Presha Investments

Financial Planning Checklist- Part II

2011-07-09T05:09:00.000-07:00

In Financial Planning Checklist- Part I (click here) we saw goal setting, Tax Planning & Managing Cash Flow’s we continue our checklist starting with Risk Planning.

• Risk Planning

There are two ways planning risk’s one is retaining the risk’s the other is to transfer the risk to insurance companies for example. If the risk of a stolen car worth 40000 is rate a person may decide not to take comprehensive car insurance & retain the risk. Another example is when a rich person whose monthly expense are covered by his investment’s & does not have any future liability like child’s education or marriage may decide not to take a life insurance & retain the risk.

Let’s look at the types of insurance to be considered & choose whether we wish to transfer the risk or retain it

1. Health Insurance

One of the most important types of insurance to have is health insurance. Your good health is what allows you to work and earn money and otherwise enjoy life. If you were to come down with a sickness or have an accident without health insurance you may find yourself unable to receive treatment or even in debt to the hospital.

2. Life Insurance

This type of policy is more important if you are married and/or have children. Your life is valuable because it is what allows you to work and earn an income to provide for your family. When you are gone you create an income gap which could put your spouse or children in financial trouble.
There are policies which combine the two like LIC Life Good Health Policy .For details look at product corner or click here

3. Property Insurance

One type of policy that for most people that is actually mandatory to have is homeowners insurance when you have a mortgage. If you borrow money from the bank to purchase a home they will require the asset to be insured. For many people this insurance premium is built into the mortgage payment. For many people their home is their greatest asset so it is vital to adequately protect it. However we recommend a separate term insurance to cover the loan .More on this in coming mailers

4. Auto Insurance

Another type of policy that is often required is auto insurance. Most states require by law that you have basic auto insurance. While it may be a law, too many people still drive around without it
The basic one is called third party insurance which is mandatory by law & the second optional one is the comprehensive one.

Investment Planning

After deciding on goals & managing the risks we come to investment planning.

• Risk Profiling

Everyone does not have the same risk appetite .For example a young person who has no liability & no need of immediate money can invest large sums of money in equity & can tolerate the negative return & wait till they turn positive.
Secondly a person struggling to meet the ends cannot invest in equity due to the risks associated with it. Hence risk profiling of the individual’s as well as product is a must

• Asset Allocation and Portfolio Construction

Golden rule never put all your eggs in one basket/.This rule easy to understand difficult to implement. Those who have earned in property wall always keep on investing in property. Similarly for other asset’s like Gold, Shares etc. One has to understand every asset growth has a life cycle

• Regular review of progress and Portfolio Rebalancing

Many make the mistake of initially investing in the wrong product & then make another mistake of not reviewing it. Always look at your investment’s at least once a year .My guess is that even Hindu ritual’s like Laxmi Pujan would be intended to bring this discipline in common person.

Coming Soon retirement planning, estate planning & more.

LIC’s LIFE GOOD HEALTH PLAN

2011-07-09T05:02:00.000-07:00

A unique defined benefit Hospitalization Insurance Scheme

For you alone (Principal Insured) or all your family members including parents-in-law, from age 18 to 65 (75 for parents) and 3 months onwards for children
Cover up to 80 years for your family and 25 for dependent children

Hospital Cash Benefit (HCB) – for hospitalization = Initial Daily Benefit amount chosen by you (will increase by 5% every year and No Claim Bonus on completion of 3 years, and will be called Applicable Daily Benefit
Major Surgical Benefit – for major surgeries = 100 times of Applicable Daily Benefit
Day Care Procedure Benefit – for minor surgeries done within one day = 5 times of Applicable Daily Benefit
Other Surgical Benefit – for all surgeries not covered in above two benefits = 2 times of Applicable Daily benefit

Hospital Cash Benefit (HCB)
• For hospitalization of more than one day where surgery may or may not be involved
• Choose between Rs.1000 and Rs.4000 as initial daily cash benefit
• Increases by 5% every year
• Additional no claim bonus of 5% every fourth year
• Less than or equal amount for every additional member as per choice
• Can avail 30 days in year one, 90 days every year thereafter not to exceed 720 days total during the policy period
• Double the cash benefit for treatment in ICU

Major Surgical Benefit (MSB)
• For surgeries that require prolonged hospitalization
• 100 times of applicable daily benefit (including 5% increase and no claim bonus)
• Maximum annual benefit 100% of major surgical benefit per person insured
• Maximum life time benefit 800% or 8 times of major surgical benefit per person insured
• See annexure for full list of MSBs

Day Care Procedure Benefit (DCPB)
• For surgeries that may nor require hospitalization of more than one day
• 5 times of Applicable Daily Benefit
• Maximum annual benefit = 3 surgical procedures per person insured
• Maximum lifetime benefit = 24 surgical procedures per person insured

Other Surgical Benefits (OSB)
• Where surgery is required but does not fall under the MSB and DCPB category
• 2 times of Daily Benefit Amount for each person insured
• Maximum annual benefit = 15 days in the 1st year and 45 days in subsequent years for each person insured
• Maximum lifetime benefit = 360 days for each person insured

Other things to know:
• Optional accident benefit and term insurance benefit
• Initial premium fixed guaranteed for 3 years and revised every 3 years depending on age and health condition
• All members to be added at the beginning except where new members are through childbirth (next policy anniversary), marriage new spouse and parents in law within 6 months and risk cover starts from next policy anniversary)

Emergency Cash Facility:
Only for instances where the treatment is from listed network hospitals and for Major Surgical Benefits alone – 50% of the MSB credited to the bank account to be treated as an advance from the claim amount

Exclusions
• Pre-existing condition unless disclosed and accepted by the insurer
• Routine check ups, cosmetic treatments, epidemics, dental treatment, non-allopathic treatments, reopening of former surgeries, self-inflicted injury, dangerous sports, war, participation in illegal and criminal activities
Premiums:
• Yearly, Half-yearly, of monthly (ECS)
• 30 days of grace for all modes except Monthly where it is 15 days
• Cooling off cancellation 15 days
• Nomination available
• Approximate premium – Rs.1922/- (age 20) to Rs.3768/- (age 50) for males and Rs.1393 (age 20) to Rs.2849 (age 50) for females

What is different from Medi-claim

• Pre defined benefit- No reimbursement, but lump sum paid based on pre-defined benefit
• Not based on expenses incurred
• This will tend to indirectly reduce the Health care cost, which is rising due to cash less mediclaim benefit
• All benefit is dependent on HCB

Termination of Policy

• If policy is issued on a single life
1. Non Payment of premium within revival period
2. On death
3. On Date of cover expiry
4. On exhausting all the life time maximum Benefits Limits as specified above

• If policy is issued on more than one life

1. Non Payment of premium within revival period
2. On death or Date of cover expiry of the PI and if the Policy does not continue with the IS as the PI
3. On death or Date of cover expiry of IS after Policy continues with the IS as the PI after the PI dies or reaches his/her Date of cover expiry
4. On PI exhausting all the life time maximum Benefits Limits as specified above
Treatments in respect of Specific waiting period
1. Treatment for adenoid or tonsillar disorders
2. Treatment for anal fistula or anal fissure
3. Treatment for benign enlargement of prostate gland
4. Treatment for benign uterine disorders like fibroids, uterine prolapse, dysfunctional uterine bleeding etc
5. Treatment for Cataract
6. Treatment for Gall stones
7. Treatment for slip disc
8. Treatment for Piles
9. Treatment for benign thyroid disorders
10. Treatment for Hernia
11. Treatment for hydrocele
12. Treatment for degenerative joint conditions
13. Treatment for sinus disorders
14. Treatment for kidney or urinary tract stones
15. Treatment for varicose veins
16. Treatment for Carpal tunnel syndrome
17. Treatment for benign breast disorders e.g. fibroadenoma, fibrocystic disease

Financial Planning Checklist- Part I

2011-07-01T11:24:00.000-07:00

A. Goal Setting

Step 1: Identify and write down your financial goals, whether they are saving to send your kids to college or University, buying a new car, saving for a down payment on a house, going on vacation, paying off credit card debt, or planning for you and your spouse’s retirement.

Step 2: Break each financial goal down into several short-term (less than 1 year), medium-term (1 to 3 years) and long-term (5 years or more) goals; which will make this process easier.

