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Sunday, July 3, 2011
Wednesday, April 13, 2011
How must you plan your Investing
But, no matter what kind of goals you may have , your investment must be spread across different investments type or very simplistically must be spread across at least Debt and Equity.
- Short Term Investment Horizon ( 1 year )
Debt : Bank Fixed Deposits and FMP and Balanced Funds
Equity : Large cap Focused Diversified Equity Funds
- Medium Term Investment Horizon ( 3-5 year )
Debt : Bank FDs, Corporate FDs , Debt Mutual Fund
Equity : Large Cap and Mid Cap Focused Diversified Equity Funds
- Long Term Investment Horizon ( > 5 year )
Debt : Bank/Corporate FDs,PPF/PF,Long Tenure Bonds
Equity : Large Cap Focused Diversified Equity Funds ,
Mid/Small Cap Focused Diversified Equity Funds
Direct Exposure to Equity.
You can add Gold to all of these for stability .
As the saying goes, "Failing to Plan is Planning to Fail" , so lets be prudent and plan
As the saying goes, "Failing to Plan is Planning to Fail" , so lets be prudent and plan
Image: renjith krishnan / FreeDigitalPhotos.net
Why is Investing important
If you have been able to save money and have been able to spend less than what you earn, that is great, you have taken a tiny step towards wealth creation, since you could never have hoped to create wealth by spending more than you earn.
The question that now begs to be answered is, is just saving enough.
Let me explain
I usually have Idlies for breakfast, about two years back my breakfast costed me Rs.10 and today the same breakfast costs me Rs.14.
Now If,
· I had saved Rs.10 as cash, I would have found after two years that my Rs.10 would no more be able to buy me the breakfast.
· I had kept this Rs.10 in a savings bank account that which gives me a interest of 3.5 % a year, I would have got Rs.0.35 the first year and another Rs.0.35 the next, so ideally I would have ended up having Rs.10.70, which would still not buy me my normal breakfast.
Which just shows that, saving thought extremely important is just not sufficient, it must be backed by a push to invest, else rise in Prices (Inflation) eats into our purchasing power, reducing the value of money.
If you see all great wealth creators, the one consistent thing you find is that, they have learnt to make their money work harder, they have learnt, left on its own money would start loosing value hence it is a far better proposition to convert money into Stocks, Bonds, Real Estate, Businesses, Gold, etc.
Do work hard , but also learn to make your money work harder .
The question that now begs to be answered is, is just saving enough.
Let me explain
I usually have Idlies for breakfast, about two years back my breakfast costed me Rs.10 and today the same breakfast costs me Rs.14.
Now If,
· I had saved Rs.10 as cash, I would have found after two years that my Rs.10 would no more be able to buy me the breakfast.
· I had kept this Rs.10 in a savings bank account that which gives me a interest of 3.5 % a year, I would have got Rs.0.35 the first year and another Rs.0.35 the next, so ideally I would have ended up having Rs.10.70, which would still not buy me my normal breakfast.
Which just shows that, saving thought extremely important is just not sufficient, it must be backed by a push to invest, else rise in Prices (Inflation) eats into our purchasing power, reducing the value of money.
If you see all great wealth creators, the one consistent thing you find is that, they have learnt to make their money work harder, they have learnt, left on its own money would start loosing value hence it is a far better proposition to convert money into Stocks, Bonds, Real Estate, Businesses, Gold, etc.
Do work hard , but also learn to make your money work harder .
Monday, March 28, 2011
Indexation ... Double Indexation
As per the Indian Taxation law , whenever an asset has been held for the long term, "Indexation Benefit" can be availed by the investor when the investor finally sells the asset.
The term "Long Term" is different for different instruments.
When an asset is sold after the above mentioned period , the profits/losses that are made are called "Long Term Capital Gains/Losses"
In case of Equity there is no Long Term Capital Gains Tax (LTCGT). But in case of other assets like Debt Mutual Funds, Property there is a Long Term Capital Gains Tax to be paid .
Long Term Capital Gains Tax (LTCGT) is computed as
What is Indexation ?
Capital gains would be usually calculated as
Capital Gain = Selling Price – Purchase Price
But fortunately government realised this is not a fair assumption because , rise in inflation usually eats into your profits . So in order to compensate for inflation , governments lets you increase your purchase price.
