CHITRA SANTHE

This is the annual road side painting and craft exhibition and sale organized in Bangalore .It is an amazing site to watch hundereds of artists from all over India , come to bangalore and setup stalls . Read more about this here

The road would be closed for traffic and it is wonderful to see people buzzing around watching the paintings , buying some , kids getting their face and arms painted and people also getting their portraits done . I joined in and got my portrait done , in flat 15 minutes ..

It was good to see so many young people willing to make career out of art . I'am always fascinated to see the astonishing sculptures in many of old Indian temples , but one thing that we miss to see is that , those temple were created during times of stable , prosperous and wealthy empires . Feel that , when the society is wealthy and prosperous enough to see beyound mere survival it starts to appreciate art and music .

So we as a society need to make sure that , as more bigger and stronger we grow economically , we also try and learn to appreciate our art and music . and also see to it that people can make a living following their passion in art and music .

My regrets in my investment journey

I have been investing for some time now , but there are somethings i wish i had done differently

1. Wish i had started Earlier : I have no regrets about when i started investing in equities directly , but wish i had started investing in MFs earlier , wish i had started SIPs earlier . If have to change somethings , i would have started a SIP , the day i started working .
2. Wish I had placed bigger bets : I have never bought any stock on a TIP, i did listen to tips and then tried to study those stock and if i was comfortable , after tracking and reading about that stock for atleast a couple of months would then invest . But being a novice , i did not have the conviction to place larger bets , that is invest larger amounts.
3. Wish I had "Accounts" as a subject in school: I wish i had studied "Accounts" . so that i could learn to read Balance sheets and P&L statements better.

Final regret , there are no UNDOs in life ...so you just have to live with the pain of regrets.

ATM usage

We had heard of numerous instances , where the ATMs were misused by fraudsters. The modus operandi was to try and pull out cash when the card holder has left the ATM , after entering the the PIN, thinking the ATM was faulty .

RBI has now made it mandatory for banks to incorporate extra safeguards in ATMs , it has made it mandatory that the PIN has to be entered every time a transaction is done . Earlier it was possible that we would enter PIN once and could withdraw cash multiple times , now that is not possible. This is a good move by the RBI.

One of the best practices in ATM usage would be, once you have finished using the ATM and have been again brought back to the welcome screen or any out of order screen  ,make sure you press the Cancel button a couple of times this would prevent any misuse of already entered PIN.

ATMs could still be prone to other kind of frauds , so be cautious

Repay the loan or Invest ?

I have read quite a few articles on different blogs and also seen people calling in on some of the call-In programs asking if they should repay the debt they carry or invest the money they have .

I have a simple take on this question . If you have at least a couple of months expense put aside as emergency saving and have a life insurance cover and also a medical Insurance cover for your family . Then go ahead and repay as much of your loans as possible .

In case you carry multiple loans , repay those loans that do not provide you with any tax deductions first as also probably they carry higher interest rate and once those have been repaid ,start repaying the others.

Even in case of a mortgage or a housing loan , if you can , prepay as much you can without paying penalty and If you are allowed to increase your EMI do so.

Nothing can describe the sense of relief and freedom a person can experience, when he owes nobody no money .

Image: Credit is due

Differential Voting Rights (DVR)

Normally One share corresponds to One Vote.The share holder can excerise this right to vote during accepting or opposing certain resolution or decision of the company that has been put up for shareholder's approval .

But there are certain category of shares , which are issued with lower voting right and lieu of surrendering their voting rights these shares usually have a higher dividend yield . These type of shares are called DVRs

For example, Tata Motors has DVR listed on the Indian stock market and each of the Tata Motor DVR  has 1/10 voting right , which means, you would need 10 Tata Motor (DVR) shares for to muster One Vote. And in lieu of this lower voting right , each DVR share enjoy 5% higher dividend then a normal Tata Motor share,  that is, if Tata Motor were to declare 10% dividend , DVR are eligible for a 15% dividends

What's in it for Investors ?
Shares with DVR, are mainly targeted at small or retail investors.When small or retail investors invest in a company they are not interested in running or in management of the company and they hardly exercise their voting rights as they are only look for financial returns.With higher dividend yield , retail investor's needs for greater financial returns is met

What's in it for Management ?
Any management which issues shares is always concerned about diluting their voting rights and hence their control on the company and hence increase the risk of a hostile take overs . But with DVR , managment get to raise money from the market , without proportionate dilution of voting rights.