Step 3: Educate yourself and do your research. Read Money magazine or a book about investing, or surf the Internet's investment web sites.
Step 4: Evaluate your progress as often as needed. Review your progress monthly, quarterly, or at any other interval you feel comfortable with, but at least semi-annually, to determine if your program is working.

B. Manage Cash flows

Step 1: Pay Yourself First
By paying yourself first, you can ensure that you nearly always have a surplus to manage. Establish a fixed amount that you enter into your budget as surplus, or savings. It should be treated as a fixed, essential expenditure that cannot be changed. If, at the end of the month, your budget shows a deficit, then your first course of action is to find areas in your non-essential spending to cut.

A good option is a mutual fund sip or a recurring fixed deposit to discipline you in investment

Step 2: Balance Your Surplus
With a monthly surplus, the decision comes down to how to use it. This should depend on your budget and financial goals. If you have debt, you will want to commit a portion to accelerating your debt reduction. If you don't have a sufficient emergency fund, you will want to contribute to that so you can build up your safety net.

Step 3: Cheapen Your Debt
If your debt payments comprise a significant part of your monthly budget, you should consider finding cheaper forms of debt. If you are good standing with your credit card companies, you are will probably continue to receive offers to transfer your debt to low or zero interest cards. As long as you are not adding to your debt (and you shouldn't have to if you are managing your cash flow to a surplus each month), you can responsibly shift your debt to less expensive cards. This can effectively decrease your debt expense and add to your surplus.

C. Tax Planning

Step 1: Plan AHEAD
Most of the people plan their tax wither in the last month or when the company asks for the of the investment proof typically during the last quarter of the financial year, Planning at the start of the year helps avoid investment mistakes and is not a burden since investments can spread out during the year.

Step 2: Tax investment is like any other investment
Somehow people feel that when it’s tax investment it’s OK to invest in any product without evaluating the return’s or the benefits of the product .Treat tax investment’s like pure investments and invest thoroughly before investing

Step 3: optimize the deductions and exemptions
Know the tax rules .From the obvious ones like sec 80 C,80 D to not so obvious ones like 80 G donation 80 DD deduction for handicap dependents,

see all tax articles on tax :- click here

In the next part of “Financial Planning Checklist” we will see retirement planning, risk planning and more

Tax Special

2011-06-30T11:45:00.001-07:00

What is Tax Planning ?

Tax planning is an essential part of your financial planning. Efficient tax planning enables you to reduce your tax liability to the minimum. This is done by legitimately taking advantage of all tax exemptions, deductions rebates and allowances while ensuring that your investments are in line with your long term goals.

Tax Filing Tips To Avoid Tax Problems

Yes, its that time of the year again when we need to prepare our tax returns. The July 31 deadline is closer than we think. And, to get us in good shape for filing tax returns here is a handy guide with 10 tips to keep in mind.
Fill out your correct Permanent Account Number (PAN) number

We come across 100s of tax filers who fill their wrong PAN details and then get into complications as a result of this carelessness. It might sound obvious, but make sure you put the right PAN details on your form and on any challans used to pay taxes. An incorrect PAN number might also result in a problem in getting your tax refund. And finally, you might have to pay a penalty of Rs10,000 for not quoting or mis-quoting your PAN.

July 31 deadline – avoid coming close to it

Don’t wait till the July 31 deadline, file your return today. You will gain nothing by procrastinating. In fact, if you attempt to squeeze in your return in the last minute you will cause yourself a lot of stress, and are exposing yourself to careless errors that can be avoided if you were to start the process early and leave enough time to review your return to your satisfaction.

If you have any overdue taxes you can avoid paying penal interest on this overdue liability. By starting early, you are also giving yourself the chance to pay off these dues a lot sooner.

Also, keep in mind that closer to the deadline, the tax department servers get overloaded. If you are choosing to e-file your return, you might get delayed if you can’t get connected to the tax department’s server.

Fully disclose all sources of income

Why invite trouble by not disclosing all sources of income you might have? With increasing digitization of financial services and the use of your PAN number for almost all substantial financial transactions, its easy to investigate what are the different sources of income you might have. Yet, many tax filers willingly don’t disclose even interest income earned from one’s savings balance, fixed deposits or small savings schemes. Don’t expose yourself by omitting any obvious disclosure.
Annual Information Return (AIR) details must be filled

ITR forms require you to declare certain types of large transactions such as:

Even if you don’t make these disclosures, its likely that your counterparty might have already done so, and then the mismatch of disclosure might lead to an investigation into your finances.

Single purchase or sale of an immovable property valued at Rs.30 Lacs
Single payment of Rs.5 Lacs or more for acquiring bonds or debentures of a company Credit card payments aggregating to Rs.2 Lacs or more on a single card
Mutual fund purchase aggregating to Rs. 2Lacs or more in a single fund
Cash deposits aggregating Rs.10 Lacs or more in one bank account
Single investment of Rs.1 Lacs or more in shares of a company
Payment aggregating to Rs.5 Lacs or more for investment in RBI bonds

State your correct bank details to ensure timely refunds

You can file for a tax refund if you don’t have a taxable income and you have faced undue tax deduction. In case you are filing a return for a tax refund, then you need to ensure that you have mentioned your bank details correctly, because the refund amount will be credited directly to your account. The following details must be correctly stated on your return: Account type - Savings or Current, account number and MICR code of your bank branch (this is the 9 digit number at the bottom of your cheques).

Save Tax: Claim Deduction without HRA

2010-02-14T17:37:00.000-08:00

With Tax Season on many of us would be calculating our tax liability & one of the deductions available is on rent in the form of HRA

Most of us are aware of the Deduction available with respect to the HRA,

Section 10(13A): House Rent Allowance

You can take advantage of the provisions under this section if you are renting an accommodation. These provisions will not be available to you if you stay in a rent-free accommodation or live with your family or in your own house.

Under Section 10(13A), HRA is exempt to the least of the following:

i) 50/or 40 per cent of basic salary= Dearness Allowance (if, applicable),

ii) Excess of rent paid over 10 per cent of basic salary; and

iii) Actual HRA received.

Now you have changed Jobs and the new company has a policy where they do not have a HRA deduction component in your salary structure making “Actual HRA received “ zero which means that though you may be paying rent you will not be eligible for the HRA deduction.

Recently one of our clients Mr. A Vasani came to us we suggested him to claim deduction under section 80 GG

Section 80GG – Deduction for rents paid.

Conditions for application of Section 80GG

1. The Assessee shall not be in receipt of any House Rent Allowance (Income) Income.

2. The Assessee shall be residing in a rental accommodation.

3. Such rental expenditure shall exceed 10% of the Net Total Income but before considering these expenses.

4. The Assessee shall not hold any residential property on his own name

5. The Assessee or Spouse or any children of the Assessee and in case of Assessee being a member of the Hindu Undivided Family (HUF) ay member of such HUF shall not hold any residential property in the place where the Assessee normally conducts his income earning activity.

This basically means the Assessee to have only one residential accommodation and that too only on rental basis.

The Family members can have property at places other than the place where the Assessee normally conducts the Income earning activity.

Deduction:

If the above conditions are fulfilled then, such amount of expenses exceeding 10 % of the Net Total Income shall be allowed as deduction from the Total Income

However, such an excess shall not exceed Rs. 2000 /- per month or 25 % of the Total Income.\

So if Mr. A Vasani is paying only Rs.12000 as rent per month he will be eligible only for Rs.2000 per month since there is a cap,

Meaning a maximum deduction will be 2000 x 12 = 24000 rupees per year.

If you belong to the highest Tax Slab you save more than 8000 rupees

So no worries if your company does not give HRA you have got section 80 GG for you.

This article is contributed by Suraj Trpathi & the inspiration is Mr.Anand Vasani

What are Futures and Options

2009-01-26T03:40:00.000-08:00

.
First to understand F&O i.e. Future and Options we need to understand what is hedging?

Hedging is an activity which is carried out to reduce or limit a risk against an event .
Let me elaborate with the following examples

Example 1

Say you had a bet with your friend [Say Friend A] that it will rain after 2 days. You had a bet of Rs.100.The next day it becomes cloudy you feel that you will loose the bet.

However there is another friend [Friend B] who believes that due to these clouds it will rain today but will not rain tomorrow. He is willing to bet Rs.50.

So you bet with friend B that it will not rain hence you have reduced your potential loss from Rs.100 to Rs.50 .However in doing do you have also reduced the profit.

