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How to analyse Banking Stock?

2020-09-19T22:10:00.004+05:30

How to Analyse Banking stock

The banking business is different than the other business. Banks are acting as a mediator. Hence its stock analysis cannot be carried out like other stocks. In this article, I will try to elaborate on the ways of analyzing bank stocks. But before starting the analysis directly let us understand

How banking business works?

Banking Business Module

What is the objective of normal investor keeping their money in the bank?

Ideally speaking Bank should charge us on keeping our money in a bank because the bank is protecting our money and providing a service of safety and security.

But this does not happen? Instead, we are expecting that bank should protect our money as well as give some returns to us.

If we keep out the money in a savings account we will get 4% interest and if we keep in FD we will get around 6 to 7%.

How Bank gives us a return on our money?

Bank act like a mediator. It gives the interest to the depositor and Bank dispenses some part of this money as a loan or it is also called advances with charging some interest and thus generates income. This is their main source of revenue or income generation.

Why Bank cannot dispense all deposited money? And how much it can dispense deposited money?

Ans: For example, if we keep 100 Rs. In bank.

· Out of these 100 rupees bank has to keep 4 rupees in RBI against the cash reserve ratio.(CRR) without any interest.

· Out of 100 19.5 rupees bank has to keep in Government bond as per SLR (Statutory liquid ratio) rule of RBI. And government bond yield get changed periodically.

· So a total of 23.5 rupees is in the safe zone and the remaining 76.5 rupees bank use for giving loans like car loans, home loans, personal loans, education loans, etc. And generates income for the bank and from this income, the bank gives us interest on saving account, fixed deposit, and any other products. The remaining balance from this money is bank profit.

Cost:

· The interest is given to the retailer against deposit.

· The bank operation activity also includes in cost.

Revenue:

· The main source of the bank is interest earned against the loan (advances) distribution called as interest income.

· Another source of income is the Distribution of multi products like a mutual fund, insurance, etc. and against it, the bank gets a commission.

· Provision of services like lockers, and charges against the minimum amount and these are called as other income.

So from a bank point of view accepting deposits is a liability, interest income, and other incomes are revenue for the bank.

How to analyze Banking stock?

1. Financial Leverage or Equity Multiplier

EM (Net worth factor) = Total Capital/Net worth. (And it should not go beyond 15)

Banking is a capital intensive sector. Bank cannot collect money as per his desire because deposits are the liability to the bank and it will be a risk to the bank because the bank has to pay interest to the depositor (Money is going out from the bank).

There are some rules to accept deposits. For that one should understand the net worth concept.

To analyze the banking stock net worth is an important factor. Because the higher the numbers of net worth higher the deposit will be accepted. Normally net worth is very low in number but it has multiplier factor and that number is 15 (normal). It is called equity multiplier or financial leverage

For example, if any bank has a net worth is 100 Rs and multiplier factor let us say 15 then the bank can accept deposit up to 1500 Rupees.

The formula for net worth factor (EM) = Total Capital/Net worth. And it should not go beyond 15.

There are multiple ways to calculate these ratios.

Total capital or Asset are used interchangeably linked it is called total capital or total asset.

Bank Net Worth = Difference between Total Assets and Liability

Financial Leverage or equity Multiplier (EM) = Total Assets/Net worth

Total Assets or Capital = Net worth + External Debt

External Debt = Total Capital –Net worth (public deposit)

2. Return on Assets ROA.

ROA =Net Profit/Total Assets

Investors are keeping their money in the bank because they have faith in banks that bank will protect their money as well will give expected returns. But the investor must check the ROA of the bank. ROA is a profitability ratio.

Return on assets, ROA tells us how the bank utilizes its assets to generate the profit. These ratios are to be compared with other banking stock and the bank which has a higher return than the bank is not risky to keep their deposits in that bank because of low risk.

Normally ROA for the bank always remains on the lower side as per its business criteria (It accepts deposit from the investor which is debt for the banks.) Comparing the same thing i.e. debt for other industries then debt-free company can survive.) But to run the banking business bank has to accept deposits. Hence normal investor should compare the ROA of the other banks before investing in banks.

Ideally, it should be >=1%.

3. Return on Equity ROE (> 15%)

ROE = Net Profit/Shareholder’s equity &

The other way of calculation is

=Equity Multiplier* Return on Assets

ROE is also a profitable ratio. It gives confidence to the shareholders for investment. Higher the ROE higher will be yield. ROE number states the utilization of shareholder funds and earns more profits which will be benefited to the shareholders.

The ROE should be > 15% why?

As stated above the ROE is also a multiplication of EM and RA. And

Ideally EM should be > 15% and ROA should be >1% and if we multiply theses figure it will come to 15%. Hence ideally ROE should be 15%.

4. NIM(Net Interest Margin)

NIM= (Interest Earned-Interest Expended)/Total Asset

NIM is also an important ratio to analyze as the whole banking business relies on the margin between Interest earned (From dispensing money as an advance or loan) and interest expended( Interest given to depositor).

NIM and Return on Assets are inversely proportional to each other

To improve the NIM to earn more profit if bank started concentrating on dispensing loan then there will be probability of generating high NPA because of non-returning the loan amount by the borrowers (Bad loan).

Hence the bank has to make a balance between NIM and ROA. As per expert opinion, NIM should be a maximum of 3%.

5. A-D Ratio (Advance Deposit ratio).

Advance (Loan) to Deposit should be below 1 as if it is above 1 that means Bank is dispensing more loan than deposit hence it will be risky for the investor. Because there will be a liquidation problem in the future. Hence it must be checked before investing in bank stock.

6. Capital Adequacy ratio:

It is the amount of money that remained after disbursing the loan. It is a ration of assets to the loan disbursed. High CAR indicates that the bank has adequate money to disburse for advances or loans. From an investor point of view, it is safe for them. The higher the CAR is higher the potential of growth. Normally 12% of CAR is a safe zone for depositor’s money.

CAR can be improved if CASA (Current Account and savings account) the ratio is high because for current account bank does not pay any interest and for a savings account, it pays around 3-5% only hence there will be a higher margin to earn more interest by disbursing the loan.

Qualitative Factors:

· Deposit should be granular and well diversified (in order to maintain the stability number of depositors should be high)

· Advances or disbarment should well-diversified and granular. The loan should be disbursed to cross-segment area mean loan should not be given to one sector only like Agriculture or manufacturing or auto etc. As this may result in a probability of high NPA.

Let us understand by example.

Below table data is of March-20 (The financial year 2019-20). I have retrieved all data from moneycontrol.com.

From the above table, you can observe that HDFC bank is performing well from all factors compare to other banks.

Though Bandhan Bank seems to be attractive next to HDFC, its A/D ratio is more than 1%. It means it is lending more money than deposits which is risky for the investor from a liquidity point of view. As higher the lending amount may lead to the probability of high NPA in the future.

The same thing was happened earlier with Yes bank.

Before coming to any conclusion please check all the data trends for at least five years. Here I have elaborated as an example.

Significance of Price to Free Cash Flow ratio

2020-09-17T15:19:00.005+05:30

Significance of Price to Free Cash Flow ratio

Like P/E ratio, EPS, PEG ratio, Price to free cash flow is also an important valuation method for stock analysis.

Free cash flow is the indicator of the growth of the business or a company. However normal investor does not go in-depth during stock valuation but the professional investor is using this for correct valuation analysis.

For the business owner, managers, and key persons Free Cash flow value helps the company to decide business expansion or restrict the activities.

What is free cash flow?

Free cash flow is the amount of money remained after paid up of all expenditures like debt, employee, plant maintenance, and rent, etc.

This free cash flow company may use for investing purposes like expansion, acquisitions, investment in fixed deposit, Mutual fund, etc. Under the head of CFI

Or else it can be used in financial activities like repayment of the debt, dividend pay-out or buyback of shares, hiring employees under the head of CFF.

Where you will get it?

It can be seen in the cash flow statement of the company but sometimes you may be required to refer the annual report for the correct picture.

When free cash flow analysis to be used?

In the company’s financial statement if you find the marginal or large difference between Net profit and operating cash flow (CFO) then this value (FCF-Free cash flow) to calculated or to be identified.

How & When there can be a large difference in Net profit & Operating Cash Flow?

If we see the typical P & L statement of a company we will find that Earning or Net profit can be manipulated. In P & L statement, non-cash items like depreciation, amortization is included. The depreciation of the asset is decided by the company. Actually, the depreciation amount does not go outside the company, so if company shows high deprecate amount then it will impact the net profit value or earning. There will be a large difference in earning and operating cash flow.

And also if we compared with book value then book value also can be manipulated. Because it also includes the depreciation amount. If you identify the asset value whatever mentioned in accounts or book value, in the market it may not sell the assets at that price quoted in P & L statement. Hence book value is also not a good indicator but if you calculate the price to cash then it will give a clear picture, as cash cannot be manipulated, so it needs to be analyzed

How to calculate Price to cash flow? And How to interpret it?

The formula for free cash flow

Price to cash flow = Share price/Operating cash flow per share

Here Share price is the current share price.

Operation cash flow can be seen in the cash flow statement.

The Price to Cash flow is identical to the P/E ratio. As in this formula we use to take net profit divided by earning per share.

EPS and operating cash flow are closely related to each other. When there is a large difference in EPS and operating cash flow then the Price to cash flow is to be calculated.

Sometimes for calculating the price to cash flow some analyst uses free cash flow (FCF) instead of operating cash flow per share. And this is ideally correct formula as in free cash flow we use to deduct capital expenditure from operating cash flow

Price to Cashflow = Share price/ Free cash flow per share.

Price to Cashflow = Market Capitalization/Free cash flow.

Free cash flow = Operating cash flow (CFO) – capital expenditure

Let us understand from the company’s P & statement and typical cash flow statement.

Typical P & L statement		Typical Cash flow statement
Revenue		PBT
Cost of Goods Sold (CGOS)(-)	Cannot be manipulated	Depreciation(+)
Gross Profit		Taxes(-)
Market & Sales (-)	Cannot be manipulated	Change in Working Capital W.C (-)
Office & Admin(-)		Operating Cash flow
EBITDA		Capital Expenditure(-)
Depreciation (-)	Can be manipulated	Free cash Flow
Amortization(-)	Can be manipulated	Investment(+)
EBIT		Financing C.F.(+)
Interest(-)	Cannot be manipulated	Net Cash flow
PBT
Tax(-)	Cannot be manipulated
Net Profit

If we see the typical Company’s P & L statement Depreciation and Amortization can be manipulated as these are noncash items. Because depreciation of an asset is decided by the company

But In typical cash flow statement free cash flow is calculated after deduction of capital expenditure like expenses on plant and maintenance.

For example, the Operating cash flow of company ABC is 500 crore & its Net profit 400 Cr

· In this case, operating cash flow may be high because company may have considered high depreciation costs which are added in the cash flow statement.

· Also, the company may have used in expansion,

· The company may have used in plant maintenance like 300 crores

But is not clear from net profit ( P & L statement) Hence if you calculate Price to cash flow then it will get clear from free cash flow (FCF)

Whenever P/Free cash flow is low then it is better because it shows that it gives high returns. Historically it is proved.

Let us see the live example as on

Asian Paints financials as on March 2018:

1. Market capitalization : 1,20,494.00

2. P/E: 55.53

Now we will calculate the price to cash flow is there any difference in P/E value and Price/ FCF value?

Cash flow statement:

1. Cash from operating activities: 2136 Crores

2. Investing Activities: :1370 Crores

Price/Operating cash flow = Market Capitalization

= 120494/2136

= 56.4

It is closely with the P/E ratio, no much difference. Hence from these value, there is no manipulation

P/FCF

In the free cash flow we are getting the clear capital expenditure so we have to see annual report

From Cash flow statement:

1. Purchase on plant and equipment : 1354 crores

2. FCF = Cash flow from operation activities- Investing activities

= 2136-1354

= 778 crores.

P/FCF = 120494/778

= 155

Here the Price/FCF is very high this is because the companies going for high expansion activities.

Now let us understand why capital expenditure is high?

Is the company doing expenses on capital expenditure every year?

If the company is going for expansion then it is better but it is going for renewal then it is a bad thing it gives the wrong signal and in such stock, the investor should not invest.

Conclusion: In company’s financial statement if you find the marginal or large difference between Net profit and operating cash flow (CFO) then this value (FCF-Free cash flow) to calculated or to be identified.

Debt to Equity ratio formula, interpretation with Examples.

2020-09-15T17:13:00.005+05:30

Debt to Equity ratio formula, interpretation with Examples.

Credit: Image by Photo by Mohamed Hassan from PxHere

Looking ahead at the great future prospectus of the business, promoters require a lot of capital but from where does this capital comes from?

There are two types to raise the capital. Either by raising the Equity or Debt from banks, financial Institutes, Private lenders, or any other resources.

But each type i.e. equity or the debt has its own impact on the business. Equity is the ownership in the business or company and does not require to be paid regularly but debt is a liability that has to be paid on regular basis like interest.

Equity can be raised in three ways

Equity Share Capital: Initial Investment by promoters.

Reserves & Surplus: Cash + Profit ( This maybe after a few years as the company grow their business they will earn some profit and all profit will not be used or distributed to shareholders but they keep theses money as a reserve.)

Preferred Shares or Equity. This can be raised from friends and families or strategic partners by creating confidence and promise that they will get some percentage of money on their investment than the other common equity shareholders

Equity Capital, Reserve & Surplus are considered as Common Equity.

Total equity includes common + preferred equity

Liabilities are also two types of liabilities

Current Liabilities: Its payment condition is within 1 year. It includes short term dues, Trade Payables, Advances & Overdue, and other short term dues.

Noncurrent Liabilities: Its payment condition is after 1 year. It includes long term debt (loan), Differed tax liabilities and other long term liabilities.

The all the above statements are applicable for the promoters but as an investor who has to invest in this company’s stock what he is looking is the stock may increase or decrease but at least his money should be protected. It should not become zero (this will happen in case of bankrupt of the company).

So in order to know the solvency of the company debt to equity ratio is important to understand.

How Debt to Equity Ratio calculated? How to interpret the Debt to equity ratio? Let us understand.

For any business Liquidity tells us the short term position of the company and Solvency tell us the overall condition of the company like the short term and long term position of the company.

Total Debt =Long term debt + Short Term debt.

Long term debt come to know from noncurrent liabilities which are mentioned in company’s balance sheet.

Short term debt come to know from current liabilities which are mentioned in company’s balance sheet.

For Example Company A has

Long term Debt = 100Crore

Short Term debt = 50 Cr.

Equity capital = 100 Cr

Then D/E = 150/100

= 1.5.

Interpretation of the D/E ratio.

Important points

· Ideally D/E < 1.: If D/E is less than 1 means the company is in the conformable zone. Because if the debt is lower than the equity then the company has money to refund the debt i

· Tougher Times –Low D/E companies will survive better. In the case of bad economic conditions or low business, the lower D/E companies will survive. Because debt is a mandatory payment in spite of business conditions.

· High debt may lead to the situation of a bankrupt company.

· For comparing the D/E of the companies you should compare with the companies from the same sector.

· High capital intensive companies like the power plant, petrochemical plant, Banks Construction, etc., always have high D/E.

· Low capital intensive companies like software, retail have low D/E.

Let us understand by the live example of the two companies from the same sector.