In India Tata Motors, Pantaloon Retail and Gujarat NRE Coke have issued DVR shares .

Pros:

• Higher Dividend Yields
• Price difference between normal share and DVR shares must be about 25 % but in india the difference is much more than that ( DVR are less priced then normal share )

 Cons:

• Liquidity, that is number of people buying and selling these shares are extremely low , this may be due of lack of knowledge . So investor may have problem when selling these shares .

Should you Invest ?
If the fundamentals of the under lying company is good , DVRs are an ideal investment vehicle for the retail investors.
 
So in the uniform world of share holdings these shares are just different.
 

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Jargons we keep hearing

There are quite a few words we keep hearing , but may not have cared to dig deep to what do these words mean

Deficit:
A situation in which liabilities exceed assets, expenditures exceed income, losses exceed profits is known as deficit

Fiscal Deficit:
Situation in which a government's total expenditures exceed the revenue that it generates is called Fiscal Deficit. In India, our government always has a Fiscal Deficit and this short fall is cover by government borrowings , disinvestment of PSUs , etc

This year the Fiscal Deficit , could be lower because of the huge amount of money made by our government from 3G auction

Current Account Deficit :
when a country's total imports of goods, services and transfers is greater than the country's total export of goods, services and transfers. This situation makes a country a net debtor to the rest of the world.this is called running a Current Account Deficit.

Usually in trade negotiations between two countries , Current Account Deficit is a major concern for the debtor that is tried to be addressed . Every country in the world today, including USA runs a Current Account Deficit with China , which means , every country in the world imports more from China , then they export to China .

Monetary Policy:
The actions of Reserve Bank of India , that determine the size and rate of growth of the money supply which in turn affects interest rates is known as Monetary Policy. If the money supply is too loose inflation will be high and if it is too tight then economic growth is affected. So in most cases Monetary Policy is a juggling act to balance growth and control Inflation/Price.

In India, RBI does this by tweaking a whole set of parameters like CRR,SLR,Repo, Reverse Repo , etc  
what to know about these terms click here

Fiscal Policy
Government policies that influence macroeconomic conditions. These policies affect Tax Rates, Foreign Direct Investments , Government Spendings, etc . In case of India , Annual Budget is a time when major Fiscal Policy directions are spelt out by the government.

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Tax FREE

Dividends are a way companies shares their profits with share holders, This is direct credit of cash into share holder's bank account . Companies are not bound or mandated to declare dividends .Companies can very well decide not to declare dividends and decide to use that cash to grow their business.

It has been usually found that companies that already have huge cash reserves and not finding avenues to deploy them profitably are better off declaring dividends

Dividend are usually declared as a % of the face value , for example a company with shares of face value of Rs.2 , when declares a dividend of 50% means it is going to pay an amount of Rs.1 for every share held by the share holder

For share holders dividend are a source of Tax free income . Dividends declared by companies as well as Equity Mutual Funds are all tax free in the hands of the share holders .

Lets take the case of Mr. Azim Pemji of Wipro , Premji holds significant stake in Wipro ( In excess of 50%) and last year received nothing less than Rs.500 crores as dividend income ,this income is completely tax free and Premji has been receiving such dividends amounts for many years now . Premji has taken stakes in other companies using these tax free income , sure these other companies add significant tax free income to Premji's kitty.

As Investors, our aim must not only be to generate multiple sources of income , but also see to it that these are generated tax efficiently .

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Exponential growth

The Graph that you see is a how your money would grow in a PPF account.

 If you invest Rs.70,000 each year , this is how your money would grow to about 20 Lakhs at end of 15 years.

