The slowdown in the property market, induced by the global meltdown and negative sentiments, had dealt a body blow to the mega land deals, in the country. But the gloom seems to be finally lifting. Coinciding with the return of buyer interest in select pockets of residential market and the improved liquidity position of builders, land auctions are inching back into the spotlight.
Consider this. DLF Ltd recently made headlines when it walked away with 350.7 acres in Gurgaon, for an estimated Rs 1,750 crore, marking one of the largest land deals in the country. The prime land, on the Gurgaon-Faridabad road, had been put on the block for re-bid after the only bidder in the first round (DLF) had drawn attention to certain difficulties in project implementation.
HSIIDC (Haryana State Industrial & Infrastructure Development Corporation) re-invited bids in July this year with easier terms and conditions, including staggered payment plan spread over seven years. This time, DLF clinched the deal with its winning bid of Rs 12,000 per square metre — two other bidders did not qualify on technical grounds.
The land in the Delhi suburb would be used for development of commercial, residential, sports complexes, and an 18-hole golf course. DLF, however, remains tight-lipped about the project, but sources say that the land deal is “positive” for the company, given its proximity to South Delhi on one side and the existing golf course on the other.
DLF is not the only one going after such transactions. Earlier this year, Anant Raj Industries decided to set aside nearly Rs 400 crore from its cash reserves, to acquire land for upcoming residential projects.
So are the land deals back in reckoning, after a long dry spell? Industry experts believe that land acquisition will gather pace, but will remain largely need-based.
“The market definitely is improving, new projects are being launched and the cash flow, for builders, is getting back in shape on the back of QIP issues and some proposed public offers that are being lined-up,” says Mr Manish Aggarwal, Executive Director, Investment Services, Cushman & Wakefield (C&W) India.
Time to buy
While the conditions are turning positive, the biggest clincher clearly is land valuation. In many cases the land prices have corrected nearly 60-70 per cent, says an industry observer.
Agrees Mr Amit Sarin, Director and CEO, Anant Raj Industries. “It is the best time to buy land — the valuation is a fraction of the 2007-level. Everyone is announcing low cost and affordable housing projects and the main ingredient of low cost in real estate is the land cost, not construction cost,” Mr Sarin points out.
But Anant Raj Industries, itself a zero-debt company, expects land buying to remain selective for a while.
“It is not a trend in the industry. It will happen only in those cases where the land costs are extremely attractive and the builder has a comfortable liquidity position,” he adds.
The company has stayed away from aggressive land buying over the last 2-3 years.
No frenzy likely
Real estate consulting firm CBRE too does not foresee the return of land frenzy seen in 2007-2008. “Companies are not rushing into transactions. They are more cautious and evaluating deals carefully on parameters such as potential for development, location, margins and valuation,” says Mr Anshuman Magazine, Chairman and Managing Director, CB Richard Ellis South Asia Pvt.
Saturday, August 29, 2009
BANK DEPOSITS IN FAVOUR
Indian households slowed their saving spree in 2008-09, though they continued to put their money in safe investment avenues such as bank deposits. That is the key takeaway from the RBI’s latest Annual Report released this week. Savings increased marginally by 4.3 per cent for the year, according to the Annual Report. Apart from lower consumption, the Sixth Pay Commission arrears and increased income levels of the public sector employees probably flowed into savings. Provisional data show that net household financial savings now constitute 10.9 per cent of GDP, down from 11.5 per cent in 2007-08. The ratio fell because savings increased at a lower rate than the country’s GDP (which grew 6.7 per cent for the year).
One highlight of the household savings patterns is the massive Rs 4,09,678-crore accretion to bank deposits in 2008-09. In the first four months of 2009-10, more than Rs 2,30,000 crore deposits were collected, which forms 35 per cent of the deposits collected in 2008-09. From the provisional data, it is clear that banks continue to form the single largest vehicle for household financial savings, absorbing 55 per cent of the money put away this year.
More attractive rates
In recent years, banks seem to have even attracted funds that were earlier earmarked for small savings schemes. The stagnant interest rates on small savings even as bank deposit rates climbed in 2008, tax exemptions to five-year bank deposits and the taxing of interest from small savings schemes made bank deposits a more attractive option. The flight to safety triggered by the equity market meltdown and worries about rising credit risk also channelled a flood of money into safer avenues. Apart from banks, NBFCs too witnessed a surge in deposits, with an inflow of almost Rs 13,400 crore in 2008-09, compared to Rs 3,700 crore in 2007-08. The fact that NBFCs offered rates that were almost 2 percentage points higher than bank deposits, helped them attract a share of deposits too. Small savings schemes lost share of incremental household savings, falling from a one-fifth share in 2004-05 to a meagre 1.4 per cent for 2008-09. The eroding share of small savings can be traced to interest rate swings.
Small savings schemes witnessed net outflows since December 2007, when bank term-deposit rates actually crossed the small savings interest rates. However, there was a greater preference for small savings in 2008-09 with marginal net inflows (Rs 10,400 crore) compared to net outflows the preceding year. Bank deposit rates began their descent in the latter half of 2008-09 and if they continue to fall, small savings schemes may see a revival in inflows.
Other avenues
Insurance companies did improve their share in incremental household savings to 20 per cent in 2008-09 from 18 per cent the previous year, helped by tax benefits and the added life cover. Mutual funds (debt and equity) which contributed, on an average, Rs 39,000 crore per year to gross household savings during 2005-08, witnessed an outflow of Rs 10,478 crore in 2008-09. This was partly due to the risk aversion of investors and underperformance of these funds because of the equity market meltdown as well the problems faced by debt schemes mid-year.
The ratio of mutual funds to total gross household savings increased from 0.4 per cent in 2004-05 to 7.9 per cent in 2007-08, indicating a manifold increase in new inflows to these schemes.
Investments in India Inc, by way of equity and debentures in the primary market, saw their proportion falling slightly to 4.2 per cent from 4.4 per cent the preceding year.
One highlight of the household savings patterns is the massive Rs 4,09,678-crore accretion to bank deposits in 2008-09. In the first four months of 2009-10, more than Rs 2,30,000 crore deposits were collected, which forms 35 per cent of the deposits collected in 2008-09. From the provisional data, it is clear that banks continue to form the single largest vehicle for household financial savings, absorbing 55 per cent of the money put away this year.
More attractive rates
In recent years, banks seem to have even attracted funds that were earlier earmarked for small savings schemes. The stagnant interest rates on small savings even as bank deposit rates climbed in 2008, tax exemptions to five-year bank deposits and the taxing of interest from small savings schemes made bank deposits a more attractive option. The flight to safety triggered by the equity market meltdown and worries about rising credit risk also channelled a flood of money into safer avenues. Apart from banks, NBFCs too witnessed a surge in deposits, with an inflow of almost Rs 13,400 crore in 2008-09, compared to Rs 3,700 crore in 2007-08. The fact that NBFCs offered rates that were almost 2 percentage points higher than bank deposits, helped them attract a share of deposits too. Small savings schemes lost share of incremental household savings, falling from a one-fifth share in 2004-05 to a meagre 1.4 per cent for 2008-09. The eroding share of small savings can be traced to interest rate swings.