So if it rains you get Rs.50 from friend B and pay Rs.100 to friend A.
Thus losing Rs100-50 = 50 rupees.

Now lets take a case when it does not rain so you win Rs.100 & lose 50 Hence a net profit of Rs.50

Example 2

A more practical example is that of airline industry where you know the approximate business in the future and expect the oil price to rise one enters in to a contract that he will buy the oil at Rs. X per barrel. This helps him to manage his finance with more reliability and accuracy. The down side being that if the price decreases then he has to pay higher price as compared to his competitors.

Hence Futures and Options are risk management tool’s its when one enters an oil contract with an intention to sell or book profits the same tools become speculative tool.

This is dangerous when it is done without fully understanding the potential losses.

One of the reasons why sub prime in US occurred was due to the “ leveraging “ option available with the various institutions It’s like you have a job so you take a personal loan and buy an asset on that asset, say a house you take another loan .Thus you have leveraged twice the loan amount you can actually pay.

Even in future and options in stock market you just pay the margin money [the maximum money you can loose or profit like Rs.50 ] & you can trade on much more than the margin amount you can trade Rs.100 in the above example.

As a financial planner’s that an individual should be prepared to loose 100% of the money & this amount should not be included in the financial planning process. This is speculation and Presha Investments does not endorse speculation

We have explained Futures in this article
A related post on Futures and Options coming soon

It Can't Happen to Me

2008-12-08T07:42:00.000-08:00

Dear All,

Taking a moment here for all those who were killed in the recent terrorist attacks and praying for peace to their souls.

It’s ironic how the world has not recognized the threat to terrorism our markets just flickered to that event.

"The tragedy in Mumbai is certainly a devastating blow to the exceptional characteristic of the Indian economy, but I am hopeful that it will not derail the improved macro performance." These are the words of Stephen Roach, the Chairman of Morgan Stanley’s Asian operations spoken in an interview with DNA Money.

It’s unfortunate though that most of us feel “It Can Never Happen to Me” we see it in all walks of life whether profit booking in Stock markets or it is crossing the road somehow we manage to convince ourselves “It Can Never Happen to Me”

Now, I am sure if we look around us some one’s cousin just escaped the ordeal, some one’s brother was in that area and condolences for those who have lost their dear ones. “This too shall pass” and soon RED FM will play regular songs, Candle marches will stop, people will move along.

As citizens of a country we should show our power by voting, as individuals for our dear ones it’s our duty to see that our risks are covered and our responsibilities are completed by us when we are alive. There is a learning from the corporate world we can take TATA’s have not only insured the Taj but they have also insured against losses. So if there is a loss to TAJ it will be borne by the insurance company.

“Some good news for the Taj Mahal Hotel (IHCL) and Oberoi Hotel (EIH) in Mumbai after the recent terror attacks. Insurers have finally decided to cover all the losses, irrespective of whether they were caused by the attackers or by the security agencies that battled them. Under terrorism insurance rules, insurers do not have to pay for the material damage caused by security forces, but only for that caused by terrorists. However in this case, the insurance companies have decided to pay all the losses because it was not easy to separate damage caused by the terrorists and the security forces. While Tata AIG is the main insurer for Taj, Trident is insured by New India Assurance Company. Cover against terrorism is typically offered as an add-on with property insurance that, along with material loss, also covers loss of business till the property is restored. For terrorism cover, Indian companies pay a premium of 22 paise per annum for every Rs 1,000 insured up to Rs 5 bn, 17 paise for every Rs 1,000 insured up to Rs 2 bn and 13 paise for every Rs 1,000 insured above Rs 2 bn. This insurance cover would aid IHCL and EIH in redeveloping their prime property, without further leveraging their balance sheet. It may be noted that the Insurance Regulatory Development Authority (IRDA), the industry regulator, has mandated that all general insurance companies collect premiums from terrorism covers in a common pool. Terrorism-related insurance claims are settled using funds from this common pool, created after the World Trade Center attacks in the US in 2001”

We leave you with a small check list which we feel is our duty to share with our clients

Get Insurance for all assets:
Start With life, heath and then wealth [property,car etc.]
All assets have a nominee. [From Fixed Deposits to Dmat accounts]
If possible make a will: Legally a nominee is only entitled to collect the money on behalf of the legal heir. So a will removed any ambiguity on which assets should go to whom

We should take efforts and pray that “it “never happens to us, but we should plan as if it will

Also See:

Do I need Insurance ?

RETURNS_ON_LIC.pps

FMP Misconstrue : A Conversation

2008-11-04T06:42:00.000-08:00

Customer: Hey did you read about the article in the FMP’s facing redemption pressure?

PI Representative: No, but I am aware of the pressures that fund houses are facing

Customer: So we have also invested in an FMP should I redeem?

PI Representative: I will not advise you that .You see FMP like Fixed Deposit will wither charge you on a redemption before the maturity date .which will cost you dearly.

Customer: But everybody is redeeming it’s in the news you see wait I will show you

Hindu Business Line

Redemption pressure

On the redemption pressure on mutual funds, especially the FMP schemes, Mr Raman said, “Corporates that have put money in mutual funds are taking it back as lending by banks is under strain. Though the Government and RBI have stepped in to ease liquidity, it may take 15 days to one month for the situation to ease.”

Source: http://www.thehindubusinessline.com/2008/10/18/stories/2008101851710100.htm

Times of India

Sandeep Dasgupta, chief executive officer, Bharti-AXA Mutual Fund, admitted that liquid and FMP (fixed maturity plan) schemes have been under redemption pressure from corporate and retail investors. “As per the industry figure, around Rs 45,000 crore worth of funds have been redeemed in September,” he added. Redemption pressure picked up in the second half of September and has only intensified in October following the global financial crisis, he added.

Source : http://timesofindia.indiatimes.com/Ahmedabad/Investors_dump_equity_and_MFs_bank_on_good_old_fixed_deposits/articleshow/3610933.c
So I will also do that I think if people redeem the NAV falls right?

PI Representative: No the NAV falls when the value of the underlying asset falls when people redeem it’s the AUM [Asset under management] which falls. This will affect the NAV if the fund manager has not diversified enough, and “breaks” his “fixed assets” to give back the redemptions.

E.g. if the Fund manager has made an investment of 10 deposits of Rs.1 lakh his AUM is 10 lakhs ,When some one comes and redeems one lakh rupees he simply breaks his deposit of Es.1 lakh hence the AUM goes down but the yield will not .On the other hand if someone makes the redemption of Rs.90000 the fund manager has to invest Rs.10000 again which will cause a marginal dip in NAV typically the affect will be max to the extentent of 0.5% in a responsible fund house

If you remember in the previous article I had advised to check the rating and the underlying asset to decide whether you should invest in an FMP or not. And that’s the only thing that need’s your attention and care everything else is pure panic.

Let me explain “pure panic” with an example lets say you created a fixed deposit of Rs.1 lakh. Suddenly one of your relative comes and says that mr.x has met an accident and he / she needs 1 lakh on an urgent basis. You call your broker to check if you have some shares you can sell he says that you will have to book heavy losses and that he had planned for a better opportunity .You have a housing loan and a credit card bill pending as you had some big expenses this month .You can’t sell the property as there is no such need even if you did it would still take a lot of time to sell a topup loan will also take some processing time. You are in a fix and suddenly….it strikes

You have a fixed deposit receipt in the investment file nicely ticked in which matures next year. its the best option and it’s cheaper than a loan as well. So you break it

Customer : Hey don’t tell me that’s what’s happening if I break a fixed deposit it does not come in papers right ?

PI [Smiling]: You are right it will not make to the papers coz 1 lakh does not make a dent in AUM of any depositor, bank or mutual fund house

Let me elaborate from the information that you have given in the above extract & if you observe the figures closely you will see that mostly corporates are redeeming and their redemption is due to a need of money we call “liquidity”

So when the company is redeeming it’s the company that’s bearing the loss [or reduced profit’s] coz it has other commitments to keep , because banks are not giving loans ,because they can’t sell shares so they are redeeming their FMP’s .

In fact since you are talking of news let me share this article with you:

“CPI-M takes mutual fund route for better returns”

But when it comes to money, the communists are also saying its money, honey.

Source: http://www.ibnlive.com/news/cpim-takes-mutual-fund-route-for-better-returns/74771-3.html

Customer : So if a communist party can trust Mutual Fund .You can too …?

