Friday, July 25, 2008

Financial Menu Card - How to prepare?

When we visit a restaurant, we sit at a table, look around; soon waiter brings some food in some quantity on our table. We consume some of it and come out. Invariably we have no clue what we have had and in how much quantity. Is this how we proceed when we visit a restaurant?

Well, hmmm….this might sound little exaggerated and sarcastic. But unfortunately, when it comes to our family finances, most of us behave in this manner. We have no clue how much we have spent on each of the expense categories.

Take this quick test, guess how much did you spend on restaurants, coffee shops and movies/theaters in last quarter? Or easier still, how much did you spend on clothes and accessories in last one year?

Making a family budget is like ordering food from the menu card. When we visit a restaurant, we take a look at the menu card and order variety of food. It is ordered in quantity to suit our appetite.

Making family budget is exactly same. There are varieties of expenses on which we can spend our hard earned income. From those categories we need to decide on how much we intend to spend on which category.

Most of us struggle to write and follow family budget because we do not approach it in structured manner. Broadly there are two categories of expenses viz. mandatory expenses and voluntary expenses. These can be further classified into fixed expenses and variable expenses.

Examples of mandatory fixed expenses are house rent, school fees etc. Mandatory variable expenses are groceries, medical expenses etc. Voluntary fixed expenses are club membership fees, subscription to magazines etc. Voluntary variable expenses include items like eating out, vacation etc.

Before beginning to write your budget, it is important that we learn to track them. Under normal circumstances tracking is not very difficult though in some cases it might take some time to develop the habit.

When we begin tracking expenses, firstly we should note down mandatory fixed expenses e.g. rent, school fees etc. Next, note down voluntary fixed expenses like club fees etc. Since these are fixed expenses, not much tracking is required.

After noting down fixed expenses, move ahead and note down variable category expenses. This is little difficult to track unless there is a habit. Under variable category, start with noting down voluntary variable expenses first. This is because expenses like eating out; movies etc. are incurred at lesser frequency compared to mandatory variable category. Also they are incurred either by credit card or in cash. If it is paid by credit card, then tracking becomes further easy.

If the habit of tracking (variable) expenses is not there, then start with tracking only 1/2 expense categories like movies etc. Ensure to note them down within 24 hours of incurring. Only after the habit is firmly formulated add more categories to track.

After about a year or two, venture into tracking mandatory variable expenses. From third year onwards start making budget i.e. deciding how much to spend on which categories.

Unless habit of noting down expenses and making a budget is not inculcated since childhood, do not start in haste. Unlike our forefathers who used to earn in cash and spend in cash, we receive our earnings in cheque, direct credit to banks and cash. Also unlike them, where they used to spend only by way of cash, we spend in cash, cheque, direct debits from bank and credit/debit cards. We have multiple sources of inflow and multiple sources of outflow. Therefore if we start in haste we will end up in waste.

Sunday, July 20, 2008

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Friday, July 18, 2008

7 Tips For Kids

7 Tips For Kids
Tell your kids, ‘Money is the root cause of all good!’ Of course, the line is from Ayn Rand.

We are in the grip of an exam fever with all parents busy with an ‘open day’ in school before the examination. Then, there will be a vacation – Diwali vacation as it is called in India. But with all this exam, vacation, exam, unit test, one thing is clear. Nobody is teaching your little darlings anything about money.

While our children's teachers share responsibility for teaching them to read and write, they won't do much to help our children develop basic financial literacy skills. Beyond simple addition and subtraction, there just isn't enough time in the school day to do it all.

So what's a caring parent to do? Take your child's money-management education into your own hands, of course. Here's how.

It's important to remember how your kids think when it comes to money (or anything else). Most children are concrete thinkers who can demonstrate progressively organized and logical thought but have a limited ability to think abstractly. Preschool and elementary-aged kids will have trouble understanding abstract concepts like inflation, interest rates, and saving for a college education that is 12 years away. However, when my 5 year old daughter tells me the following things, I realize that she understands money:

Daughter: Dad, I need money to buy a gift for Mom

Self: Why don’t you use what is in your piggy bank?

Daughter: Dad, coins do not buy anything, I need notes!

My wife and I shop separately, so when my wife was contemplating quitting her job, my daughter said, “Do not quit. Dad does not buy you anything. Keep your job”

At five, she understands that bread costs Rs 17, a car Rs 8 lakh and a house Rs 40 lakh. This is only because of constantly talking with her about money - unemotionally and factually.

That's why, when I told her that we couldn't buy the five feet tall teddy bear because we don't have enough money, she was worried that we wouldn't be able to buy bread. To her, ‘no money’ meant, quite literally, that our pockets were empty. I should have said, ‘We choose not to spend money on that so we have enough money for other things we need to buy.’

Understanding the way your child thinks is the key to providing him or her with a quality education in money management. Here are 7 ways to help your literal thinker learn about money:

1. Piggy bank
Buy your preschooler, a piggy bank and give him or her a stack of coins to put in it. Ask your child to sort the coins in a variety of different ways - shiny versus dull, big versus little. Know that he or she won't understand for some years that a rupee saved today can be better than a rupee saved when she is 30 years old, they should get a touch and feel of money. I make my daughter pay money at the shop so that she understands the difference between coins, a small note and a big note. Supervise carefully, though, since sometimes, they still like to test things in their mouths. (Piggy bank or real bank account: What to give your kid?)

2. Pocket money
For older children, establish an allowance so he or she can begin to make independent money decisions. Some folks will advocate linking the allowance to certain chores; I prefer establishing the basic chores (e.g., making the bed, cleaning their own room, and setting the table) as something each person does because they are a part of a family and it is their job. Be very careful that they do not become too money minded and keep asking, “How much will I get for looking after granny when she is unwell?” However, giving your child ‘extra’ tasks (like washing your car) for which he or she can earn money can teach her the satisfaction that comes from working for a goal. Your child will also understand that the more work that's done, the more money he or she earns - a valuable life lesson.

3. Value inculcation
One customer of mine has done a brilliant ‘value inculcation’ in his son. He gives his son 30 coins of Rs 5 each. The kid needs one coin every day at the recess. So, 22 of them are precious. He has only eight to spare every month. Now when the kid says he wants a new tennis racket or new tennis shoes, my friend quotes a price of say ‘12 coins’, it takes his son about three months to accumulate the same. And he treats each Rs 5 coin with far greater care than a 500 note.

4. Introduce financial jargon
Get your older children to understand words like saving, investing, donating, pension, financial goal setting – they will thank you in the future.

5. Bank account
Opening a savings account, touring a bank vault, using the rupee-counting machine, comparing prices, and paying for items and receiving change are a few everyday ways to learn about money.

6. Summer jobs
Encourage your child when he or she tries entrepreneurial ventures like buying crackers in the wholesale and selling in retail, baby-sitting for the neighbors, or starting a dog-walking service. There's no substitute for learning on the job.

7. Lead by example
Last, but not least, be mindful of how you talk about money. Do you complain about bills, fret about money, and always use negative terms about finances? Don't be surprised, then, if your kids feel negatively, too. If you need some financial refreshing of your own, make full use of your Getting yourself on the right financial track is the best lesson of all for your kids.

So, parents, remember that some lessons still start in the home. Managing money wisely is one of them.

Two simple habits to help you create wealth

Two simple habits to help you create wealth

All of us want to create wealth. Also we want to create it fast and with ease. It is really very easy to do it. Also it does not require any great efforts and skills to create wealth. We just need to develop right habits.

We all know that if we want to reach somewhere fast we need to start early. Similarly if we want to create wealth faster in our life – so that we can enjoy it while we are young – we need to start creating it earlier on. Legendary investor and wealthiest man on earth Warren Buffet made his first investment when he was 11 years old and according to him he started late. Warren Buffest was millionaire by the time he was around 30 years old.