You would come across lots of article on power of compounding and also calculators that would calculate for you the final amount . But like the saying, a picture speaks a thousand words , only when you see it as a graph you see what compunding actually does to your money.

As you would see the graph is not linear , but Exponential

In nature during any epidemic and massive outbreak of infections and diseases , it is found that the microbes have started mutiplying exponential to reach gigantic proportions quickly and similarly when fraudster want to increase the reach of their schemes , they try to build Mutilevel Marketing and Pyramid Schemes , since all these help them to grow very very fast.

On the graph , if a line was drawn joing the top of each of the bars , it would increasingly get steeper and steeper , which means larger and larger returns , so the most important factor then would be "Time" ...you give enough time for your investments that is growing exponentially and you would see your returns grow to gigantic proportions

Balance Sheet and P&L Statement

Balance Sheet and the Profit & Loss statement is suppose to describe the financial health of a organization . To put it very simplistically it is suppose to explain these

Income/Expenditure and Asset/Liabilities

• Explain how much did the company Earn and all sources of its Earnings
• Explain the Expenses incurred and all sources for its Expenditures
• Explain Assets that the company has created
• Explain Liabilities that the company would need to take care off.

Valuation
Explain how has the company valued it Assets, Intangible Assets and Liabilities

Disclosure
The risks that company sees to its business and hence to its earning prospects and any other problems and issues that the management foresees

As simple as this may sound , it is not , as we have seen in case of Satyam in India and may be Enron in US, the management is uncomfortable keeping its accounts as pain and simple and finds ways to distort facts, when all that is expected of them is to be unambiguously clear about the above mentioned three pieces of information

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We are approaching end of January , you know what time of the year it is ? , well time to do your Tax Planning .

I do not mean tax planning for the year 2010-2011 , nope , but for the year 2011-2012. This is that time when you need to start planning and finalise where to invest for the next financial year .

Imagine by March end if you can finalized your investment plan and begining April 2011 start on that plan , you do not have to

• Hurry at the end of the year and end up choosing wrong investment instruments
• Hurry at the end of the year to get all the investment proofs
• Worry about where to get all the money to do the tax saving  investments
• Worry about able to make full required investment by the proof submissions date

So , don't be late , start your planning and avoid all the hurry and worry

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Market Capitalization

We keep hearing the term "Market Capitalization" , also called Market-Cap , what really is this and how do we categories companies based on Market-Cap

Mathematically , Market Cap is the Price of a Single Share of the company multiplied by Total Number of shares issued by the company

                      ( Price of Single share ) x (Total Number of Share ) 

Well , in business sense , this can be constructed as , the price a person needs to pay , if he would like to buy the entire company or it can be constructed as the the price the market thinks in all its infinite wisdom , what the whole company is worth

Based on the total price that is reached , companies are classified as

• Large Cap
• Mid Cap
• Small Cap 

Any company with valuation in excess of Rs.1000 crore is labelled Large Cap and Any company with valuation of less than Rs.500 crore is labelled Small Cap , and all companies in between Rs.1000 - Rs.500 crores as the Mid Cap.


The Market Capitalization could also be used to see if a company has been undervalued. This could be done by something called "Replacement Cost Analysis". Suppose it would cost far greater to build a company of certain nature and scale compared to the  market cap of an existing similar company , then it is considered as under valued company and possible a candidate for further study with intend of investing

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Topup SIP

HDFC AMC has launced a new product called Topup SIP , this is a add-on to an exisiting SIP. The investor would need to specify a fixed amount and choose a time interval . The SIP installment would be increased by the fixed amount ,once every specified time interval

Let me explain , Suppose you have a SIP currently in progress for Rs.2000, and you opt for the Topup SIP  and specify Rs.1000 , every six months for next 2 years . then after the first six months your SIP installment would be increased to Rs.3000 ( Rs.2000 + Rs.1000) and this would remain so for next 6 months . after which the SIP installment would get increased again to Rs.4000 ( Rs.3000 + Rs.1000) .and so on till it reaches Rs.6000 at the end of two year .