Small savings schemes witnessed net outflows since December 2007, when bank term-deposit rates actually crossed the small savings interest rates. However, there was a greater preference for small savings in 2008-09 with marginal net inflows (Rs 10,400 crore) compared to net outflows the preceding year. Bank deposit rates began their descent in the latter half of 2008-09 and if they continue to fall, small savings schemes may see a revival in inflows.
Other avenues
Insurance companies did improve their share in incremental household savings to 20 per cent in 2008-09 from 18 per cent the previous year, helped by tax benefits and the added life cover. Mutual funds (debt and equity) which contributed, on an average, Rs 39,000 crore per year to gross household savings during 2005-08, witnessed an outflow of Rs 10,478 crore in 2008-09. This was partly due to the risk aversion of investors and underperformance of these funds because of the equity market meltdown as well the problems faced by debt schemes mid-year.
The ratio of mutual funds to total gross household savings increased from 0.4 per cent in 2004-05 to 7.9 per cent in 2007-08, indicating a manifold increase in new inflows to these schemes.
Investments in India Inc, by way of equity and debentures in the primary market, saw their proportion falling slightly to 4.2 per cent from 4.4 per cent the preceding year.
PRICE RISE - REAL ESTATE MUMBAI
Call it better home loan rates or just improved consumer confidence and market sentiment, demand in the residential category, particularly in the affordable segment, has picked up.
And, as bookings and enquiries pour in, developers, particularly in Mumbai, have gone back to the customary practice of hiking rates, which have risen 20-30 per cent since May and continue to go up by the day as bookings grow.
Sales improve
Of late, there has been a marked improvement in sales across metros. DLF reported bookings for 1,356 apartments, measuring 2 million sq.ft, for its project Capital Greens, on a single day.
Indiabulls Group, which launched an affordable home project in Gurgaon, has closed over 100 bookings of its launch of 200 in the first phase. The project is a cluster of 800 apartments.
In Mumbai, Kalpataru Group’s project in Thane saw 110 flats sold in 10 days at Rs 3,100 per sq.ft. Another of its project at LBS Marg logged a sale of 50 flats after the rate for a two-and-a-half BHK was reduced from Rs 98 lakh to Rs 82 lakh. At the distant western Mumbai suburb of Virar, a residential township project promoted by Rustomjee and Evershine on 217 acres registered sale of 174 apartments at Rs 1,700 a sq.ft.
“DB Realty project at Dahisar registered 1,400 bookings, even before construction began,” says Mr Suman Memani, Associate Vice-President, Religare Securities, who also points out that prices have since gone up, particularly in the Mumbai suburbs.
Prices go up
According to Mr Memani, HDIL’s Versova project launched at Rs 7,500 a sq.ft had since gone up to Rs 9,500. Similarly, DB Realty had raised prices at Dahisar to Rs 3,300, from Rs 2,700. The most recent instance is of the Harasiddhi Group, which launched its offering in Goregaon, near here, at Rs 10,000 a sq.ft (carpet area), raised the price to 10,300 a sq.ft.
In general, the price hike creeps in after 50-60 per cent of the project gets sold out. In some ways developers are testing the waters and gauging how much the market can absorb. In any case, after the major chunk is sold any developer can afford to wait for a better tiding, he says.
The price increase is only 5-8 per cent since May, says Mr Anand J. Gupta, General Secretary, Builders Association of India.
Justifying the increase, Mr Gupta says it is purely based on demand-supply dynamics. Builders, who were languishing for want of enquiries, now see a silver lining on the horizon, after they had lowered prices to the maximum to stimulate demand.
Mr Gupta points out that historically real estate had either gone up or come down. It had never been stagnant and in places where it had been constant, development was rather stunted such as in Baroda and Ahmedabad. For ages, the only reason for real estate remaining a choice asset class is because it appreciates, he says.
NO JUSTIFICATION
Mr Pawan Swamy, Managing Director - West India, Jones Lang LaSalle Meghraj, sees little justification for escalation in rates at this point in time. The corrections that have taken place in overheated locations of cities such as Mumbai were required, since developers had priced themselves out of the market.
The fact that the slowdown forced them to rationalise their rates has been working to the developers’ advantage, and one would have assumed that the recent market dynamics had delivered a clear and unequivocal message.
However, Mr Swamy feels that there has been a resurgence of demand for residential property in many markets that are not seeing much supply. In such locations, a number of developers who have successfully sold a sizable component of their existing projects are now attempting to see what kind of price escalations the market will be able to accommodate.
This is, to a significant extent, a gamble that can backfire if the developer in question misjudges market dynamics.
However, this is not happening across the board, but rather in high demand-low supply locations and only among developers who have sufficient capital clout. Nevertheless, much depends on the buyer community — if such price escalations are pandered to, we may be looking at price bubbles building up in such locations.
Last month, Mr Deepak Parekh, Chairman, HDFC, cautioned developers against raising prices, stating that such a move would stall recovery of the segment. He was also sceptical about the builder fraternity’s commitment to the affordable housing segment.
And, as bookings and enquiries pour in, developers, particularly in Mumbai, have gone back to the customary practice of hiking rates, which have risen 20-30 per cent since May and continue to go up by the day as bookings grow.
Sales improve
Of late, there has been a marked improvement in sales across metros. DLF reported bookings for 1,356 apartments, measuring 2 million sq.ft, for its project Capital Greens, on a single day.
Indiabulls Group, which launched an affordable home project in Gurgaon, has closed over 100 bookings of its launch of 200 in the first phase. The project is a cluster of 800 apartments.
In Mumbai, Kalpataru Group’s project in Thane saw 110 flats sold in 10 days at Rs 3,100 per sq.ft. Another of its project at LBS Marg logged a sale of 50 flats after the rate for a two-and-a-half BHK was reduced from Rs 98 lakh to Rs 82 lakh. At the distant western Mumbai suburb of Virar, a residential township project promoted by Rustomjee and Evershine on 217 acres registered sale of 174 apartments at Rs 1,700 a sq.ft.
“DB Realty project at Dahisar registered 1,400 bookings, even before construction began,” says Mr Suman Memani, Associate Vice-President, Religare Securities, who also points out that prices have since gone up, particularly in the Mumbai suburbs.
Prices go up
According to Mr Memani, HDIL’s Versova project launched at Rs 7,500 a sq.ft had since gone up to Rs 9,500. Similarly, DB Realty had raised prices at Dahisar to Rs 3,300, from Rs 2,700. The most recent instance is of the Harasiddhi Group, which launched its offering in Goregaon, near here, at Rs 10,000 a sq.ft (carpet area), raised the price to 10,300 a sq.ft.
In general, the price hike creeps in after 50-60 per cent of the project gets sold out. In some ways developers are testing the waters and gauging how much the market can absorb. In any case, after the major chunk is sold any developer can afford to wait for a better tiding, he says.
The price increase is only 5-8 per cent since May, says Mr Anand J. Gupta, General Secretary, Builders Association of India.
Justifying the increase, Mr Gupta says it is purely based on demand-supply dynamics. Builders, who were languishing for want of enquiries, now see a silver lining on the horizon, after they had lowered prices to the maximum to stimulate demand.
Mr Gupta points out that historically real estate had either gone up or come down. It had never been stagnant and in places where it had been constant, development was rather stunted such as in Baroda and Ahmedabad. For ages, the only reason for real estate remaining a choice asset class is because it appreciates, he says.