Unfortunately most of us procrastinate our wealth creation. Initially when we start our career and earn our first income, we want to buy whole world from it. Soon we get married, we buy home, have our family, expenses keep adding up. Our income increase but so does our expenses. These are testing time for wealth creation. If we wait for next year, next increment, next bonus, next incentive to start saving it will never happen. The only thing that will happen is delay in wealth creation.

Vikram decided to set aside Rs 10,000 every month in an instrument that generated 8% return per annum in January 1991. His friend Rohit also thought he should start investing and hence he began investing same Rs 10,000 in same instrument one year later i.e. from January 1992. On 31st December 2000 i.e. when Vikram had invested for 10 years and Rohit had invested for 9 years both the friends looked at their investments. Vikram had created corpus worth Rs 18,29,460, while Rohit who had started one year later had Rs 15,74,295. Rohit had Rs 2,55,165 less as he delayed his investments by one year.

If Vikram and Rohit were to continue same investment of Rs 10,000.00 per month for 40 and 39 years respectively than the difference in their corpus at the end of the period will be Rs 27,90,415. Think of the loss Rohit incurred purely because he delayed investing just by one year.

Many times when I give similar examples in my articles, I get emails from readers stating they do not have Rs 10,000 to invest now and hence they will start investing only when they accumulate Rs 10,000. This is another way of procrastinating. Whether one starts with Rs 100 per month or Rs 1,00,000 per month, end result is that the individual who starts early wins with the race hands down.

Our spending habits also create hurdle in wealth creation. While prudent wealth creation philosophy is to follow P-I-P-E i.e. Prepone Investment, Postpone Expenses, we always Prepone Expenses and Postpone Investment. Rushing for ‘Sale’ and purchasing our future requirement today is preponing expenses. Note that I am not against purchasing from sale. I am only suggesting do not buy something which you do not require immediately. Retailers are always keen that we prepone our purchases. This will help them earn their income early. However our focus should be to make efforts to propone savings and investments. This will help us create wealth early.

“It's not your salary that makes you rich; it's your spending habits.”- Charles A. Jaffe

Thursday, July 17, 2008

10 important things to do before filing I-T returns

It is that time of the year again when tax payers - particularly the salaried class - scramble to file I-T (income tax) returns.After all, filing of tax return is compulsory for everyone whose gross total income exceeds the basic exemption limit.For financial year 2007-08 (assessment year 2008-09), for instance, this limit was Rs 1.45 lakh for women below 65 years of age, Rs 1.95 for senior citizens and Rs 1.10 lakh for any other individual. If your income for the year exceeded the exemption limit, you will be required to file the return by the due date (July 31, in this case).However, despite all the precautions taken by you, rush-hour filing may mean that you could inadvertently miss out on certain details and disclosures, and therefore be on the bad books of the taxman.If not that, you might just forget to make the most of the tax breaks available to you, thus paying more tax in the process and claiming no or less return. Here are 10 important things to do before filing your I-T returns:
1. Choose the right form:
The first thing to do is to see that you have chosen the right form to file your return. For example, there are two I-T return forms -- ITR-1 and ITR-2 - available for salaried individuals at the moment, and your sources of income will decide which form to use.Use the first form if your income is from salary, pension or interest, and use the second one in case of any capital gain, income or loss from house property and income from any other source.The Tax Department will refuse to accept your form in case you have chosen the wrong form.
2. Fill in correct personal details:
Ensure that you fill in correct personal details in the form meant for you, especially your name, address, bank account details and PAN number.Bank account details include the bank account number, type of account and the bank’s MICR code. This is crucial, especially if you are claiming a refund.Likewise, your PAN is very important because the tax laws levy a fine of Rs 10,000 for not quoting or misquoting your PAN number.
3. Attach Form -16:
Check that you have already received your Form -16, i.e. certificate of tax deducted at source by the employer on your salary income. The original Form-16 will have to be deposited with the I-T return form.Similarly, "if any tax has been deducted by bank on interest or any other party on the payment made to you, then you will have to obtain Form -16A, i.e. certificate of tax deducted at source on rent, interest etc," informs Vikas Vassal, executive director, KPMG.
4. Analyze your bank statement:
Ensure that you have analyzed your bank statement as to any income received or any investments made, that are required to be disclosed in your tax return."A common mistake most salaried tax payers tend to commit is the exclusion of interest income. Your assessing officer doesn’t have to a genius to guess that any person who maintains a savings/deposit account would normally also receive interest income and not disclosing the same may.Therefore, be one sure way to get discomforting correspondence from the tax office," says R K Chopra, V-P (Finance), Alankit Assignmets Ltd.
5. Compute your tax liability:
Ensure that you have computed your tax liability, including your salary income, and "if any tax is payable, the same has been paid as ‘self assessment tax’ before filing the tax return.Further, if any interest is payable for late payment of tax, then the same has also been deposited," says Vassal.
6. Fill in income details:
Check whether you have correctly filled in details of your salary income/other income and also the tax deducted at source in the relevant columns of the tax return form to ensure that you get the credit for TDS.
7. Income from stocks:
Don’t miss on the details of your stints with stocks last year.Note that even if the markets haven’t been kind, the loss would be allowed for carry forward for luckier times in future for setoff only if the same has been appropriately been disclosed in the form.
8. Claim all deductions:
Ensure that you have, under various sections of the I-T Act, claimed all the deductions that you are eligible for. For example:a. Under Sec 80 C - For investments made like PF, PPF, NSC, school tuition fees of children, insurance premium investments in specified mutual funds etc.b. Under Sec 80 G - Donations made to charitable organizations.c. Housing deduction for interest on housing loan etc.
9. Information of specified investments:
You also have to fill in information in respect of specified investments, as per prescribed limits, such as:Property bought or sold in excess of Rs 30 lakhMutual funds, in excess of Rs 2 lakh;Cash deposits in excess of Rs 10 lakh;Credit card payments in excess of Rs 2 lakh;Bonds etc in excess of Rs 5 lakh
10. Disclose exempt income:
It is also important to know that certain income that is exempt (i.e. income which is not taxable) is also required to be disclosed in the I-T return form.For example, dividend received and receipt of PF balance, among others. Not disclosing these incomes may land you in trouble also.

Tuesday, July 15, 2008

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Smart lessons for stock market investors

The other day, two school kids were talking to each other – sharing jokes and having a great time. I happened to be around and overheard the following joke.

One day, a moron decided to swim across the English Channel. He started with a lot of enthusiasm. He had crossed around three fourth of the channel. Tired and exhausted, he thought this was enough and he cannot go any further. So he swam all the way back.

Well, this is a good joke from the perspective of the kids. They enjoy the situation that the moron put him into.

But that set me thinking. Doesn’t this sound familiar – especially for many investors in the stock markets? Why do the markets have to start rising immediately after we have sold or vice versa?

Rational thinking suggests that an investor chooses to invest in the “risky” stock market securities to reap higher rewards. Reality suggests that an investor chooses to invest in the “ever-rising” stock markets after the prices have been rising for some time in the recent past. This past trend is then extrapolated into infinite future to conclude that upward is the only direction in which stock prices can and will go. In such a scenario, one tends to assume that the stock markets can give super normal returns without carrying any risk at all. The investor perceives the risk to be absent from the market and continues to pour in more and more money.

Suddenly, for reasons not known to anyone, the market takes a “U” turn and prices start their southward journey. The initial response from people at large is that of denial. The situation looks like small aberration and one is convinced that the reversal will happen once again. It may or may not happen that way. And when the prices do not start moving up in a hurry, one’s patience gets tested. How long can one control the emotions in such a scenario is a function of the conviction that one has and of course the solvency. But often, more than the solvency, it is the conviction that is more important to survive in the market.

Where does the conviction come from? Conviction comes from supreme confidence in what one knows and understands. What is this knowledge?

“Stock prices are slaves of the profit growth of underlying companies over longer periods.”

This simple line sums up all the knowledge that one needs to have in order to develop the confidence. As Benjamin Graham puts it,

“In the short run, the market is a voting machine - reflecting a voter registration that requires only money, not intelligence or emotional stability - but in the long run, the market is a weighing machine.”