PI: Let me put it this way, trust or distrust with knowledge not news

Customer: OK !! So educate me why should I choose FMP over an FD and take that small but additional risk?

PI: Well for starters as mentioned earlier FMP do offer little better returns which justify the additional risk

Secondly even at same rate FMPs earn better returns than FDs because of the differential tax treatment meted out to them. The differential tax treatment ensures that the net yield of FMPs for individuals falling in the higher tax brackets is greater than FDs. This is because interest earned on an FD is treated as other income and hence, taxed at regular personal tax rates. So, for a person in the highest tax bracket (income more than Rs 10 lakh) the tax rate would be 33.66 per cent. On the other hand, tax rates for FMPs are different. Following are the tax implications for FMPs:

· Dividend received is tax free in the hands of investors. However, a Dividend Distribution Tax (DDT) of 14.165 per cent is levied on the mutual fund company.

· Long-term capital gains (investment more than 365 days) enjoy indexation benefit.

· Short-term capital gains (investment less than 365 days) are added to the income of the investor and taxed according to his personal tax rate.

The illustration in the table below shows how the post tax return in FMPs is higher than that offered by FDs.

	Fixed Deposit	Fixed maturity Plan- Dividend
Returns	9 per cent	9 per cent
Income Tax	33.66 per cent	N.A.
Dividend Distribution Tax (DDT)	N.A.	14.16 per cent
Effective Yield	5.97	7.72

Note: For the sake of simplicity, it has been assumed that the FMP has distributed the entire yield as dividend. The DDT is deducted on the gross yield. In actual practice, the returns on the FMP-dividend would be slightly higher than indicated.

In case the maturity term of the FMP is more than a year, the growth option yields more because of the indexation benefit. To benefit from indexation, FMPs with maturity term more than a year structure the maturity term in such a way that you earn double indexation benefits- one for the year of purchase and another for the year of redemption.

Customer: Here is my cheque for FMP.

PI: Your asset allocation suggests its time for …….. [rest is confidential];)

Conclusion: FMP's have an additional risk associated with them which is justified by the additional return and the tax treatment gives it an additional advantage however if you do not wish to take that additional risk or do not have guidance of a financial planner to advise you which is the right FMP then may be FMP is not your cup of tea

If you liked the article -->

If you have something to share tell us. -->

How is Sensex Calculated ?

2008-10-01T12:34:00.000-07:00

When the market started going down there were many who asked us what do you think is happening, why is the market going down, will it touch 9000 etc. Most of these questions were discussed in newspapers, TV Channels etc. There was one question by one Mr,Arun Tiwari which was “zara hut ke” [different] HOW IS SENSEX CALCULATED ?

Like all good things there is no one line answer to this one, To understand how is Sensex [Indian Context] calculated first we need to understand some terms.

1. Market Capitalization:

This term is popularly also known as “Market Cap” or not so known term “Capitalised Value”. It’s a measurement of economic size of a company.

Mathematical Representation

Market Capitalization = Number of Shares x Share Price
Depending on the value of the market cap, the company will either be a “mid-cap” or “large-cap” or “small-cap”. Interesting isn’t it ?

The second term we need to understand is “derived” from Market Capitalization.

2. Free Float Market Capitalization

Free-float market capitalization is defined as that proportion of total shares issued by the company which are readily available for trading in the market.

Meaning: The shares owned by government, directors, proprietors etc. are excluded .These shares are also known as “locked in” shares.

Mathematical Representation

Free Float Market Capitalization = Share Price x Free Float Shares

What is BSE-SENSEX (also known as BSE 30) composed of?

Now that you have understood the two major terms let us bring our focus to BSE SENSEX most of us know that BSE SENSEX is make up of 30 scripts These 30 scripts [Companies] are chosen and changed form time to time by BSE committee to accurately reflect state of stock market and has predefined criterions to fulfill before any company is included in the BSE 30.Details on these are outside the scope of this article.[You will probably get bored.]

Two Steps away from SENSEX:

1. Add the Free Float value of all the 30 shares.
(Infosys share price x No of free shares) + (HDFC Share price x No of free shares) …….and so on.
2. Map it to the base value to get today’s sensex value:
Like an NFO or an OLD IPO where the typical base price is of 10 rupees even BSE started with a base value of 100 in the year 1978-79.Everyday after that day we are mapping the index using “Index Divisor”

Meaning

If yesterday sensex was on 13055x with free floating market capitalization on 2855 crores [remember economic value of bse 30 shares] & today's free float market capitalization has increased to 3010 crores then today’s index value is :

Today’s Index Value = 13055x (3010 / 2855) the number 3010/2855 is the index divisor and is adjusted at times to accommodate corporate announcement’s which affect the market capitalization like share bonuses etc.
We have tried our best to explain the various concepts and calculations in the simplest form however we would love to hear from you to know that our efforts are in right direction and would like to hear from you how we can improve in the future.

References: wikipedia,bseindia
Based on a query from Mr.Arun Tiwari

FMP Fixed Maturity Plan Demystified

2008-09-11T09:43:00.000-07:00

There is never a dearth of ideas among the AMC (Asset Management Company) think tanks, when it comes to drawing investors towards their offerings. The AMCs usually adopt innovative ways to promote their products. Often these ideas have the desired impact and get investors all interested.

While such promotional gimmicks have always been in vogue, they have become more visible over the years as AMCs scramble to mobilise assets. A glimpse of this can be seen in some of the recently launched FMPs (fixed maturity plans), with some AMCs projecting a relatively higher cost inflation index (CII) to make the FMPs returns more attractive.

Recently one of my client asked me about FMP’s / ELD’s he also shared with me one of the mailers which stated absolute return of 15% over three years with an entry load of 2.5%. With banks offering 9.5% pa and equities not doing so well it’s good isn’t it?

Well not quite you see the mailer “assumes” that you understand all the intricacies of financial terms. So the trick of the trade is “absolute”, with 15% absolute return means that 15/3 = 5% p.a. again please note that I have not yet considered an entry load.

So FMP’s are bad are they? No in fact fixed maturity plans are great when you understand the product. First of all decide what you need do you need an equivalent of a fixed deposit? If yes that see that the FMP’s are not linked to any equity, second study the offer document to see how secure is the FMP, one needs to understand that the money in FMP is then invested in instruments like company deposit’s and other debt instruments which have a variety of risk rating you may need a good financial planner to help you out here. Last but not the least always remember that the return is an indicative yield, if the underlying asset [e.g. a company deposit] defaults or does not pay the AMC your yield goes down.

So what’s the definition?

What is an FMP?

FMP stands for Fixed Maturity Plan. These are essentially close-ended income schemes with a fixed maturity date i.e. that run for a fixed period of time. This period could range from one month to as long as two years or more. When the fixed period comes to an end, the scheme matures, and your money is paid back to you.

The Tax Angle

FMP’s are taxed similar to a fixed deposit unlike equity based schemes which do not attract tax after one year .However they score over fixed deposit by giving the option to calculate tax using an indexation method. [More about indexation method in coming months] .

On more plus for FMP is that they give better rates even as compared to an equivalent FD’s and the penalties on premature withdrawal are less as compared to FDs.

Please remember that the above comparison is generic in nature hence you may find some product which is an exception to the norm. In case you are in a tax bracket you might also like to evaluate the dividend option. Please take help of a financial planner to evaluate a right product for you.

11 Things NOT To Do With Your Money

2008-07-24T10:31:00.000-07:00

Smart investing is the key to financial happiness. It helps you multiply your money. And it certainly is not as difficult as you think.

If you think you need extra money to start saving, you are wrong! Saving is not about saving extra money. It is about planning your expenses in a manner that lets you save enough money, no matter what you earn, for a safe future.

But handling money is not very easy. So here are 11 tips on what you must not do with your hard earned money.

1. Don't go on depositing your salary in your savings account

Do you rush to the ATM and withdraw money regularly? Well, you cannot afford to be careless about withdrawals. While a savings bank account helps you meet your regular needs, it is important not to deposit all your earnings in the savings account.

While you must keep a portion of the salary in the savings account, make sure you allocate enough money for regular expenses, as well as additional expenses, that you may need to meet unexpectedly.

Excess money in savings account will always also tempt you to spend more money than you should ideally spend.