NO JUSTIFICATION
Mr Pawan Swamy, Managing Director - West India, Jones Lang LaSalle Meghraj, sees little justification for escalation in rates at this point in time. The corrections that have taken place in overheated locations of cities such as Mumbai were required, since developers had priced themselves out of the market.
The fact that the slowdown forced them to rationalise their rates has been working to the developers’ advantage, and one would have assumed that the recent market dynamics had delivered a clear and unequivocal message.
However, Mr Swamy feels that there has been a resurgence of demand for residential property in many markets that are not seeing much supply. In such locations, a number of developers who have successfully sold a sizable component of their existing projects are now attempting to see what kind of price escalations the market will be able to accommodate.
This is, to a significant extent, a gamble that can backfire if the developer in question misjudges market dynamics.
However, this is not happening across the board, but rather in high demand-low supply locations and only among developers who have sufficient capital clout. Nevertheless, much depends on the buyer community — if such price escalations are pandered to, we may be looking at price bubbles building up in such locations.
Last month, Mr Deepak Parekh, Chairman, HDFC, cautioned developers against raising prices, stating that such a move would stall recovery of the segment. He was also sceptical about the builder fraternity’s commitment to the affordable housing segment.
Why fund investors didn’t get their timing right
“Buy low and sell high” is a lesson mutual fund investors in India continue to ignore, as trends in money flows into mutual funds over the past two years show. Flush with funds in a rising stock market until early 2008, equity funds saw new inflows dwindle in the bear market, reviving only in the recent rally.
However, the good news is that older fund investors held on patiently as NAVs fell, and reaped gains from the subsequent rally. Another key trend was some investors shifting attention to other asset classes when returns from equities fell. Gold ETFs and income funds saw steady inflows during periods marked either by uncertainty or poor performance by equities.
The tendency to chase returns rather than anticipate them appears to have taken hold of many equity fund investors over the past two years. Net inflows into equity funds (gross sales minus redemptions) peaked, with the stock market in January-2008 at Rs 12,717 crore, though some spillover effect remained with healthy inflows in the following months. However, from April onwards, fund flows dipped as the market’s free fall continued.
Behind the curve
An analysis of trends in monthly equity fund flows between early 2007 and now shows that investors have been slow to react to market spikes as well as its falls. Though the equity market was buoyant from August 2007, the gush of inflows caught up only later in November. When the market corrected in January 2008, inflows continued for a few more months.
Net flows that had turned negative following the October 2008 crash, remained so till April 2009 (but for February, which reported net inflows). They resumed in full flow again in May 2009, two months into the recovery rally. These suggest that investments, more often than not, chased good performance from equity funds.
Investments picked up after equity funds put in an average holding period return of 32 per cent between August and November 2007, and 25 per cent in the two-month period between March 2009 and April 2009.
Herd mentality, the need for assurance that the investment value will not drop immediately after committing funds, and the fear of missing out on rallies appear to be the key motivating factors for retail investors in equity funds. Such a short-term approach to equities may also have limited investor participation in the current rally, as the monthly net inflows remained unimpressive throughout last year and the first quarter of the current year.
New fund offerings also garnered larger sums during bullish phases — equity NFOs in April-January 2008 saw inflows of Rs 33,191 crore — but investors appeared to have given them a wide berth during the bear phase.
Fund houses too should shoulder some of the blame for this; as new fund launches have peaked during good times. Triggered also by fewer offerings during the period, equity NFOs garnered only Rs 2,293 crore between April 2008 and March 2009.
The revival in equities since April 2009 has seen more new funds cropping up. With positive response from investors, these have collected over Rs 3,221 crore between April and July.
Reluctant to pull out
However, what’s interesting is that while new money committed to funds dropped in 2008, the year did not see any significant pick-up in redemption activity. Investors preferred to remain invested in equity funds, despite a fall in, or poor performance of, the market.
While pullouts from equity funds did pick up a little after the January 2008 correction, they dwindled considerably in the months thereafter and remained low throughout 2008. Though the average NAV of diversified equity funds plunged by 55 per cent in 2008, average monthly redemption numbers stood at just Rs 3,375 crore.
Even in October, when the equity market nose-dived to new lows, investors refrained from pulling out a large chunk of their investments. Investors took out only Rs 2,652 crore in October, compared to Rs 7,536 crore in January 2008, the market peak. Another interesting sidelight is that some investors did cash out close to, though not exactly at, the market peak. Equity fund redemptions, which began to inch higher as early as May 2007, peaked in October 2007, well ahead of the market peak in January.
That the average monthly redemption stood at about Rs 6,905 crore between April-December 2007, even when equity funds notched up average holding period returns of 73 per cent, suggests that a section of investors does constantly monitor fund portfolios and book profits.
The trend appears to be gathering strength in the recent rally too. Following the broader market rally, the average monthly redemption between May and July 2009 went up to Rs 4,082 crore.
Looking beyond equities
Spurred by the need to make up for the lack of returns in equities, a section of mutual fund investors appear to have ventured beyond equity funds too. A host of other dynamics, such as higher inflation and interest rates in 2008, may also have triggered the flow of funds into other assets.
Income funds, which primarily invest in debt securities with varying maturity periods, reported net outflows in November and December 2007 (coinciding with a rising equity market). However, following the crash in equities, fund flows into income funds turned positive and remained buoyant till the Lehman Brothers collapse in September.
While it can be argued that income funds usually see participation only from the well-informed investors (such as banks and other financial institutions), retail participation in other assets is also evident from fund flows into other categories.
For instance, net inflows into gold ETFs have been rising steadily since the January 2008 crash and 2008 saw gold ETF assets expand by about 54 per cent. Investors also appear to have taken temporary shelter in low-risk gilt and liquid funds in October 2008 following the collapse of equities worldwide. Flight to safer avenues following a liquidity crunch, both domestic and global, may explain the changed stance, especially since the asset classes saw poor inflows in the earlier months.
ELSS funds too saw a change in fund patterns. Being tax-saving instruments, these funds generally tend to report peak flows toward the end of a fiscal year.
In keeping with this, while ELSS funds did report higher net flows in the four-month period between December 2007 and March 2008 (peaked in March with Rs 2,071 crore net inflows), the risk-appetite of investors appears to have fallen sharply since.
The downward spiral in equities in 2008 led to a lower quantum of net flows between January-March 2009 (Rs 547 crore in March 2009). That these funds, notwithstanding the lock-in, saw a pick-up in redemption activity in October 2008 and more recently in June 2009 also points to the reluctance of investors to lock in funds for the long term.
Overseas investing too appears to have lost its charm, what with these funds recording net outflows since October 2008. What’s more, the funds reported a significant jump in net outflows (Rs 127 crore) in May 2009, which also coincided with a broader equity rally.
However, the good news is that older fund investors held on patiently as NAVs fell, and reaped gains from the subsequent rally. Another key trend was some investors shifting attention to other asset classes when returns from equities fell. Gold ETFs and income funds saw steady inflows during periods marked either by uncertainty or poor performance by equities.
The tendency to chase returns rather than anticipate them appears to have taken hold of many equity fund investors over the past two years. Net inflows into equity funds (gross sales minus redemptions) peaked, with the stock market in January-2008 at Rs 12,717 crore, though some spillover effect remained with healthy inflows in the following months. However, from April onwards, fund flows dipped as the market’s free fall continued.