If one understands this and has confidence in the economic growth, staying invested could be highly rewarding. Then comes the question of the short term movements of the prices. Someone has very nicely said that the long term is made up of many short terms. Absolutely correct, but one forgot to mention that many of the short terms cancel one another out and the remaining short terms are a part of the long term trend.

It takes enormous courage to stay calm in the noise of the short term – what with ticker, media, friends, brokers, internet – giving out number of messages. It takes a lot of patience to stay balanced in such a scenario. But patience is a rare virtue.

Look at the everyday life and one can see how impatient we have generally become. One of the funniest examples of impatience is what railway passengers do while nearing their destination – even when that may be the last station on the train’s route. I was once travelling from Ahmedabad to Mumbai in Shatabdi Express and had to get down at Mumbai Central, which is the last station on the route. Shatabdi starts from Ahmedabd in the afternoon and reaches Mumbai late in the evening. Soon after we crossed Borivali, the penultimate station, some of the passengers started to take their luggage off the overhead racks and from below the seats to queue up towards the door. Some left the comfort of air-conditioned cabins to stand near the exit doors. And they stood there for close to 20 minutes.

I was wondering what was happening. Mumbai Central being the final station, the train was not going to go anywhere after that giving ample time to the passengers to get off the train with all the luggage they had. The train, as mentioned earlier, reaches Mumbai late in the evening and hence there is no hurry to rush for a time bound schedule unlike in the morning or during the day time. Inside the train compartment, the environment was very comfortable, thanks to the air-conditioning. Outside was typical Mumbai weather – hot and humid. And still, many gave up the comfort for no apparent benefit.

What was the hurry then? But, that is human nature. And if that is how people behave in such a simple case, stock markets are a much more complicated place. Expecting patience might be asking for too much. But then, that one trait ensures you get out of the market with reasonable profits.

To sum up, let us see what Warren Buffet had to say about patience in stock market investing, “The stock market is a device for transferring money from the impatient to the patient.”

Monday, July 14, 2008

Investment ideas that have stood the test of time

Lately there have been lots of talks on inflation being around the 11-12% mark. Personally I am of the view that inflation in India is not just around 11-12%, but much higher. Figures can be manipulated, and they always are. Just look at the prices of things we use in our daily lives. Some things they have gone up by more than 40% in a matter of few months.

Inflation, political problems, energy crisis, credit crunch, higher interest rates, sub-prime problem are all going to affect the markets. Investors are usually extremely jumpy and do not take rational decisions. Simply on hearing all this there is a flight of capital which has been bringing the markets down. Markets can go down further - I don’t know if they will or they won’t. Most retail investors who do not believe in value and do not bother too much about fundamentals are constantly grumbling and cursing everything now. Many of them have gone bankrupt due to taking leverage in the form of trading in futures. I understand their problem, however I wish that all of them learn from their mistakes and try to use this time as an opportunity to learn more. I too have made such mistakes in the past, but luckily I have learnt from them.

For value investors the markets going down is a great opportunity to buy, however the sad part is that most retail investors do not think this way and now even if they do, they might not have sufficient funds to benefit from this. Many will panic and sell and again after a few years will curse their luck for selling so low. My advice to them would be that use this opportunity as a time to start afresh. Every day is a new day and every day gives us the chance to start a new life. Once Edison had his whole lab burnt. Lots of his work and research was there in the lab, but he still was very happy. People were surprised and wondered why is he smiling even though his lab is burnt. He told them that all his mistakes have been burnt and he has the opportunity to start afresh. If you have made mistakes, do not worry and use this time to learn.

Less than around 4% of India’s savings goes into the stock markets. As more and more people are educated about investing, this figure is bound to rise. As this figures rises, unethical operators and dirty money belonging to politicians will be less likely to control the stock markets. As more and more people have a stake in our country’s growth, politicians will be more responsible to make sure that their decisions are beneficial to investors and the capital markets. This correction has been one of the best things that could have happened for any value investor. It is giving us a chance to buy assets into an economy which still has a long way to go.

I am a strong believer in the theory of Karma. If we work hard today, learn more and invest in knowledge we will be rewarded. I was at the BSE building the other day and a good friend there who has been a part of the markets as well as the BSE for several decades very beautifully told me something from the Gita, which he has used in the markets. He told me that the Gita tells us to do our duty and not worry about the fruits and rewards. If we do our duty we will get the fruits either sooner or later. The same applies to the markets. We need to do our work and not worry about the returns in the short term. If a business is good, it shall be discovered by the masses sooner or later. These ideas are not very popular, but these are the very ideas which have stood the test of time. This simple idea runs into every area of our life. Let us all sow seeds of good in every area of our life.

Keep smiling and feel free to share whatever you read here with friends, family and loved ones!

Is this a Bear Bubble?

We normally talk about a bubble when asset prices go beyond fundamentals on their way up. However have we ever used a phrase Bear Bubble to indicate excesses on the downside? Well this was the thought that actually crossed my mind some time back when the Sensex was down at around 12800 + and there was endless rhetoric on how the markets could go to 10000 levels.
Given that the Sensex now trades at 13 times FY09 Earnings (assuming an EPS of Rs. 1000); one would have considered such valuations attractive. However given the uncertainty due to several factors such as oil, commodity prices, inflation, weak global cues; persistent FII selling has unnerved not just first time investors but several market veterans as well. One is forced to think whether to invest or to wait. People who have been waiting for this opportunity or who jumped in (at 17000 levels) when the market initially corrected now believe there is more to come. The weak IIP numbers that came out on Friday would probably compound their fear.
This has clearly created what I would term a Fear Bubble. Bubbles at the end of the day are just bubbles whether on the way up or the way down or in our minds. What matters is how we filter the noise around us, take a perspective on the growth of the Indian economy going forward 5, 10, 15 and 20 years down the road and make choices that will deliver superior returns in a portfolio. What I am talking about is nothing new and I must have repeated some of these thoughts in my previous columns as well. The reality is that there is nothing radical or extra ordinary that can be done in such situations. Such tough situations ask for some basic set of behaviors and principles to be adopted.
There is a lot of focus on action in every market situation. In a bullish market, the focus is to get in the market and in bearish situation; the focus is to get out. People believe that investment returns are a function of getting in and out of the market on time. Additionally the common belief is that one must do something every time the market goes up and down. Nothing could be further from reality. There is no equity portfolio today that is not in the red (if you have started in the last 1 year). Every portfolio whether it be institutional investors or retail investors would have some element of red in it. This is no reason to alter your investment strategy if you indeed have one. Your situation is completely unique and if it warrants a certain exposure to equity, so be it. Your equity allocation would have certainly come down and it’s time to scale it up in a staggered fashion and ensure that you continue to buy during such times.
Review your investment plan and see if there are any course corrections that must be done. Don’t just exit investments because they have gone down. However if there are aggressive investments, look at toning down the aggressive investments and restructuring the equity portion of portfolio with less volatile investments.
Money needed in the next 1 to 2 years should never be in equity and money needed after 5 years can always be in equity but in line with your overall asset allocation. When you invest money needed in 5 years and more in equities, you are taking a calculated risk and also at the same time reducing your risk (considering that you have made good choices of investments). Investing money needed in the next 1 to 2 years in equities is taking on extremely high risk , something that one should comfortably avoid.
Don’t look at products or investments you do not understand. Several investors are tempted to go short or trade in derivatives to make up for the red that can be seen in the portfolio. This can only result in further pain and I have come across countless examples where people have actually taken a lot more risk to cover up for losses.
Additionally avoid most of the complex structured products that many institutions are now coming out with or any flavor of the season offering. Today people would like to participate in the upside of equity without the associated downside and uncertainty. People like to hear terms such as Capital Guarantee with Nifty linked returns. There seem to be utopian institutions that just manage to do that. I wonder why such offerings are not launched when the markets are moving towards glory. That’s a different story altogether but the point is avoid such offerings.
No one knows when and where this Bear Bubble will stop and reverse. One thing I know for sure though that there will be brighter and sunny days ahead and the pain that we are witnessing today will be forgotten like a distant and bad dream.