This product allows you to gradually increase your SIP investment in a phased manner.

This product may help you start off investing in a trickle and let that grow into a deluge

Image: Nagendra kamath 

Financial Plan for Children

We have seen a slew of Child Plans launches last few years. All these plans try to market the product , reminding the parents of their obligation to provide their kids with the best of education and about the expenses involved for the marriage .

Are these products really worth buying
Most of the child plan in the market are a combination of An insurance cover for the parent , with child as the nominee , along with this the promise to invest the rest of the money in equity,debt or some other asset class .

What i find surprising is that, these child plans would have atleast about 2% of recurring charges , along with some premature charge of about 2% .

If you see closely , it is possible for a Individual Investor to form this bouquet of investment on his own from the products available in the market .

Individual Investor with little bit of discipline can form a bouquet of

• Term Insurance Plan ( buy policy online here or compare policies here)
• SIP in a combination of Balanced Fund and  Diversified Equity Fund ( Get the best rated MFs here )
• Buy some amount of Gold  ( ETFs, know more here )

How would this help investors: 

• Reduced charges 
• Flexibility to move to some other funds, if the performance of your invested fund does not lives up to the mark. 
• Encash the investment whenever the child needs the money .

Conclusion
Have some discipline , avoid packaged child plans and form the child plan bouquet yourself  .I'm sure you would find that planning for your child, sure is child's play .

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Behavioral Finance

"Behavioral Finance" , is more of a science and art  then finance , it deal with the behavioural aspect of  humans, in the context of finance . it tries to explain things like

Why in a bull market investor is willing to sell  the winners in his portfolio , when he clinches on to the looser


Why is a investor in a bull market willing to buy when the valuations are high  , but is uncertain in a bearish market  , when the same stocks are available at attractive discounts.

Why do even knowledgeable fund managers get caught up in the herd mentality and take bets on already very pricey stocks

Fear and Greed are the emotions that makes the market what they are ,extremely unpredictable and highly irrational .

In the Indian context , i can say that the greed of few like Harshad Mehta, Ketan Parikh , have caused far more fear among the investor .

So stock markets end up being a function of human mind and emotions rather than financial fundamentals


In India, Parag Parikh is a proponent of Behavioral Finance, with a couple of books to his credit . you can watch and read more about Parag @ ppfas.com

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Inflection Point

Andy Grove of Intel in his book speaks of  the "Inflection Point" , Inflection Point is a point in time , when a company realises that it could no more survive profitably doing what it previously did and has to start thinking out of the box . And for "Intel" this realisation came very late , when it had already lost significant market share to cheaper and better Japanses products.

But there are companies , which have the forsight and vision to see this "Inflection Point" coming their way decades before it has actually arrived, one such company in India is ITC

ITC , as the name suggest "India Tobacco Company" started off as a one product company , it was all about cigarettes , they were , are and will be the indisputable leaders in this additive category .

But the management had/has vision , they saw problems coming from multiple directions , higher taxation , increasingly health conscious public , tighter government policy on smoking and started diversifying and today has a product portfolio that is staggering and awe inspiring.

Similarly 2010 was a year of  "Inflection Point" for the Mutual Fund Industry , when the SEBI removed the entry load , which was used to pay the MF agents , thus forcing the agents and industry to thing of more creative and innovative ways to do business .

2012 would be a year to watch out for, with DTC ( Direct Tax Code ), it could be a "Inflection Point" for individual investors.

It is said in times of great uncertainty , wealth is transfered from the unprepared to the prepared . So use 2011 to prepare for the "Inflection Point" that awaits you in 2012

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Action

No matter what your level of knowledge , it is your actions that matter , nothing else matters .

I'am somebody , who has been planning to buy a car for ages now . I know which car to buy , when to buy , why to buy , what are the car loans available , I can even give you a hundred reasons for me not to buy a car .  Except for buying a car, i have done everything else , what is the value of all this knowledge without action ...hmm... ZILCH

The same applies to investing .. you may make mistakes or rather blunders when you try .. but without action , you will never be able to build long term wealth .