2. Don't manage money without a good plan

A golden rule in investing is to have a good financial plan. Do not invest money only on the basis of what your friends or relatives say. You must identify your priorities and set realistic goals.

Calculate your monthly expenses and see how much you can save every month. Make a list of things you can and cannot avoid. Learn to strictly stick to you plans.

3. Don't invest all your money in the same plan

No matter which investment plan you choose, you must not invest all your money in just one plan or in one bank. You must allocate your resources across various schemes, be it mutual funds, fixed deposits, stocks or small saving schemes.

It is very important to diversify your investment. Remember, interest rates and services charges vary from one bank to the other. Before you invest money in any scheme, call up banks, financial service companies and make sure you get the best deal.

4. Don't set high savings targets

You must not go overboard on savings. You are the best judge of how much you can save and how much you can spend every month. There is no point in saving all your money and being sad about not having enough for your needs.

If you have a family, you must take care of their needs as well before you start investing. Set a target accordingly. But you should allocate a fixed amount every month. The more you can save, the better.

5. Don't lose your focus on savings

You may have invested your money across various investment options. Don't think that your job is over. In fact, you must keep a watch on interest rate changes and market fluctuations.

If it is stocks you have invested in, check out how the companies are performing, read up, be alert. You have to be proactive to the changes and be actively involved to make your money grow.

6. Don't splurge more just because you got a hike

Most people have a habit of spending more and changing their lifestyle when they get a good hike or bonus. There is no harm in enjoying and have a good time. However, if you would like to save money, you must invest the additional amount to add to your savings.

You must always think about the long-term benefits.

7. Don't shop for unnecessary items

You must learn not to give in to temptations while on a shopping trip. It is important to make a list of things you would need for the month and stick to the list. While it is good to indulge yourself once in a while, you must always be careful about spending money on impulsive buying.

Many items may look attractive but soon you may end up not using it, thus wasting your money.

8. Don't go for too many loans at the same time

It is very easy to get a loan nowadays. Loans are available just by sending an SMS. But beware of easy loans! Your may want to own a car, a home or some other luxury, but ideally you must not go for too many loans at the same time.

Buy things one at a time so that you have enough money for yourself and to save and you are not too indebted.

9. Don't join any scheme without verifying the credentials

There have been several cases of fraud, where innocent investors have been cheated by crooks posing as smart investors or advisors. They may lure you with all kinds of schemes of getting higher returns at the shortest possible time. Always cross-check facts and figures and their credentials before you invest in any plan.

You must also be aware of the fine print. Ask for all the details even it is time consuming. At the end of the day, you must be thoroughly convinced that you have made the right choice.

10. Don't invest your money in risky plans

While it is important not to keep stacking your money in a savings account, it is not important not to indulge in risky investment plans. You must start saving with smaller amounts and try to save more as you go along.

To start with, you must seek the advice of a good financial planner or choose low-risk plans. Remember, slow and steady wins the race!

11. Don't forget the dates, plans

Most people are very bad at remembering dates of maturity of their fixed deposits, or savings schemes or dates of paying premium. Make sure you keep a diary of all the saving plans, their maturity dates and remember to either reinvest the money or go ahead with any plan that you have in mind when the plan matures.

All the papers must be safely kept in either a bank locker or any safe place. You must also keep a photocopy of all the important papers incase you lose the original will be useful.

Source : Email from Ms.Pramila

Senior Mediclaim

2008-07-09T07:52:00.000-07:00

Do you always wonder why most of the best things in life come at high cost .I sometimes wish how would it be if you ate cheese and you would be thin or if you have sweets and your sugar levels will decrease.

Similarly wouldn't it be best if the medical insurance premiums will be cheap when you need them the most? Yes we are talking about old age, as the age increases so does the need of the medical cover and the premiums increase.

More than any other age group, senior citizens require health cover the most. However, given the number of senior citizens being hospitalised, insurers have hiked rates to a large percentage of the sum insured.

For instance, if a 25-year-old individual pays 1.5% of the sum assured as a premium, then the same number can be as high as 8% of the sum assured for a 60-year-old individual. “An insurer prices a policy based on two risk factors.

One; for how long an individual is required to stay in the hospital and two, what the individual stands to lose because of the sickness. These risk factors are high and are common among the senior citizens

However, the fact remains that despite high prices, senior citizens need insurance as medical treatment can actually wipe out their savings. Today, there are a number of public as well as private sector players offering mediclaim for senior citizens.

Some policies come with sub-limits. Common sub-limits imposed by insurers are room rents, doctors’ fees and diagnostics. These policies typically cap the room and boarding cost at 1% of sum insured a day and at 2% a day for those in an intensive care unit.

The overall limit is capped at 25% of the sum insured for an illness or injury. So, when you sign up for a policy, check if the insurer has assigned a maximum amount for a specific expense.

Also consider that, in order to check malpractices and offer uniformity in the text of health insurance policies, General Insurance Council (GIC), a statutory body of all non-life insurers, has come out with a uniform definition on pre-existing diseases. Also, all policies issued from 1 June will cover pre-existing disease from the fifth year of the policy.

What this means is that for a fresh policy, no pre-existing disease will be covered for four years. After these four years of continuous coverage and no claims on account of the ailment in question, the pre-existing disease will be included under the cover.

The best part here is that this applies to all health insurance companies.

These are basic guidelines and areas to address, do take help of a financial planner to decide the right product and premium for you.

Inspiration & Source : Mrs.Revathi Sreedharan & ET

Take your “Umbrella” when going abroad for studies?

2008-07-04T08:05:00.000-07:00

If you have seen most of the insurance advertisements depict an Umbrella as a way of risk cover and to most extent they are right.

Most of us who go abroad for studies are going through using some form of educational loan. These loans are given in lieu of either an asset like property, gold etc. or a guarantor .It’s the moral responsibility of the person taking the loan to accommodate the risk that he /she is taking in case any unforeseen event

The student should at least take the amount of life insurance equivalent to the loan amount if not more so that the dependents or the asset heirs interest’s are taken care of.

Another area where insurance is of help is medical insurance with new whether patters and different food patters one is exposed to some health uncertainty especially when you have not visited the country earlier, more so important factor is that health care in countries like UK and US is very expensive as compared to India.

Medical insurance is mandatory for students heading for most foreign universities. A few educational institutes insist on you getting an insurance policy on the campus. But the lucky ones, whose university allows them to select their own insurance policies, can put their money to better use by carefully selecting an insurance scheme in India.

Policies issued at home equip you with essential tools to manage your ever-bulging expenditure when you are out. Domestic student insurance policies would help prune the policy cost by over a third of the investment required by foreign insurance companies.

Moreover, foreign insurance policies would offer coverage merely for your medical expenses.

Even if a foreign policy offers other add-on benefits, they would not be in line with the expenses an Indian student would usually incur. For instance, a foreign student policy would offer coverage for expenditure on drug addiction rehabilitation and pregnancy, while a domestic policy would help you manage more relevant costs such as an emergency visit by either the student or the relative back home, loss of passport, an interruption in studies on medical grounds or loss of checked in baggage.

Besides offering medical expenses coverage of up to $500,000, Indian policies offer coverage for personal accident, lost baggage (checked), bail bond, personal liability and two-way tickets in case of medical emergency. Some others offer minimal stay facility charges along with two-way tickets for a relative to be with a student who has been hospitalised for more than seven days. Also, to battle out a financial crunch caused by the death of the person sponsoring your education abroad, the insurance company would reimburse the tuition fees, to a maximum limit of $10,000.

The coverage period for student overseas insurance policies ranges from 30 days to a maximum of 365 days, which can be extended once for an additional period of 30-365 days. The travel care insurance policy for students offered by Reliance General Insurance provides protection for a maximum of two years.

The policy premium, which is a one-time payment, is based on whether the student has opted for a university in the US and Canada or any other country. Medical costs in the US and Canada are higher than those in other countries and so are the premiums of policies tailor-made for the respective regions. You would need to invest less if your university is in, say, London.

The cost of getting a high-end plan for education in the US is at least 100% more than the policy meant for a student pursuing education in a non-US destination. Almost all policies offer four plans, differing in the medical expenses coverage and add-on facilities offered.

The low-cost plan would offer fewer facilities at a lesser premium. Few insurance companies offer plans for non-medical expenses. Such plans are meant for students whose universities insist on an in-house insurance policy.