7 Mutual Funds Do's and Don'ts

Life (including investments) is not about not making mistakes, but to learn from them. A wise person quickly learns from his mistakes - and those of the others too. Given below are 7 do’s and don’ts which we can follow to avoid mistakes commonly made by investors in MFs.
Rule 1 : Don’t look at NAVI would be repeating this maybe a 100th time – Rs 10 NAV does NOT mean that the fund is cheaper than an existing fund with say Rs 200 NAV. Therefore, never look at NAV when you are making an investment decision.
Rule 2 : Do systematic investmentThe market valuations today, despite the recent correction, are still not cheap. Also, there is risk of a possible slowdown in the economy. Therefore, averaging one’s investment by doing SIP is a safer route to investing in equity markets.
Lump-sum investment is advisable only at very low market PE levels, when the risk of markets going down further is low and the probability of appreciation high.
Of course, this does not apply so much to debt funds, where the returns are relatively much more stable.
Rule 3 : Don’t go for Dividend optionIf the investment horizon is more than 1 year (which should ideally be the case when one invests in equity funds), Growth option is generally preferable both from the point of view of wealth creation and tax efficiency. For investment period less than 1 year for the short-term needs – and usually invested in debt funds – dividend option would generally be better.
Rule 4 : Don’t have too many or too few fundsDon’t invest in too many or too few funds. While, there is no specific number of funds which you may own, a portfolio of 12-18 funds should in most cases be OK.
Too large a portfolio will mean many similar funds, which could dilute your overall returns. Too small a portfolio will mean that you are not covering the entire breadth of the market, besides exposing yourself to high risk of a concentrated portfolio.
Further, your corpus should be appropriately spread across large-cap/diversified funds, mid-cap funds and sector funds from different fund houses. Large-cap/diversified funds are relatively less risky, mid-cap funds are riskier and sector funds carry highest risk. Therefore, to have a balanced and stable portfolio, maximum money should go to large-cap/diversified funds, some amount to mid-caps and only a small portion should be invested in sector funds.
I have seen many portfolios which are stacked with infrastructure funds (the latest market fancy). Such concentrated portfolios carry very high risk.
Rule 5 : Don’t invest in New Fund OffersDo not invest in NFOs; unless they have something very different to offer, which the existing funds don’t.
Since there is no portfolio or performance to look it, it is difficult to assess whether the fund would add value to our portfolio or not. Besides, most of the NFOs launched today are the risky sector funds.
Rule 6 : Do your own study before investingAds are meant to lure people. Therefore, it will not be prudent to invest just because some advertisements say so.
Further, it would also not be prudent to blindly trust your distributor (especially those who are not professional advisors too). One, they may not be fully equipped to understand your needs and advise accordingly. Two, they may not be selling all the products you may need. Three, they may be guided more by their commissions than your interest.
Hence, always cross-check the advice you receive with multiple sources, before you commit your money.
Rule 7 : Don’t invest too much in global fundsBe very careful when investing in global funds. Global funds would probably be the riskiest amongst the equity funds. Like any equity funds, they face the equity-risk.
Besides this they are also open to currency risk. If the rupee appreciates, you will get less rupees/dollar. Therefore, it is possible that whatever returns you make in dollar terms, may get fully eroded if in the meantime the dollar has depreciated. Given the strength of the Indian economy vis-à-vis the US/Europe etc., the chances of rupee appreciation are high. In fact, had RBI not intervened, dollar might have already depreciated to Rs 35-38.
Therefore, invest only a small percentage of your corpus in good diversified global funds; that too primarily for diversification purposes.
These rules will guide an uninformed investor to invest his money wisely and profit from the potential that the Indian economy offers today.

5 things to do with your money

There are individuals who have so much money that they don’t really know what to do with it. While these individuals may attract the envy of many, we believe owning money and not knowing what to do can be quite an unenviable situation. On the other hand, there are small time investors, who don’t own a great deal of surplus money, but are in complete control of their finances. These individuals seem to be in the driver’s seat where finances are concerned and should in fact be envied.
While most would find it a little to digest that there are investors out there who have the money but don’t know what to do with it, that is the truth. Don’t believe us, look around and see the number of people with the latest gizmos, mobiles, cars, clothes and consumer goods. What’s wrong with that? Nothing at all! It’s a free world and you can own anything and everything that your finances permit you. Do this small test – when you see someone flashing his latest mobile or some gizmo, ask him if he has planned for his retirement, or whether he has a financial plan in place to pay for his child’s college fees 10 years down the line. Chances are that person will be more keen on discussing ‘relevant’ points like the features of his latest mobile rather than dwell on the ‘irrelevant’ issues raised by you.
To be sure, these issues are anything but irrelevant. But money has that effect on people, it makes them want to rush towards the immediate and ignore the future. So you have more mobiles being bought than financial plans being prepared.
So while it’s a good thing to have money, it’s equally important to know what to do with it. We list 5 most critical tasks individuals must accomplish with their money.
1. Do your tax planning
If you are liable to pay tax, tie up your tax planning exercise. As a law-abiding citizen paying taxes is most important so investing promptly in the right avenues to save tax assumes importance. An individual can save tax upto Rs 100,000 (Rs 1 lac) by investing in tax-saving investment avenues. These avenues range from the traditional Public Provident Fund (PPF), National Saving Certificate (NSC) and life insurance to the more dynamic (read market-linked) tax saving mutual funds (Equity Linked Saving Schemes - (ELSS)). These avenues not only help in tax planning but if selected well can also help individuals achieve their long-term financial goals.
2. Plan now for your retirement
A common regret for most of us in our twilight years (apart from not having exercised enough) is our poor savings and investment track record. Most individuals wish they had saved either better or more. Planning for retirement is one thing that individuals across age groups must take up on priority. Of course, if you start at an early stage it’s even better, but the fact is it’s never too late to set aside some money for retirement.
What makes retirement planning so important for us to list it second in our ‘to do’ list? To answer that question in a single word – inflation. Inflation is what usually leads to a rise in prices of goods and services. If you are wondering why oil, the gas cylinder, toothpaste, eggs and even idli sambhaar costs a lot more than what it used to even 5 years ago, blame it on inflation. So planning earlier on in your life is a solution. Calculations show that even a 5-year delay in investing (Rs 10,000 annually at 10%) can make a substantial difference (as high as 80%) to your retirement corpus.
3. Get yourself insured
Life today has become a lot more uncertain than ever before. Therefore, taking life insurance is another objective that should rank high in the priority list of all individuals. Simply put, the purpose of life insurance is to indemnify the nominees/dependents of the insured against an eventuality. So life insurance must form an integral part of the individual’s financial planning exercise. In addition to life insurance, individuals should also be equipped with adequate medical insurance.
Note that we haven’t mentioned life insurance while discussing tax planning in an earlier point. This is because it’s time insurance got it’s due as an independent entity unlinked to anything but your life. Our advice is don’t mix the two, don’t chase tax benefits while taking a life cover.
There are three types of life insurance plans; term plan, endowment plan and ULIPs (unit- linked plans), available at investor’s disposal. While ULIPs are not an ideal avenue to take life cover, term plans, the cheapest and most effective form of life insurance are best suited for this purpose.
4. Prepare yourself for contingencies
Contingencies/emergencies never announce their arrival. But that does not mean we close our minds to the possibility of their intrusion in our lives. As always, the best way to deal with such a situation is to provide for it well in advance. Such situations could possibly arise out of an accident/operation that is either not covered by mediclaim or exceeds the mediclaim limit or it could be another expense that you have provided for (like a buying a house) which actually falls short at the time of purchase. At times like these, having a contingency fund can prove to be a boon. How do you know how much to save for contingencies? While there is no formula for the same, having 10%-15% of your entire portfolio in low risk investments should arm you adequately during a contingency.
5. Don’t forget charity
Even before Bill Gates and Warren Buffet began doing it, charity was always necessary. If you have the money, it’s only fitting that you share some of it with the less privileged. Also, although some charities qualify for tax benefits, our advice is you ignore them and just focus on giving money away without worrying about how you can benefit from it one way or another.