Behind the curve
An analysis of trends in monthly equity fund flows between early 2007 and now shows that investors have been slow to react to market spikes as well as its falls. Though the equity market was buoyant from August 2007, the gush of inflows caught up only later in November. When the market corrected in January 2008, inflows continued for a few more months.
Net flows that had turned negative following the October 2008 crash, remained so till April 2009 (but for February, which reported net inflows). They resumed in full flow again in May 2009, two months into the recovery rally. These suggest that investments, more often than not, chased good performance from equity funds.
Investments picked up after equity funds put in an average holding period return of 32 per cent between August and November 2007, and 25 per cent in the two-month period between March 2009 and April 2009.
Herd mentality, the need for assurance that the investment value will not drop immediately after committing funds, and the fear of missing out on rallies appear to be the key motivating factors for retail investors in equity funds. Such a short-term approach to equities may also have limited investor participation in the current rally, as the monthly net inflows remained unimpressive throughout last year and the first quarter of the current year.
New fund offerings also garnered larger sums during bullish phases — equity NFOs in April-January 2008 saw inflows of Rs 33,191 crore — but investors appeared to have given them a wide berth during the bear phase.
Fund houses too should shoulder some of the blame for this; as new fund launches have peaked during good times. Triggered also by fewer offerings during the period, equity NFOs garnered only Rs 2,293 crore between April 2008 and March 2009.
The revival in equities since April 2009 has seen more new funds cropping up. With positive response from investors, these have collected over Rs 3,221 crore between April and July.
Reluctant to pull out
However, what’s interesting is that while new money committed to funds dropped in 2008, the year did not see any significant pick-up in redemption activity. Investors preferred to remain invested in equity funds, despite a fall in, or poor performance of, the market.
While pullouts from equity funds did pick up a little after the January 2008 correction, they dwindled considerably in the months thereafter and remained low throughout 2008. Though the average NAV of diversified equity funds plunged by 55 per cent in 2008, average monthly redemption numbers stood at just Rs 3,375 crore.
Even in October, when the equity market nose-dived to new lows, investors refrained from pulling out a large chunk of their investments. Investors took out only Rs 2,652 crore in October, compared to Rs 7,536 crore in January 2008, the market peak. Another interesting sidelight is that some investors did cash out close to, though not exactly at, the market peak. Equity fund redemptions, which began to inch higher as early as May 2007, peaked in October 2007, well ahead of the market peak in January.
That the average monthly redemption stood at about Rs 6,905 crore between April-December 2007, even when equity funds notched up average holding period returns of 73 per cent, suggests that a section of investors does constantly monitor fund portfolios and book profits.
The trend appears to be gathering strength in the recent rally too. Following the broader market rally, the average monthly redemption between May and July 2009 went up to Rs 4,082 crore.
Looking beyond equities
Spurred by the need to make up for the lack of returns in equities, a section of mutual fund investors appear to have ventured beyond equity funds too. A host of other dynamics, such as higher inflation and interest rates in 2008, may also have triggered the flow of funds into other assets.
Income funds, which primarily invest in debt securities with varying maturity periods, reported net outflows in November and December 2007 (coinciding with a rising equity market). However, following the crash in equities, fund flows into income funds turned positive and remained buoyant till the Lehman Brothers collapse in September.
While it can be argued that income funds usually see participation only from the well-informed investors (such as banks and other financial institutions), retail participation in other assets is also evident from fund flows into other categories.
For instance, net inflows into gold ETFs have been rising steadily since the January 2008 crash and 2008 saw gold ETF assets expand by about 54 per cent. Investors also appear to have taken temporary shelter in low-risk gilt and liquid funds in October 2008 following the collapse of equities worldwide. Flight to safer avenues following a liquidity crunch, both domestic and global, may explain the changed stance, especially since the asset classes saw poor inflows in the earlier months.
ELSS funds too saw a change in fund patterns. Being tax-saving instruments, these funds generally tend to report peak flows toward the end of a fiscal year.
In keeping with this, while ELSS funds did report higher net flows in the four-month period between December 2007 and March 2008 (peaked in March with Rs 2,071 crore net inflows), the risk-appetite of investors appears to have fallen sharply since.
The downward spiral in equities in 2008 led to a lower quantum of net flows between January-March 2009 (Rs 547 crore in March 2009). That these funds, notwithstanding the lock-in, saw a pick-up in redemption activity in October 2008 and more recently in June 2009 also points to the reluctance of investors to lock in funds for the long term.
Overseas investing too appears to have lost its charm, what with these funds recording net outflows since October 2008. What’s more, the funds reported a significant jump in net outflows (Rs 127 crore) in May 2009, which also coincided with a broader equity rally.
Thursday, August 27, 2009
Drought-proofing your portfolio
With weather officials finally conceding that the south-west monsoon has failed in 2009, should investors look to “drought-proof” their portfolios? The stock market certainly seems to think so. On evidence of a faltering monsoon, the stocks of FMCG and select automobile and two-wheeler makers — all of which rely largely on rural consumption — have been battered.
Stocks of agricultural input makers have been trimmed and substituted by sugar and rice processors who are seen to reap windfall gains from rising commodity prices. But analysis suggests that such a reaction to Monsoon 2009 may be premature. Investors can reduce the impact of drought on their portfolio by simply exercising greater selectivity in choosing stocks, rather than by giving entire sectors a wide berth.
Companies that rely on rural consumption may see the impact of lower farm output cushioned by higher agri-produce prices and counter-cyclical government spending. For agri-input companies, the impact of the deficient south-west monsoon would at best last through this quarter.
Muted market impact
For cues to future earnings, the key to stock valuations, investors need to watch prospects for the coming rabi season and beyond. (Kharif describes the cropping season from April-September, while rabi is the post-monsoon season, October-March). To begin with, a drought may not have a calamitous impact on either the economy or the stock market in today’s context. With agriculture contributing 17 per cent to India’s current GDP, economists expect that a 3 per cent decline in agriculture will shave about 0.50 percentage points off the annual GDP. If manufacturing and services stage a strong revival (helped by global cues), significant downgrades to GDP estimates may not be necessary.
Both manufacturing and services actually did rev up in 2002-03, the previous year when India witnessed a drought of worrying proportions. That suggests that the ripple effect of a poor monsoon on the rest of the economy isn’t very high. A drought may also not cause significant upheavals in the earnings of the listed universe. Sectors that have linkages to agriculture or rural consumption contributed only 6 per cent to the aggregate profits of the CNX-500 basket in the latest financial year.
Agri-input companies
Manufacturers of agricultural inputs — fertilisers, pesticides, seeds and tractors — are perceived to be the most direct victims of a deficient monsoon, going by the logic that lower crop coverage immediately trims their consumption. Fertiliser and tractor sales did, for instance, dip by 7 per cent and 25 per cent respectively in 2002-03. However, 2009 may be quite different, owing to three factors.
One, the failed monsoon of 2009 follows four consecutive years of normal or above normal rains. Two, unlike 2002, rural purchases have remained strong in the first few months of this fiscal, helped by a a robust 2009 rabi crop and upward-bound market prices for agri-produce. Take fertilisers. Sales have already expanded by 9 per cent in the April-August 2009 period, despite the erratic monsoon. DAP and complex fertilisers saw scarcely any impact, with sales volumes expanding by 46 per cent and 12 per cent respectively in this period (urea sales fell by 6 per cent).
