term bonds issued by the Government of India and have a Maturity period starting from 2015 upto 2027. When these bonds mature, the fund will re-invest an equivalent amount in other debt instruments per the Fund Managers discretion.

About the Other Bonds held by HDFC Prudence:

The Other Bonds & Debt Obligations held by HDFC Prudence are from some of the most credit worthy bond issuers in India. The major issuers of bonds held by HDFC Prudence are:

1. National Bank for Agriculture & Rural Development
2. State Bank of India
3. Indian Railways Finance Corporation
4. LIC Housing Finance Corporation
5. Power Finance Corporation
6. The TATA Power Company
7. Rural Electrification Corporation
8. Punjab National Bank
9. State Bank of Indore
10. HDFC
11. Infrastructure Finance Development Corporation
12. TATA Motors
13. State Bank of Bikaner & Jaipur
14. ICICI Bank Limited
15. State Bank of Patiala &
16. Jet Airways India Ltd

All of these Bond Issuers are rated ‘AAA’ by CRISIL and are of the highest creditworthiness.

Money Market Instruments held by HDFC Prudence

As you might have seen in the Asset Allocation section, HDFC Prudence fund invests around 2% of its assets in Money Market Securities. These Money Market Securities are issued by the following entities:
1. State Bank of Patiala
2. Punjab National Bank

These entities are rated as ‘A1+’ by CRISIL and are of very high creditworthiness.

NAV Movement:

NAV Stands for Net Asset Value. You can learn more about how a Mutual Fund works and how the NAV is calculated by Clicking Here

HDFC Prudence Fund – Dividend Scheme

1. NAV As on January 2009 – Rs. 19.29
2. NAV As on June 2009 – Rs. 23.728
3. NAV As on January 2010 – Rs. 30.14
4. NAV As on June 2010 – Rs. 28.734
5. NAV As on January 2011 – Rs. 33.811
6. NAV As on June 2011 – Rs. 29.216
7. NAV As on September 2011 – Rs. 27.902
8. NAV As on October 2011 – Rs. 27.613
9. NAV As on November 2011 – Rs. 28.223

HDFC Prudence Fund – Growth Scheme

1. NAV As on January 2009 – Rs. 95.504
2. NAV As on June 2009 – Rs. 134.357
3. NAV As on January 2010 – Rs. 174.258
4. NAV As on June 2010 – Rs. 187.067
5. NAV As on January 2011 – Rs. 220.119
6. NAV As on June 2011 – Rs. 214.327
7. NAV As on September 2011 – Rs. 204.684
8. NAV As on October 2011 – Rs. 202.561
9. NAV As on November 2011 – Rs. 207.038

Net Returns:

The HDFC Prudence Fund has outperformed almost all of its peers in the Equity-Balanced Fund Category over the past 5 years. Even during extreme turbulent times in the Indian stock markets over the past 2-3 years, the fund has posted only marginal losses and has always rebounded to meet customer satisfaction. The Net Returns over the past 5 year time period is as follows:

Time Period	Returns %
1 Month	2.1%
3 Months	-2.8%
6 Months	-3.3%
1 Year	-10.4%
2 Years	11.1%
3 Years	29%
5 Years	13.5%

A point to note here is that, even though the NAV Movement may seem higher on the Growth Scheme when compared to the Dividend Option. That is because, the Dividend Scheme pays a periodic dividend (Usually once ever year) and hence the net returns inclusive of dividends earned in the Dividend Scheme will be comparable to the Growth Scheme. Don’t worry, the Dividend history is available in the next section.

Dividend History – HDFC Prudence – Dividend Plan

Dividend Date	Dividend Amount (Per Unit Held)
6-Aug-1999	Rs. 2
29-Nov-1999	Rs. 2
7-Apr-2000	Rs. 1.5
09-Mar-2001	Rs. 0.9
15-Mar-2002	Rs. 1
15-Jul-2003	Rs. 2
26-Dec-2003	Rs. 3
15-Mar-2004	Rs. 1.5
18-Mar-2005	Rs. 5
03-Mar-2006	Rs. 5
21-Feb-2007	Rs. 5
21-Feb-2008	Rs. 5
19-Mar-2009	Rs. 2.5
18-Mar-2010	3.5
17-Mar-2011	3.5

Sample Returns Comparison – HDFC Prudence Dividend Plan & Growth Plan

Date of Investment: 01-Jan-2009
Amount Invested: Rs. 25,000 (Each in Dividend & Growth Plan)
No. of Units: 261.769 (Growth) & 1296 (Dividend)
Current Value of Investments: Rs. 54,196 (Growth) and Rs. 36,577 (Dividend)

Dividend Earned in Dividend Scheme:

1. On 19-March-2009 @ Rs. 2.5 per unit = Rs. 3,240/-
2. On 18-March-2010 @ Rs. 3.5 per unit = Rs. 4,536/-
3. On 17-March-2011 @ Rs. 3.5 per unit = Rs. 4,536/-

Net Dividend Earned = Rs. 12,312/-

Net Value of Investments in Dividend Plan (Including Dividends) = Rs. 48,889/-

Though the Net value of Investments in the Dividend Plan is Rs. 5,307/- less than the Growth Plan, if you consider the fact that you could’ve invested this amount in any decent investment that earns at least 8% returns (like a Bank FD) then the net worth of the Dividend would be Rs. 13,996/- which means the net value of investments in Dividend Plan would be = Rs. 50573.8/-

Why Such Value Adjustment?

You might be wondering, why I did such an elaborate calculation to compare the returns. This is because, some people might think that the Growth Plan is better by just looking at the net worth of the Investments but the fact it, that method is incorrect. We cannot do such an assumption because of the following reasons:

a. You are getting a regular cash inflow (though small, it is around 13-18% of your net investment every year) which is superb in terms of just the returns
b. Your capital is intact and has grown on an average of around 15% year on year over the past 3 years which again us superb in terms of just the returns

Note:
1. The AUM numbers are as of 30-Sep-2011. Fund houses release AUM numbers only once every quarter and the next release will be only by end of December 2011.
2. The Sector Weightages, Asset Allocation% etc are as of end of October 2011. These details are released only once every month by the fund house.

Important Disclaimer:

Past Performance May or May Not be Sustained in Future. The Fund House does not Guarantee any returns. As with all equity market related investments, the value of the investment will move in accordance with the stock market and may go up or down depending on the world economic situation. Investors are advised to exercise caution before investing in the above mentioned fund. The Author does not endorse or recommend this fund to investors. The purpose of this article is just a Fund Review and should not be treated as Investment Advise.