10 qualities of a successful stock market trader

Many people take to trading in the mistaken belief that it is the simplest way of making money. Far from it, I believe it is the easiest way of losing money. There is an old Wall Street adage, that "the easiest way of making a small fortune in the markets is having a large fortune". This game is by no means for the faint hearted. And, this battle is not won or lost during trading hours but before the markets open but through a disciplined approach to trading.
1. A successful trader has a trading plan and does his homework diligently
Winning traders diligently maintain charts and keep aside some hours for market analysis. Every evening a winning trader updates his notebook and writes his strategy for the next day. Winning traders have a sense of the market's main trend. They identify the strongest sectors of the market and then the strongest stocks in those sectors. They know the level they are going to enter at and approximate targets for the anticipated move.
For example, I am willing to hold till the market is acting right. Once the market is unable to hold certain levels and breaks crucial supports, I book profits. Again, this depends on the type of market I am dealing with.
In a strong up trend, I want the market to throw me out of a profitable trade.
In a mild up trend, I am a little more cautious and try to book profits at the first sign of weakness.
In a choppy market, not only do I trade the lightest, I book profits while the market is still moving in my direction.
Good technical traders do not worry or debate about the news flow; they go by what the market is doing.
2. A successful trader avoids overtrading
Overtrading is the single biggest malaise of most traders. A disciplined trader is always ready to trade light when the market turns choppy and even not trade if there are no trades on the horizon. For example, I trade full steam only when I see a trending market and reduce my trading stakes when I am not confident of the expected move. I reduce my trade even more if the market is stuck in a choppy mode with very small swings. A disciplined trader knows when to build positions and step on the gas and when to trade light and he can only make this assessment after he is clear about his analysis of the market and has a trading plan at the beginning of every trading day.
3. A successful trader does not get unnerved by losses
A winning trader is always cautious; he knows each trade is just another trade, so he always uses money management techniques. He never over leverages and always has set-ups and rules which he follows religiously. He takes losses in his stride and tries to understand why the market moved against him. Often you get important trading lessons from your losses.
4. A successful trader tries to capture the large market moves
Novice traders often book profits too quickly because they want to enjoy the winning feeling. Sometimes even on the media one hears things like, "You never lose your shirt booking profits." I believe novice traders actually lose their account equity quickly because they do not book their losses quickly enough.
Knowledgeable traders on the other hand, will also lose their trading equity -- though slowly -- if they are satisfied in booking small profits all the time. By doing that the only person who can grow rich is your broker. And this does happen because, inevitably, you will have periods of drawdowns when you are not in sync with the market. You can never cover a 15-20 per cent drawdown if you keep booking small profits. The best you will do is be at breakeven at the end of the day, which is not the goal of successful trading.
A trading account that is not growing is not sustainable. Thus when you believe you have entered into a large move, you need to ride it out till the market stops acting right. Traders with a lot of knowledge of technical analysis, but little experience, often get into the quagmire of following very small targets, believing the market to be overbought at every small rise -- and uniformly so in all markets. Such traders are unable to make money because they are too smart for their own good. They forget to see the phase of the market. Not only do these traders book profits early, sometimes they even take short positions believing that a correction is "due". Markets do not generally correct when corrections are "due". The best policy is to use a trailing stop loss and let the market run when it wants to run. The disciplined trader understands this and keeps stop losses wide enough so that he is balanced between staying in the move as well as protecting his equity. Capturing a few large moves every year is what really makes worthwhile trading profits.
5. A successful trader always keeps learning
You cannot learn trading in a day or even a few weeks, sometimes not even in months. Successful traders keep reading all the new research on technical analysis they can get their hands on. They also read a number of books every month about techniques, about trading psychology and about other successful traders and how they manage their accounts. I often like to think about traders as jehadis; unless there is a fire in the belly, unless there is a strong will and commitment to win, it is impossible to win consistently in the market.
6. A successful trader always tries to make some money with less risky strategies as well
Futures trading, for example, is a very risky business. The best of chartists and the best of traders sometimes fail. Sure, it gives the highest returns but these may not be consistent -- and the drawdowns can be large. Traders should always remember that no matter how good your analysis is, sometimes the market is not willing to oblige. In these times the 4-5 per cent that can be earned in covered calls or futures and cash arbitrage comes in very handy. It improves the long term sustainability of a trader and keeps your profit register ringing. Traders must learn to live with lower risk and lower return at certain times in the market, in order to protect and enlarge their capital.
Disciplined traders have reasonable risk and return expectations and are open to using less risky and less exciting strategies of making money, which helps them tide over rough periods in the markets.
7. A successful trader treats trading as a business and keeps a positive attitude
Trading can be an expensive adventure sport. It should be treated as a business and should be very profit oriented. Successful traders review their performance at regular intervals and try to identify causes of both superior and inferior performance. The focus should be on consistent profits rather than erratic large profits and losses. Also, trading performance should not be made a judgement on an individual; rather, it should be considered a consequence of right or wrong actions. Disciplined traders are able to identify when they are out of sync with the market and need to reduce position size, or keep away altogether. Successful trading is like dancing in rhythm with the market. Unsuccessful traders often cut down on all other expenses but refuse to see what might be wrong with their trading methods. Denial is a costly attitude in trading. If you see that a particular trade is not working the way you had expected, reduce or eliminate your positions and see what is going on. Most disciplined and successful traders are very humble. Humility is a virtue that traders should learn on their own, else the market makes sure that they do. Ego and an "I can do no wrong" attitude in good times can lead to severe drawdowns in the long term.
Also, bad days in trading should be accepted as cheerfully as the good ones. So disciplined traders maintain composure whether they have made a profit or not on a particular day and avoid mood swings. A good way to do this is to also participate in activities other than trading and let the mind rest so that it is fresh for the next trading day.
8. A successful trader never blames the market
Disciplined traders do not blame the market, the government, the companies or anyone else, conveniently excluding themselves, for their losses. The market gives ample opportunities to traders to make money. It is only the trader's fault if he fails to recognise them. Also, the market has various phases. It is overbought sometimes and oversold at other times. It is trending some of the time and choppy at others. It is for a trader to take maximum advantage of favourable market conditions and keep away from unfavourable ones. With the help of derivatives, it is now possible to make some money in all kinds of markets. So the trader needs to look for opportunities all the time.
To my mind, the important keys to making long term money in trading are:
· Keeping losses small. Remember all losses start small
· Ride as many big moves as possible
· Avoid overtrading.
· Never try to impose your will on the market
It is impossible to practice all of the above perfectly. However, if you can practice all of the above with some degree of success, improvement in trading performance can be dramatic.
9. A disciplined trader keeps a cushion
If new traders are lucky to come into a market during a roaring bull phase, they sometimes think that the market is the best place to put all one's money. But successful and seasoned traders know that if the market starts acting differently in the future, which it surely will, profits will stop pouring in and there might even be periods of losses. So do not commit more than a certain amount to the market at any given point of time. Take profits from your broker whenever you have them in your trading account and stow them away in a separate account. I say this because the market is like a deep and big well. No matter how much money you put in it, it can all vanish. So by having an account where you accumulate profits during good times, it helps you when markets turn unfavourable.
This also makes drawdowns less stressful as you have the cushion of previously earned profits. Trading is about walking a tightrope most times. Make sure you have enough cushion if you fall.
10. A successful trader knows there is no Holy Grail in the market
There is no magical key to the Indian or any other stock market. If there were, investment banks that spend billions of dollars on research would snap it up. Investing software and trading books by themselves can't make you enormously wealthy. They can only give you tools and skills that you can learn to apply. And, finally, there is no free lunch; every trading penny has to be earned. I would recommend that each trader identify his own style, his own patterns, his own horizon and the set-ups that he is most comfortable with and practice them to perfection. You need only to be able to trade very few patterns to make consistent profits in the market.
No gizmos can make a difference to your trading. There are no signals that are always 100 per cent correct, so stop looking for them. Focus, instead, on percentage trades, trying to catch large moves and keeping your methodology simple. What needs constant improving are discipline and your trading psychology. At end of the day, money is not made by how complicated-looking your analysis is but whether it gets you in the right trade at the right time. Over-analysis can, in fact, lead to paralysis and that is death for a trader. If you can't pull the trigger at the right time, then all your analysis and knowledge is a waste.