Given the substantial 25 per cent shortfall between domestic demand for and supply of fertilisers even this year, fertiliser makers appear well-placed to deliver volume growth in 2009-10, provided the rabi crop turns out reasonably well. Investors in fertiliser stocks should, therefore, pay closer attention to factors such as international price trends and subsidy disbursals, as also the Rabi season, while selecting stocks.
Crop protection companies may be more vulnerable to a poor monsoon than fertiliser makers (given that pesticides are applied at a later stage); but the saving grace lies in the 17 per cent expansion in the acreage under cotton, the key target crop for pesticides.
Of the listed players, investors should best take a cautious stance on players with a significant domestic presence — Rallis India and Monsanto (both closed the June quarter with flat sales). Investors in other agri-input companies such as makers of seeds (Advanta India and Kaveri Seed) may not have much to worry about from the monsoon. Not only have seed sales remained quite strong in previous drought years (2002-03, for instance), the substantial shortage of hybrid seeds, the likely government push to seed sales and buoyant trends in agri-commodity prices may support volumes.
If the impact of a drought on agri-input companies is direct and immediate, its impact on consumption is more difficult to quantify. Yes, a poor monsoon is bound to dent consumer confidence in rural India and may cause deferred purchases.
Whither rural consumption?
That is worrying, given that rural India’s spending spree has been a key driver of growth for sectors ranging from FMCGs, to consumer durables and motorcycles in the slowdown-hit economy of last year. But whether the failure of this south-west monsoon will prompt rural consumers to tighten their belts over the next year or two, really hinges on three factors.
One, while farm output may shrink on lower crop coverage, this may be partly or entirely made up by the higher agri product prices. In this respect, 2009, where global trends are supportive of higher farm product prices, may be a much better year than 2002, when the dip in farm output was accompanied by muted (3 per cent) inflation in agri product prices.
Two, splurging by the government on rural infrastructure building schemes such as Bharat Nirman, JNNURM and NREGA, not in the picture in 2002, may help soften the blow from a poor crop in 2009.
Three, the big push to agricultural credit and lower interest rates may continue to make big-ticket purchases more affordable for rural consumers.
There is also no evidence from the sales trends over the past 10 years to suggest that sectors such as commercial vehicles, FMCGs or even two-wheelers face an impediment to volume sales in a drought year; each of these sectors expanded by healthy double digits in 2002-03. While volume sales may not be impacted much, the possibility of consumers turning more value-conscious and downtrading to cheaper products cannot be ruled out.
Consumer durables and tractor sales were the only ones to suffer that year (sales down by 6 and 25 per cent respectively). However, purchases in both these segments, being credit funded, have displayed an increasing sensitivity to the availability of finance and interest rates in recent years.
Having said this, investors should note that FMCG companies are trading at rather rich valuations after leading the recent stock market rally. This may make stock prices vulnerable even to a small blip in their growth rates. Seen in this backdrop, it may be best for investors to avoid companies in these sectors with a sizeable rural footprint, until clarity emerges on spending.
In the FMCG space, Hindustan Unilever and Dabur India (nearly 50 per cent rural sales), Colgate Palmolive (35 per cent) may be more vulnerable than Nestle India, Marico or GSK Consumer (less than a fourth). In addition, investors should also take care to avoid users of agri-products such as sugar, milk and coffee, as they have spiralled on the poor monsoon. In the auto space, Hero Honda and M&M may be more vulnerable to poor rural demand than others such as Maruti Suzuki or Bajaj Auto.
Stocks of agricultural input makers have been trimmed and substituted by sugar and rice processors who are seen to reap windfall gains from rising commodity prices. But analysis suggests that such a reaction to Monsoon 2009 may be premature. Investors can reduce the impact of drought on their portfolio by simply exercising greater selectivity in choosing stocks, rather than by giving entire sectors a wide berth.
Companies that rely on rural consumption may see the impact of lower farm output cushioned by higher agri-produce prices and counter-cyclical government spending. For agri-input companies, the impact of the deficient south-west monsoon would at best last through this quarter.
Muted market impact
For cues to future earnings, the key to stock valuations, investors need to watch prospects for the coming rabi season and beyond. (Kharif describes the cropping season from April-September, while rabi is the post-monsoon season, October-March). To begin with, a drought may not have a calamitous impact on either the economy or the stock market in today’s context. With agriculture contributing 17 per cent to India’s current GDP, economists expect that a 3 per cent decline in agriculture will shave about 0.50 percentage points off the annual GDP. If manufacturing and services stage a strong revival (helped by global cues), significant downgrades to GDP estimates may not be necessary.
Both manufacturing and services actually did rev up in 2002-03, the previous year when India witnessed a drought of worrying proportions. That suggests that the ripple effect of a poor monsoon on the rest of the economy isn’t very high. A drought may also not cause significant upheavals in the earnings of the listed universe. Sectors that have linkages to agriculture or rural consumption contributed only 6 per cent to the aggregate profits of the CNX-500 basket in the latest financial year.
Agri-input companies
Manufacturers of agricultural inputs — fertilisers, pesticides, seeds and tractors — are perceived to be the most direct victims of a deficient monsoon, going by the logic that lower crop coverage immediately trims their consumption. Fertiliser and tractor sales did, for instance, dip by 7 per cent and 25 per cent respectively in 2002-03. However, 2009 may be quite different, owing to three factors.
One, the failed monsoon of 2009 follows four consecutive years of normal or above normal rains. Two, unlike 2002, rural purchases have remained strong in the first few months of this fiscal, helped by a a robust 2009 rabi crop and upward-bound market prices for agri-produce. Take fertilisers. Sales have already expanded by 9 per cent in the April-August 2009 period, despite the erratic monsoon. DAP and complex fertilisers saw scarcely any impact, with sales volumes expanding by 46 per cent and 12 per cent respectively in this period (urea sales fell by 6 per cent).
Given the substantial 25 per cent shortfall between domestic demand for and supply of fertilisers even this year, fertiliser makers appear well-placed to deliver volume growth in 2009-10, provided the rabi crop turns out reasonably well. Investors in fertiliser stocks should, therefore, pay closer attention to factors such as international price trends and subsidy disbursals, as also the Rabi season, while selecting stocks.
Crop protection companies may be more vulnerable to a poor monsoon than fertiliser makers (given that pesticides are applied at a later stage); but the saving grace lies in the 17 per cent expansion in the acreage under cotton, the key target crop for pesticides.
Of the listed players, investors should best take a cautious stance on players with a significant domestic presence — Rallis India and Monsanto (both closed the June quarter with flat sales). Investors in other agri-input companies such as makers of seeds (Advanta India and Kaveri Seed) may not have much to worry about from the monsoon. Not only have seed sales remained quite strong in previous drought years (2002-03, for instance), the substantial shortage of hybrid seeds, the likely government push to seed sales and buoyant trends in agri-commodity prices may support volumes.
If the impact of a drought on agri-input companies is direct and immediate, its impact on consumption is more difficult to quantify. Yes, a poor monsoon is bound to dent consumer confidence in rural India and may cause deferred purchases.
Whither rural consumption?