1. Asian Paints &

2. Berger Paints

BALANCE SHEET OF ASIAN PAINTS (in Rs. Cr.)	Mar-20	BALANCE SHEET OF BERGER PAINTS INDIA (in Rs. Cr.)	Mar-20
	12 months		12 months
EQUITIES AND LIABILITIES		EQUITIES AND LIABILITIES
SHAREHOLDER'S FUNDS		SHAREHOLDER'S FUNDS
Equity Share Capital	95.92	Equity Share Capital	97.12
TOTAL SHARE CAPITAL	95.92	TOTAL SHARE CAPITAL	97.12
Reserves and Surplus	9,357.37	Reserves and Surplus	2,527.92
TOTAL RESERVES AND SURPLUS	9,357.37	TOTAL RESERVES AND SURPLUS	2,527.92
TOTAL SHAREHOLDERS FUNDS	9,453.29	TOTAL SHAREHOLDERS FUNDS	2,625.04
NON-CURRENT LIABILITIES		NON-CURRENT LIABILITIES
Long Term Borrowings	18.5	Long Term Borrowings	0
Deferred Tax Liabilities [Net]	282.68	Deferred Tax Liabilities [Net]	29.14
Other Long Term Liabilities	501.32	Other Long Term Liabilities	206.79
Long Term Provisions	136.78	Long Term Provisions	3.41
TOTAL NON-CURRENT LIABILITIES	939.28	TOTAL NON-CURRENT LIABILITIES	239.34
CURRENT LIABILITIES		CURRENT LIABILITIES
Short Term Borrowings	0	Short Term Borrowings	222.46
Trade Payables	1,760.08	Trade Payables	1,012.92
Other Current Liabilities	1,390.83	Other Current Liabilities	212.95
Short Term Provisions	44.14	Short Term Provisions	29.99
TOTAL CURRENT LIABILITIES	3,195.05	TOTAL CURRENT LIABILITIES	1,478.32

Asian Paints:

Total Shareholders fund = 9,453.29

Long term Borrowings = 18.5

Short term Borrowings = 0.0

D/E = 18.5/9453.29

= 0.0019

Berger Paints:

Total Shareholders fund = 2625.04

Long term Borrowings = 0

Short term Borrowings = 222.46

D/E ratio = 222.46/2625.04

= 0.08.

From the above calculation both the companies are having the D/E ratio below 1 but the Asian Paint (0.0019) is in a better position than Berger Paints (0.08)

But for choosing the stock for investment one should not rely only on one financial ratio but all other financial ratios are to be compared.

Debt to equity ratio in personal finance

This ratio can also be used in personal finance also. Particularly in case of loan. While lending a loan the bank or financial institutes look after borrower’s capacity to repay the loan that is why while sanctioning the loan Bank generally ask the borrower about the source of income, any other loan if he has, the property he has.

In this case, the term equity refers to the difference between total assets value and total liabilities.

It can be represented as:

Personal debt/equity ratio = total personal liabilities / (total personal assets – total liabilities)

What does D/E ratio tells us

· D/E ratio gives the comparison of total liability to equity. (As mentioned above in the example)

· The Debt/Equity ratio is used by lenders to gauge the financial situation of a borrower and make a judgment regarding their repayment ability.

· In general higher the D/E ratio higher is the risk to invest in the stock for the investor.

· It helps Investor to decide for investment in the stock by comparing the D/E ratio of the same type of the company.

Return on Assets ROA, What, How it is calculated?

2020-09-14T16:23:00.008+05:30

Return on Assets ROA, What, How it is calculated?

Return of Assets states the condition of the company that how the company is performing with respect to its assets.ROA gives the management of the company or investor that how the company utilizes its assets to give the expected returns.ROA is shown in percentage.

In order to utilize the assets most of the company try to squeeze their limited resources and try to maximize the profit.

For example, a company tries to produce its product beyond its rated capacity. Like running the plant more than 100% (To the maximum level of design)

What is Asset?

Asset = Equity + Liability

Assets are of two types.

1. Current Asset: Payment received in a year

2. Noncurrent Asset: Payment is to be received after 1 year.

Liabilities are of two types.

1. Current liabilities : Payment is to be done within one year

2. Noncurrent liabilities : Payment is to be done after 1 year

Return on Assets means how the company is utilizing its asset to earn more profit. So it means the company which has more ROA than its competitor then that company will be more better than the others.

ROA = Profit / Asset

We can understand the asset from the balance sheet but the question is what type of profit is to be considered here?

Whether it is to be considered as PBIT or PBT or PAT? It always creates confusion

Explanation:

When we calculate ROE we consider total equity.

As ROE = PAT/Total Equity

Here why we are considering PAT in ROE because the priority of the payment is

1. Interest

2. Tax

3. Equity Returns

The third number is equity return hence here we have to consider PAT here.

Normally many analysts use the formula for ROA as

1. ROA = PAT/Total Asset

But ideally, it should be

2. ROA = PAT + Interest (1-Tax %)/Total Asset

PAT is considered in ROE so interest should not be considered in ROA and we are including liabilities also as a basic definition of the asset mentioned above.

The third formula used by the analyst is

3. ROA = PBIT/Total Asset

4. ROA = PAT/Total Average Asset.

As per my opinion the 2 &3 number are better.

No 4 formula is used whenever there is any change of asset value in the year this is just by taking the start asset value at the beginning of the year and at the end of the year and divide it by 2. For example, if a company sells it some nonperforming assets in the year then the asset value will get changed.

However whichever formula is used stick to one formula for comparison of companies.

ROA for the different sectors is varying a lot. It depends on the type of company. ROA for the banks, financial institutes, telecoms, the software is higher than the capital intensive industry chemical industry, construction Industry.

Let us understand by example:

Suppose company A has established with a capital of 4 crores. With the following details.

Equity Capital	300L
Liabilities @ 10% interest rate	50L

Financial Statement

EBIT (Earnings before Interest and Tax)(Operating profit)	100,00,000 (100L)
Interest on Debt (-)	30,00,000 (30L)
PBT Profit before Tax	70,00,000 (70L)
Tax @ 30% (-)	21,00,000 (21L)
PAT (Profit after tax) (Net profit)	49,00,000 (49L)

ROA = PAT/Total Asset

= 49L/350L

= 14%

ROA = PAT + Interest (1-Trate)/Total Asset

= 49L+30L (1-0.30)/350L

=49L+21L/350L

= 20%

ROA = PBIT/Total Asset

= 100L/350L

= 28.57%.

From the above calculation we will observe that there is a lot of difference while using different formulas. So if you want to carry out the comparison between the companies one should apply same formula for all the companies otherwise result will be absurd and it will misguide you.

Let us understand the comparison of two companies.

(Same sector company)	Company-A	Company-B
Equity capital	300L	900 L
Liabilities @ 10% interest rate	50L	500L
EBIT (Earnings before Interest and Tax)(Operating profit)	100L	800L
Interest Debt (-)	5L	50L
PBT Profit before Tax	95L	750L
Tax @ 30%	28.5L	225L
PAT	66.5	525L

ROA (company-1):

ROA = PBIT/Total Asset

=100L/350L

= 28.57%.

ROA (company-2)

ROA = PBIT/Total Asset

=800L/1400

= 57.14%

By comparing the above example it clearly shows that company-2 is performing better than company-1. It means it is efficiently using its asset to generate profit.

Important points of ROA.

· Company having better ROA indicates that it is efficiently using the Assets But it is not the only ratio to be considered while choosing the stock for investment. Other financial ratios are also to be compared to get the overall picture.

· ROA can be increased by:

1. Increasing PBIT

a. Better pricing

b. Economics of scale (High volume low margin)

c. Lowering cost by better efficiency and productivity.

2. Decrease Assets

a. Reducing accounts receivable (reduction of credit time)

b. Better inventory turnover

c. Higher asset utilization.

d. Leasing instead of buying (Optional)

e. Divesting lower margin businesses/assets.

Limitations of ROA:

ROA cannot be compared for different sector companies as different sectors have different ROA. This means you cannot compare the ROA of Software Company with the petrochemical Industry.

Live Example: AS on today i.e. 14 Sep 2020 15:21 hrs.

KEY FINANCIAL RATIOS OF INFOSYS (in Rs. Cr.)	MAR 20	MAR 19	MAR 18	MAR 17	MAR 16
PER SHARE RATIOS
PROFITABILITY RATIOS
Return on Capital Employed (%)	31.28	31.38	31.00	27.80	20.75
Return on Assets (%)	19.17	18.62	21.29	17.29	17.45
Total Debt/Equity (X)	0.00	0.00	0.00	0.00	0.00
Asset Turnover Ratio (%)	97.53	92.62	81.63	74.21	74.22

Tata Consultancy Services Ltd. | BSE 2492.10 118.40 (4.99%) | NSE 2493.10 119.00 (5.01%) | Trade | Add

Top of Form

Bottom of Form

Top of Form

Bottom of Form

Return Ratios	MAR 2020	MAR 2019	MAR 2018	MAR 2017	MAR 2016
Return on Networth / Equity (%)	38	35	30	30	34
ROCE (%)	46	45	39	39	33
Return On Assets (%)	27	27	24	25	27

From the above example, TCS ROA is 27% and its peer company Infosys is having ROA 19.17% as of March 2020. That means TCS is utilizing assets better way than Infosys.

But this is not the only ratio to be compared for choosing the stock for investment other financial ratios are also to be considered.

Return on Capital Employed ROCE Formula & Interpretation

2020-09-13T16:57:00.004+05:30

Return on Capital Employed ROCE Formula & Interpretation

Return on Capital Employed, ROCE is the financial ratio to analyze company performance. ROCE indicates the efficiency of utilization of total capital employed by a company to generate profit.

Return on equity ROE deals with the returns on the investment of the shareholders and

Return on Capital Employed, ROCE considers not only equity capital but it also includes the liabilities like a loan or any debt which are used as a capital in the business.

Equity can be raised in three ways

Equity Share Capital: Initial Investment by promoters.

Equity Capital, Reserve & Surplus are considered as Common Equity.

Total equity includes common + preferred equity

Liabilities are also two types of liabilities

Current Liabilities: Its payment condition is within 1 year. It includes short term dues, Trade Payables, Advances & Overdue, and other short term dues.

Noncurrent Liabilities: Its payment condition is after 1 year. It includes long term debt (loan), Differed tax liabilities and other long term liabilities.

Let us understand by Example:

EBIT (Earnings before Interest and Tax)(Operating profit)	100,00,000 (100L)
Interest on Debt (-)	30,00,000 (30L)
PBT Profit before Tax	70,00,000 (70L)
Tax @ 30% (-)	21,00,000 (21L)
PAT (Profit after tax) (Net profit)	49,00,000 (49L)

The ROCE = Profit (EBIT)/ Capital Employed.

The priority of payment for any company is

1. Debt

2. Tax

3. Preferred equity

4. Common equity

In ROE, we have to calculate on returns on equity we have to consider PAT for the calculation as the priority of payment is 1. Debt interest 2. Tax. As in total equity, we are not considering the debt amount.

But in ROCE,

Profit: Here we have to consider the profit as PBIT since we are calculating ROCE on total capital (Equity + Debt) hence as per payment priority only interest will be deducted from the returns.

Capital Employed: There are different ways that are being used by different analyst.

Some analysts and investors may choose to calculate ROCE based on the average capital employed, which takes the average of opening and closing capital employed for the time period under analysis.

If you observe ROCE on three different websites for the same company. They all have used different formulas to calculate ROCE. But one should follow the same formula to get consistent results for different companies.

1. ROCE = EBIT/(Equity + Noncurrent liabilities (long term debt))

Here noncurrent liabilities are considered because they think that there is no high impact of short term liabilities as these are to be pay within one year only.

2. ROCE = EBIT/ (Equity + Long term debt).

Here they are considering only long term debt they are not considering the short term debt. They are thinking that whatever money they are utilizing as capital is to be only considered. Since the short term is to be paid within a year there is no impact hence only long term debt is considered.

3. ROCE = EBIT/(Equity + Long term debt + Short term debt)

This is ideally the correct definition.

Let us understand by example:

Suppose company A has established with a capital of 4 crores. With the following details.

Initial Investment	200L
Reserve & surplus	50L
Preference shares equity @ 15% (promise by the company as a dividend)	50L
Short Term Debt @ 10% interest rate	50L
Long term Debt	100L

Financial Statement

EBIT (Earnings before Interest and Tax)(Operating profit)	100,00,000 (100L)
Interest on Debt (-)	30,00,000 (30L)
PBT Profit before Tax	70,00,000 (70L)
Tax @ 30% (-)	21,00,000 (21L)
PAT (Profit after tax) (Net profit)	49,00,000 (49L)

ROCE = EBIT / Equity + Short term + Long term debt)

= 100L/ (300L+50L +100L)

= 22.22%

With another formula i.e. ROCE = EBIT/ (Equity + Long term Debt)

= 100L/(300L +100L)

= 25%.

Comparison between two companies from the same sector.

(Same sector company)	Company-A	Company-B
Initial Investment	200L	400 L
Reserve & surplus	50L	300L
Preference shares equity	50L	200L
Short Term Debt @ 10% interest rate	50L	500L
Long term Debt	100L	2500L
EBIT (Earnings before Interest and Tax)(Operating profit)	100L	800L

ROCE = EBIT / Equity + Short term + Long term debt)

ROCE company A = 100L/ (300L +50L + 100L)

= 100L/450L

= 22.22%

ROCE company B = 800L/ (900L + 500L + 2500L)

= 800/3900

= 20.51%

As you can see, Company B is a much larger business than Company A, with higher revenue, EBIT, and total capital. However, when using the ROCE metric, you can see that Company A is more efficiently generating profit from its capital than Company B.

Return on Capital Employed

Important points.

1. ROE Vs ROCE

· ROE doesn’t give overall picture of the return on capital.

· ROE can be manipulated –More debt to increase ROE.

· ROCE gives overall picture of the return on the total capital employed in the business.

· ROCE can be compared to return from other investments like FD, Mutual fund, or Bonds. This is to make a decision about whether this money investment is really fruitful.

· Invest only when ROCE > Cost of capital

Here what is the cost of capital?

For example, suppose if you have taken a loan @ interest of 12% then your ROCE > 12% otherwise there is no point in business. As if ROCE is less than 12% then you will not get any profit. All money will go to the lender (Bank)

Or ROCE > WACC (Weighted average of capital cost)

ROCE to be used for measuring the capital intensive companies like utilities and telecoms

· For the investor to invest in stock has to keep in mind following points.

· If the company has not any debt then he should observe ROE and if the company is having any debt then he should see the ROCE.

Why financial ratios are to be analysed?

2020-09-12T12:30:00.009+05:30

Why financial ratios are to be analyzed?

Credit Image by Pixbay.com

Financial ratios are the indicators of the company's performance and status. So In order to know the health condition of the company, these ratios are calculated because of these calculations

Know about the financial health of the company and also you can compare it with the competitor. This is to understand the sustenance of the business in a competitive world.
For the retailer investor, it is always to be aware of the company before investing in the stock.

The financial ratios are divided into 5 categories.

1. Profitability Ratio

2. Liquidity ratio

3. Solvency Ratio

4. Activity ratio

5. Valuation Ratio

From all these ratios you can understand the profit margin of the company, short term and long term debt position of the company, operational the efficiency of the company, the share price valuations of the company.

Financial Ratios and Analysis:

1. Profitability Ratios:

· How good a company is giving returns on earning?

· Competitive position of the company in the market.

· Income statement- Sources of Income and expenses.

Example: Profit Margin = Net profit/Sales Revenue.

2. Liquidity Ratios:

· The position of the company: How comfortable the company is to pay debts in the short term.

Example: Current Ratio = Current Asset/Current Liabilities

It is always to better for the company to have more asset value than the current liabilities. This is to pay its short term debt. So that there will not be any risk of the insolvency of the company in the future.

3. Solvency ratio:

It is like a liquidity ratio but here solvency is considered for long term debt.

· The position of the company: How the company is to pay debts in long term.

In long term debt, it includes term loan for purchasing the assets for utilization like machinery, infrastructure.

· Also known as the leverage ratio or Debt Ratio.

Example: Debt ratio = Total Liabilities/Total Assets.

From this ratio you will understand, how much debt is used to finance its asset. Suppose if the debt ratio is 0.9then 90% of finance is used to purchase it asset which is not good.

So it Is always better to have a low debt ratio so that it will not create any insolvency problem in the future.

4. Activity ratio:

· Measures the operation efficiency of the company.

· How the company utilizes its working capital and long term assets efficiently to produce more.

· Also known as Efficiency Ratio or asset Utilization Ratio.

Example: Inventory Turnover Ratio = Cost of Goods Sold/Average Inventory For instance let us see the example of any chemical product company

Suppose the production cost of the chemical is 100 Lakhs.

Suppose Average inventory which includes raw material, packing material, etc and its cost is 10 Lakhs.

Then Inventory turnaround ratio = 100/10 =10.

This means 10 times the chemical is being sold in a year. So it is always to higher inventory ratio.

5. Valuation ratio:

· Used for investment decision

· What is the right value of the company

Example = Earnings per share = Net Profit/ No of outstanding shares.

P/E ratio = Profit per share/Earning per share.

Low P/E = fairly Priced = Better for investment.

ROE Return on equity How to calculate? Let us see by the example

2020-09-11T16:46:00.000+05:30

ROE Return on equity How to calculate? Let us see by the example

The ROE ratio is discussed for stock analysis or comparing the different companies of the same sector or you can evaluate the performance of your own business.