Students planning to study abroad should make sure that the insurance company they are opting for has collaborations with international organisations. It makes sense to take a policy that offers cashless service, meaning that a third party administrator (TPA) would take care of the hospital bills, and the student can avoid the running around for reimbursement of bills.

TPAs are overseas partners of Indian insurers and they would have your policy details to settle the bills. The policyholder has to inform the TPA using an international helpline number provided by the insurance company in case of an eventuality.

Insurance players can register a policy in your name only when your student visa has been issued and the foreign university has confirmed your application. The overseas student insurance procedure takes 24 hours. However, make sure you start looking out for a suitable plan at least a month ahead of your departure. The coverage clock starts only from the day you take off

Conclusion:

Life cover and medical cover are a must for normal person. With uncertainties associated with new land and travel it’s a must for students planning to study abroad. Please always take help of a financial planner to decide the optimum amount of insurance cover that one needs.

Source : Ms.Kiran Chalke ,DNA

Do I Need Insurance ?

2008-07-04T07:47:00.000-07:00

Well this is question most of ask ourselves after we tell the irritating caller that "I am not interested".

There are two kinds of people [Es duniya mein do tarah ke log hote hain]

Type 1 : No I don't need it as "it" can never happen to me.OR
Type 2 : I already have one.

Well if we carefully look around us.We will find enough instances to prove that we need insurance.[unless you have no dependents and will have none in future]

Some people may argue "you know all members in my family have lived till 80 my term insurance will be over by 60 , more so I do not get any money back .So why should I pay the premium ?"

Lets say you live in a society its highly probable that there has never been a theft ? Does that mean you stop locking the house ?

Do you get your money back from where you bought the lock if there is no theft ?

Though there is no comparison of ones life with a theft in the house but it does puts things in some perspective

Secondly through there are endowment plans which give returns .Term Policies are efficient . A term policy + a company deposit may give you better returns and cover as compared to an endowment plan.[However let a good financial planner decide whats best for you.As endowment plans once taken make forced disciplined saving ]

Type 2 : I already have insurance .You may have insurance which you took few years back to save tax .You need to evaluate your cover need from time to time .

E.g,A housing loan,Marriage,Personal Loan,Increase in Salary,Change / Upgrading your lifestyle,Birth of a child,Retirement of a parent,purchase of any big asset.

All these events are examples of events on which you should check your insurance cover
When income levels are low you might not be able to mitigate all your risk
For a typical individual the priority can be in the following order.

Life
Medical
Accident
Assets

For a typical individual life cover should at least be three times the annual salary.Here the presumption is that he has no liability and that his family / dependents will find alternate sources of income within 3 years.

By now you can see that insurance is more than a tax saving instrument or a compulsion by law [e.g.Car Insurance] its a need.

So be informed and take a decision on whether you have enough cover for a rainy day.

What is Insurance ?

2008-07-04T07:45:00.000-07:00

Insurance in its basic form is defined as “ A contract between two parties whereby one party called insurer undertakes in exchange for a fixed sum called premiums, to pay the other party called insured a fixed amount of money on the happening of a certain event."

A more technical definition would be:

Insurance, in and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a potential loss, from one entity to another, in exchange for a premium and duty of care. Insurer, in economics, is the company that sells the insurance. Insurance rate is a factor used to determine the amount, called the premium, to be charged for a certain amount of insurance coverage.

ESOP ALL EGGS IN ONE BASKET

2008-05-30T00:52:00.000-07:00

We have a client who works for a large IT company. Predictably, a good amount of their investments are in the form of their own company's stock options. They are now coming to grips with the possibility that if the rupee keeps gaining strength, employment growth in the IT industry could slow down and perhaps even sharply reverse. That's a double problem. Realisation dawns that the permanently bright future that their industry was supposed to have may not exist. And, at the same time, their investments in their own employer have declined to less than half in about an year's time. Like many IT stocks, their employers' stock too hardly rose when the markets were rising but fell with great speed when the markets fell.

Another client works with a banking firm with subprime crisis the stock has been hammered by the markets. The point we are making is one which has been told by financial gurus since the inception of finance itself.”DON’T PUT ALL YOUR EGGS IN ONE BASKET”.We don’t deny that ESOP are wealth creators our contention is that once the wealth is created it has to be managed as well so one is suppose to spread one’s investments spread across different sectors and industry so that bad times in one may be offset by another. However, today when Employee Stock Options are a big part of some people's exposure to the stock markets, diversification must start with diversifying one's life, not just one's investments. Your career is tied up with a particular industry, so your stock investments must necessarily be as far diversified from that industry as possible.

However, for a variety of reasons, the reverse seems to be true. The biggest reason seems to be that many of the employees of who receive ESOPs are otherwise not stock investors. They never buy any other stock or mutual fund and thus have 100 per cent of their investments in their own company. What's worse, we hear that some companies have a culture of bias against selling ESOPs and employees face a subtle pressure against selling. Even worse, talking to some ESOP-holders about their investments, we’ve realised that even when they diversify, they have a tendency to buy the stock of other companies in the same industry, probably because they feel they understand the industry or they admire another company in the same industry. This is illusory diversification. Maruti employees buying Tata Motors stock or Satyam employees buying Infosys stock may feel like they are diversifying but they are not.

The point I am making should be obvious by now. Diversification is supposed to be the most important part of any investment strategy.

So what should you do with your ESOPs? Whether you otherwise invest in stocks or funds or not, the logic of diversification is very clear. You must sell your ESOPs as soon as you think the time is right There's a huge range of alternative investments that you can choose from. Tying up both your career and your savings to the well-being of the same company (or the same industry) is clearly a case of putting all your eggs in one basket. And that's never a good idea.

Inspiration : Mr.Sharad Desai,Our Clients

Reference : http://www.valueresarchonline.com

Why Prepayment of Housing Loan Does not make sense ?

2008-05-04T05:07:00.001-07:00

This will be one of the most technical articles till date let’s make it simpler by taking an example.

Mr.PB age 34 has taken a loan from a leading finance company and is paying an EMI of 24000 and the loan is taken for 20 years. He is overwhelmed by the interest amount that he paid in his third year and he decides to prepay the loan in the forth year.

Let us take a moment here to understand how financial institutions charge us the EMI (Equated Monthly Installment)In the initial years in the EMI contains more principal component than interest.

As time goes by the principal component increases and the interest component decreases

Coming back to the case, the following are the details of Mr.PB’s loan.

Loan Amount: Rs.24 lac

Rate of Interest: 10.5%

Installment / month (EMI): Rs: 24,299

Annual Payment made through EMI = 24299*12 = 291588

Now lets look at is yearly amortization schedule:

[Detail of his payment and its components like interest and principal]

Click on the image to see the schedule properly

Say he makes prepayment in the end of fourth year highlighted above in this case

Principal Paid till date	2,44,106
Principal Outstanding (Prepayment Amount)	22,14,916
Years Remaining	16 = 20 - 4
EMI Saved	46,65,408 = 291588*16

Now presuming that he would have taken a financial advisors advice and instead of prepaying the loan he invests the amount in say an Index Fund (e.g. Index fund currently ranked 15^th by moneycontrol.com) a bulk investment would have yielded 26.85% (Componded)* return. The amount Rs.22.14 lakh invested would have become Rs.9.95 Crore

Principal Invested	22,14,916
Avg rate of return of Index Fund (CAGR)*	26.85%
Years Invested	16
Amount*	9,95,41,643

Mr.PB would have profited Rs.9.5 Crore (99541643 – 4665408) if he would have chosen to invest in a index fund over prepaying

To every rule there is an exception [When it makes sense to prepay]:

· When you are expecting uncertainty in the source of income with which you are making your EMI payment.

· When you are getting a better re financing deal in spite of the pre payment penalty.

· When the loan tenure is less (say two years) the risk is high in markets and there is less compounding.

Having made the case for non prepayment let me tell you that you might be an exception to the rule , let your financial planner decide what’s best for you.

* Notes:

1. We have taken oldest index fund of SBI which is the oldest private fund house; this is just an example and not a recommendation.

2. Index Funds are less risky than Diversified Equity and Sector Funds

3. Compounding Formula used A = P(1+1/R) ^ N where P = amount invested ,R = Rate of Return , N = No of Years.

4. In the above calculations we have not considered the benefit one gets for continuing the housing loan under section 80 C

SIP BY SIP TO TAX FREEDOM

2008-04-01T09:08:00.000-07:00

Most of us are relieved with financial year coming to a close and we managed to complete the 1 lac tax investments. Many of my clients made the investments in the month of January .Why January you ask?