That is worrying, given that rural India’s spending spree has been a key driver of growth for sectors ranging from FMCGs, to consumer durables and motorcycles in the slowdown-hit economy of last year. But whether the failure of this south-west monsoon will prompt rural consumers to tighten their belts over the next year or two, really hinges on three factors.
One, while farm output may shrink on lower crop coverage, this may be partly or entirely made up by the higher agri product prices. In this respect, 2009, where global trends are supportive of higher farm product prices, may be a much better year than 2002, when the dip in farm output was accompanied by muted (3 per cent) inflation in agri product prices.
Two, splurging by the government on rural infrastructure building schemes such as Bharat Nirman, JNNURM and NREGA, not in the picture in 2002, may help soften the blow from a poor crop in 2009.
Three, the big push to agricultural credit and lower interest rates may continue to make big-ticket purchases more affordable for rural consumers.
There is also no evidence from the sales trends over the past 10 years to suggest that sectors such as commercial vehicles, FMCGs or even two-wheelers face an impediment to volume sales in a drought year; each of these sectors expanded by healthy double digits in 2002-03. While volume sales may not be impacted much, the possibility of consumers turning more value-conscious and downtrading to cheaper products cannot be ruled out.
Consumer durables and tractor sales were the only ones to suffer that year (sales down by 6 and 25 per cent respectively). However, purchases in both these segments, being credit funded, have displayed an increasing sensitivity to the availability of finance and interest rates in recent years.
Having said this, investors should note that FMCG companies are trading at rather rich valuations after leading the recent stock market rally. This may make stock prices vulnerable even to a small blip in their growth rates. Seen in this backdrop, it may be best for investors to avoid companies in these sectors with a sizeable rural footprint, until clarity emerges on spending.
In the FMCG space, Hindustan Unilever and Dabur India (nearly 50 per cent rural sales), Colgate Palmolive (35 per cent) may be more vulnerable than Nestle India, Marico or GSK Consumer (less than a fourth). In addition, investors should also take care to avoid users of agri-products such as sugar, milk and coffee, as they have spiralled on the poor monsoon. In the auto space, Hero Honda and M&M may be more vulnerable to poor rural demand than others such as Maruti Suzuki or Bajaj Auto.
Wednesday, August 26, 2009
SMART MONEY IDEAS - HIMANSHU THAKKER REPLIES TO QUERIES
qwe asked, I can invest 5000Rs/month, my goal is downpayment(2.8 lacs) of home. So how can I invest this amount?
Himanshu answers, hi, if you are saving Rs.5000 for 24 months, you will have saved 1.20 lacs. You need Rs. 2.80 lac. This means that your money should double in next 2 years. I would recommend that you invest in safe investments like Bank FD. Given the fact that your returns will be less then 6-7% p.a there will be a huge shortfall as far as your goal of Rs. 2.80 lacs is concerned. There is no option but to increase your savings by atleast Rs. 5,000
________________________________________
chatwithme asked, My SIPs are in following funds. Kindly review my portfolio and suggest one more fund, if i want to invest. - Birla Frontline Equity - DSP BR Top 100 - HDFC Top 200 - Sundaram Select Focus (Growth Option)
Himanshu answers, hi, you have a very healthy portfolio. Continue with the same
________________________________________
jatinshah asked, which is better option for Stable growth of money ? Bank FD, PPF or NSC
Himanshu answers, hi, banks are offering 7% for one year FD, PPF is offering 8% compounded annually (tax-free) but will be taxed after 2011. NSC is offering 8% for 6 years but offers tax savings. I would go for PPF and Bank FD
________________________________________
sawan asked, Sensex is at approximate 16000. when it grow @ 15%, it must be at 28000 in 4 years. do u think it is possible?
Himanshu answers, well... if it grows by 15% over the next 4 years it will touch 28000. If India continues to grow at 6.5% and attracts foreign investment, then 15% is very much possible atleast over the next 2-3 years.
________________________________________
prasadlavekar007 asked, hi Himanshu ! I have just planned for Invt . My wife salary we save & I spend my salary to Household , we save rs.20000 a month ,please advise how can we invest more efficiently
Himanshu answers, hi, make a comprehensive financial plan for your self that will help you achieve your financial goals. Divide the amount of Rs. 20000 towards each goal in line with the recommendation of the financial plan. I would recommend that you take help of a competent and honest finacial planner/advisor to plan for you
________________________________________
Mayukh asked, Hi Himanshu, I have invested in 2 ULIP policies, one ICICI Life time Super and another TATA AIG Invest Assure2. They give me Tax benefit but the current value is too low for both specially TAT AIG. Can you please advise if I should pull out my money from them/close those policies?
Himanshu answers, hi, ULIPS are not the ideal investment/insurance products. I would not recommend that you pay any premium beyond the mandatory premium payment term. For insurance Term plans are the best and for investment build a portfolio of debt and equity funds. ULIPs combine both investment and insurance, have very high initial cost and hence not the best option
________________________________________
pgr asked, I have currently having SIPs of 1500 in Franklin India Bluechip ( largecap, Franklin India prima fund (midcap), Reliance diversified power and Tata Infrastructure fund from last two years. I wish to continue for at least for next five years. Please tell whether I continue with these or switchover to other.
Himanshu answers, hi, Reliance Power and Tata Infrastrucue funds are not suitable funds for your portfolio as these are sectoral/ thematic. Opt for diversified funds instead
________________________________________
sonali asked, Dear Sir, I HAVE INVESTED IN BIRLA MNC[D], TATAINFRA[D], UTI LOGISTIC[D] since oct 08 and got 17-30% returns though you advise not to invest in themetic funds, shall i continue or book the profit
Himanshu answers, hi, I would recommend that you redeem and invest in large cap biased diversified equity funds as discussed earlier in the chat
________________________________________
asdf asked, I am S/W Engg. and earning around 2.5 Lac P.A. I want to know abt LIC plans.. which can be beeter one for me..??
Himanshu answers, hi, if you are taking an insurance policy for covering the risk in case anything happens to you then go for the Term plan. Term plans offer higher sum assured for lower premiums. I would not advise any other form of insurance for risk cover. If you are planning investments then mutual funds are an ideal option for you
________________________________________
bhaskar asked, Hi Himanshu, i want to invest Rs.80K for shortterms ie for 6 months, can you suggest
Himanshu answers, hi, given the current interest rate scenario, I would recommend that you park your money in liquid / liquid plus funds.
________________________________________
madhusudhan asked, Hi Himanshu, I want to invest pension cum investment plan of 10000 per year. I am already plan for my child.could you please suggest
Himanshu answers, hi, i would not recommend that you buy a pension plan. Rather work out a retirement plan for yourself and invest in mix of equity and debt as suggested by the plan. The corpus you save till retirement should be able to generate adequate income to take care of your post retirement needs
________________________________________
sonali asked, Can we invest in HDFC TOP200, DSPBR TOP100 for long term at current level?
Himanshu answers, hi, you can invest in both thses funds at the current levels
________________________________________
Ramachandra asked, Hi, I am 29 and I am planning to purchase a flat .Is it wise to save money in Mutual Fund every month and buy a flat after i collect the total money or should i take home loan right now and keep paying the EMI?