Two simple habits to help you create wealth

Two simple habits to help you create wealth

All of us want to create wealth. Also we want to create it fast and with ease. It is really very easy to do it. Also it does not require any great efforts and skills to create wealth. We just need to develop right habits.

We all know that if we want to reach somewhere fast we need to start early. Similarly if we want to create wealth faster in our life – so that we can enjoy it while we are young – we need to start creating it earlier on. Legendary investor and wealthiest man on earth Warren Buffet made his first investment when he was 11 years old and according to him he started late. Warren Buffest was millionaire by the time he was around 30 years old.

Unfortunately most of us procrastinate our wealth creation. Initially when we start our career and earn our first income, we want to buy whole world from it. Soon we get married, we buy home, have our family, expenses keep adding up. Our income increase but so does our expenses. These are testing time for wealth creation. If we wait for next year, next increment, next bonus, next incentive to start saving it will never happen. The only thing that will happen is delay in wealth creation.

Vikram decided to set aside Rs 10,000 every month in an instrument that generated 8% return per annum in January 1991. His friend Rohit also thought he should start investing and hence he began investing same Rs 10,000 in same instrument one year later i.e. from January 1992. On 31st December 2000 i.e. when Vikram had invested for 10 years and Rohit had invested for 9 years both the friends looked at their investments. Vikram had created corpus worth Rs 18,29,460, while Rohit who had started one year later had Rs 15,74,295. Rohit had Rs 2,55,165 less as he delayed his investments by one year.

If Vikram and Rohit were to continue same investment of Rs 10,000.00 per month for 40 and 39 years respectively than the difference in their corpus at the end of the period will be Rs 27,90,415. Think of the loss Rohit incurred purely because he delayed investing just by one year.

Many times when I give similar examples in my articles, I get emails from readers stating they do not have Rs 10,000 to invest now and hence they will start investing only when they accumulate Rs 10,000. This is another way of procrastinating. Whether one starts with Rs 100 per month or Rs 1,00,000 per month, end result is that the individual who starts early wins with the race hands down.

Our spending habits also create hurdle in wealth creation. While prudent wealth creation philosophy is to follow P-I-P-E i.e. Prepone Investment, Postpone Expenses, we always Prepone Expenses and Postpone Investment. Rushing for ‘Sale’ and purchasing our future requirement today is preponing expenses. Note that I am not against purchasing from sale. I am only suggesting do not buy something which you do not require immediately. Retailers are always keen that we prepone our purchases. This will help them earn their income early. However our focus should be to make efforts to propone savings and investments. This will help us create wealth early.

“It's not your salary that makes you rich; it's your spending habits.”- Charles A. Jaffe

The real reason why stock markets are crashing

In a way it captures the irony of our times. Isn't it a bit strange that Saudi Arabia, the perceived beneficiary of the relentless oil price hike, should host a summit expressing 'concern' on the rising oil prices?
This high-profile summit was held in Jeddah, Saudi Arabia, last week after crude prices more than doubled over the past twelve months, stoking inflation and hurting economies across continents, ostensibly to diagnose the problem and possibly prescribe solutions.
This meeting was a congregation of oil producing and consuming countries to discuss the biggest challenge to the world economy since the World War II. Much less provide solutions to the issue of global inflation, the summit exposed serious fault lines that exist between major players even on the fundamental issue of arriving at a consensus on what causes the problem in the first place.
"Given the vital importance of petroleum to modern life, the global nature of the oil markets and the far ranging social, political and economic impacts of high prices and market volatility, we all have a stake in this conversation," Ali bin Ibrahim Al-Naimi, the Saudi petroleum minister, said. "The current market conditions are in the interest of neither the producers nor the consumers, and none of us can be content with the status quo," he added.
Reiterating the arguments put forth by the Saudi minister, a summit working paper reportedly called for action to "improve transparency and regulation of financial markets through measures to capture more data on index fund activity and to examine cross exchange inter-actions in the crude market."
In fact this is the predominant view of most consumer countries, including India.
But in direct contrast to the concerns expressed by many players in the oil market, US Energy Secretary Samuel Bodman concluded -- even before the summit -- that ". . . there is no evidence that we can find that speculators are driving futures prices. It is clear that the financial markets have seen unprecedented movement of capital into commodities in recent years. Our view is that this capital is following the market upward, it is not leading that movement."
Importantly, Bodman went on to add: "Fundamentally tight market conditions in our view are the major driver of the dramatic price increases that we have seen over the last five years, and particularly in recent months."
Crucial questions follow: if the current price is neither in the interest of the producers or consumers -- as the Saudi minister observed -- then, who is the end beneficiary of this relentless price rise? And even if we forget oil for a moment, is it not a fact that there has been a relentless price hike in virtually every commodity that is traded globally?
So is there a demand-supply mismatch in all commodities across continents, as Bodman observed in the case of oil? Are China and India, with their robust growth, creating relentless pressure on the global commodities markets and thereby causing runaway inflation? Or is there something more to it than meets the eye?
The impact of the Index Speculators
These questions were brilliantly, factually and logically answered by Michael Masters, managing member of Masters Capital Management, in a testimony before the United States Senate Committee recently.
Emphatically stating that institutional investors (comprising corporate and government pension funds, sovereign wealth funds, university endowments and other institutional investors) -- whom he terms 'Index Speculators' -- are contributing significantly to food and energy price inflation, Masters analyses the extant global inflation phenomenon in far greater detail and from a macro-economic perspective, perhaps unmatched by anyone else on this subject in recent times.
What is interesting in Masters' testimony is that he zeroes in on the crux of the issue straight away. Pointing out to the fact that never before have "investment majors had considered seriously investing in commodities futures markets as viable," Masters points out to the recent yet tectonic shift in the investment strategies of these players.
Correlating to the increase in the investment allocation to commodities index from $13 billion in 2003 to about $260 billion in March 2008, Masters points out to the resultant price increase of 25 commodities by an average of 183 per cent in this period.
Further, rubbishing the view that relentless consumption in China was the cause for the demand-supply mismatch that had led to the price increase, Masters points out that annual increase in Chinese demand of 920 million barrels for petroleum since 2003 till date has more or less matched by the demand by Index Speculators in the same period -- a fact that is virtually un-debated by analysts.
Naturally, Masters opens up a new paradigm in attempting to link the accumulation of commodities by these Index Speculators and the relentless price increase in such commodities globally.
The following Table gives out the commodity purchases by Index Speculators during the past five years:
Masters does not stop there. Taking exception to the standard reply of economists on diversion of corn to ethanol production to be the reason for the rise in the prices of corn, he points out that institutional investors have stockpiled enough to potentially fuel the entire United States' ethanol industry at full capacity for an entire year!
Turning to wheat, he points out that the current wheat stockpile of Index Speculators is enough to supply every American citizen with all the bread, pasta and baked goods they can eat for the next two years!
Economists ignore collective psychology
Most economists believe that price and demand are inversely related. But in real world, it need not be so. That is because economists do not take into account the impact of collective psychology, which is difficult to predict. For instance, when prices rise, more people are tempted to buy more shares of that particular company in anticipation of greater price increases.
Economists rationalise the same as 'healthy speculation' which is 'vital' for the orderly functioning of the markets. When the prices of stocks move up rapidly it is termed as a 'boom.'
Strangely, when the same principles are applied to commodities it is termed as inflation! As the cliche goes, why not rename inflation as steel boom or oil boom, especially when similar financial instruments and rules are at play?
Naturally, in the absence of a clear understanding of the impact of collective psychology, classical solutions don't work with new investors who are insensitive to prices and continue to buy even when the prices increase.
After all, the net effect of all this has been to elevate commodities normally destined for consumption into an investment category by hoarding these commodities. This explains the price spiral as demand of these commodities for investment purposes far exceeds the normal supply.
What adds fat to the fire is that when prices increase, Index Speculators benefit. This tendency is in direct contrast to the normal speculator who remains price sensitive. Strangely, as prices increase, the allocation of the Index Speculators too increases as they are virtually insensitive to any increase in risks as well as prices.
The following table captures the resultant increase in the prices of commodity futures prices increases between 2003 and 2008.
Toxic in Jeddah, nectar in New York
In effect, this is the new paradigm. Classical economists, trained in traditional methods to fight inflation, are no wonder finding their measures ineffective and are flummoxed by the turn of events. This explains the accelerating rate at which commodity prices are increasing globally.
And, as Masters rightly points out, there is a crucial distinction between traditional speculators and Index Speculators. While traditional speculators provide liquidity by both buying and selling futures, Index Speculators never sell. Therefore, 'they consume liquidity and provide zero benefit to the futures markets.'
Thus, today Index Speculators occupy 40 per cent of the long positions, while traditional speculators and physical hedgers occupy 27 per cent and 33 per cent, respectively. This paradigm is significantly different than what was prevailing even a few years ago where only the other two players -- physical hedgers and traditional speculators -- dominated.
That explains why the Saudi King is worried as his country is no longer the beneficiary of oil price rise. Neither are consuming countries. Economists, oblivious of this paradigm shift, blame everyone from China to India for this conundrum.
In the process they strain every sinew to explain the demand-supply mismatch when none exists, forgetting that it is the Index Speculators who are responsible for this price rise.
Economics is often held to be a trans-national discipline implying what is good economics for Americans must be good for Saudis. But times have changed. No wonder, this speculation by the new breed of Index Speculators is held to be toxic in Jeddah.
How, this is nectar in New York, London and perhaps in some other financial centres too.
To conclude:
Rising commodity prices erodes the profits of corporates;
Naturally as this fuels inflation, interest rates are hiked globally (except in the US). Interest rate hikes in turn acts as a disincentive for stock markets; and
Finally, increased allocation to commodities by Index Speculators makes returns from such investments far more attractive than from stocks.
Investing in stock markets it seems is passe for now. No wonder stock markets are crashing.