What is equity?

Equity is nothing but the ownership of the company.

What is ROE?

The shareholders invested their money in the company so how much they earn from their investment in the company in a year is called Return on Equity.

There are two types of equity.

1. Return on total equity

2. Return on common equity: In this category, preference equity is not considered.

We will see both the types here.

Return on equity definitely tells about the earnings on the equity but there are certain limitations also in return on equity. In the 2008 crises, many companies have misguided to the shareholder. They have taken high debt to show high returns on equity.

There are two ways to raise the capital of investment.

1. Equity

2. Debt

Equity can be raised in three ways

Equity Share Capital: Initial Investment by promoters.

Preferred Shares. This can be raised from friends and families or strategic partners by creating confidence and promise that they will get some percentage of money on their investment than the other common equity shareholders.

Let us understand by example:

Suppose company A has established with a capital of 3 crores. With the following details.

Initial Investment	200L
Reserve & surplus	50L
Preference shares equity @ 15% (promise by the company as a dividend)	50L
Debt @ 10% interest rate	300L

Now let us see the financial statement of the company.

EBIT (Earnings before Interest and Tax)(Operating profit)	100,00,000 (100L)
Interest on Debt (-)	30,00,000 (30L)
PBT Profit before Tax	70,00,000 (70L)
Tax @ 30% (-)	21,00,000 (21L)
PAT (Profit after tax) (Net profit)	49,00,000 (49L)

In the above example total equity is

Return on common equity means return on initial investment+ Reserves & surplus preferred equity i.e. 200+50 +50L = 300L

The priority of payment will be

1. Debt
2. Tax
3. Preferred equity
4. Common equity

Since we have to calculate on returns on equity we have to consider PAT for the calculation as the priority of payment is 1. Debt interest 2. Tax.

Since we are calculating Return on Total Equity we will not consider 15% (in this example) payment as it is a part of total equity.

So Return on Equity = PAT/Total equity

In this example PAT = 49 L. Total equity = 300L. Then ROE will be 49/300 = 16.33%.

For calculating the return on common equity then the formula will be:

Return of Common equity = PAT-Dividend on preferred equity/Common Equity.

= 49-(0.15*50L)/(200+50) = 41.5/250L = 16.6%.

So the returns on common equity are on the higher side because here the preference equity the dividend has deducted from the PAT.

But sometimes the company, rearrange or manipulate the ROE to lure the shareholders. As investors are interested in returns from their investment in equity.

There are two ways to increase the ROE either by increasing the efficiency of the company which will in turn increase the profit of the company. But instead, they are applying another way of manipulation by reducing the total equity.

How they can reduce the equity just by increasing the debt.so let us see by example herewith. So by increasing the debt it really gives the benefit or disadvantage let us see case by case.

Company -1

Company-2

Total equity (50%)	300L
Debt @ 10% interest rate (50%)	300L
EBIT (Earnings before Interest and Tax)(Operating profit)	100,00,000 (100L)
Interest on Debt (-)	30,00,000 (30L)
PBT Profit before Tax	70,00,000 (70L)
Tax @ 30% (-)	21,00,000 (21L)
PAT (Profit after tax) (Net profit)	49,00,000 (49L)

Total Equity (25%)	150L
Debt @ 10% interest rate (75%)	450L
EBIT (Earnings before Interest and Tax)(Operating profit)	100,00,000 (100L)
Interest on Debt (-)	45,00,000 (45L)
PBT Profit before Tax	55,00,000 (55L)
Tax @ 30% (-)	16,50,000 (16.5L)
PAT (Profit after tax) (Net profit)	38,50,000 (38.5L)

Case-1: Both the companies are doing their business efficiently

Let us calculate ROE for both the companies:

Company 1: 49L/300L = 16.33%

Company 2: 38.5L/150L = 25.66%.

Why Company-2 is giving more return on equity?

This is just because it is doing business very efficiently.

Case-2: Bad economy

Company-1 Company-2

Total equity (50%)	300L
Debt @ 10% interest rate (50%)	300L
EBIT (Earnings before Interest and Tax)(Operating profit)	40,00,000 (40L)
Interest on Debt (-)	30,00,000 (30L)
PBT Profit before Tax	10,00,000 (10L)
Tax @ 30% (-)	3,00,000 (6L)
PAT (Profit after tax) (Net profit)	7,00,000 (7L)

Total Equity (25%)	150L
Debt @ 10% interest rate (75%)	450L
EBIT (Earnings before Interest and Tax)(Operating profit)	40,00,000 (40L)
Interest on Debt (-)	45,00,000 (45L)
PBT Profit before Tax	-5,00,000 (5L)
Tax @ 30% (-)	0
PAT (Profit after tax) (Net profit)	-5,00,000 (5L)

ROE for company1 = 7L/300L = 2.33% (+Ve)

ROE for the company is negative and in fact its equity is getting eroded due to high debt interest.

Conclusion: In excessive debt can demolish the company in a tough economic environment. Hence ROE (Return of equity does not show a clear scenario we have to see the ROCE (Return on capital employed.)

Hence one should not rely on one ratio but one should study all fundamental analytical ratios before investing in the stock.

How to carry out the comparisons between two companies.

Let us see by the example:

Share Capital	200L
Reserve & Surplus	50L
Preferred Share capital	50L
Net Worth or Net capital = addition of all above 3 rows.	300L
Debt @ 10% interest rate (50%)	300L
EBIT (Earnings before Interest and Tax)(Operating profit)	100,00,000 (100L)
Interest on Debt (-)	30,00,000 (30L)
PBT Profit before Tax	70,00,000 (70L)
Tax @ 30% (-)	21,00,000 (21L)
PAT (Profit after tax) (Net profit)	49,00,000 (49L)

Share Capital	200L
Reserve & Surplus	200L
Preferred Share Capital	0
Net worth or net equity = addition of all above three rows.	400L
Debt @ 10% interest rate (75%)	100L
EBIT (Earnings before Interest and Tax)(Operating profit)	100,00,000 (100L)
Interest on Debt (-)	10,00,000 (10L)
PBT Profit before Tax	90,00,000 (90L)
Tax @ 30% (-)	27,00,000 (27L)
PAT (Profit after tax) (Net profit)	63,00,000 (63L)

Let us calculate ROE for both the companies:

ROE company1 = 49L/300L = 16.33%

ROE company2 = 63L/400L = 15.75%.

If we observe the above calculation even company -2 is making a high profit (63L) and having less debt but ROE for this company is lower compared to the ROE of company-1. This is because it has more equity capital but it is not utilizing their capital efficiently even though it has more resources than company-1.

So by comparison company-1 is giving better ROE but one should not stop by just comparing the ROE but he should also calculate other financial ratios as well. As we have elaborated in a bad economy if the company is having high debt then the impact will be adverse.

You can compare or calculate ROE for any companies by observing the financial statements of those companies which are easily available online website like WWW.Moneycontrol.com, WWW.IIFL.com. Also, the readymade ratios are also available online.

Promoter Holding Analysis and Actions before Investing

2020-09-10T16:39:00.005+05:30

Promoter Holding Analysis and Actions before Investing

Credit Image By Pxfuel.comMany retailor investors must have read the article that promoters of more than 100 companies have bought their companies’ shares from the open market in the first a quarter of the current financial year i.e. 2020-21 and more than 50 promoters cut their stakes in the same quarter.

Companies whose promoters have increased their stake by buying the shares from the open market the stock of those companies have boosted from 10-200% from the previous low value.

Why promoters are buying the shares from the market and how it impacts the normal retailer investor let us understand.

As per Sebi's guideline for the public limited company, the shareholding should be 75% by the promoter and 25% by the public. But for FII (Foreign Institutional Investment) limit is different for different stocks.

Ideally if the promoters are buying the shares from the open market must boost up the share price because it shows that the promoters have confidence in their business and their business may have good future prospects.

But this is not always true.

As an investor who is investing in the stock always track the promoter behavioural action before investing in the stock.

Investor should consider the following two aspects before investing in the stock with respect to promoter holding news.

1. What is the reason behind increasing or decreasing the stake by promoter?

2. The method of changing the holding pattern

For example: generally, promoters are relatives of each other in the company, in such cases, many promoters use to gift the shares to others and change their stakes.

There are so many ways to change the holding pattern like gift, interlay transfer etc.

So as retailor investor, you should know the director or key managerial person who has rights to take the decision of the company and his behavioural action.

What are the reasons that promoters are increasing or decreasing their holding?

1. There may be future growth of the company.

2. Promoters may be buying the shares from open market and pledging their shares as collateral

3. Some companies are paying high dividend their promoters also use to buy the shares from the open market to get maximum gain.

4. To liquidate the money by buying the shares from the open market will give a positive impact on stock price hence they will buy at a low price and sell at a high price.

Let us understand in details.

Promoters are increasing their stake (Buying the shares from open market)

If promoters are buying their stock means they know the position of the business and which is not known to retailor investor. It might be due to future growth is expected to be bright. If these persons are positive on this stock then as a retailor investor you should also think positively.

For example one of the Auto company has bought the share at the price of 451 but still stock price dropped down to 250 but even that price promoters have bought again the shares but share price dropped to 170 but after few months they have increased their business in other countries as a business has the great prospectus and then share price increased substantially

Buyback is also an increase in promoter holding. This also gives a positive impact on short time.

Sometimes it may be a trap. This is to increase market sentiment promoters use to spread the news that they are buying the stock and they have acquired a big deal.

The retailor investor gets carried away by hearing or reading the news of the company and they will rush to buy the stock. Due to the rise in demand for shares in the market the price will get boosted. As they reached the target the promoters will sell their shares and liquidate the money and as a retailor investor, they will lose the money because the retailor will not go in deep to find out the about the good news whether it was really right or wrong. Because this news is purposely spread to create positive sentiments. Also, they did not go in deep about the selling of the stocks by the promoter during this period.

Sometimes promoter increase their stakes by buying the stock but simultaneously they may pledge their shares or keep their shares as collateral.

Any promoter increase the stock price by buying the stocks from the market, it is short term sentiment.

Third, the reason is profit skipping. Many companies declare a very high dividend. To acquire the profit promoters used to buy shares from the market and increase their stake so that the maximum profit they can acquire. So the company who gives high dividend their stock will not perform but they can give a high dividend. These companies are useful for those people who are retired who don’t want to take any risk, this will give consistent high dividend more than the FD interest rate.

If promoters are decreasing their holding, is it negative for that stock or not?

As a thump rule it is negative, but it is not always right.

Sometimes promoters are issuing ESOS to their employees in that case also the promoter holding gets decreased.

Sometimes promoters are bringing new strategic partners in the company for example if any the company wants some new technology, in that case, they will offer their shares instead of directly paying the money

Other the reason may be that promoters are selling their holding for debt repayment.

Sometimes promoters reduce their stakes for meeting the regulatory norms for example Uday Kotak has sold his shares of the amount 6900 crores to reduce his stake from Kotak Mahindra Bank to 26.1%

ICICI the bank sold 4% stake in ICICI Lombard to strengthen the balance sheet for bad loan burden adjustment.

Sometimes promoters sell their shares for a personal reason also.

But suppose, promoters are exiting from the company then it is a negative impact on the stock.

What should be the promoter’s holding in the company?

As per Sebi's guideline for the public limited company, the shareholding should be 75% by the promoter and 25% by others it may be public, mutual fund, FII or DII. For FII (Foreign Institutional Investment) limit is different for different stocks.

Let us understand the promoter holding in the company, suppose public shareholding is 25% and promoter holding is 75% is it good or bad?

It’s bad because there is no institutional investment in their stock. As these institutional investors like FII, DII, Mutual fund etc. are not interested in this stock they don’t see any future growth of the company.

As per the study report if the promoter holding is between 35-60% then it is good a stock If the promoter holding gone below 15-20% then it is not a good indication for that stock. And between 20-35% it is borderline. So you should not invest in a stock in which promoter holding is below 20%.

But in some companies, the promoter stake is 0% like Larson and Turbo but the FII, DII and mutual fund have more stake in the company.

If FII stake is very high then that stock is bullish or bearish?

There might be both ways as if FII stake is high then demand that stock is very high, FII is very much interested and they are not able to buy further. But there may be disadvantages also suppose if FII is getting out from the market for profit booking then the stock in which FII have an invested huge amount and if they sell these stocks then those stocks get the very low price. When FII is investing in the stock then the market will be bullish and when FII is selling the stock then the market will have become bearish

So what retailor An investor should do?

1. An investor should analyse the reason behind rising or decreasing promoter stake

2. An investor should track on the behavioural pattern of promoters

3. If any promoter sell their stake in the large deal then the investor should track the reason.

4. Investor should analyse the pledging data which is easily available on any web site like www.moneycontrol.com.

5. Read the research the report, Broker’s report.

PEG ratio: Understanding the PEG ratio in stock fundamental analysis.

2020-09-05T18:14:00.001+05:30

PEG ratio: Understanding the PEG ratio in stock fundamental analysis.

Buying a stock with fundamental analysis is a wise decision and may not repent in the future for the good investor.

In order to buy or invest any stock, there are a number of tools available. One of the primary or basic tools is to know the P/E ratio but what you understand by the P/E ratio?

We come to know from the P/E ratio is that any company’s share price is high or low compare to other competitors in the peer group. But right P/E for the company depends upon the growth of the company. The relation between PE and growth is understanding by the PEG ratio.

PEG ratio is called Price to Earnings Growth Ratio.

For example:

if company ABC whose current share price is 10 and it has earned a profit of 10 lakhs for the year and it has outstanding shares in the market is 10000/-(ten thousand) then it’s EPS will be

1000000/10000 = 100

P/E ratio = 100/10

= 10.

If company XYZ whose current share price is 10 and it has earned a profit of 20 lakhs for the year and it has outstanding shares in the market is 10000/-(ten thousand) then its EPS will be

2000000/10000 = 200

P/E ratio = 200/10

= 20.

And PE for the same type of Industry is 15 then which stock is to be bought, At a glance, we will think of company ABC. Is cheap and the company XYZ is expensive. But is it the correct analysis?

It depends on the company’s growth.

Let us understand the fundamentals behind, what does share price of the company represents?

· The share price represents the market estimate (value) of the company.

· The net present value (NPV) of the company.

§ For example, if a company earns a profit of 10 /20/30/50 lakhs profit in the subsequent years. It will represent the net present value and gives the market capitalization and

§ Market Capitalization/No of shares = Share price. And thus growth is more important to increase /decrease the share price.

§ So future growth of the company is very important to estimate the company’s valuation.

Here comes the importance of the PEG ratio.

PEG ratio = (P/E ratio)/ Growth Rate of future earnings

Let us understand by another example:

FMCG Company A financial statements:

	Y5	Y4	Y3	Y2	Y1	Future Growth
EPS	100	110	120	160	200
Growth %	10	12	15	22	29
P/E	12	15	16	27	28
PEG	1.2	1.25	1.066667	1.227273	0.96

· PEG should not be more than the profit growth rate and

· When you compare profit growth ideally you should consider 3 years or 5 years of historical data.

· The PEG ratio should be around 1.0.

· In the above example, the expected future growth is considered by the average of 3 years growth then as per the PEG ratio, the stock price is slightly undervalued. In this case, if we consider 5 years' growth then it is slightly overvalued.

· Pharmacy Company in which earning is regular in nature.so PEG ratio to be used where earning is regular and stable.

· The PEG ratio is useful for non-dividend paying company.

Interpretation of PEG ratio

· When the PEG ratio is less than 1 then the company’s stock is undervalued so it can be considered for buying.

· When the PEG ratio is more than 1 then company’s stock is overvalued so it can be considered as selling.

· If the PEG ratio is equal to 1 then it is fair value stock.

· If the PEG value is < 0.5 then it is strong buying signal.

· If PEG values> 2 then it is a strong selling signal.

Limitations of the PEG ratio.

· Growth forecast maybe wrong.

· Past growth may not be replicated.

· PEG doesn’t consider Dividends.

· Not a good metric for asset-heavy businesses like real estate, telecom because the share prices are very fluctuating. And in this case, the P/B ratio is useful.

What is P/B ratio? When to use and when not to use?

2020-09-04T13:23:00.001+05:30

What is the P/B ratio? When to use and when not to use?