Himanshu answers, hi, the answer depends on when you want to buy the property. If its immedaite and you do not have adequated savings, you will have to go for the loan. If its few years away like 5-7 years, you can save towards the same in mutual funds and build the desired corpus. However, thisagain will be a funcion of your monthly savings and income and expenses. In my view saving for property aand keep ing the loan amount to the minimum would be more prudent though it may not always be the case.
________________________________________
Amit asked, Hi Himanshu, Which will give better returns investing in buying a appartment in HYD [DP will be 6-7 lakhs rest bank loan of 30 lakhs] or invest in equity for next 3 years. I can invest 6-7 lakhs in equity.
Himanshu answers, hi, as far as returns from equity is concerned I expect returns in the range of 12-15% p.a. over the next 3 years. Not too sure how much your porperty will appreciate. Your real estate advisor should be in a better position to advise you on the same based on the type of property, location and overall development in the region
________________________________________
sonali asked, Dear Sir, Can u pl tell on 'NEW TAX CODE'.It will restrict investment options, what happens to ELSS? Long term gain tax will be eliminated. pl tell how one shall plan investing according to NTC
Himanshu answers, hi, as of now going by the Direct Tax Code provisions, investment in tax savings schemes like ELSS and PPF may not be attractive post 2011. Its too early to take a call on how the strategy should be modified. Once the final code is in place the strategy can be revised
________________________________________
pram asked, Hi I have planned this aggressive portfolio for next 1 year.... IDFC Premier Equity Plan A - 30% ( Aggressive Large Cap) DSPBR Equity - 30% ( Large Cap ) HDFC Top 200 - 25% ( Large Cap ) Sundaram BNP Paribas S.M.I.L.E. Reg - 10% ( Aggressive Small/Mid Cap ) GoldBeES ETF - 5% (Gold ETF ) Please share your feedback on these portfolio and how diverse the companies are in this portfolio
Himanshu answers, hi, you should add funds like Franklin India Bluechip to your portfolio. Restrict your exposure to Sundaram SMILE to 15% of your overall portflio. Overall your portfolio is good
________________________________________
salaryslave asked, My current savings plan just about covers 1 lakh under 80c and nothing else. I plan to start investing in mutual funds. I can spare 15-20 k per month. Can you please suggest me a good place/fund to start with ? Thanks
Himanshu answers, hi, i would recommend that you make an investment plan for each and every financial goal you wish to achieve and invest in line with the recommendations of the plan. Do not save only from the tax savings perspective. Plan your investments for important goals like retirement, child education and marriage among others.
________________________________________
kishurawat asked, Can you suggest some good mutual funds for regular income?
Himanshu answers, hi, Monthly Income Plans (MIPs) can be considered for investments to generate regular income. However, it should be noted that the dividends from MIPs are not assured or guaranteed. IF the equity / debt market do not perform well the fund may skip its monthly or specified dividend. If you are looking for assured monthly income scheme then go for Post Office Monthly Income Scehme (POMIS)which offers interest @ 8% p.a.
________________________________________
venu asked, Could you please suggest which is the best Tax Saving MF(ELSS)..
Himanshu answers, hi, you can consider funds like Franklin India Taxshiled and Fidelity Tax Advantage Fund
________________________________________
jude asked, is investment in UTI infrastructure advantage fund good
Himanshu answers, hi, infrastructure funds are thematic funds and hence restricted from investing in sectors that do no form a part of the overall theme. The perfomance of the fund is manily dependend on the few sectors that constitue the theme and hence the fund is high risk fund. I would not recommend any investor to invest in any sector / thematic fund. Diversified equity funds are the best option
________________________________________
vikas asked, Hi Himanshu, I can invest 20k every month. Please suggest me good mid-cap/small-cap funds which can give me high returns. i am prepared to handle high risks.
Himanshu answers, hi, i have given the name of 2 large cap funds at the start of chat. In the midcap category you can conisder investing in Sundaram BNP Praibas Select Midcap
________________________________________
shekhar asked, Hi, I want to save a corpus of 1 core for retirement. I have started investing in HDFC LT advantage sip of 4000 per month for the past 2 years and plan to continue it for the next 25 years. Please advice if this will help me achieve my corpus in 30 years.
Himanshu answers, hi, I appreciate the fact that you have developed the habit of regualr investing through the SIP. But do not invest only in one scheme. Diversify your portfolio to include equity funds that are not tax savings (i.e. ELSS)Have atleast 4-5 funds in your portfolio. HDFC Long Term Advantage is a midcap biased fund and hence may not be the ideal fund. Also it is a tax saving fund hence subject to lock in of 3 years. Avoid such funds in your portfolio and invest only to the extent required for tax savings purpose
________________________________________
rahul asked, hi I want to invest 75 thousand for short term say 1-2 yrs wht r best options
Himanshu answers, hi, you can consider investing in Monthly Income Plans (MIPs)offered by mutual funds. MIPs typically invest 20-25% in equity and rest in debt. The returns however are not assured and linked to the performance of both the equity and debt markets. If you are looking for safe and assured returns on your investments, you should consider investing in Bank FDs
________________________________________
raghu asked, i have spare 5 lakhs , which i want to invest now , could you please advice some good investing tools .. i can take moderate risks
Himanshu answers, hi, since your risk apetite is moderate you can ideally divide your portfolio 50:50 in debt and equity. For equity, you should consider investements in diversified large cap biased equity funds. For debt you can consider bank FD among other options like debt mutual funds which may not be the right choice as of now. Enusre that your investment horizon is atleast 3 years
________________________________________
HimanshuMultani asked, Could you please suggest me the good return child plans in current market
Himanshu answers, hi, answer to your question lies in first determing the goals which can include higher education and post graduation. It may also incude pllaning for the child's marriage. In such a case you need to ascertain the cost of education and marriage in today's value and inflate it by atleast 10% for number years the goal is away. This will give you the amount required and then start saving in a mix of equity and debt depending upon the monthly/annual investment as suggested by the plan
________________________________________
xavier asked, Sir, I want to invest Rs 5000/pm as SIP in mutual fund . Kindly sugeest some good fund. Also suggest which will be a good MF for th edivident payout options ( as a separate investment )
Himanshu answers, hi, you should invest in well diversified and well mangaed funds like Franklin Inida Bluechip Fund and HDFC Top 200 Fund. Ensure that your time horizon is atleast 3 years and risk apetite high. If you are not in need of regular income in the form of dividend, then go for the growth option
Himanshu answers, hi, if you are saving Rs.5000 for 24 months, you will have saved 1.20 lacs. You need Rs. 2.80 lac. This means that your money should double in next 2 years. I would recommend that you invest in safe investments like Bank FD. Given the fact that your returns will be less then 6-7% p.a there will be a huge shortfall as far as your goal of Rs. 2.80 lacs is concerned. There is no option but to increase your savings by atleast Rs. 5,000
________________________________________
chatwithme asked, My SIPs are in following funds. Kindly review my portfolio and suggest one more fund, if i want to invest. - Birla Frontline Equity - DSP BR Top 100 - HDFC Top 200 - Sundaram Select Focus (Growth Option)
Himanshu answers, hi, you have a very healthy portfolio. Continue with the same
________________________________________
jatinshah asked, which is better option for Stable growth of money ? Bank FD, PPF or NSC
Himanshu answers, hi, banks are offering 7% for one year FD, PPF is offering 8% compounded annually (tax-free) but will be taxed after 2011. NSC is offering 8% for 6 years but offers tax savings. I would go for PPF and Bank FD
________________________________________
sawan asked, Sensex is at approximate 16000. when it grow @ 15%, it must be at 28000 in 4 years. do u think it is possible?