Sunday, July 13, 2008

Dear All,
The details are as follows.
Note: one pager Scanned copy is attached as attachment.
Issue Open 09-Jul-2008
Issue Close 07-Aug-2008
Scheme Objective
ICICI Prudential Banking and Financial Services Fund, is an open-ended equity scheme. The investment objective of the scheme is to generate long-term capital appreciation tounitholdersfrom a portfolio that is invested predominantly in equity and equity related securities of companies engaged in banking and financial services.
Mutual Fund Family
ICICI Prudential Asset Mgmt.Co. Ltd

Fund Class
Equity - Banking
Fund Type
Investment plan
Fund Manager
Prashant Poddar
Entry Load
2.25 %
Exit Load
1.00 %
Entry Load: 2.25% for investments of less than Rs.5 crores and Exit Load 1% for investments of less than Rs.5 crores made during the NFO period and redeemed before 6 months from the date of allotment.

Jinendra Kumar Porwal

Contact Now:

Jinendra Kumar Porwal (Advisor) "Riddhi Siddhi" Estate, 1, Gokul Nagar (Commercial) Near Bohra Ganesh Ji Temple, Udaipur (Rajasthan) 313001. Phone: 0294- 2471358, 2470476, 3201157 Mobile : 9351445025, 9829353219 & 9460700906 E-mail: Website: Deals in: All Mutual Funds , Birla Sunlife Insurance,General Insurance, Health Insurance & DEMAT Account in Reliance Money

How to pay zero tax on family income of Rs 13.10 lakh

How to pay zero tax on family income of Rs 13.10 lakh
Believe it or not, it's true.
One would be forgiven for being sceptical because for the ongoing year (FY 2008-09), the total income exempt from income tax in the hands of a male individual is only Rs 150,000 and that for a woman taxpayer only Rs 180,000 (for senior resident Indian citizens above the age of 65 years, the tax exemption is higher at Rs 225,000 but for our purpose, we shall consider a family where all the members are below the 65 years of age.). So how, then, can an income of Rs 13.10 lakh be completely exempt from tax?
You can achieve this by following one of the five golden rules of tax planning, namely, by spreading your income among your family members.
This golden rule makes creative use of the classic power concept of divide and rule. The simple strategy is that each family member must have his or her independent source of income so as to legally become an independent taxpayer under the provisions of the Income Tax Law. When the entire income of a family belongs to just one member, the tax liability is very much higher than when the same income is divided among different members of the family.
Thus, the first golden rule of tax planning requires that one develops income tax files for oneself, one's spouse, one's major children, the Hindu Undivided family, and for all other major relatives in the family, including one's parents.
Now, under the income tax law it is not possible to arbitrarily divide or apportion one's income amongst different members of one's family - and then pay lower tax in the names of different family members. However, you can achieve this goal by intelligent use of the perfectly legitimate facility of gifts and settlements.
Here is how:
Generally, any gift you receive from various members of your family and specified relatives is not considered your income but a capital receipt. Thus, no income tax is payable on gifts received from relatives, and gifts received from parties other than relatives up to a sum of Rs 50,000 - and up to any amount at the time of marriage.
Let us consider the example of a small family consisting of Mr. Zerotaxwala, his wife who is a homemaker and not a career person, his major son studying in college, and one major daughter studying in school. They also constitute a Hindu Undivided Family.
Let us consider that the total combined income of all five members of the Zerotaxwala family, including the HUF, is Rs 13.10 lakh. Every member contributes Rs 70,000 in the PPF Account and has invested Rs 30,000 in an infrastructure or company or equity linked savings scheme, etc. such that each of the five assesses achieves full benefits of maximum deduction under Section 80C, namely Rs 100,000 each.
Through an intelligent use of gifts and settlements by Mr. Zerotaxwala to all members of his family, each family member has investments in business, industry, house property, etc., in their own individual names in such a manner that each of the male members and the HUF would have a gross annual income of Rs 250,000 each, and both the female members have an income of Rs 280,000 each, in total adding up to Rs 13.10 lakh.
And here is the beauty: this income of Rs 13.10 lakh can be totally tax-free. Here is how:
Section 80C of the Income-tax Act, 1961 provides each individual taxpayer, including an HUF, a deduction of Rs 100,000 from his / her gross income when investments up to Rs 100,000 is made in stipulated investment avenues, such as PPF, infrastructure bonds, equity linked savings schemes, life insurance, etc. Thus, all the four family members, and also the HUF, can avail of this deduction under Section 80C to the extent of Rs 100,000 each.
After availing of the deduction of Rs 100,000 each under Section 80C, the taxable incomes of the five taxpayers of the Zerotaxwala Family would be as follows:
Mr. Zerotaxwala Rs 150,000
Mr. Zerotaxwala's son Rs 150,000
Zerotaxwala HUF Rs 150,000
Mrs. Zerotaxwala Rs 180,000
Mr. Zerotaxwala's daughter Rs 180,000
There, we have it!
The total tax liability of the Zerotaxwala Family is now ZERO, since the income of each taxpaying constituent individual / HUF is below the taxable limit which, as noted earlier is currently Rs 150,000 for male and HUF taxpayers, and Rs 180,000 for women tax payers.
It may also be mentioned here that we have not considered the additional tax savings which are possible through a deity Trust, or a trust for an unborn person in the family, which would further increase the zero income tax level income to more than Rs 16 lakh.
In addition, several items of fully exempted income, such as agricultural income, dividend income, income from mutual fund, etc., could be planned for each of the four family members, and also for the HUF, to secure a still higher level of zero income tax for the Zerotaxwala Family.
By following the simple principles outlined above, you, too, can become a zerotaxwala family.