But arbitrary increase of purchase price cannot be allowed , so every year CBDT (Central Board of Direct Taxes ) comes out with a Index value for Cost Inflation Index (CII). using this Index to reduce the cost of purchase is called Indexation
How is this index to be used
Capital Gain = Selling Price – Cost Inflation Indexed Purchase Price
How is "Cost Inflation Indexed Purchase Price" calculated
Cost Inflation Indexed Purchase Price = Purchase Price X (CII for current year / CII for year of purchase )
Suppose you bought a 370 day FMP on 28th March 2009 (Financial Year 2008-2009) for Rs. 50,000 and then it was redeemed on 3rd April 2010 ( Financial Year 2010-2011 ) for say Rs.70,000
Then the Cost Price = Rs. 50,000
Cost Inflation Indexed Purchase Price = 50,000 x ( 721/582 ) = 61,941
Please note: Financial year is considered not the calender year . so thought it was only for a year ( 370 days ) that this money was invested, since this crossed two Financial year ( 2008-2009 to 2010-2011) , we are doing a "Double Indexation" here
So Capital Gain
Capital Gain Tax would be :
So, the month of March each year see a heavy offerings of 370 days FMP by mutual funds to let investors take advantage of "Double Indexation".
The term "Long Term" is different for different instruments.
- Stocks and Mutual funds,a period of one(1) year is considered long term
- House, Property a period of three (3) years is considered long term
When an asset is sold after the above mentioned period , the profits/losses that are made are called "Long Term Capital Gains/Losses"
In case of Equity there is no Long Term Capital Gains Tax (LTCGT). But in case of other assets like Debt Mutual Funds, Property there is a Long Term Capital Gains Tax to be paid .
Long Term Capital Gains Tax (LTCGT) is computed as
- 20% of Long Term Capital Gains with Indexation
- 10% of Long Term Capital Gains without Indexation
What is Indexation ?
Capital gains would be usually calculated as
Capital Gain = Selling Price – Purchase Price
But fortunately government realised this is not a fair assumption because , rise in inflation usually eats into your profits . So in order to compensate for inflation , governments lets you increase your purchase price.
But arbitrary increase of purchase price cannot be allowed , so every year CBDT (Central Board of Direct Taxes ) comes out with a Index value for Cost Inflation Index (CII). using this Index to reduce the cost of purchase is called Indexation
How is this index to be used
Capital Gain = Selling Price – Cost Inflation Indexed Purchase Price
How is "Cost Inflation Indexed Purchase Price" calculated
Cost Inflation Indexed Purchase Price = Purchase Price X (CII for current year / CII for year of purchase )
Suppose you bought a 370 day FMP on 28th March 2009 (Financial Year 2008-2009) for Rs. 50,000 and then it was redeemed on 3rd April 2010 ( Financial Year 2010-2011 ) for say Rs.70,000
Then the Cost Price = Rs. 50,000
Cost Inflation Indexed Purchase Price = 50,000 x ( 721/582 ) = 61,941
Please note: Financial year is considered not the calender year . so thought it was only for a year ( 370 days ) that this money was invested, since this crossed two Financial year ( 2008-2009 to 2010-2011) , we are doing a "Double Indexation" here
So Capital Gain
- With Indexation = 70,000 - 61,941 = Rs.8,059
- Without Indexation = 70,000 - 50,000 = Rs.20,000
Capital Gain Tax would be :
- 20% with Indexation = 20% of 8,058.5 = Rs. 1,611
- 10 % without Indexation = 10 % of 20,000 = Rs, 2,000
The Income tax payer can choose any of the two options , based on his option to pay less amount of tax.
So, the month of March each year see a heavy offerings of 370 days FMP by mutual funds to let investors take advantage of "Double Indexation".
Friday, March 25, 2011
Bonus Debentures
Dr. Reddy's Laboratories the pharma major has decided to issue "Bonus Debentures" , below is the gist of their corporate announcement.
"Dr. Reddy's Laboratories Limited has informed the Exchange that the Management Committee of the Board of Directors of the Company at its meeting held on March 24, 2011, has approved the allotment of 1,015,516,392 Unsecured Redeemable Non-Convertible Debentures of Rs. 5/- each carrying a coupon of 9.25% per annum, ("Bonus Debentures") amounting to an aggregate value of Rs. 5,077,581,960/- from the General Reserve by way of distribution as bonus, to the Members, based on their equity holding on the Record Date i.e. March 18, 2011, in the ratio of 6 (six) Bonus Debentures of Rs. 5/- each for every equity share of Rs. 5/- each held."
Corporate Announcement PDF
What does this mean:
If Instead of Bonus Debentures , if they had declared dividends , then it would have meant that each (1)share would have been eligible for 6 x Rs.5 ( 6 Bonus Debentures of Rs. 5/- each ) = Rs.30 as dividend
Now, instead of giving cash to the share holders , the company would issue FD ( Company FDs ,which are also called Debentures ) , so each share would now receive 6 (Six) Debentures of Rs. 5/- each with a interest rate of 9.25% payable annually .Which means every year you would get Rs.2.775 as interest and these Debentures (Company FDs ) would mature , that is you would get your Rs.30 back in 2014.