Financial Inertial , is something which people find very very hard to overcome .

Financial Inertia : Is continuing to do nothing about your financial state, knowing perfectly well what needs to be done and how

A friend of mine approached me with all his investment details and we found that , he had very little idea of what all he has invested in and why . So we started with a plan of set things in order by first making sure we gathered all the information like folio numbers , policy numbers , kind of policies and state of each policy . After we had all these details i wanted him to make sure that his contact emails were updated in all his investments and also wanted him to start SIPs  in some good MFs instead of taking direct exposure to equity

In persuance towards this goal, made sure he had the PDFs of all the MF application forms and instructions on how to fill them . All that he had to do was to fill those forms , attach a PAN card/KYC photo copy and submit it at the CAMS office, along with a cheque . It has been about a month now and my friend has not done any progress.. this is Financial Inertia .

And trust me , this is not a isolated case . I have seem this pattern of inaction over and over across a crossection of people

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Investing ? -- Make it boring

Investing is all about Capital Preservation and Capital Appreciation . Simply put investing is all about making sure that you do not lose money and that the money you invested earns a decent return.

Investing is never about thrills and excitements , if thrills and excitements is what you crave for , then you would need to visit a Casino.

So what adjectives must we associate with good investing , well to be frank "Boring" .Greater the mastery you have achieved in managing your money , more boring and may be more predictable you will be in your investment style .

i) There is hardly any excitement in finding a good Mutual Fund and starting a SIP in it ,

ii) There is hardly any excitement investing in companies like ITC,GAIL,COLGATE and then to hold on to these stocks and let them compound

iii) There is hardly any excitement in maxing out your PPF contributions

iv) Neither is there any excitement in increase your contribution to VPF/EPF

As boring as these may sound , these are the investments that would build you, your long term wealth

Power of Mistakes

"A child becomes an adult when he realises that he has a right not only to be right but also to be wrong " --Thomas Szasz

This is such a wonderful quote , there are so many things in life which we never try for fear of failure , for fear of being ridiculed . But the most lasting and greastest of lessons are learnt when we make a mistake .

The path to investing in Equity is ridden with lessons along the way . And these lessons can only be learn by being hands-on . No matter how much you read about investing , what you know is a tiny bit, as your lessons only start when you commit to getting your hands down and dirty in this amazing school called Equity Markets

The Market teach you many things , it teaches you patience , it teaches you not to be greedy , it teaches you that, no matter how many years you spend in the market, there is always something new to learn.

My learnings from market , in my little time in the market has been

1) You make money when you buy a stock not when you sell.
What this means is , buy at the right price and you will never be worries about your stock portfolio. Since by buying at the right price , you have made sure there is sufficient margin of safety and value .

2) Never be in a hurry to buy , since you will again get the very same price point , if you have the patience.

3) Buy a good business and hold it for as along as you can .

4) If you are itiching to invest without much study about the stock , stick to the large caps .

5) Have the discipline to hold on to your winners .

6) Keep reading . something read ages ago may help you spot a winner.

and always learn from mistakes either yours or somebody elses ..

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Post Office Schemes

The Post office in India is a very unique institution . Think only one in the world that delivers your mails to your door step .And i consider it one of the very very few government services which still has a large pool of very dedicated and sincere people working for it .

Indian Postal Services are unique in another sense , it is also a Bank and offer some highly popular investment option to us , which i feel cannot be ignored .

PPF ( Public Provident Fund ) :
I cannot stress more , if you do not have a PPF , get one today . PPF is a must have investment option , check my post on PPF and also how to use it Optimally

MIS (Monthly Income Scheme ) & RD (Recurring Deposit ) combo:
This is a unique combo where you try to feed the interest earned from MIS into a RD , through a S.B.Account . MIS is a simple scheme where you would do a one time deposit which would give you a 8% rate of return and the subscriber would be paid every month as the name the suggest and at the end of 6 years , you would even get a 5% of the money deposited as a lumpsum bonus along with the principal amount.You can mandate the post office to deposit this monthly income into a S.B .account and you can then open an R.D and madate the post office to credit the RD's monthly installment by debiting your S.B account . So that your MIS could in turn feed your RD .