Well that was the month when the company wanted the investment proof. Wrong timing one might say. ; When you ask them why you didn’t invest earlier they say we are waiting from August markets never corrected. There are some who have the capacity to invest now but they say markets might dip further this may not be the right time to invest.

So when does one invest who can help time the market?

Well the answer is a simple one. No one can time the market .One of the best ways to beat the market is through SIP [Systematic Investment Plan].It’s based on a simple rupee averaging principle. When the price is high you get less number of units when the price is low you get more number of units.

Why ELSS ?

1. Generates highest returns as compared to other Investing avenues

2. Provides a lock in period of Three years which is the minimum for any tax saving avenue.

3. ELSS can also be seen as a way to long term investing in equity markets.

4. With India growth story unfolding and fundamentals looking intact, Presha Investments is of the opinion that equities would continue to outperform other investing avenues for at least next 5 years in spite of the recent downfall. Investing in ELSS provides dual benefit of capitalizing on superior returns as well as tax saving.

Why risk does ELSS pose to an Investor?

The basic risk with ELSS scheme is that since it has a considerable equity exposure, the returns are linked to market returns and hence there is no guarantee of returns and even capital.

However, we feel that this is more of a precautionary statement and needs to be reviewed in broader sense.If we choose an ELSS schemes which has delivered excellent performance in past years and has a track record of consistent results, the chance of investors losing out would be negligible..

Click Here for a presentation on ELSS

View the presentation online here

Secure your most precious asset : YOUR CHILD

2007-12-29T05:24:00.000-08:00

This month we will appeal to all the parents and to be parents in this world .Yes we are talking about your child’s future.

Why is it important?

In a child’s life there are times when he needs a hand from his parents it starts with all the small things like school admissions, college admissions and grows to bigger things where even after being an adult he might need a helping hand like buying a house or marriage.

There are times when parents are too pre occupied to focus on these issues. The time is today…

Why one might ask , well let’s take education.

An MBA course, which at present costs around Rs 520,000 (including lodging expenses), will cost Rs 2,172,169 after 15 years. To accumulate this amount, you have to invest around Rs 93,548 at 6% return p.a. or Rs 63,404 at 10% return p.a.

What should one take care while investing for children

Have a distinct objective (amount of investment, period & expected return)
Don’t dip in to investments for your child.
Focus on the investment vehicles and their pros and cons.

For points 1 & 3 a financial planner can help but the one part where the parents have to stay disciplined is to not dip in the child’s portfolio. There are investment vehicles like FD’s which offer a lock in but these vehicles yield comparatively lower returns .You invest like a normal investor & focus on maxmising returns and yet control the urge to dip in to the investments.

A final tip switch to low risk instruments as the time to reap your investments.

Presha Investments wishes all the children a financially secure future.

Happy Investing

ROTI , KAPDA AUR HEALTH INSURANCE

2007-11-13T05:27:00.000-08:00

Illness is a part of the city lifestyle, with high levels of stress or old age its inevitable. To decrease ones financial burden at the time of emotional ordeal we at Presha Investments recommend Health Insurance.

Health insurance, also known as mediclaim, has become a modern day necessity. However, we have found that in the recent past, many policyholders have seen their claims being denied by insurance companies for one reason or another. Here are some tips on how to maximise on your policy.

Read Your Proposal Carefully

Some time insurance agents hide certain facts so that the proposal is accepted .We don’t advise to lie but incase you have a policy based on some unspoken facts please make sure they don’t turn against you.

Original bills

Most insurance companies ask for original bills to be submitted while filing for a claim. So, maintaining a record of all the original bills that are generated during the course of hospitalisation is very important with the prescription

Filing the claim

Filing the claim as soon as possible is of utmost importance. In case of most insurance policies, the claim has to be filed within 60 days of hospitalisation. Waiting beyond that can create problems with the insurer dilly-dallying on the payments.

Post-hospitalisation benefits

These benefits are essentially for the treatment required after the individual is out of the hospital.

Please note that these are the base guidelines and may differ from one insurance company to other and also from policy to policy. Always make sure you have a good insurance agent to guide you through this difficult time.

The NRI Dilemma

2007-11-01T07:19:00.000-07:00

With Dollar Rates coming down its time to revisit investment
portfolio of the NRI Investor.

The NRI investor needs to answer a few questions first

1. What is the need?
2. Which country should I invest in?
3. The Rupee v/s Dollar factor

For NRI's planning to settle abroad

Your need is to settle abroad look mostly at the earnings in
dollar terms .So on one hand you might gain from indian
markets on the other you might take a beating in the
currency valuation.

Physical assets demand more local approach so an NRI
should focus on building physical assets at the point of
residence as these assets demand some level of
maintenance, unless you have someone to take care of these
assets in the country you are buying them in.

As mentioned above your earnings might get eroded in case
you are not able to factor the Rupee v/s dollar factor.

For NRI's planning to settle in India

Well the answer is simple for this set of investor .Invest as
much as possible in India keeping teh investment window in
mind.

You might invest using a higher dollar rate but since you are
not converting back to dollar, the earnings from the
investments made will take care of it in medium to long
term.

Party Pooper

Where is the Indian Rupee Headed? A cautious view would
be a gradual decline, in the range of 3 - 5 % every year. We
must remember that India still runs a hefty fiscal deficit and
relies on imported crude oil.

In a Nutshell:

NRI's planning to settle in India should invest as much as possible in India
and those planning to settle abroad should take the
currency factor in to account

Happy Investing

Festive Season? Celebrate with Gold

2007-10-19T22:20:00.000-07:00

In a Nutshell

For Long Term Investors buy gold biscuits

For Non Investment Ladies who would never sell buy jewellry.

For Short Term Investors less than one year buy ETF’s

Deep Dive

Why Gold?

There are various reasons for which you should own gold in your portfolio. The most important of these is that gold is a real asset whose value is driven by factors (such as the amount of gold mined) that are very different from those that impact the value of financial assets. Therefore, it brings in a much needed element of diversification in your portfolio

Form of Gold

The next question that is often put to us is in which form should one hold gold? The one form which we all are familiar with of course is jewellery. However, from an investment perspective this is not the best option as the making charges for jewellery can be as high as 30% of the value of the gold i.e. if your jewellery has gold worth Rs 100, you are probably going to be buying it for Rs 130. So if you wish to sell your jewellery, all you will get is the value of the gold; the making charges will be a loss to you. Not to mention that sometimes jewellery that is promised to be made of 22K gold turns out to be of a poorer quality.

The best form to hold gold, from an investment perspective, is probably, gold bars (or like they say “biscuits”!). Gold bars are standardised products whose purity is assured by the hallmark (seal of the producer) that it carries. There are no making charges involved and as the purity and quantity is assured, on liquidation you do not have any surprises in store for you.

The returns from gold:

During the 1950s, gold appreciated only marginally; from Rs 99 per 10 gms in 1950 to Rs 111 per gms in 1960. During the next decade, from 1960-70, it moved up to Rs 184.

Between 1970 and 1980 came the massive rise from Rs 184 to Rs 1,330.

During the 1980s, it moved up another 240 per cent. The trend of gold prices in India in the last few years is given in Table 1 which reveals that between 1950 and 2007 gold appreciated 95-fold, an annual compound rate of return of 8.32 per cent.

Gold prices in India

March end	Gold price per 10 gm (Rs)
1925	18
1930	18
1935	30
1940	36
1945	62
1950	99
1955	79
1960	111
1965	71

March end	Gold price per 10 gm (Rs)
1970	184
1975	540
1980	1,330
1985	2,130
1990	3,200
1995	4,658
1996	5,713
1997	4,750
1998	4,050

March end	Gold price per 10 gm (Rs)
1999	4,220
2000	4,395
2001	4,410
2002	5,030
2003	5,260
2004	6,005
2005	6,165
2006	8,210
2007	9,500
2008	11000

How to buy gold

Gold Deposit Scheme

Introduced in 1999, this scheme is managed by SBI Individuals, HUFs, trusts and companies can deposit a minimum of 200 gm of gold with no upper limit, in exchange for gold bonds carrying a tax-free interest of 3 to 4 per cent depending upon the tenure of the bond ranging from 3 to 7 years.