These are called Bonus Debentures , because you did not pay that original Rs.30 , it was something the company invested in the Debentures , but in your name.
How does the company benefit :
The company would have needed money to expand their business or for some other business expense , so they normally would have , had to borrow from a bank , which could have charged them higher rate of interest . But with "Bonus Debentures" , they would get money at a lower rate of interest.
And it is also a way of treating/rewarding their share holders and hence enhancing their corporate image .
How does the share holder benefit :
The share holder finds that , company has invested in his name some money which fetches him 9.25% interest each year for 3 years , at the end of which he gets the Principal Amount too
The record date for this "Bonus Debentures" was 18th March 2011.
"Dr. Reddy's Laboratories Limited has informed the Exchange that the Management Committee of the Board of Directors of the Company at its meeting held on March 24, 2011, has approved the allotment of 1,015,516,392 Unsecured Redeemable Non-Convertible Debentures of Rs. 5/- each carrying a coupon of 9.25% per annum, ("Bonus Debentures") amounting to an aggregate value of Rs. 5,077,581,960/- from the General Reserve by way of distribution as bonus, to the Members, based on their equity holding on the Record Date i.e. March 18, 2011, in the ratio of 6 (six) Bonus Debentures of Rs. 5/- each for every equity share of Rs. 5/- each held."
Corporate Announcement PDF
What does this mean:
If Instead of Bonus Debentures , if they had declared dividends , then it would have meant that each (1)share would have been eligible for 6 x Rs.5 ( 6 Bonus Debentures of Rs. 5/- each ) = Rs.30 as dividend
Now, instead of giving cash to the share holders , the company would issue FD ( Company FDs ,which are also called Debentures ) , so each share would now receive 6 (Six) Debentures of Rs. 5/- each with a interest rate of 9.25% payable annually .Which means every year you would get Rs.2.775 as interest and these Debentures (Company FDs ) would mature , that is you would get your Rs.30 back in 2014.
These are called Bonus Debentures , because you did not pay that original Rs.30 , it was something the company invested in the Debentures , but in your name.
How does the company benefit :
The company would have needed money to expand their business or for some other business expense , so they normally would have , had to borrow from a bank , which could have charged them higher rate of interest . But with "Bonus Debentures" , they would get money at a lower rate of interest.
And it is also a way of treating/rewarding their share holders and hence enhancing their corporate image .
How does the share holder benefit :
The share holder finds that , company has invested in his name some money which fetches him 9.25% interest each year for 3 years , at the end of which he gets the Principal Amount too
The record date for this "Bonus Debentures" was 18th March 2011.
Thursday, March 24, 2011
SBI Lower Tier II Bonds
These are the BSE code of the listed bonds
SBI Bonds Listing Date: March 23, 2011 - Wednesday
Face Value of NCD: Rs.10,000/-Series 3 Lower Tier II Bonds :9.75% Per Annum
Scrip Code: 961701
Scrip ID: SBIBIIIR
Series 3 Lower Tier II Bonds :9.30% Per Annum
Scrip Code: 961702
Scrip ID: SBIBIIINR
Series 4 Lower Tier II Bonds :9.95% Per Annum
Scrip Code: 961703
Scrip ID: SBIBIVR
Series 4 Lower Tier II Bonds :9.45% Per Annum
Scrip Code: 961704
Scrip ID: SBIBIVNR
Source : BSEIndia
Wednesday, March 23, 2011
Rupay
I had written in my article Indirect lesson from Wiki Leaks about the risks involved on our over dependence on VISA and Master Card , to process our card transactions .
If you like to know more about, how VISA and Master Card work , please read this
National Payments Corporation of India , has finally woken up to this risk and has come out with a India specific card transaction gateway and has named it "RUPAY"
This is a good move, once formally launched , hope all our Nationalised and Private banks would enthusiastically adopt this , especially for the Debit Cards and Non international Credit Cards
This must see significant revenue saving for the banks , if NPCI , prices this service very conservatively .
Only risk involved is, will NPCI be able to stand up to the arm twisting that most of these MNCs resort to , using their government , when they find their dominance challenged in a foreign market .
So in this customer driven market . If we as customer demand that the Banks Issues us cards based on "RUPAY" , we may then give "RUPAY" a fighting chance to survive and thrive .
So watch out for the formal lauch of "RUPAY" .
Image: worradmu / FreeDigitalPhotos.net
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