SCSS ( Senior Citizen Saving Scheme)
9% rate of interest per annum, Maturity period is 5 years. A depositor should be of 60 years Premature closure is allowed after one year.

All Post Office Schemes

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Choices

Thinking of Investing in a Mutual Fund ...these are your choices

i) SIP - Systematic Investment Plan

In this mode , you decide to invest a fixed amount , on a fixed day of every month , in a Mutual Fund of your choice. The advantage of this method is , you would endup buying more units when the markets are down ( and hence NAV of the MF is low ) and also that it would help develop a sense of discipline in investing .

ii) VIP - Value Investing Plan

In this mode , the amount you invest every month varies , you would specifie a range ( say Rs.2000 to Rs.5000) ,Mutual Fund company would invest more when the markets are down hence buying more Mutual Fund Units when markets are low and buying less when the markets are high , thus averaging your buys. Even in case of VIP , you would need to specify a day of month and the fund scheme to invest in . Benchmark AMC provides this mode for investing.

iii) STP - Systematic Transfer Plan

In this mode you invest a lumpsum amount , a one time investment into a debt fund ( a mutual fund , which does not invest in stocks ) and then you instruct the Mutual Fund to transfer a fixed amount to a choosen Equity Mutual Fund scheme on a fixed day of the month .Advantage of this mode is that instead of keeping the amount in a S.B account and earning about 3.5% interest , in a debt fund you may earn a higher rate of interest and still keep investing the money in a phased manner in a Equity Mutual Fund , which could earn you higher returns in the longer term.

iv) Flex - STP (Flexible - Systematic Transfer Plan)

This mode is exactly like a normal STP , but instead of a fixed amount that gets transfered or invested each month like a SIP, a variable amount gets invested each month like a VIP. currently HDFC AMC provides this mode for investing.

v) FLEX-INDEX (Flexible Index Plan)

This is another mode very similar to STP , but instead of a amount being transfered for investing every month , the trigger for transfer or date when the investment takes place is when the Index say NIFTY or SENSEX reaches a certain level . When we want to use this mode , we would need to specifiy the Index level and % of the total money to be invested at each of these levels . All these levels and % specified would be valid only for a year from date of enrollment . If during this time interval , those index levels are not reached, then no amount would be invested .This is one more of HDFC AMC's scheme.

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Credit Card

Have you ever wondered how your credit card works , i do not mean about the interest rate and all that , but , how is the merchant getting paid and how is your account charged .. let me explain

There are 5 different entities involved in a single card transaction

1) Card Holder : That is you

2) Issuer : This is the bank which issued the card to the Card Holder , and who has an agreement with Card Holder regarding payment

3) Merchant : This is the retail outlet , which has agreed to accept the card

4) Acquirer : This is also a bank , which has issued the card swipe machine to the merchant and with whom the merchant has a bank account

5) Payment system : Visa , MasterCard , Amex, Dinner, etc .

From the point you swipe the card to the point merchant finally gets paid ,there are two systems involved

i) Authorisation :

ii) Clearing and Settlement

Authorisation :

When your card is swiped at the merchant location and when the merchant punches in the invoice amount , a call is made from the merchant's swipe machine to the "Acquirer" and your card details are shared with the Acquirer for authorisation. The Acquirer forwards this request to say VISA , which in turn contacts the "Issuer" of the card for checking the validity and credit limit of the card , on receiving a authorization from the "Issuer" , VISA forwards it to the "Acquirer" and who in turn forwards it to the merchant .

Clearing and Settlement :
Once the Authorisation is done , the merchant gets the transaction slip signed and deposits it at the "Acquirer" , who in turn would pay the merchant the money and raises a request to VISA for settlement . VISA pays the "Acquirer" and debits the amount from the "Issuer". The "Issuer" in turn charges this to the "Card Holder" and sends the card holder a Card statement .