Furthermore, these bonds are free from wealth tax and capital gains tax. The principal can be collected back in gold or cash at the investor's option

Banks

In recent months, banks have become very aggressive in marketing gold bars. This pick up in tempo is not only due to the festive season; it is also due to the fact that banks have hit upon a new idea to make a “neat buck” off you. We will let the numbers speak for themselves.

On the 8th of November, 2006 we called one private sector bank and one jeweller making an enquiry to purchase gold. This is what we got as a response –

Expensive, for sure

	Bank (Private)	Branded Retailer	Jeweller
Purity	0.999	0.999	0.999
Price per kilo* (Rs)	1,071,520	1,025,000	940,000
% Discount to Pvt Bank Rate	NM	4.5%	14.0%

* Prices as on 8th of November 2006; Including VAT
NM - Not Meaningful

Do not make a judgment as yet. The banks, as their relationship manager will definitely pitch (only if you ask though), give you a certificate assuring you of the purity of the gold. And that’s why they charge a premium for the gold. So, on the one hand you get pure gold with a “certificate” and on the other you get just pure gold.

To be able to make a rational decision, let’s ascertain the value of the certificate i.e. what benefit it offers you. In case of standard gold bought for the purpose of investment, the benefit which one looks for is whether the seller will buy the gold back or not and, if yes, at what price will he buy it back?

Banks lose out

Gold Bar	Bank (Private)	Branded Retailer	Jeweller
Buy back facility	No	Yes	Yes
Discount on buy back	NA	NIL	NIL

Here’s an eye opener for you. The bank, which pushed you into buying standard gold at a premium, will not buy the gold back from you! So, if you bought gold from a bank today for Rs 100, and you needed to sell it the same day (to a jeweller as the Bank will not buy the gold back from you), all your will realise is Rs 86! Of course, you get to keep the certificate!

The jeweller on the other hand, will buy back gold from you any day at the prevailing price. Some jewellers also give you a certificate for the gold you buy, thus diluting a key selling point of the bank.

The answer to the question of where you should buy gold from is simple – give the banks a skip in case you are looking at buying gold. Opt instead for a credible jeweller (even in the case of jewellers, we found that there is a lot of price variation with branded stores charging a premium – do your homework well before you buy gold). And, of course always buy standard hallmarked gold.

If you do decide to go to a jeweller to buy gold in bulk, do negotiate. It is likely you will get a discount. In our conversations with a couple of brokers, we were offered a discount on bulk purchases.

THE NEW ETF ROUTE

The modern international method of investing in gold is via gold mutual funds. India should soon be catching up in this area.

In his Union Budget for 2005-06, Finance Minister P Chidambaram had proposed that Securities and Exchange Board of India should permit mutual funds to introduce Gold Exchange Traded Funds (Gold ETFs) with gold as the underlying asset.

According to the Budget proposals, the scheme would enable households to buy and sell gold in units for as little as Rs 100 and such units could be traded in the same manner as units of mutual funds.

Gold Exchange Traded Funds are a relatively recent phenomenon even in the American market where the first Gold ETF--StreetTracks Gold--made its debut in the New York Stock Exchange in November 2004. Each unit of the StreetTracks Gold ETF represents one-tenth an ounce of gold.

In Gold Exchange Traded Fund, the underlying asset is exclusively gold bullion, and not a basket of stocks as is the case of equity ETFs. Gold ETFs are shares or units of gold that are owned by investors and are fully backed by gold bullion bars held by a custodian.

Like other ETFs, they are traded on a stock exchange.

Gold ETFs will allow investors to buy gold in small increments. In the global market, one unit represents one-tenth of an ounce fine gold (1 oz-28.35 grams). If an investor in the fund holds 100 units, the fund must have physical gold worth 10 ozs.

The value of the unit will move in accordance with the price of gold. Just like mutual funds, the value per unit will be the total value of the gold held, divided by the number of units, minus the expenses of the fund. Gold ETFs, like any share, can be traded and bought by the investors through their stockbrokers.

They can be used for speculating in the short-term for betting on the price of gold, or it can be used for long-term investing. Just like the ETFs, Gold ETFs can be open-ended funds or closed ended funds.However there are some hidden charges like some funds need an underlying DMAT account or entry loads causing an additional expense, thus giving gold biscuits an edge hence Presha Invesntments recommends biscuits for long term and ETF strictly for short term.

Tax implications

Since there is no income as such from holding gold, there is no liability of income tax. But bullion and jewellery are subject to capital gains tax and wealth tax, without any exemptions whatsoever.

While determining the value of gold ornaments for the purpose of wealth tax, making charges should be ignored, unless the ornaments are studded with precious stones. The value of gold contained in the ornaments can be reduced by 15 to 20 per cent because the dealer invariably deducts 15 per cent of the ruling rate of standard gold when ornaments are sold in the open market.

Difference between Dividend and Growth

2007-09-28T12:14:00.000-07:00

Simply put

In a growth plan, the gains made by the scheme are reinvested. Therefore, the net asset value (NAV) moves up. In a dividend plan, the gains are periodically distributed as dividend. So the NAV drops to the extent of the dividend, whenever it is paid out.

Dividend reinvestment is a facility to put the dividend back into the scheme, buying up some more units. Dividends are tax free, whereas an investor who sells his or her units to earn the gains will have to pay capital gains tax on the gains, depending on the holding period.

Therefore, investors who need income should choose dividend plan, and investors who can hold for longer period, should choose the growth option.

In an equity fund, gains realized after one-year holding period are also not taxed.

Deep Dive

The common perception

Investors believe that after the dividend is distributed, growth NAV and dividend NAV do not appreciate or depreciate in the same proportion. In other words they believe that since the growth NAV is higher than the dividend NAV, it has appreciated more than the dividend NAV. Therefore, they think that they are better off selecting the growth option as opposed to the dividend option. While there are several reasons why investors must choose a particular option (growth or dividend), this is certainly not one of them, mainly because the reality behind the discrepancy between the two options is far from the perception. To know when to select which option, read our article on this subject:

What happens when dividend is declared
Once a dividend is declared by the mutual fund, the dividend option NAV diminishes to the extent of the dividend declared. The growth option NAV on the other hand remains unchanged (for simplicity’s sake we have ignored the market movement on that particular day). The diminution in the dividend option NAV equals the amount of dividend declared.

A matter of dividend

		Growth	Dividend
NAV as on January 1, 2007	Rs	10.0	10.0
NAV as on March 30, 2007	Rs	12.0	12.0
Dividend declared as on March 31, 2007	%	-	10.0
NAV as on March 31, 2007	Rs	12.0	11.0
NAV growth over 1-month	%	10.0	10.0
NAV as on April 30, 2007	Rs	13.2	12.1

(We have assumed that the growth and dividend options have similar portfolios. If they have different portfolios then the discrepancy will be due to a combination of market movements and their respective portfolios. For simplicity’s sake we have ignored the market movement on March 31, 2007)

For instance, in our illustration (refer table) both the growth and dividend NAVs have appreciated by 20% from the NFO (new fund offer) period to close at Rs 12.0. The mutual fund declares 10.0% dividend after which the dividend NAV declines to Rs 11.0 (ex-dividend). The growth NAV on the other hand remains unchanged at Rs 12.0.

The difference between the growth and dividend NAVs will equal the dividend declared (i.e. Re 1). However, the difference in both the NAVs will equal the dividend declared only on the day of the dividend declaration. The next day this difference will vary (from Re 1 in this case) based on the market movement. For instance, lets assume that markets appreciate by 10% over 1-month after the dividend declaration. In that case, the growth option will rise from Rs 12.0 to Rs 13.2, while the dividend option will rise from Rs 11.0 to Rs 12.1.

The 10% growth in NAV is based on the value of the portfolio’s investments. Therefore, although the growth NAV seems higher compared to the dividend NAV, both NAVs have appreciated proportionately. The difference between the options is now Rs 1.1 while at the time of the dividend declaration it was Rs 1.0.

What investors should do
As we have impressed no matter what option the investor chooses, dividend and growth NAVs will appreciate/depreciate based on the market movement; there is no other factor at play over here. Which option (growth or dividend) to select is dictated entirely by the investor’s investment objective and income/liquidity constraints.

Happy Investing

Sources : EquityMaster & Wikipedia