Investors are using many methods before investing in any stock in order to evaluate the objective of the investment The P/B ratio is one of them But is very dangerous ratio as if you don’t know about this stock where to use and where not to use? If you use it wisely then it will be more beneficial and if you made slightly any mistake then it will create a mess up.

Sometimes it is difficult to analyze the earnings of the company like some times the growth of the company is negative for the current a year and in the future, It is expected for handsome returns it is not making losses every time in such cases P/E ratio will not give the proper direction in such cases P/B ratio is useful to analyze the stock price.

So let us know about the P/B ratio.

Price to Book ratio (P/B ratio) = Current share price/Book value per share.

The relation between share prices is how many times the share price with respect to book value.

Here Book Value = Net tangible Asset – Liability

You called it a net worth of the company or shareholder’s equity as per account.

Asset means Net the tangible asset of the company as per account like a property like land, machinery, vehicles, and infrastructures, etc.

Tangible asset do not include brand, technology,

Liabilities means paying of money to others like interest to bank in case of a loan or any debt,

In simple language if you sell a company’s all asset and pay the liabilities then what is remaining is a book value.

Tangible Asset= 100	60.	Net worth or Shareholder equity
Tangible Asset= 100	40	Liability

Here Book value = 100 – 40 = 60

Means if the company gets bankrupted then shareholders will get only 60. But this is the total book value.

Suppose No of shares = 20

B. V. per share = Book value / No of shares.

= 60/20. = 3.

So, Her P/B ratio = Current Share price / Book value per share

Let us assume the current share price of this company as on today is 30 then

P/B = 30/3 = 10

Another formula to calculate P /B ratio is = Total Market Value/ Total Book Value

Here total market Value is total market capitalization on NIFTY or SENSEX

Market capitalization is = number of shares X share price.

If we calculate here we will get = 20*30/ 60 = 10.

What this value indicates:

· For 1 Rs of the net asset, you are paying 10 Rs more premium to that share.

Why Market is ready to pay a premium on Book Value?

1. Perception of future growth of the company

2. Value of intangible asset like Brand, Technology Copyrights, Employee, Leadership, Strategy etc.

When to use P/B ratio?

· You cannot apply this ratio to each Industry.

· You can use the P/B ratio: For Asset of heavy Industries e.g Manufacturing, Oil & Gas, Chemical Industry, Infrastructure, Real Estate, etc.

In the above case, the P/E ratio may not be useful but the P/B ratio will be useful and in this case, P/B will be lower.(Book value comes in the denominator of the formula)

· While evaluation of the P/B ratio it is also to be consider the quality of the asset whether it is appreciating or depreciation asset.

1. Appreciating assets like land, Gold, Investment etc.

2. Depreciating Asset are Machinery

If P/B is less than 1 what does it indicates?

· There may be bad news from the company or A lower P/B proportion can imply that the stock is underestimated or something is in a general sense amiss with the organization. This proportion gives you a thought in case you're paying a lot for what might be left if the organization defaulted on some loans

When not to use the P/B ratio?

· For technology & Service Industries: Software, Services, and Consulting, etc. as in this case the tangible assets are very minimal, intangible assets are more like technology, brand, employee so it's P/B remains always high because the book value is very low. So in this case the P/E ratio is useful. ( For P/E ratio please visit my earlier blog)

Let us examine by taking current market data.

Please see the snapshot of Reliance Industries ( Taken from IIFL website) Here you will get the current market price and book value also. It will be:

2086/685 = 3.04.

Let us examine by comparing peer (same type of) industries like IOC.BPCL etc.

Sr No	Industry	Current Share Price	Book Value	P/B ratio
1	Reliance Industries	2086	670	3.11
2	BPCL	409	154	2.65
3	IOC	85	100	0.85
4	HPCL	200	190	1.05
5	MRPL	32	45	0.71

In the above example, P/B for Reliance Industries is higher than the others, because in reliance Industries other types of assets included JIO, Petrochemical, Refinery, Life Sciences, etc. So it will remain always on the higher side. This value indicates that the market is paying a premium of 3.11 times more.

So Always compare P/B ratio of peer Industries before investing in the stock.

Using the Price-to-Earnings Ratio to Assess a Stock: Guideline with examples

2020-09-02T22:19:00.006+05:30

Using the Price-to-Earnings Ratio to Assess a Stock: Guideline with examples

For investing in the stock market for long term investment one should carry out the fundamental analysis by yourself of the stock before investing in any stock. You should not rely on the tips and recommendations from the broker or anybody.

There are many ratios that are being calculated to make better decisions for investment into a particular stock. So, to carry out the fundamental analysis the P/E is the first ratio to be calculated but for that, you should know certain terms.

The P/E ratio which represents the valuation of the stock and gives us the direction for proceeding the decision. But before directly going for the P/E ratio first let us understand the EPS which is required to calculate the P/E ratio.

What is EPS?

EPS is nothing but the earning per share means the income return from a single share.

It is defined as the company’s net profit divided by the number of shares

EPS = Net profit/No of Common Shares

The net profit is calculated after deduction of taxes (Profit after Tax –PAT)

For example, if a company let us say ABC incurred profit after-tax is 100000 and having a number of shares in the market is 10000 then its EPS will be 100000/10000 = 10.

This 10 represents the income per share for that year.

To carry out the fundamental analysis one should consider the EPS value for last consecutive 5 years this will represent the direction of the growth /loss of the company.

A higher EPS gives the direction that more value and people will attract towards investment because they will think that this is a profit-making the company, and people will get confidence to invest in that company

EPS helps in financial statement analysis and calculations.

PE Ratio:

Before investing in any stock one should know that the stock price is overvalued or undervalued. For example, if you have a choice of two residential property in which you would like to invest suppose one property is having the value of 25 lakhs and it gives 10000 (ten thousand) rent and another property is of 30 lakhs and it gives rent of 15000/- then where you will invest, naturally one will decide to invest in 30 lakh property though investment is slightly high but it gives 50% higher returns from the other property. The same fundamentals are applicable in stock also.

P/E = Price per share/EPS.

Here price per share means the market value of the share.

Let us say one company whose current market share value is 200/- and its EPS is 10 then P/E will be 20.

What this PE ratio indicates?

This 20 indicates that for getting One rupee income from this company’s share one has to pay 20 times more amount. i.e. One should have to pay 20 rupees to get the income of one rupee from this stock.

Why PE ratio is important?

1. Stock Valuations

2. Is the stock overvalued or undervalued?

3. It also gives idea for entry or exit from the stock.

4. Comparison of a company with the sector.

5. Financial analysis with different ratios.

Let us understand by Example.

Company ABC		Company XYZ
I IEPS	10	EPS	20
Price	100	Price	400
P/E ratio	=100/10 = 10.	P/E ratio	=400/20 = 20.

And Sector P/E =18

In the above example company ABC stock is cheap and Company XYZ stock price is slightly expensive. This is because the sector PE is 18 In this case low PE doesn’t mean that company’s share is a recommendation to buy or Company XYZ is not to the recommendation to buy some times expensive share can be bought how?

Let us understand by the following example.

Company ABC

	Year-1	Year-2	Year-3
EPS	10	11	12	· company EPS is growing by 10%
Price	100	110	120	· Price is also growing @ 10%
P/E ratio	10	10	10	· P/E ratio maintained at 10.

Company XYZ

	Year-1	Year-2	Year-3
EPS	10	20	40	· Growth is doubling here
Price	100	400	1600	· Price is also increasing with a high margin
P/E ratio	10	20	40	· P/E ratio also getting doubled.

In the above example what would be the decision to buy?

· Company ABC P/E low but growth is also low. It is growing @ 10%

· Company XYZ P/E ratio high and growth is also high it is growing @ 100%

Conclusion:

Company XYZ has a better future the prospectus and it has high potential to grow hence it will be beneficial to buy the XYZ company stock.

Company ABC is slow-growing company and hence has no potential to grow further.

Another example of a low PE ratio. ( Negative growth)

	Year-1	Year-2	Year-3
EPS	80	60	40	· company EPS is declining
Price	2400	1200	400	· Price is also declining
P/E ratio	30	20	10	· P/E ratio declining

In the above example, PE is low and also growth is negative. So it is not advisable to buy the stock.

	Year-1	Year-2	Year-3
EPS	10	25	50	· company EPS is growing fast
Price	100	375	1000	· Price is also increasing
P/E ratio	10	15	20	· P/E ratio not increasing as per growth

In the above example company growth is high as well as EPS is also high but P/E ratio is not increasing that fast that P/E ratio is moderate. This may happen in cyclical Industry for example in construction Industry it may have a high business in tow years but in subsequent years it may not do that much business. In this case, the P/E ratio will increase as expected.

So PE is dependent on so many factors like the type of Industry, so before investing in any stock and always identify the reasons for the PE ratio. Generally

Low P/E

1) Low P/E is for an undervalued stock

2) Low growth or negative growth

3) Future prospects are not great

High P/E

1. Stock is overvalued

2. High growth

3. Great future prospectus.

How to check the P/E ratio the right way?

· Always compare stock with competitive Industry and industry average PE

· Do not compare different companies PE to buy or sell for example Software Company should compare with the software industry and not with the Auto or Metal sector industry.

· Why P/E is high or low

· Growth is sustainable or temporary

Always Remember:

· Low PE means not to buy

· High PE means not to sell

· Always compare PE with other companies of the same sector

· Do not compare different companies PE to buy or sell

· Always compare stock with competitive Industry and industry average PE

There are two types of PE

1. Trailing PE: On some websites, it is written near the P/E ratio as TPM means trailing per month. It is derived from historical data. It is a more authentic value as it is based on historical data.

2. Forward PE: It is estimated data. It is not much authentic value, it is an estimated value.

Market PE:

There is also market PE like NIFTY PE it can get you in any website. As per statistical data, the market PE is on an average remains around 18

The economic survey related the market PE as if the nifty is more than 21 then it is overvalued and if it is below 16 then it is undervalued.

It indicates that if the nifty PE is more than 21 then the prices of nifty stock have moved a lot faster as compared to the earnings of the nifty company. Historically it has shown that if the market PE goes higher than one above 18 then it gets corrected.

Share Market Basics & fundamentals: Beginners guide for investment

2020-09-01T22:32:00.001+05:30

Share Market Basics & fundamentals: Beginners guide for investment

Image By: Image by pixabay.com/users/PIX1861-468748

Investing in the stock-market always scare too many individuals as there are lots of misconceptions, myths about the stock market. Many people said that it is gambling does not go for it. But is it a real thing? Unless and until you analyze yourself you will not believe that the share market is not gambling. It is one kind of business. But before investing in the share market let us understand its basics then you will realize the actual scenario.

Before going directly in to share market let us understand

What is share and how it is formed?

In India following types of business entities are available.

· Sole proprietorship

· Partnership

· Private limited company

· Public limited company.

The sole proprietorship is related to a single individual having a small business like a shop owner. He is responsible for all the profit or loss.

Partnership: Two or more than two persons who contribute to starting the business is a partnership. Whatever profit or losses in business will be shared by themselves as per their agreement. Here the investment amount is not large.

Private limited company: When two or more than two partners start their business with a large amount of capital and forms a company is a private company. All partners are responsible for profit or loss like in partnership only thing is here the investment amount is more than in partnership business.

Public limited company: Whenever any private limited company grows its business and require a higher amount of money or capital they can get it from bank/financial institute, but borrowing from bank/financial institutes require to pay the interest so they may feel to share some of the ownership to the public so that they can raise a large amount of money and implement their future plan for the development of the business. This is how share comes in the picture.

That means a share is a unit of ownership of a company that may be purchased by an investor. So for the investor who purchases the share gets the ownership of the company as per his percentage shares he is holding with him.

What is share market?

Share market is a place where shares are being sold or buy.

There are two types of share market.

1) Primary market

2) Secondary Market

Primary Market: Whenever any company go to the public for the first time by raising IPO (Initial Public Offer) as per SEBI’s rules, regulations, and guidelines. It is done in the primary market means the company directly sell their share to investors.

Secondary Market: After listing the IPO, Traders are transacting between themselves to buy or sell the shares in the secondary market i.e. on the stock exchange. Means people are buying or selling the shares between themselves on the stock exchange. This means they are not dealing with the company directly like.

These shares are traded on NSE or BSE. (These are two primary stock exchanges in India) i.e Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). These are regulated by Securities and Exchange Board of India (SEBI).

The first stock exchange was formed in Europe in the 16^th and 17^th centuries. But they were interested in bond selling or buying and not equity.

In the 18^th century the first stock exchange was formed in philipadia America were they allowed to sell or buy shares. The NYSE (New York Stock Exchange formed in 1792.

What is SEBI?

It is a central government-approved body that controls the stock exchanges from any fraudulent transactions or any activities by any parties or company. This was established in 1988 and given statutory power in 1992 through the Sebi act 1992.

Stock Exchanges in India.

NSE

Nation stock exchange established in 1992. Here more than 2000 companies are listed.

BSE: Bombay stock exchange is established in June 1875. and 5000 companies are listed here.

The all-share transactions are done through Demat Account which is compulsory.

The Demat account which holds all your shares, bonds, mutual fund in electronic form i.e. dematerialized

A form like a bank account and these are maintained by CSDL or NSDL. All records are maintained by these two depositories in electronic form.

How the share transactions processed?

Though the share transactions are done on the stock exchange but they are not able to manage all transactions hence here the broker comes in picture.

The broker is SEBI registered representative or financial advisor who carries all buying and selling of shares on behalf of the client by charging the brokerage charges.

There is another type of broker who is not a registered broker but acts as the agent of the registered broker

There are again two types of broker 1) Full-service broker 2) Discount broker

Full-Service Broker: Who gives all financial transaction services and keeps following with clients but there brokerage charges are higher.

Example: ICICI Direct, HDFC Securities, Share Khan, Motilal Oswal, Ventura, Angel Broking, etc.

Discount Broker: Who just guides online and do not follow up with the client, where the client is responsible for all transactions. Their brokerage charges are lower compared to a full-service broker.

Example: Zerodha, RKSV, Paisa.

The share processing is carried out through three accounts .i.e. Bank Account, Trading Account, and Demat Accounts and these are interlinked with each other. As you buy any share the funds from bank account will be transferred to trading account and shares will be transferred to Demat account by the broker and vice versa for selling off the shares.

Indian stock market timing:

Start 09:00 end 015:30 hrs.

Pre-open trading session starts from 09: 00 to 9:15 where no transaction takes place only orders are placed in NSE or BSE on 50 stocks of the NIFTY index. And normal stock trading option starts from 09:15 to 15:30 hrs.

What is SENSEX?

Sensex is an indicator of performance of top 30 companies from all sectors listed in Bombay stock Exchange calculated on the average of these 30 companies.

NIFTY is an indicator of performance of top 50 companies from all sectors listed in National stock Exchange calculated on the average of these 50 companies.

Sectors defined in the stock market:

1) FMCG

2) Bank

3) Auto

4) Pharma

5) IT

6) Metal

7) Media

8) Reality

9) Oil & Gas

10) Telecom

11) Health

12) Power.

Index i.e. Sensex or Nifty is also defined on Market Capitalization

Market Capitalization of any company is means the= share price X share price.

1) Large Cap 2) Mid Cap 3) Small Cap

Large Cap: the Company whose market capitalizing is more than 20000 cores

Mid Cap: the Company whose market capitalizing is more than 5000 cores and less than 20000 cores

Small-Cap: the Company whose market capitalizing is less than 5000 cores

Basics of Trading

Trading is done in two types 1

§ Equity

§ Derivatives

1. Future

2. Option

§ Call

§ Put

Equities are for any numbers from one number to the max.

Derivatives are derived from equities but in derivatives a certain number of equity lot is decided.

Common Terms used in Shares Market.

Stop Loss: A predefined order to sell the stock when it reaches a particular value of the stock this is to limit the loss or gain.

Intraday: When any share sells on the same day it is called intraday.

Delivery of Share: When you buy any share it will get deposited in your Demat account after two days (T+2 days) this is because of the transaction time period from transferring from one account to another account. This is called the settlement period.

BTST: Buy sell today and sell tomorrow is called BTST

STBT: This is related to the derivative. Sell today and buy it tomorrow. This is not possible in cash market.

Bonus Share: If the company makes more profit than expected then it may decide to issue bonus shares to the existing shareholders to increase the dividend pay-out.

Dividend: If the company makes a profit and if it has sufficient capital for further improvement then board of directors can decide to give part of the profit in cash to existing shareholders.