Inflation - How to reduce its impact on your pocket

Inflation - How to reduce its impact on your pocket

If there is an earthquake in a particular region, then all individual in that region will get affected by the earthquake in some way or the other. No one will be able to escape it, whether he is male or female, rich or poor, child or old. This is because the impact of earthquake is in the system. Some other examples of risks that exist in the system are political situations, war etc. Similarly since inflation exists in the system, everyone will be affected in some way or the other and there is no way one can avoid inflation.

Economic meaning of inflation is “general and progressive rise in prices.” However more apt explanation for inflation would be to state that it is a phenomenon which exists in the system and slowly affects all parameters of finance. We can say it is a silent killer. Further since inflation exists in the system there is no way to escape it.

Secondly, inflation is always prevalent in the system and therefore it continuously affects us. Sometimes the impact of inflation is high and sometimes it is less. However it is never absent unless economy is contracting. Cost of a masala dosa in 1987 was Rs 3.50. Same masala dosa in 1997 costed Rs 14.00. If the rise in prices continues at same rate then in year 2017 masala dosa will cost Rs 224.00. Similarly cost of Colgate toothpaste in 1987 was Rs 8.05. It increased to Rs 18.90 in 1997. If it keeps progressing at same rate in 2017 we will have to pay Rs 104.00. All of us witnessed the rise in prices of masala dosa and Colgate toothpaste. However since it was slow we did not realize how large its impact is in the long run.

There are four pillars of finance (i) Assets (investments) (ii) Liabilities (Borrowings) (iii) Income (iv) Expenses.

Since inflation exists in the system, it affects all our investments. Assume we are generating 8%, 20%, 12% and 25% returns from debt, equity, gold and real estate respectively. If rate of inflation in the system is 11% than our real rate of return from debt will be 8% - 11% = -3%, equity returns will be 20%-11%%=9%, Gold returns will be 12%-11%=1% and real rate of return from real estate will be 25%-11%=14%. Thus inflation affects all our investments.

During inflation, rate of interest in the economy rises. Therefore invariably our rate of interest on borrowing will rise. We will have to pay higher rate of interest on our borrowings. Cost of home loan, car loan etc. will go up. As far as possible avoid borrowings and if there is loan, get out of it as soon as possible.

Since value of rupee depreciates due to inflation, our income can buy lesser goods and services. Thus inflation indirectly reduces value of our earning.

Lastly inflation has direct impact on expenses. Since inflation increase general rate of prices, all goods and services become expensive.

While we cannot escape inflation we can try and reduce its impact on us. From investment perspective we should invest in assets which can generate returns higher than rate of inflation. These are equity, Gold and real estate. However these asset classes are highly volatile in near term.

Sure shot way to beat inflation, is to increase our level of income. However it is not possible for individuals to increase level income immediately. Therefore during higher inflation period if possible find out avenues to increase income level. This is easier said then done.

Learn to control your expenses..

Expenses are something that can be tackled. Before discussing strategies to control expense first let us try and understand categories of expenses. Broadly there are two categories of expenses (i) Mandatory (ii) Voluntary. Within each of these categories there are fixed and variable expenses e.g. Mandatory fixed expenses e.g. school fees, house rent etc. Next these are Mandatory variable expenses like grocery, medical and health care expense etc. There is absolutely no one way can avoid mandatory expenses.

In case of voluntary expenses again there are two categories e.g. Voluntary fixed expenses e.g. Gymnasium fees, club membership etc. Voluntary variable expenses include eating out, vacations etc. While the inflation is rising we should cut down on voluntary variable expenses at once. Also as and when renewal for voluntary fixed expenses come up same can be reduced or stopped completely.

Even after controlling voluntary expenses if we are struggling to make two ends meet, then we should follow step down process. Let us consider example of cost of transport to work, a mandatory variable expense. Using a chauffer driven car is the upper most step and walking is lower most step. After deciding on these two find our other options by lowering one step. After chauffer driven car next lower step could be to self drive car to work. Step lower than that could be car pool and step lower than car pool could be to use public transport. Once the ladder is constructed we should find out optimal suited option.

Invariably we focus too much on risks which are transparent like volatility of equity market, illness in family etc. Unfortunately a non-transparent risk like inflation gets ignored. However, just because we cannot see impact of inflation on our finances, it does not mean inflation does not exist. Inflation is a silent killer and if we ignore it, one day it will kill us.

Mutual Fund TIPS

How to tackle a bear market?
Sensex’s rollercoaster ride over the last several months has shaken the faith of a lot of equity investors. People who prided themselves as long term investors suddenly question their ability to stay patient as the market moves up and down. Savvy investors who have seen several market cycles and understand the nature of equity as an asset class are not really perturbed. They see these swings as opportunities to make long term investments.

However as soon as investments are done, most people expect markets to rise upwards. If the markets are moving upwards, everyone feels confident and is tempted to invest more. On the other hand if there is downside or negative returns for more than several months, one tends to get pessimistic about future returns. In such a situation people are tempted to stop their investments temporarily with the belief that as soon as the market starts moving up, one will start all over again. Markets like life do not always move in a linear fashion and hence it’s almost impossible to get timing right all the time. Second the Sensex will not call anyone to tell whether the downside has come to an end or whether the up move has started.

Contrary to what most people would expect, I feel that if the markets go down after you have invested at reasonable levels, you have every reason to be happy. This is because you get to buy at lower levels and the more it goes down, the better your purchase price would be. However it is extremely difficult to turn a blind eye to the red numbers that you see across your investments and this is precisely what shakes up confidence. The only time you should be concerned about the value of your equity investments is when you really need the money and wish to sell your investments. I am not saying that one should not review investments or just turn a blind eye to investments once made. The key point is that one should review the fundamentals of the investments made regularly, but if sound investments goes down for a few quarters , do not be unduly worried about it. Review whether the same reasons for which you had made this investment still applies. No equity investment is insulated from a downturn and there are times in a stock or fund’s life when it will under perform. There can be no equity investment that cannot go down. In bear markets, investments can be down not just for several quarters but also for several years.

Subsequently when investments do rise, people who have bought continuously at lower levels earn much higher returns than the ones who had bought only when the markets were going up. Besides global woes, there are several risks that our markets are exposed to. Some of them are:

Oil & Commodity Prices going up
Earnings slowdown
Political risks
Risk Aversion and
FII selling and not enough domestic buying
Some analysts will say there is more bad news to come while some will say markets have discounted the bad news. We can only say that the market has discounted the bad news only when it is possible for the market to foresee all types of bad news. As far as market pundits and ability is concerned, no one really talked about subprime until last year or about oil prices and inflation being major problems until a couple of months back.
This brings me to a fundamental question “Can market movements and different types of risks be predicted at all?” We can only dissect and understand when the initial strong symptoms start to appear or mostly after the event has happened. Like the fury of nature, there will be testing times in the life of every equity investor. One needs to understand the very nature of equities, risk associated with it and also that seeing negative returns is not necessarily bad. Yes it is an unpleasant situation to see negative numbers if you need money for a financial goal (having been invested for several years). To mitigate this risk one should start liquidating equity assets atleast 12-18 months before you need money. If the market is down at that point of time, you should patiently wait for some meaningful recovery to happen. In sound equity investments, markets generally give an exit opportunity to most investors. It is only the greed quotient that determines the final outcome. For all others, seeing negative returns or red after investments are made isn’t really harmful.

Going Green is good but when it’s a question of your investments, Red is good for a long term investor and makes absolute economic sense for a long term equity investor.