The Payment system acts a bridge between "Acquirer" and the "Issuer" , who may be in any part of the world.and for providing this service they charge a fee for every transaction.
source: www.visa.com

CAGR (Compounded Annual Growth Rate)

CAGR is a term that would keep poping up when try to read about the financial performance of a Mutual Fund or a stock or any other financial instrument .

Let me try to expain what actually CAGR is and why is it important . Let us assume that we are analysing the performance of a stock over a period of last three years and we find that in last three years, the company has seen different % of growth . you may be tempted to ask , so instead of this fluctuating rate of growth , if the company had grown at what uniform rate , would we have seen the same level of growth.

So CAGR can be described as a way to calculate a uniform rate of return over a period of time when the actual rate of return has been fluctuating over the same period of time.

CAGR would help us to compare different Stocks,MFs or any other investments ,since we could never have compared these with a fluctuating rate of return .

CAGR = [(Current Value/Initial Value)^(1/# of years)] - 1

E.G:

Let us assume that a investment of Rs.100 has grown as shown and after three years has grown to Rs.225 , and we also see that every year it has grown by different %. so if we want to find a uniform rate of grown for these 3 year ..this is how we go about

CAGR = [(225/100)^(1/3)] - 1 = 0.3103 = 31.03% .

This mean that if Rs.100 grows by a uniform rate 31.03% each year , at the end of 3 years we will still endup with Rs.225

So CAGR can be described as a way to smoothen the curve .

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T + 2

When we buy stocks, the process followed by stock exchanges is T+2 , that is , suppose I buy a certain stock on a Wednesday , then Wednesday would be "T" or "Day of the Transaction" and the stock exchange would take 2 more days to square the transaction , that is on Friday , I should see my demat account credited with the stock and cash debited out of my trading account .This T+2 th day is called "Settlement day"

This would be the situation when both the buyer and seller have acted in good faith .

What would happen , suppose the seller , sells 10 shares of a certain company , when he has only 5 shares with him ?

In this situtation, on T+2th day( i.e on Friday) the stock exchange realises that there has been a short fall, this situation is called "Short Deliveries" . Now to set right this situation, stock exchange would debit the money account of the broker who is unable to deliver the promised quantity of shares an amount equal to the short fall.

The stock exchange then conducts a auction for the required shares , various brokers can take part in this auction and the stock exchange finally buys the required shortfall of shares and delivers it to the buyer . If the price paid by exchange in the auction is higher then the debited amount , then the defaulted seller would have to shell out the difference too.

In situation like these the transaction ceases to be a T+2 and ends up being a T+5 , since the stock exchange would take 3 more days to set right the wrong .

To arrive at the settlement day all holidays are excluded.

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Net Asset Value per unit (NAV)

What is NAV of a Equity Mutual Fund?

In case of a Mutual Fund , the NAV of a fund is the total value of all the cash and stock in the fund's portfolio minus any expences, divided by number of units that the Mutual Fund may have sold.

What are the expences involved ?

Mutual funds would have to pay brokerage every time they buy and sell stocks , they would have expence in marketing the Mutual Fund , paying the fund managers, and other charges involved in maintaining the folios and other administrative charges. SEBI , has mandated that expences cannot cross 2.5% of the total Amount under management of a particular scheme.

So you would see here that better the mutual fund is able to manage its costs,better it would be for the investors । Lesser the Mutual Funds buys and sells , lesser would its brokerage expence, hence lesser its expense.So always do look at the expence ratio of a fund .

When is NAV calculated

NAV is calculated at the end of everyday after the trading ends . This is done by finding value of all the stocks in the portfolio of the Mutual fund based on the day ending price and also adding to this any cash or other security that Mutual Fund has and then subtracting all the expences involved and finally dividing this amount by the number of units that has been issued by the Mutual Fund .

So even if there is huge fall/rise in the price of a certain stock which the Mutual Fund holds in the middle of the day, that would not affect negatively or positively the mutual fund NAV as the day end price is what counts ।

What price do investor pay to Buy/Sell Mutual Fund Units ?