Stock-split: Whenever the company wants to increase transaction in share market in order to increase the liquidity, then it may decide to split the share face value. This will increase the number of shares. This mostly happens when the share price of the company goes high, in that case, people are reluctant to transact at a high price and if the company splits the stock resulted in an increase in number of shares and this will lead to a reduction of share price in that case many people can transact in the share market. But this does not affect the market capitalization value.

Bull and Bear Market:

if Sensex or Nifty is expected to go on the higher side then it is called a Bullish market and if Sensex or Nifty is expected to go on the lower side then it is called as Bearish market.

Same fundaments applicable to stock price if the stock price is expected to rise then it is called bullish and if it expects to on lower side then it is called bearish stock price.

Market Trend: The market direction tells us the market scenario.

52 weeks High and Low: If the share price increased to the highest the level at which it has traded during the previous 52 weeks level then it is called 52 weeks high and if it reaches to lowest level l at which it has traded from the previous 52 weeks level then it is called 52 week low.

All-time High/Low: The highest traded value ever since the listing of the share is called All-time high. And the lowest traded value ever since the listing is called all-time low.

Upper Circuit: The stock exchange set the price limit for all the individual shares on the given trading day. The low as well high limit varies from 2%, 5%, 10% or 20%. It is decided by stock exchange selection criteria. Whenever the highest price of that share reaches it is called the upper circuit and whenever its lowest price reaches it is called a lower circuit. This is for the particular trading day only.

This is to restrict the high volatility of the share market whenever any news gets published for that particular stock.

Volume: Volume indicates the total transaction which includes buy or sell of a particular stock on a particular day.

Senior Citizen Scheme: Eligibility, Interest Rate and its features

2020-08-31T17:30:00.000+05:30

Senior Citizen Scheme: Eligibility, Interest Rate and its features

The SCSS scheme is the most reliable and risk-free investment for the senior citizen. The retiree who retires from the job get their hard-earned aggregate money at a time but due to tax system implications, they could not understand where to invest? Though there are plenty schemes are available in the market but each scheme has its limitation and risk associated with it and these people are more worried about their future due to stopping of the source of income so they more rely on the hard-earned money in their life so the government has introduced the senior citizen saving scheme in 2004. This scheme is not a saving scheme like others but it gives high-interest rates than the other saving scheme. Since it is government-sponsored the risk factor is negligible.

Let us understand what is a senior citizen saving scheme? Who are eligible for the scheme? And other features of the scheme.

Who can invest in SCSS?

The person who has retired from the company as per company rule or retired under the voluntary retirement scheme at the age not less than 55 years can invest this scheme but the maximum limit of investment is 15 lakhs.

The person retired from (Not civilian defense employee) is also eligible for this scheme provided he has completed 50 years of age and should satisfy other conditions stated in SCSS. The maximum limit is the same for them all.

The person who has completed the age of 60 years can also invest his money immaterialise the source of his income.

All these conditions are applicable to the citizen of India and not applicable for NRI (Non-resident of India)

Where you can get this scheme?

You can invest money under this scheme in the post office, public and private bank also. The current interest rate under this scheme is 7.4%. The maximum interest offered under this scheme was 9.3% in the financial year 2012-13.

The features of the scheme.

· The interest is revised in every quarter of the financial year. Since it is decided by the government and government decided on the factors like inflation rate, economic condition, and market rates.

Quarter-wise history of the interest rate under this scheme.

Timeline	Rate of interest
1st Quarter of The financial year 2020 – 21	7.40%
4th Quarter of Financial Year 2019 – 20	8.60%
3rd Quarter of Financial Year 2019 – 20	8.60%
2nd Quarter of Financial Year 2019 – 20	8.60%
1st Quarter of Financial Year 2019 – 20	8.70%
4th Quarter of Financial Year 2018 – 19	8.70%
3rd Quarter of Financial Year 2018 – 19	8.70%
2nd Quarter of Financial Year 2018 – 19	8.30%
1st Quarter of Financial Year 2018 – 19	8.30%
4th Quarter of Financial Year 2017 – 18	8.30%
3rd Quarter of Financial Year 2017 – 18	8.30%
2nd Quarter of Financial Year 2017 – 18	8.30%
1st Quarter of Financial Year 2017 – 18	8.40%
Financial Year 2016 – 17	8.50%
Financial Year 2015 – 16	9.30%
Financial Year 2014 – 15	9.20%
Financial Year 2013 – 14	9.20%
Financial Year 2012 – 13	9.30%
till 2012	9.00%

Tenure period of the scheme: The tenure of the scheme is 5 years. However one can extend further for three years only once. But Upon extension, however, interest rates applicable at that quarter would apply

Constant fix Income

Once you invest in this scheme the interest rate remains constant throughout the tenure period even though the rates are revised. The new applicable rates are for the individual who is investing in a particular quarter.

For example, Mr. X has invested Rs. 10 Lakh in SCSS on 11th January 2019. The interest rate offered under the scheme for the 4th quarter of Financial Year 2018 – 19 was declared at 8.7%. Hence, his deposit would continue accruing interest at the rate of 8.7% throughout the maturity period even though it was revised and altered to 8.6% in the 3rd quarter of FY 2019 – 20. But those individual who wants to invest now i.e. In Aug 2020 they will be offered an interest rate of 7.4% only.

Type of Account and nominee;

The eligible individual can open his account in individual or jointly but the joint holder should be the only spouse. He can also nominate his survivor in their joint account. And after the death of first joint holder, other account holders can continue to operate the account. But on account of his death, the amount will be given to the joint holder. The nominee will get the amount only when both the account holders are diseased.

Also A senior citizens can invest up to Rs 15 lakh in an SCSS account. This account can be held jointly with one's spouse. I.e. suppose Mr. A and his wife Mrs. A can jointly invest a maximum of 15 lakh in the SCSS scheme with the first deposit holder Mr. A

And Also Mrs. A can invest in SCSS scheme maximum 15 lakh rupees jointly having first name holder of her i.e. Mrs. A. And joint holder Mr. A. So, a total of Rs 30 lakh can be invested by you, and your wife in two jointly-held accounts provided the SCSS eligibility conditions are satisfied.

Premature withdrawals and account closure

The premature withdrawal facility is also available in this scheme like a savings scheme like a fixed deposit in the bank. Like bank is charging a 1-2% penalty for premature deposit same clause is applicable for this scheme also. Under this scheme, if the amount is to be withdrawn for any reason after one year opening of the account then a 1.5 % penalty will be charged and if the amount to be invested after 2 years then a 1% charge will be applied. But for extended account i.e. extension after 5 years, there will be not any penalty charged.

For example, if Mr. X deposits Rs. 10 Lakh in Senior Citizen Savings Scheme on 1st March 2018 and closes it on 6th February 2020, he will have to bear a penalty of Rs. 15000.

However, if the investor is deceased before the maturity of their account, no penalty will be charged.

Quarterly disbursal of interest

The SCSS account holder will get interest amount payment on 1^st working day of every quarter only i.e. April, July, October and January.

For example, if Mr.X deposits Rs. 10 Lakh in SCSS in the 4th quarter of FY 2019 – 20, he will earn:

Rs. [(1000000 * 8.6% /4] or Rs. 21500

Hence, Mr. X is eligible to earn approximately Rs. 21500 as interest for 20 quarters on the dates mentioned above.

Mode of deposit

An individual can deposit money in cash if the amount is less than 1 lakh but if it is greater than 1 lakh then he has to pay it by cheque.

Loan Facility:

No loan facility is available under this scheme.

Account transfer:

If account holder wishes to transfer his account from one branch to another then he has to pay a nominal fee of Rs 5 (Five) per lakh.

Security of capital

SCSS is initiated by the government hence it is highly secure and risk-free with a guarantee.

Tax Implications of Senior Citizen Savings Scheme

Tax deduction under section 80C is applicable to this scheme. But as per the present income tax rule if your interest earned is more than 50000/- (fifty thousand) then you will have to pay the TDS as per the guideline.

The interest received is, however, subject to taxation as per the applicable slab of the concerned taxpayer.

For example, if Ms. X earns Rs.60,000 annually as interest from SCSS and her total income in a year amounts to Rs. 4 Lakh, then the interest will be taxed at a 5% rate; his tax outgo on account of SCSS interest income, thereby, would be Rs. (60000 * 4%) or Rs. 2400.

Documents Required to Apply under SCSS?

An individual needs to produce the following documents to open an account under SCSS –

· Aadhaar Card

· PAN card

· Electricity bill

· Birth Date proof/senior citizen card

2 passport-sized photographs

These documents need to be self-attested

How does inflation affect fixed income: Let us Talk

2020-08-30T18:56:00.000+05:30

How does inflation affect fixed income: Let us Talk.

Image by pixabay.com/users/mohamed_hassan-5229782/

Many people are depositing their money in fixed deposit of the bank because of the no risk, hassle free procedure and expecting for good returns. Is it really happen?

We have to consider it by two ways either for safety, security or as an investment.

The young generation should think from investment point of view and elders think it from security, and risk free investments with expected returns. For elder people from risk free investment is okay but from expected return it is a dicey question.

But present fixed deposit risk is up to only 5 lakhs as per Deposit Insurance and Credit Guarantee Corporation (DICGC) guideline (from current year-2020)

Let us examine from expected returns or investment point of view.

India’s latest inflation rate is on rising trend, it touches to 6.09% in the month of June 2020. The savings and fixed deposits are as of now varying between 3.0 to 6.7s max as below.

HDFC	3.00% – 6.25%	7 days to 10 years
ICICI Bank	3.25% – 6.25%	7 days to 10 years
Axis Bank	3.50% – 6.75%	7 days to 10 years
SBI	3.30% – 6.50%	7 days to 10 years

The difference between the inflation rate and fixed deposit interest rate is very narrow that means people are actually losing their money than earning the in fixed deposit.

What is inflation?

Suppose you have got Rs. 1000 in your savings bank account and let’s say that the bank is giving an rate of 1 per cent. This effectively implies that within a year, your account would have Rs 1010. Although initially sight, it looks as if you earned Re 10, it’s not really the case. If within the same year, the speed of inflation was, say 5 per cent, it means you'd require Rs 1050 to possess the same buying power that you simply began with. So although you’ve gained a ten rupee, you’ve lost your buying power. This effectively implies that if your savings are growing at a rate slower than the rate of inflation, you’re losing money. and therefore the wider that gap is, the heavier is your loss.

Let understand by actual calculations.

Formula

Where

V = Present Value, n = Holding Time, I = Interest Earned Each Year,

P= Principal, r =inflation factor.

Let’s find out the value on a fixed deposit using the above formula. The details of the fixed deposit is mentioned below:

• Deposit Value (P): Rs.100, 000.

• Interest Rate Offered: 6.00% p.a.

• Period (n): 5 Years.

• Inflation Rate (r): 6.09% p.a.

Here we will consider two case like 1) Interest payable yearly and 2) Interest + maturity payable after the completion of tenure:

• CASE-1: INTEREST PAYABLE AT THE END OF EACH YEAR

As stated above the inflation rate r=6.09% then by investing money into fixed deposit for 5 years what will be returns from the fixed deposit.

The above data shows that in year zero, the cash flow is negative (-ve) Rs.1.0 Lakhs. Because the money is being invested into the FD. In the succeeding five years, the interest @6% p.a. flows in. In addition to this the principal amount also flows back-in at the end of the fifth year.

To calculate the Present Value of these cash flows, the mathematical formula will look like this.

Present estimation of all incomes occurring between year zero and the future five years is Rs.- 37 (negative) As the worth is negative, it implies that the venture does not merit spending-in. Why this is occurring?

Due to the negative impact of inflation (@6.09% p.a.). Had the inflation rate be lower than the "interest rate” offered by FD's, available worth would have been positive.

At the end of the day, our Rs.100, 000 will be more fragile by Rs.37 following five years. If you don't mind note that this same impact as above is going on even after it remained contributed for all the five years

CASE 2 – INTEREST + PRINCIPLE AMOUNT PAYABLE AT MATURITY

Here same assumptions will be applied i.e. inflation rate is considered as 6.09% Deposit amount is 100000/- and rate of interest is 6% and tenure of deposit is 5 years.

Let us see practically by calculation:

Here: 33,822 = [1, 00,000*(1+6%) ^5 – 1, 00,000]

The above data shows that in year zero, the cash flow is negative (-ve) Rs.1.0 Lakhs. This is the year where the money is being invested to buy the FD. The next cash flow happens only after the end of fifth year. This will be interest plus the principal (Rs.1, 33,822).

To calculate the ‘present or current value’ of these cash flows,

“How much “net extra cash” this fixed deposit is going to bring-in into our pockets after five years – considering the impact of inflation? The net extra cash flow will be again in negative (-423). In other words, our Rs.100, 000 will be weaker by Rs.423 after five years

Here we have not considered the tax deduction case. The TDS rate on fixed deposits (FDs) is 10% if the interest amount for the entire financial year exceeds Rs 40,000 for AY 2020-21. For the above example there will not be any TDS applicable however for higher amount it will be applicable and hence effective returns on fixed deposit will again get decreased. It will also depends on the taxable slab also.

So, in order to keep purchasing power as earlier Rs 1 lakh should grow at an after tax rate of 7% the Rs 1 lakh will be converted to Rs.1,40,255/- in 5 years so that at least he would get some positive returns than the inflation provided the inflation rate remains steady as stated above ( 6.09%).

For the individual who is in 10% income tax bracket should get returns at 8%, for 20% and 30% tax bracket individual should earn @ interest rate of 8.75 and 10.14% to overcome the inflation.

Conclusion: Hence, fixed deposits are not wealth investment for long period. This is applicable for the younger generation it is a great saving option.

But for elder people i.e. Senior Citizen it will be useful from the safety, security risk point of view off course they should not rely totally FD interest. There are other options available who gives higher returns than the FD like senior citizen scheme, corporate deposits, NBFC, Housing Finance, Debt mutual fund etc. But before investing they should check the reliability like ratings, background etc.

How to Invest in Gold?Option of Gold Investment.

2020-08-26T21:35:00.001+05:30

How to Invest in Gold?

If we buy gold in physical form, there is some loss in it, then we should not confuse it in the investment form that we are buying to use it and what are the reasons

First, we get making charges

15:20% of our loss is right there

Second, there comes the problem of storage there, if you keep the storage at home there is a risk of theft if you keep it in the bank, then its cost has to be given.

The third problem comes when we are buying purity from jewelers, so how much adulteration is there that we do not know

Income problem comes there is no income

So what can be optional for gold?

This is how we will discuss five alternative

1. Physical Gold Investment

2. Digital Gold

3. ETF: an exchange-traded fund

4. Gold Mutual fund

5. Sovereign-Gold Bond

But, every investment has some pros or cons and has its use

We will see which investment will be right and we will try to identify which is the best from all by comparing risk and reward review.

· the first the option of physical gold here, we are not talking about jewelry. Contact us of gold biscuits and coins

If you invest in a biscuit or a coin, there is no problem with impurity here because here you invest in 24-carat gold, there is not even a second design and making charges but the storage problem also come here if you keep it in the house. So the risk remains if you keep it in the bank, then there is a cost, then to question it,

Another option has come nowadays.

You must have seen many apps such as Google pe Phoneme, Kuvera, SHCIL, Paytm You can buy gold from the stock exchange.

In how a digital gold works, inside it you can invest in one rupee, In digital gold as much as you have invested, whatever collection they have, they have to buy 50 kg of gold from the 3 company.

1. MMTC- PAMP.

2. The second company is Safe Gold,

3. The third company is Augmont: The Company is the refining and minting company. It stores gold near it inside secure vaults.

You can buy and sell as much as you want within Digital Gold, so the liquidity is very high, you can take delivery even if you want it, but for delivery, you have to invest a minimum point of 5 to 1 gram. You can invest for 5 to 7 years. For example, MMTC gives an option of 5 years. After 5 years, you have to take delivery of it, or you can sell it the sailing price will be the current price at that time.

There are no storage charges are charged at all, there is no charge inside the MMTC, or it seems very minimal as if there is an investment below 2 grams inside Safe- Gold, after 2 years, 0.05 charges are charged after 2 years.

In digital gold, you can invest up to 50000 comfortably, on top of that, you have to give KYC

if you invest in Stock Holding Corporation of India Limited, where your minimum investment is hounded and there you Getting KYC done is essential from the beginning.