Even if you give a buy or sell instruction to your Mutual Fund at the start of the day , the price or NAV that which your units would be bought or sold , would be the one that gets calculated at the end of that particular day.

But suppose you give buy or sell instructions to your Mutual Fund after the NAV is calculated for the day , that is after 3 PM , than your buy or sell request would be implemented or executed only at the end of the next working day after the NAV of the next working day is calculated.

So bottom line is , you would never know the exact NAV at which your Buy or Sell instruction would be executed.

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MF Dividends and SEBI

As per new Guidelines from SEBI , Mutual Funds can only declare dividends from "Realised Gains" and not from the "Unit Premium Reserve".

What exactly does this mean , well , let me explain, Suppose MF came out with a fund with a face value of Rs.10 and lets say after a year the NAV of the scheme is 22 . If you are going to buy a unit in this scheme now , Rs.10 would go into the capital fund and the amount greater than the face value i.e Rs.12 in this case goes into a account called Unit Premium Reserve, Ideally, the mutual fund is suppose to use this amount to buy equity from the market or rather invest and let that money grow .

But the Mutual funds did not do that , they would try to lure more people into investing in their schemes , by declaring dividends and the dividends would be paid from this Unit Premium Reserve, which means the mutual fund is paying back to the investor , the same money which they invested few days back .

So in order to prevent this farce , SEBI declared that hence forth , dividends cannot be paid from the Unit Premium Reserve, but must be from "Realised Gains", i.e from profits made from investment activity by the mutual fund .

This is sure to improve the HEALTH of the Mutual funds , as only serious long term investor may invest , and also for MF to generate "Realised Gains", they need to invest , investor's funds prudently and profitably.

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Capital Gains

Capital Gain is profits that results from investments into stocks, bonds , real estate, Gold ETF .The profits thus made will be taxed differently.

To start with Capital Gains are classified as Short Term Capital Gains and Long Term Capita Gains

Long Term Capital Gains: If Stocks and Mutual Funds are held for atleast 1 Year and then sold , the profits made would be considered as Long Term Capital Gains. But in case of Real Estates , the holding period needs to be more than 3 Years for the profits made to be considered as Long Term Capital Gains.

Short Term Capital Gains : Are gains made from Stocks and Mutual Funds that are held for less than 1 Year and Real Estates for less than 3 Years.

In case of Stocks , if stocks had been purchased at different times , the concept of First In First Out from demat account would be considered to ascertain the date of purchase. And it is also important that the Stocks needs to be sold on a recognised stock exchange , duly paying the requisite STT( Securities Transaction Tax )

Capital Gains Tax Rate for different types of securities. click to view tax rates

source :finance.indiamart.com

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House Loan - Pre EMI

Housing loan or Mortgage has become a everyday reality in our lives and the indispensable part of any housing loan is Equated Monthly Installments (EMI) , that is the montly instalment that we would need to pay to clear off the loan .

Then what is Pre EMI ?, well , in case of a house under construction , the disbursal of the loan amount to the builder by the bank would be in stages , that is, a certain percentage of the loan amount would be paid when the foundation is completed , and a further more when the roof of the house is ready and so on .

It is only when the entire amount is disbursed and the house is possesed by the borrower that , EMIs would start off and each EMI would contain a part towards interest payment and a part towards principal payment .

During the initial phases,when percentages is being disbursed by the banks and house is still not complete and possesed by the borrower yet, the borrower may be asked by the banks to start making payments towards the amount disbursed , mainly towards the interest of the amount disbursed . And this constitutes a pre EMI.

We know that Interest and the Principal amount repaid as part of EMI are tax deductibles to the tune of Rs.1 Lakh of Principal under section 80C and either Rs.1.5 Lakh for self occupied house and without Limit for a rented out house under section 24 of the Income Tax act

Where does pre EMI fit in , well , to claim tax deductions for the pre EMI, the entire pre EMI amount needs to be devided into 5 equal parts and would need to be clubbed with the Interest paid for next five years , but please do note that , it cannot exceed the Rs.1.5 Lakhs limit for a self occupied property.

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