So let's talk about the investment of gold ETF:

Our ETF is an exchange-traded fund like a mutual the fund operates in the same way it also operates, collects money from the public, does it from the company and puts that money inside the securities and for the EFF.

If the NIFT has the ETF, then the Nifty puts money within the same weightage as the stock is there. If Debt ETF, then the money invests in government securities. Similarly, there are ETFs of gold. Gold follows the gold index. Gold ETF put money directly in gold mining and Refinery Company and also invest some money from zero to 10% debt securities for their security. But to invest in ETF you must have a Demat account

The fourth option Gold mutual funds: Gold mutual fund invest in ETFs. And if you do not have a Demat account then you can take the option of a gold mutual fund. What does gold mutual fund do differently? If you invest in an ETF, then it can be called Fund of Fund, but if you put money in Gold ETF, then your cost becomes -steady.

The fifth the option of Sovereign-gold-bonds. This is a more secure option from all as RBI issues the sovereign gold bond.

Now we will compile the investment options in detail.

If you want to compute returns, then we have to see how much the cost is coming first. Who gets more in some cases, due to which our returns are reduced and our returns depend on the cost.

Cost	Physical Gold	Digital Gold	Gold-ETF	Gold Mutual Fund	Sovereign Gold Bond
GST	3%	3%	-	-	-
Storage, Transaction Delivery	-	2-3%	-	-	-
Expense ratio	-	-	0.5-1%	0.5-1..5% +0.5-1.)%(ETF)	-
Exit Load	-	-	-	1-2% (< 1 year)	-
Brokerage, DP, STT, etc	-	-	Negligible (Zerodha/Upstox)	0 (Zerodha/Upstox)	0 (Zerodha/Upstox)
Returns	40%	40%	40%	40%	40%
Additional	-	-	-	-	2.5-3%
Effective Return	37%	35%	35%	30%	52.5%

If Physical has to talk about Gold at 3:00% GST, even inside Digital Gold, you have to pay three% GST and there is no GST inside EPF and sovereign-gold bond

The transaction and delivery charges in Physical Gold form It does not have, but when you go to invest in digital gold it takes two to three percent because if you convert it into a coin then you will incur some making charges, other than that there may be storage or transaction charge and if you deliver it together then Can also be charged, we can say two to three percent. Gold ETFs cannot be recharged within Gold Mutual Funds and the sovereign-gold bonds,

if you talk about the expense ratio, there are no additional expenses in physical gold and digital gold But because someone has to manage the fund inside the ETF, it will charge management fees. It ranges from 0.5 to 1%.

For Gold Mutual Funds. It is charging 0.5 to 1.5% Management Fee. It takes place here because it invests inside ETFs and additionally here. The fees are charged twice. Taking the management fees of ETFs as well, the fee of 1% is looking extra, so what can the average hold? Two percent will be charged. Gold bonds do not incur any fees

Consider the exit load, then it is just for gold mutual funds. if you withdraw money before 1 year, then there is a load from 1:00 to 2:00, there is no exit load inside the gold bond.

Now about DP Charges STT etc. It can be for gold ETF. Because if you buy from a broker, there is no charge if you buy a direct mutual fund inside a gold mutual fund. If you buy a gold bond, then there is no charge in it

If the returns are calculated then let us assume an 8% increase in the year. From the investment year, then in 5 years, the price by simple calculation has gone up by 40%, according to this we have got 40% returns. You will have to add inside the sovereign gold bond. Here we get an additional 2:50 to 3:00% annual interest which gives you by RBI then if we calculate then it will, not 2 .5%. It will be 2:50 * 5% equal to 12.5%.

If we compute returns, then 37% returns physically gold form.

in digital gold Within 35%

An ETF, 35% percent

For computing returns on Gold Mutual Fund, it will come around 30% as 1% management fees for f Mutual Fund, 1% is going to ETF, then for 5 years, it will be 10%, so 10% out of 40% So your effective returns have come in 30% of the gold mutual fund.

For sovereign-gold bond, there is no cost in any way, plus here you get annual interest. So for 5 years, it will get an additional 12.5 percent returns here so it comes around at 52.5%. If it is good to invest in bonds,

Is it better to invest in bonds?

Let us compare the rest of the factors also.

Other Factors	Physical Gold	Digital Gold	Gold-ETF	Gold Mutual Fund	Sovereign Gold Bond
SIP	No	Yes	No	Yes	No
Liquidity	High	High	Moderate	High	Moderate
Minimum Investment	0.5-1 gm	Rs. 1/-	1 Gm	Rs-500/-	1 Gm
Delivery	Yes	Min 0.5-1.0 Gm	Min 1.0 Kg	No	No
Loan	< 50g coin	No	No	No	yes
How to invest?	Dealer, Bank, Jeweler	Paytm, Gpay Phonepay, Kuvera SHCIL NSEL. MMTC-PAMP, Safe-Gold Augmont	Demat Account Zerodha Upstox & other brokers	Zerodha Groww Paytm Kuvera	Bank Post-office SHCIL Demat(secondary-Market)

SIP: In physical Gold there is no option of SIP. but you can do it in digital gold, you do not get this option even inside Gold ETFs. This option is available in Gold Mutual Fund. There is no option inside the bond. You can invest in sovereign gold bonds only RBI declares the issue.

Liquidity, you can give it comfortably in physical gold, so here liquidity is high.

There is also the liquidity of digital gold because through the app, you can sell comfortably,

Liquidity in gold-ETF is moderate. In ETFs why it is not so popular in India, It is popular in the western country. It is not well marketed.

In gold mutual funds, can you easily sell gold? So here also liquidity is high.

In sovereign gold-bond, then liquidity is moderate here because the transaction volume of gold is not so high here.

Minimum investment, physical gold, you can take minimum point 5 or 1 gram in old,

In digital gold, you can start with one rupee,

in the case of ETF, you should get an investment value of a minimum of 1 gram cost.

It is a gold mutual fund you can start from ₹ 500,

Even inside the sovereign gold bond, now you have to start with a minimum of 1 gram.

Delivery, you have to take delivery in physical gold

In digital gold, you get a minimum of 0.5 to 1 gram delivery.

An ETF, you have to take delivery of the minimum 1kg and 1kg is a very large amount of gold

If we talk about the gold mutual funds of then delivery is not possible

In sovereign gold bond delivery is not possible.

Loan: You can take a loan against coin but it should be below 50 gm in physical gold. There is an RBI guideline for that and it is only in the form of a biscuit.

You cannot take a loan on it even inside digital gold.

You cannot take a load even within ETFs and mutual funds.

You cannot take a loan in a gold mutual fund.

But within the sovereign gold bond, you can take it.

How do we buy it

Physical gold: From Gold dealers buy through the bank

Digital Gold: through the App.

Gold ETFs have to buy a Demat account.

A mutual fund can be bought through mutual fund apps.

Sovereign gold bond: You have to buy gold bonds. Only when RBI issue id declared you can buy t it through the bank through the post office, you can buy from the stock holding corporation

In the secondary market, you can buy them through the stock market. If you have bought in between them, you can now take the through of your Demat account.

Conclusion: Considering the above factors you can invest in the option which is suitable for you.

Has Gold been a good Investment?

2020-08-21T17:38:00.005+05:30

Has Gold been a good investment?

Gold has always been a popular investment even today. If we look at the value of the investment by gold, then it will come in the second number after real estate. If we talk about the returns of the last one dead year, then returns are also very good at 25-30%.

On the other hand, the stock market has gone down and if the stock market returns are not good, then it seems that gold can be a good investment, on the other hand, someone says is Gold Is not for Investment, gold is not a productive asset it will not give any other income, which of them is correct?

So we look at the historical comparison of how gold's and stock's returns are. We will see them on risk and returns.

So in this article, we will look at the gold and stocks investment and we will see if we have to invest in gold or not if we want to do then how much should we do?

First of all, what kind of investment is gold?

Gold is a commodity, there is no income-producing asset inside it if we compare it to other assets which are income-producing assets for example,

• If you invest in real estate, you can get regular income from rent.

• If you invest in the farm, you can get income from the crop.

• If you invest in stocks, then that is the underline asset. The business that a lot of people work in it and give income product and that business is grown because of that, the price of that stock also goes up consequentially the business continues to grow,

So the net the question comes if the gold is not income-producing is an asset, so why does its value go up?

Its value goes down due to demand-supply only

• Price is driven by demand and supply for example in India if demand always remains, and we have been buying gold because of this the price of gold keeps going up.

• If this demand stops, the price of gold can go down and go.

So you will think that if gold is not producing income then you should not invest but under it is not like that we should invest in gold, so why should we?

The business that a lot of people work towards the income-producing product and that business is grown because of that the price of that stock also goes up,

So the net question comes if the income inside gold Producing is not an asset, so why does its value go up?

Its value goes down due to demand-supply only

Price is driven by demand and supply, for example, India if demand always remains, and we have been buying gold because of this the price of gold keeps going up.

For example, if this demand stops, the price of gold can go down and go.

Why we are buying the gold there may be dual purpose as for use and as an investment

When we are buying it for consumption, that is, we buy it as gold jewelry, then we buy it to use, we will not consider it as an investment because here making charges have to be paid

As you exit the jewelry shop, then the value of 20 to 25 cents is reduced.

The second big problem is to remember the storage of jewelry, so keep it in the house

You cannot do much investment to keep at home because of the risk remains or you will keep it in the bank locker, you will have to pay the cost in the bank locker.

The third problem is when you buy jewelry of impurities, it does not become more than 22 carats.

Gold jewelry is made of 22 carats or less, with impurities added to it. Because gold is softer,

So gold in the form of jewelry is not an investment

But apart from this, we can buy gold as an investment

We have 4 ways

The first is physical gold, it is not gold jewelry, but it is in the form of coin or biscuit

Here you can get 24-carat gold. Here also the problem of stores definitely comes, if you keep it at home, then the risk of theft will remain. if you go to the bank and store it, then costs will come, because of this So, for this reason, we have come to the option of digital gold nowadays.

We have three options:

So our second form would come is that ETF of gold investment which we know in the name of exchange-traded funds, ETF works in the same way as Mutual Funds on the one hand, as Mutual Fund invests in stocks, ETFs invest themselves in physical form inside Gold. ETF stores gold at their end and take a value of that fund from you if you invest it in ETF fund, but to invest in an ETF, you have to have a Demat account.

The third option for gold investment is a gold mutual fund that is a kind of fund of funds. Those who do not want to invest directly in the ETF, those who do not want to operate a Demat account, they can invest in the Gold Mutual Fund, but here also some cost comes.

We have the fourth the option is sovereign bond gold bonds, RBI issues gold bonds within which you can invest.

Here we will compare the returns from gold and stock histologically.

How long have we been calculating returns, we should always look at the graphically, how has it performed the investment.

So here I have plotted a graph of gold and nifty. Let's understand that the orange color is our nifty and that of blue color is that of gold the point is, looking at the graph we will observe in the year about 2020, gold is going up fast here. Can you see the pattern of the stock on it? It is going down fast. Have we seen such a pattern even before that in 2008 It was the same as Nifty went down and Gold came up sharply? You see the annual return. Straight from 2006 to 2020

Year	Gold	Nifty
2006	20.26	39.86
2007	15.28	53.18
2008	22.17	-51.84	Financial Crisis
2009	22.67	68.85
2010	22.71	17.25
2011	31.09	-24.09	Europe crises in Greece, Italy & Spain, Late effect of 2008 crises
2012	12.12	27.35
2013	-4.99	5.93
2014	-8.6	31.44	News of China slows down. NPA was increased in INDIA
2015	-6.04	-4.08	News of a lot of companies may be bankrupted
2016	11.13	2.8
2017	5.18	28.75
2018	7.51	4.09
2019	23.67	11.66
2020	24	-15	Corona Effect

I have highlighted the pattern here when the Nifty has dropped sharply, then Gold has gone up. Similar returns have come in 2011 nifty was down by- 25% and gold shot up to 31%.

In the year 2014-15, then the Sensex went down and again gold shoot up here

If we talk about 2020, then here also Nifty was down by about -15% and Gold has up by 24%

So why? It is happening, so once in a while, we try to analyze the pattern.

See the financial crisis came here in 2008, the Nifty went down sharply and gold went up after this and we had a crisis in 2011, the debt crisis of the world in the year 2008, that crisis came in Europe, it was delayed in 2011. Much was seen inside Italy, how much was there inside Spain, inside Greece, there was a great debt crisis in Europe. See also at that time, this Nifty had also gone down and gold had come up the same pattern in 2014 -15 there was news of China's slowdown. NPAs were happening too much inside India. Some of the companies started getting bank-corrupt here. If we look here, the Nifty went down here and gold came up

By 2020. The crisis came here too due to coronavirus pandemic effect which has shaken the whole world, here the Nifty went down very fast and gold came up very fast,

In 2008, at that time there was a lot of crisis, people were thinking for safe investing at that time. If we were talking about 2011, people felt that the economy was going down fast, the gold started rising.

If more NPAs started increasing in India within 2014-15, then people felt that the economy could also go down from here, then people also invested more in gold here.

Because of the sentiments of the people whenever the stock market goes down for the safety of their future people are diverting their money to gold.

As gold is being treated as a safe investment, it is also a historical reason that gold was always used in the form of currency from ancient. But, when many countries started their currency in printed form, but still gold was maintained as a standard, and the government could not print unlimited currency for many years, but in today's date, the gold standard was almost abolished.

Any country can print currency unlimited numbers, But if you can have any number of currency, then it will mean more currency circulation, then inflation increases. Increasing inflation means that hyperinflation can also occur. It has also been seen in many countries.

When there is too much crisis in any economy, then the chances of taking hyperinflation are increased, that is, things become more expensive, you will have to spend more money to buy any goods, but if you have gold then you can buy anything by spending gold hence the value of that gold will not fall, because of this, gold is called a safe investment.

Now we will compare gold with stock. Compute every investment on the old 4 parameters

Return

Risk

Liquidity

Volatility

Returns: In the stock market, you will see long term returns and hot and average you get 14 to 15 percent returns. But if you talk about gold, you get a 10 percent return from it, then gold is not a wealth creation asset for money, Gold is not a wealth creation asset.

Stock is a wealth creation asset. The stock is an income-producing asset because the business can grow if the stock is priced too low then you will lose your income but why should we buy the stock?

Risk: The risk inside the stock is more than the risk inside the gold, but it is not too low

For gold which we saw from the graph, the price of gold used to go up and down, which means that the volatility is quite high and A standard method of calculating risk is also by considering the standard deviation, that is, no matter how much the asset returns, if you see how much of the asset goes down from the average value, then we will see there is also a risk in gold but it is a Moderate Risk compare to stock.

Liquidity: The liquidity for both is high. You can spend it anytime. You can give physical gold at any time. For digital opted gold like a gold mutual fund, ETF you can give the exchange point also in the stock market only thing is, if we talk about the gold bond, you do not have given it back for 5 years because of the locking period here a little liquidity problem comes.

Volatility. Stock and Gold is both of them, there is a lot of volatility, and it depends on which timeline you are observing the returns. Sometimes Nifty returns may be higher in any period, but if we cross the long term then stocks always give more returns and they beat gold,

Conclusion:

Then our final question comes, we should invest in gold, so why? And how much gold should we invest I?

You can invest in gold at least 5 to 10 percent of your portfolio why should we keep it? Gold always works for hedging. Gold does not create long term investment it is a very good hedging instrument hedging what is the meaning of hedging?

Hedging means reducing the risk We reduce our risk so that the risk can be subsidized with gold in the times of distracting when there is a crisis, then we lose a little bit in stock as the stock prices get tremendously down and during this period it will not be a wise decision to sell the stock but you can subsidize it with gold as during this period gold prices get shot. as we have seen historically above.

COVID-19 IMPACT and OPPRTUNITIES

2020-08-16T17:04:00.000+05:30

COVID-19 IMPACT AND OPPORTUNITIES

Description: Image By: Image >Pixabay

The COVID-19 pandemic has had unbelievable impacts on not only business, the economy, society but on our lifestyle, behaviour also. This COVID-19 pandemic effect probably remains for long-term. Mainly for labour education, healthcare, supply-chain, Industrial operation etc.

Everybody in the world knows that COVID-19 is pandemic and it is unknown to all because of this many countries has forced to implement lockdown and stopped all the activities including all services, Industrial operation, transportation .As everybody was clueless, they don’t know from where to start and where to stop. There was no forward path to control other than lockdown.

But every coin has two sides. Hence COVID 19 pandemic has an adverse effect, as well as some, has the opportunity.

Here are the main challenges as well as opportunities for the various Industry. I have elaborated here for IT industry, Real Estate, Chemical Industry and Logistic operations.

IT Industry:

Challenges and Adverse effect

· The main impact is on hardware business, software business, and IT services.

· It is believed that the growth of the IT industry is expected to go down by 3-4% in the year 2020-21. Hence the main challenge is for recovery but all depend on downstream projects.

· Many IT industrial companies have reduced their workforce due to non-availability of projects

· Due to the lockdown situation many IT industries have encouraged their employees to work from home but due to hook up of personal network it has created cyber threats like, critical data security issues and may lead to the opening of business secrets and hence further future challenges.

Opportunity:

· Many IT industry has claimed that the work from home system increases the productivity of the employees. Hence it will be thinking of the future of work solution.

· IT industry can assure their clients for un-interrupted service due to work from home system implementation they got the flexibility on business continuity and security means in any situation IT industry can help to the clients.

· Making use of next-generation technologies, like AI, faster processing and better accuracy are often provided by advanced analytics and AI to spot trends, patterns and intelligent forecasts about the spread of the Coronavirus. IT vendors should specialise in building/improving capabilities on AI and large Data as new challenges and use cases emerge

Real Estate:

The sector, which has been battling a slowdown for the past five years had started seeing some green shoots of recovery earlier this year. However, the coronavirus outbreak has created many challenges.

Adverse effect:

· the lockdown that ensued has led to a collapse in sales, halt in construction at ongoing projects and derailment of latest project plans this is because of potential homebuyers—staring at possible job loss and pay cuts—are likely to remain far away from the market,

· Also, co-working spaces, a hotdog segment until recently, may struggle to seek out takers within the near-term amid the necessity for social distancing.

· Due to standstill of the economy, the real estate rate may remain on the lower side for the long term may be at least next three-four years.

· Delay in delivery of project this will lead to the financial crisis may create business sustainability issues for many builders.

· The lockdown has impacted the paying guest and co-living operators. The organised ones are especially hit because they need minimum rental guarantees with their landlords

· Organised players are going to be preferred as they're better positioned to deliver a clean and hygienic environment to students and dealing professionals.

Opportunity:

· Reduction in lower house sale rate as well reduction in home loan interest rate lead to purchase the home for the potential buyer who can afford to.

· The adoption of digital technology among developers is probably going to urge a lift thanks to this crisis. With home buyers likely to avoid the site visits, developers would wish to leverage augmented reality and computer game to offer homebuyers a glimpse of their projects.

· Preference for ready-to-move-in One of the trends that might emerge out of this crisis would be that there would be an increase in preference for ready-to-move-in properties

Chemical Industry:

Adverse effect”

· The lockdowns have adversely affected the demand for chemicals and petrochemicals due to a decline in consumption and shutting down of producing plants, supply chains and distribution networks

· Due to non-availability of the labour force also impacted the industrial operation. This has created the financial burden also to many Industries like increase in labour cost, Increase in medical expenses on testing the employees as per government guideline.

· Due to migration of labours created workforce to limit in number this has also impacted productivity.

· Exports demand has impacted due to port handling and international logistic issues.

Opportunity:

· Indian Industries has received temporarily global order due to interruption in supply from China.

· Packaging Industries, especially food packaging, sanitary and medical applications have emerged a growth in business due to high health-care focused activities.

· The sharp decline in petroleum cost has benefited to petrochemical Industry who are using a petroleum product as raw material.

Beware of stock-market scams !!!

2020-07-29T18:53:00.003+05:30

Beware of stock-market scams !!!

Image by publicdomainpictures.net

Description:

Investors invest in stocks are that they provide the highest potential returns than the other options. But like someone once said, “Stock markets are the toughest place in the world to make easy money in the long run” This sentence is remembered when someone has loses his money However he gets carried away to fraudster with the hope of recovering the loses. Below are the types of frauds that are being run in the market.

Tip and recommendation plan for guaranteed income:

Some fraudster claims through social media like Facebook, WhatsUp messages, SMS that they can help to recover the losses in share market and gives a guarantee of income provided they should buy their different paid advisory service plans. They will quote you two type’s plans like a basic plan and an advanced plan.

Naturally, the person who loses his money will prefer to with basic plan. Once you hire their paid service they will give the recommendation of stock to invest without carrying out any research. Once you buy the recommended stock you will realize that the stock has not given the return but you lost money, So you will be called to the adviser but they have the answer ready that “ I have already told you that you should buy this advance type service but you didn’t listen., so if you want to recover the losses you go for this option” So again you get trapped in his advice and again same story get repeated but when you try to call him you will never lift the phone instead he will block your number.

But some investors are smart they will ask for free trial service, so what fraudster used another trick like they will choose to say around 100 persons and divide into two groups, what they will do that they will recommend the stock such a way that for first group, they will tell that the stock will rise to a certain amount

But this is not the case for all advisers, as some advisers are qualified, registered with authorized institutes like SEBI in India. But they won’t offer free service and even they won’t quote guaranteed income.

Operating of an Individual’s account.

Some fraud advisers search for very busy people that they don’t have time but are get lured easily for earning money easily. For such a person’s fraudster lure for investing in trading options and convince them that they will operate the account on behalf of them and they will earn income guaranteed as they have their expert team. And they will ask for user id and password. But what they will do that they will purchase the non-genuine stock at higher prices and sell them at a lower price. They will siphon off money from your account to the other account.

But what you will feel that you lose the money in the stock market but this is not the case they are intentionally transferring the money into another account.

Apart from the loss, you are now also exposed to regulatory action. Any such trading activity in your account would be looked upon by the income tax department as money laundering (creating losses to avoid taxes or convert white to black money or vice versa). SEBI considers such trades circular trading. Apart from the monetary penalty that such trades entail, you could potentially be banned for life from the markets by SEBI.

For the above reason, the Finance Minister has imposed a tax of 10% on equity as LTCG (Holding the equity more than a year)

PUMP and Dump Strategy:

This is carried out for penny stocks (The penny stocks means whose value is very low like One to Two rupees). The penny stock liquidity is very low like nothing. In such type of company the promoters, fraudsters along with operators make some strategy like they will buy a large number of shares from the market at a very low price and make the artificial scarcity of shares in the market. And after purchasing a large number of shares send positive messages text messages to investors in forums like promoters are buying the stocks, Company has acquired a huge contract from some other company, any well-established company is going to buy some stakes in the company. So by reading these messages in forums, text emails, some beginner’s get attracted into this fraud and them will

What precaution you should take?

· Never entertain tips and recommendations.

· Learn stock market strategy or working style then only invest after your analysis.

· Do not share your credentials like user id or password. to anybody

· Do not allow to operate your account on your behalf.

· Do not believe blindly.

· Even if you get the tips or recommendation and if you tempted to go ahead please confirm the authenticity of the provider.

· Do not invest in penny stock.

Conclusion: if we listen to Buffett never lose money never lose money never lose money then it's simple if you see something fishy you simply avoid it buying a stock is like buying a second-hand car you see a car and then you have to start researching asking the question of what is odd with the car what doesn't work so that you don't buy something wrong and avoid losing money

Should you buy or rent the property now?

2020-07-26T22:57:00.001+05:30

Should you buy or rent a property now?

Buy or Rent
Image by: Pixbay

While owning a home is typically the nightmare of every person, highly rising property prices, particularly in metro cities, have led people to decide on renting rather than buying. However, for people who can afford to buy a house, the choice between buying and renting is always a difficult one. In the Indian situation, it is observed that people who can afford to buy a house be likely to put more weightage on owning a house and renting is mostly a compromise.

Off-course the perspective of each individual is different. Somebody looks as investment purpose, somebody, etc. from security purpose

There are definite benefits and drawbacks of both the options and some of the advantages are summarized as:

Benefits to Own House:

1. Ownership feeling.

2. No waste of money as somebody feels that paying rent is a waste of money as it always goes to the owner’s pocket.

3. Social security

4. Safety

5. Long term Investment (As the real estate prices get appreciated in the long term)

6. Forced savings

7. Decision maker

8. Income tax savings as per government guidelines.

Drawbacks to own House

1. Restriction on lavish life, you have to cut down the expenses to avoid failure of EMI. As if you fail to pay the three EMI then the bank can take legal action.

2. EMI may get increased as per inflation rates if the loan is not taken on fixed-term this will also tremble your budget.

3. Mental stress till completion of house loan tenure period

4. If job is transferable then you cannot utilize the property as you desired

5. If you lose the job or having business loss it will create huge mental stress

6. You cannot change your house even if your surrounding gets changed and it creates disturbances in your life like erection of metro rail beside your property

7. Adverse effect by a change in the surroundings of the property: Suppose you bought the under-construction property and during that period the property surroundings were clear and you would get proper ventilation as well as sunlight but after a few years any construction works like high rise building/hospitals get erected which will affect all the above factors

8. Health effect: Due to mental stress throughout life ( till completion of a loan tenure period) there may be chances of health issues due to the financial burden

Rented House:

Benefits of rented accommodation:

1. Rent a house is a cheaper option of buying a house

2. More flexibility: You can change your accommodation wherever you suits you.

3. No long term commitments required.

4. Interest is also one type of rent, as you are borrowing money and paying interest.

5. You can rent a property in such a location where you cannot buy the property due to sky-rocketing prices like to purchase a property in a metro city it is highly difficult.

6. Only rent amount is required to pay as other expenses like maintenance cost/ municipal taxes etc. is the responsibility of a house owner

7. No need to cut down other expenses as he can save more money than the house owner. And this saved money can be utilized in other options like the stock market or any other product where you can earn more money.

Drawbacks of renting a house:

1. Renting a house is under the lease agreement, hence it impacts the freedom as you cannot modify, decorate or renovate as per the agreement you have to return the property as it was.

2. For getting a house on rent you may have to involve third-party like real-estate broker hence it may take a longer period to occupy the property.

3. Renting the option will not give returns as whatever rent you are paying is not coming back as an investment.

4. You have relied on the house owner’s will.

5. Impact of freedom due to society’s regulations, this is more related to bachelors.

6. Nowadays it is very difficult to get rent accommodation to bachelors due to society’s regulations.

7. No control on annual rental fluctuations.

8. There is no guarantee that the lease will be renewed when it expires.

Let us analyze the financial implication while deciding to buy or rent the house if you are considering in investment perspective

Suppose Mr. X is working in a private firm whose salary is such a way that his tax bracket is around 20% and he has decided to buy a House of 2 BHK @ to 40,00,000/- (Forty lakh) in an area in which the rent of the similar property is around 12000/- (Twelve thousand).

In order to calculate buying and rent valuation following assumptions has been considered for simplification purposes.

1) HRA benefit considered @ 20% (For simplification process, Maximum HRA benefit is 1,00,000/- only.)

2) Home loan benefit is considered 100% as maximum tax benefit is 2,00,000/- only and he is under 20% tax bracket.

3) Loan the period is 20 years.

4) Loan the amount is considered only 80% of the total value as Bank gives only an 80% loan against the property value. Balance 20% is down payment which is required to be given from the savings or any other source.

5) In renting valuation the expected return from the savings amount is considered @ 8%.(This amount is not to be paid in renting and it is to be paid as down payment amount in case of buying property) The 8% returns are possible only if Mr X invested wisely. Otherwise, he will get only up to 6% as per inflation.

6) The property annual appreciation has been considered @ 8%.

Rent Vs Buy property Valuation

Analysis Period	₹ 20	Years			Unit

Renting			Buying
Monthly Rent	₹ 12,000	Rs	property price P	4000000	Rs
HRA Tax benefit	8%	%	Down Payment	800000	Rs
Actual Monthly rent	₹ 9,600	Rs	Loan Amount	3200000	Rs
			Loan Interest Rate	9%	%
			EMI E	₹ 28,791	Rs
Effective Annual rent	₹ 1,15,200	Rs	Tax Bracket	20%	%
Annual rent Increase	8%	%	Effective Interest rate	7.20%	%
Rent (Analysis period) R	₹ 52,71,778	Rs	Effective EMI (E')	₹ 25,195	Rs
Returns on Savings
			Total Interest payment
Down payment	₹ 8,00,000	Rs	(@ interest rate I)	2846843	Rs
Monthly Saving(S)	₹ 16,791	Rs
Actual EMI - Monthly rent	₹ 16,791	Rs

calculation Below
Expected Returns	8%	%	Maintenance Per Month (M)	2000	Rs
			Annual Increase	6%	%
			Total Maintenance during the analysis period	₹ 8,82,854	Rs
FV of Down Payment	₹ 37,28,766	Rs
FV of monthly savings	₹ 98,90,378	Rs

net savings (D+S+R)	₹ 83,47,365	Rs	Total Cost (C=P+I+M)	₹ 77,29,697	Rs


			property sell after analysis period
			annual Appreciation	8%	%
			FV of property (p)	₹ 186,43,829	Rs
			Net Saving P-C	₹ 109,14,132	Rs

Above calculations clearly show that the net saving on the property is more beneficial than renting the house provided the annual property appreciation is @ 8%. Which is quite possible in metro cities.( Net savings in Renting= 83,47,365/- and Buying savings is 1,09,14,132/-)

Now if you considered for short term like 5 years. Then the scenario will be different.

Analysis Period	5	Years			Unit
Renting			Buying
Monthly Rent	₹ 12,000	Rs	property price P	4000000	Rs
HRA Tax benefit	8%	%	Down Payment	800000	Rs
Actual Monthly rent	₹ 9,600	Rs	Loan Amount	3200000	Rs
			Loan Interest Rate	9%	%
			EMI E	₹ 66,427	Rs
Effective Annual rent	₹ 1,15,200	Rs	Tax Bracket	20%	%
Annual rent Increase	8%	%	Effective Interest rate	7.20%	%
Rent (Analysis period) R	₹ 6,75,832	Rs	Effective EMI (E')	₹ 63,666	Rs
Returns on Savings
			Total Interest payment
Down payment	₹ 8,00,000	Rs	(@ interest rate I)	619973	Rs
Monthly Saving(S)	₹ 54,427	Rs
Actual EMI - Monthly rent	₹ 54,427	Rs
calculation Below
Expected Returns	8%	%	Maintenance Per Month (M)	1200	Rs
			Annual Increase	6%	%
			Total Maintenance during the analysis period	₹ 81,174	Rs
FV of Down Payment	₹ 11,75,462	Rs
FV of monthly savings	₹ 39,99,106	Rs
net savings (D+S+R)	₹ 44,98,736	Rs	Total Cost (C=P+I+M)	₹ 47,01,148	Rs
			Property sells after analysis period
			annual Appreciation	8%	%
			FV of property (p)	₹ 58,77,312	Rs
			Net Saving P-C	₹ 11,76,165	Rs

The net savings on rent property is 44, 98,736/- however net savings on buying property is on 11, 76,165/-). Here renting is more beneficial.

Conclusion:

The buying or renting the property is solely depends on market conditions as some times real estate annual appreciation goes very high and some timed it will not. However, the present scenario is doubtful for the very high property annual appreciation as earlier in the 2001-02 year.

Following maybe the reason for the low real estate appreciation

· Implementation of new policy like RERA, GST

· COVUD-19 a pandemic effect that creates a huge loss of business.

So at least it will take 2-3 years to streamline business, hence it is doubtful that real estate will appreciate for 2-3 years.

But for the individuals who don’t have a single home and who can afford to buy can take advantage of lower home loan rates. This does not form an investment perspective but from a safety and security perspective. The final decision lies with him/her.

Other benefits and drawbacks are already covered above.

How to fill ITR form for the AY 2020-21

2020-07-22T14:47:00.001+05:30

How to Fill ITR form for the AY 2020-21.

ITR form and criteria of filling appropriate ITR.

Sr No	Particulars	Criteria
1	ITR-1	For individuals being a resident (other than not ordinarily resident) having total income up to Rs.50 lakh, having Income from Salaries, one house the property, other sources (Interest, etc.), and agricultural income up to Rs.5 thousand Not for an individual who is either Director in a company or has invested in unlisted equity shares
2	ITR-2	For Individuals and HUFs not having income from profits and gains of business or profession (Please see Rule 12 of the Income-tax Rules, 1962
3	ITR-3	(For individuals and HUFs having income from profits and gains of business or profession) (Please see rule 12 of the Income-tax Rules,1962)
4	ITR-4	For Individuals, HUFs and Firms (other than LLP) being a resident having total income up to Rs.50 lakh and having income from business and the profession which is computed under sections 44AD, 44ADA or 44AE [Not for an individual who is either Director in a company or has invested in unlisted equity shares]
5	ITR-5	For persons other than- (i) individual, (ii) HUF, (iii) company and (iv) a person filing Form ITR-7 (Please see Rule 12 of the Income-tax Rules,1962)
6	ITR-6	For Companies other than companies claiming exemption under section 11 (Please see rule 12 of the Income-tax Rules,1962)
7	ITR-7	For persons including companies required to furnish return under sections 139(4A) or 139(4B) or 139(4C) or 139(4D) only (Please see rule 12 of the Income-tax Rules, 1962)

Modifications in Income tax due to the COVID-19 effect.

· Government to impart Rs 50,000 crores liquidity by reducing rates of TDS, for non-salaried specified payments made to residents, and rates of Tax Collection at Source for specified receipts, by 25% of the existing rates”

· “Among other measures, Due date of all income-tax return for FY 2019-20 will be extended from 31st July 2020 & 31st October 2020 to 30th November 2020 and Tax audit from 30th September 2020 to 31st October 2020”

· “The Period of ‘Vivad se Vishwas Scheme’ for making payment without an additional amount will be extended to 31st December 2020”

· “Extend the last date for income tax returns for (FY 18-19) from 31st March 2020 to 30th June 2020.” Note: CBDT department has revised the due date till 31st July 2020.

· “Aadhaar-PAN linking date to be extended from 31st March 2020 to 30th June 2020 (Extended till 31st March 2021).”

· “Vivad se Vishwas scheme – no additional 10% amount, if payment made by June 30, 2020 (Extended till 31st December 2020).”

Online filing of Income Tax returns has become very stress-free and suitable today, allowing one to do it by themselves instead of depending on a tax practitioner. So any individual who is eligible for the ITR-1 form can be filled his/her ITR online easily. For others like businessmen, companies, institutions, they have their own recruited or hired consultants.

What is the Income Tax Return (ITR) 1 Form?

ITR 1 Form is filed by the taxpayers and the individuals being a Resident (other than Not Ordinarily Resident) having Total Income up to INR 50 lakhs, having Income from Salaries, One House The property, Other Sources (Interest, etc.), and Agricultural Income up to INR 5 thousand. (Not for an individual who is either Director in a company or has invested in Unlisted Equity Shares). Also to note down, from now onwards, as mentioned by the tax department, furnishing PAN and Aadhaar card details on the official website of the Income Tax Department is mandatory.

The income tax department has notified ITR forms for taxpayers based on their source of income in order to create a simple tax compliance structure. Therefore, you are required to furnish the return as per the source of your income.

Eligibility to File ITR 1 Online For AY 2020-21

ITR-1 is filed by the taxpayers whose income is up to Rs 50 lakhs from below-mentioned sources:

· If the income is from one house property (the case where losses of previous years are carried forward are not included in this ITR)

· If the source of income is pension or salary

· If the source of income is other sources

· If the clubbed income of minor or wife is shown, then ITR-1 can be filed only in case their source of income as mentioned in the above points.

Not Eligible for ITR 1 Filing Online for AY 2020-21

· Such a person will have to file return in ITR-2 or ITR-3, as the case may be.

· The taxpayer whose income is more than Rs 50 lakhs is not eligible to furnish this form.

· Non-residents and RNOR (Residents not ordinarily resident) cannot file ITR 1.

· Taxpayers who have two or more house properties are not eligible.

· Assesses having income under business or profession head are not eligible.

· Taxpayers who have long or short-term capital gains

· Taxpayers whose income from agriculture means is greater than Rs. 5,000

· The taxpayer who claims relief for foreign taxes paid or claim double taxation relief as mentioned in section 90/90A/91.

· ITR 1 cannot be used by residents having any asset (including financial interest in any entity) located outside India or signing authority in any account located outside India.

Penalty for Late Filing of Income Tax Return on the failure of the deadline

The government compromises a four-month time to its citizens to consolidate complete details of their income and file the income tax returns for every assessment year. The tax filing period for the previous year starts from the 1 April and stretches up to 31 July. The income tax filing process takes a few minutes to file ITR. Paying taxes on time is important, but at the same time filing the return before the due date is equally important or one must be ready to face the consequences. Read more to know about the penalty for the late filing of the income tax return.

Starting from April 1, if you file your ITR post the deadline of July 31, 2018 (unless the tax department extends it), you will be liable to pay a maximum penalty of Rs 10,000.

As per the new law, a penalty of Rs 5,000 will be levied if the return is filed after the due date but before December 31 of that year and Rs 10,000 post December 31. However, as a relief to small taxpayers, if your income is not more than Rs 5 lakh, the maximum penalty levied will be Rs 1,000.

Modifications Details in ITR 1 Sahaj Form

· INR 50,000 standard deductions

· No applicability on directors of any company

· No applicability on individuals holding unlisted equity shares of any company

· No changes in computation

· ITR 1 & ITR 4 offline availability for senior-most citizens aged more than 80 years

· Section-wise return filing is segregated within the normal filing return and response to the notice

· Salary bifurcation will be done as the standard deduction, entertainment allowance and professional tax

· Pensioners column has been added in the nature of employment

· Details of Employer like TAN of Employer (mandatory if tax is deducted), Name of employer and Nature of Employer), Address of Employer, Town/City, State, PIN/ ZIP Code has been inserted under the head income from salary.

· Deletion of details of Return of Income filed in response to notice u/s 153A and 153C.

o A new deduction of 80CCC, 80CCD (1), 80CCD (1B), 80CCD (2),
80DD, 80DDB, 80E, 80EE, 80EEA, 80EEB, 80GG, 80GGC, 80U has been added in the deductions column.

· Point of the amount of rent which cannot be realized has been inserted under the head house property.

· The individual income from one house property, salaries and other sources summing up to 50 lakhs, this condition retains its place even after changes

Due Date for Filing ITR 1 Online AY 2020-21

· Every year ITR -1 has to be filed on or before 30 Nov of the following year. After that, a late fee under section 234F is levied

· Applicable Income Tax Rates for FY 2019-20 (AY 2020-21)

Tax Slab Rates for individuals less than 60 years of age and HUF

Income Tax Slab (in Rupees)	Tax Rate for Individual Below the Age Of 60 Years
0 to 2,50,000*	Nil
2,50,001 to 5,00,000	5% of total income exceeding 2,50,000
5,00,001 to 10,00,000	Tax Amount of 12,500 for the income up to 5,00,000 + 20% of total income exceeding 5,00,000
Above 10,00,000	Tax Amount of 1,12,500 for the income up to 10,00,000 + 30% of total income exceeding 10,00,000

Tax Rates for Senior Tax Payers between the age of 60 years to 80 years old

Income Tax Slab	Senior Citizens (between 60 years – 80 years)
Up to 3,00,000	Nil
3,00,001 to 5,00,000	5% of income exceeding 3,00,000
5,00,001 to 10,00,000	Tax Amount of 10,000 for the income up to 5,00,000 + 20% of total income exceeding 5,00,000
Above 10,00,000	Tax Amount of 1,10,000for the income up to 10,00,000 + 30% of total income exceeding 10,00,000

Tax Rates for Super Senior Taxpayers above the age of 80 years

Income Tax Slab	Very Senior Citizens of and above 80 years of age
Up to 5,00,000	Nil
5,00,001 to 10,00,000	20% of income exceeding 5,00,000
Above 10,00,000	Tax Amount of 1,00,000for the income up to 10,00,000 + 30% of total income exceeding 10,00,000

(ITR) 1 Online:

ITR 1 is divided into 7 sections where:

Part A – General Information

This section contains details of the following general fields:

· Name/Address/PAN number/Mobile No/Aadhar Number/return filing Details/Nature of employment viz Govt/PSU/Pensioners /Others

Part B – Gross total income

This section contains details related to gross total income:

Part B1

· Details of Employer like TAN, Name, Nature& Address of Employer

· Salary details

· All the allowances which are exempted

· All the value of perquisites

· Net salary

· Deduction in u/s 16

· Income chargeable under the head ‘salaries’

Part B2

· Gross Rent received

· Tax paid to local authorities

· Annual value

· 30% of the annual value

· Interest payable on borrowed capital

· Arrears/unrealized rent less than 30%

o Income chargeable under head ‘house property’

Part B3

· Deduction u/s 57(iia)

Part B4 – Gross total income

· (B1 + B2 + B3)

Part C – Deductions u/c VI-A and Taxable total income

This tab includes all the deductions and taxable total income

Here the deduction limit will be as per inc

incometax act

· 80C,80CCC,80CCD(1),80CCD(1B),80CCD(2),80DD,80DDB,80E,80EE,80EEA,80EEB,80GG,80GGC,80U

· Value of Total deduction

· Total income (B4 – C1)

Part D – Computation of tax payable

This tab includes all the valuation of tax payable

· D1 Tax payable on total income

· D2 Rebate u/s 87A

· D3 Tax after rebate

· D4 Cess on D3

· D5 Total tax and cess

· D6 Relief u/s 89(1)

· D7 Interest u/s 234A

· D8 Interest u/s 234B

· D9 Interest u/s 234C

· D10 Fee u/s 234F

· D11 Total tax, fee, and interest

· D12 Total tax paid

· D13 Amount payable

· D14 Refund

· Exempt income

Part E – Other Information

This tab includes banking details

· IFSC Code of the bank

· Name of the bank

· Account Number

Schedule-IT: IT Details of advance tax and self-assessment tax payments

· BSR code

· Date of deposit

· The serial number of challan

· Tax Paid

Schedule-TDS: TDS details of TDS/TCS

· TAN of deductor/ PAN of tenant

· Name of deductor

· Gross payment

· Year of tax deduction

· Tax deducted

· TDS/TCS credit

Schedule DI – Details of Investment

· The eligible amount of deduction during FY 2019-20 (As per Part C- Deductions and taxable total income)

· Deduction attributable to investment/expenditure made between 01.04.2020 to 30.06.2020

Verification

The taxpayer has to verify and self-attest the form at the last by signing the verification content after entering all the details such as name, parent name and PAN details.

Medium To Online Furnish Income Tax Return 1 (ITR)

An ITR-1 form can be furnished either in online or offline mode. In online mode, either XML needs to be uploaded or the client can directly login to the income tax portal and select the submission mode as “prepare and submit online”. In the case of online filing, some data can be imported from the latest ITR or form 26AS.

Also, super senior citizens (Age of 80 years or more) are exempted from the online filing of ITR.

Offline here means to furnish the return form in paper format.

File ITR 1 Online or Electronically:

While furnishing ITR-1 online, feed the details and e-verify return using EVC via Bank
Account/Net Banking/Demat Account/Aadhar OTP or
Feed the details using electronic medium and send a physical copy of ITR V to Centralized Processing Centre (CPC), Bengaluru through speed post or normal post.

When you furnish the ITR-1 return form using an electronic medium, the receipt will be seen in the inbox of the registered email id. It can also be downloaded from the official income tax website manually. After downloading the acknowledgment, you need to sign the form and then send to the CPC office, Bangalore before completing 120 days counting from the e-filing date. On the other side, it is not required to send the ITR V to the CPC if EVC/OTP option is used.

Important Terms to Realize In ITR-1 SAHAJ Form for AY 2020-21

Notice Number: Notice Number is required to be mentioned when the taxpayer furnishes the return in answer to the notice issued by the Income Tax Department.

Revised Return: There is an option of re-file, so if you have made certain mistakes, you can rectify them again. For the FY 2019-20, the taxpayer can furnish the revised return on or before 31 March 2021.

Advance Tax: If the tax on other income is above Rs. 10,000 in a year, the assessee is required to calculate and deposit the advance tax. This advance tax is to be paid on a quarterly basis such as on, June, December, September, and March.

Annexure-less Return: Annexure-less a return which means it doesn’t require to affix any documents with the ITR-1 Form.

How to select the best option according to you

2020-07-20T14:02:00.001+05:30

How to select the best investment option according to you

Image by /pixabay.com/users/nattanan23-6312362

Every person thinks about his security of him/her and his/her family. For the security of his life, he thinks of earn money in a short time by selecting the option he had in his mind. But there is no legal way to earn money in a short time. So most investors would like to look after the best investment option available to get high returns in a short duration. But for a better return, he has to think of the following three parameters.

Three parameters

Liquidity: How easily can you get money back from the investment is called liquidity

Risk: It is the possibility that you lose your money

Return: How much can money grow

Example: Saving money in the form of cash, Cash liquidity is high because when you need it, it is right there, the risk is low it is not zero because of the possibility of stealing your cash and returns are negative. Suppose if you leave your cash in a locker or anywhere at a safe place then it is not going to increase as its own. And as time goes ahead and ahead the prices of items also get increased as per inflation but the value of your money that is in your hand will remain the same and you will realize that it is not fulfilling your requirement. That is why the returns of cash are negative. With this understanding let us analyze the following investment option.

1. Saving Account: Saving account is a basic bank account that allows us to deposit money and withdraw money all while earning interest. It is very easy to withdraw money from the bank but because of that, we often get tempted to spend which is why with saving accounts, long term investments become a challenge. Liquidity is high because you can take out your money any time you want but every bank has a set a number of financial transactions.you can do per day. Risk is zero your money is safe with the bank if you pick a trusted bank but returns are low. All nationalized banks give an interest rate of 3.25% to 3.5% on saving

Current Account: Current account is mainly for the shopkeepers or traders as they require to transact on a daily basis but you will not get any interest in it. Here the liquidity is high and risk is also low but you will not earn any money.

Please note that even if you keep your money in a savings account you have operated the account within 6 months otherwise again as per government guideline the bank will lock your account and for unlocking there will be a lot of procedure to go through.

Now How to invest in a savings account:

Just select a bank that you like or trust the most, walk-in to their branch that’s near you, and then they will help you open your savings account with minimal documents as per government norms.

2. Fixed deposit: To earn higher interest than savings account you have another option to keep your money in a fixed deposit of the bank. Provided you have adequate money to spare considering your day to day requirement. You will get higher returns in a fixed deposit than a savings account.

The risk is low but liquidity is medium as you cannot withdraw money before maturity and still, you required money for any reason then there will be a penalty on premature that is you will lose interest by 1-2% of the rated investment depending upon the bank that you have selected. Also, you have to pay income tax on beyond certain earned amounts as per income tax rules.

3.Recurring Deposit: This is the third option to invest, here also you will get high returns than savings amount Here you have to deposit money into the bank on monthly basis as decided by you. The liquidity is medium and risk is low like fixed deposit Here also you will be charged penalty by the bank on laps up of installment

4. Fixed Deposit in the listed company: You can earn 1-3% higher returns than fixed deposit in banks but here liquidity is low and risk is high. It depends upon the selection of your company. You can select the company by analyzing its past records but even though the risk remains high as per company performance.

5.Life Insurance: You can invest in life insurance it will secure your life but from investment point of view it is not feasible but from a security point of view it is a good option Here the risk is low and liquidity is medium as you cannot get money back instantly if you required it. However, you will get returns of 6-7 % on maturity. But the duration is very long. But nowadays there are insurance product options available which purely market base is. And it gives high returns also but here again the risk is high and liquidity is low you can decide the product by analyzing the options which are available online you can search on a website like policy Bazar.

6.Stock market: This is another option of investment but here Risk is high, some people have lost everything in the stock market But it has also made some people very rich As a name suggests is a market where you can buy and sell shares of the publically held company. But investing in the stock market again depends on your analysis. You should not invest in the stock market just by tips received from anyone. You should first acquire the stock market procedure and analyze the stock option then go for investment.

7. Mutual Funds: Another option for investment is to invest in a mutual fund: In mutual fund various institution, expert teamwork collects money from us and invest the money into the stock market. The mutual fund also gives higher returns subject to market risk but it has lower risk than investment in the equity market. There are also some products available which have low risk and medium return as these products are invested in debt market and bonds which are not very risky.

In addition to the above, there are some products available for senior citizens and parents who have a daughter and these products are having low risk and high returns but the tenure is long. These products are an investment in RBI bond, Sukanya Yojna.

Some tax benefit products are also available in the market like PPF/PF/NSC but their tenure is also very long.

The least, not the last one is an option on investment in the Real estate but it depends on your requirement. I will write a separate article on it.