Himanshu answers, well... if it grows by 15% over the next 4 years it will touch 28000. If India continues to grow at 6.5% and attracts foreign investment, then 15% is very much possible atleast over the next 2-3 years.
________________________________________
prasadlavekar007 asked, hi Himanshu ! I have just planned for Invt . My wife salary we save & I spend my salary to Household , we save rs.20000 a month ,please advise how can we invest more efficiently
Himanshu answers, hi, make a comprehensive financial plan for your self that will help you achieve your financial goals. Divide the amount of Rs. 20000 towards each goal in line with the recommendation of the financial plan. I would recommend that you take help of a competent and honest finacial planner/advisor to plan for you
________________________________________
Mayukh asked, Hi Himanshu, I have invested in 2 ULIP policies, one ICICI Life time Super and another TATA AIG Invest Assure2. They give me Tax benefit but the current value is too low for both specially TAT AIG. Can you please advise if I should pull out my money from them/close those policies?
Himanshu answers, hi, ULIPS are not the ideal investment/insurance products. I would not recommend that you pay any premium beyond the mandatory premium payment term. For insurance Term plans are the best and for investment build a portfolio of debt and equity funds. ULIPs combine both investment and insurance, have very high initial cost and hence not the best option
________________________________________
pgr asked, I have currently having SIPs of 1500 in Franklin India Bluechip ( largecap, Franklin India prima fund (midcap), Reliance diversified power and Tata Infrastructure fund from last two years. I wish to continue for at least for next five years. Please tell whether I continue with these or switchover to other.
Himanshu answers, hi, Reliance Power and Tata Infrastrucue funds are not suitable funds for your portfolio as these are sectoral/ thematic. Opt for diversified funds instead
________________________________________
sonali asked, Dear Sir, I HAVE INVESTED IN BIRLA MNC[D], TATAINFRA[D], UTI LOGISTIC[D] since oct 08 and got 17-30% returns though you advise not to invest in themetic funds, shall i continue or book the profit
Himanshu answers, hi, I would recommend that you redeem and invest in large cap biased diversified equity funds as discussed earlier in the chat
________________________________________
asdf asked, I am S/W Engg. and earning around 2.5 Lac P.A. I want to know abt LIC plans.. which can be beeter one for me..??
Himanshu answers, hi, if you are taking an insurance policy for covering the risk in case anything happens to you then go for the Term plan. Term plans offer higher sum assured for lower premiums. I would not advise any other form of insurance for risk cover. If you are planning investments then mutual funds are an ideal option for you
________________________________________
bhaskar asked, Hi Himanshu, i want to invest Rs.80K for shortterms ie for 6 months, can you suggest
Himanshu answers, hi, given the current interest rate scenario, I would recommend that you park your money in liquid / liquid plus funds.
________________________________________
madhusudhan asked, Hi Himanshu, I want to invest pension cum investment plan of 10000 per year. I am already plan for my child.could you please suggest
Himanshu answers, hi, i would not recommend that you buy a pension plan. Rather work out a retirement plan for yourself and invest in mix of equity and debt as suggested by the plan. The corpus you save till retirement should be able to generate adequate income to take care of your post retirement needs
________________________________________
sonali asked, Can we invest in HDFC TOP200, DSPBR TOP100 for long term at current level?
Himanshu answers, hi, you can invest in both thses funds at the current levels
________________________________________
Ramachandra asked, Hi, I am 29 and I am planning to purchase a flat .Is it wise to save money in Mutual Fund every month and buy a flat after i collect the total money or should i take home loan right now and keep paying the EMI?
Himanshu answers, hi, the answer depends on when you want to buy the property. If its immedaite and you do not have adequated savings, you will have to go for the loan. If its few years away like 5-7 years, you can save towards the same in mutual funds and build the desired corpus. However, thisagain will be a funcion of your monthly savings and income and expenses. In my view saving for property aand keep ing the loan amount to the minimum would be more prudent though it may not always be the case.
________________________________________
Amit asked, Hi Himanshu, Which will give better returns investing in buying a appartment in HYD [DP will be 6-7 lakhs rest bank loan of 30 lakhs] or invest in equity for next 3 years. I can invest 6-7 lakhs in equity.
Himanshu answers, hi, as far as returns from equity is concerned I expect returns in the range of 12-15% p.a. over the next 3 years. Not too sure how much your porperty will appreciate. Your real estate advisor should be in a better position to advise you on the same based on the type of property, location and overall development in the region
________________________________________
sonali asked, Dear Sir, Can u pl tell on 'NEW TAX CODE'.It will restrict investment options, what happens to ELSS? Long term gain tax will be eliminated. pl tell how one shall plan investing according to NTC
Himanshu answers, hi, as of now going by the Direct Tax Code provisions, investment in tax savings schemes like ELSS and PPF may not be attractive post 2011. Its too early to take a call on how the strategy should be modified. Once the final code is in place the strategy can be revised
________________________________________
pram asked, Hi I have planned this aggressive portfolio for next 1 year.... IDFC Premier Equity Plan A - 30% ( Aggressive Large Cap) DSPBR Equity - 30% ( Large Cap ) HDFC Top 200 - 25% ( Large Cap ) Sundaram BNP Paribas S.M.I.L.E. Reg - 10% ( Aggressive Small/Mid Cap ) GoldBeES ETF - 5% (Gold ETF ) Please share your feedback on these portfolio and how diverse the companies are in this portfolio
Himanshu answers, hi, you should add funds like Franklin India Bluechip to your portfolio. Restrict your exposure to Sundaram SMILE to 15% of your overall portflio. Overall your portfolio is good
________________________________________
salaryslave asked, My current savings plan just about covers 1 lakh under 80c and nothing else. I plan to start investing in mutual funds. I can spare 15-20 k per month. Can you please suggest me a good place/fund to start with ? Thanks
Himanshu answers, hi, i would recommend that you make an investment plan for each and every financial goal you wish to achieve and invest in line with the recommendations of the plan. Do not save only from the tax savings perspective. Plan your investments for important goals like retirement, child education and marriage among others.
________________________________________
kishurawat asked, Can you suggest some good mutual funds for regular income?
Himanshu answers, hi, Monthly Income Plans (MIPs) can be considered for investments to generate regular income. However, it should be noted that the dividends from MIPs are not assured or guaranteed. IF the equity / debt market do not perform well the fund may skip its monthly or specified dividend. If you are looking for assured monthly income scheme then go for Post Office Monthly Income Scehme (POMIS)which offers interest @ 8% p.a.
________________________________________
venu asked, Could you please suggest which is the best Tax Saving MF(ELSS)..
Himanshu answers, hi, you can consider funds like Franklin India Taxshiled and Fidelity Tax Advantage Fund
________________________________________
jude asked, is investment in UTI infrastructure advantage fund good
Himanshu answers, hi, infrastructure funds are thematic funds and hence restricted from investing in sectors that do no form a part of the overall theme. The perfomance of the fund is manily dependend on the few sectors that constitue the theme and hence the fund is high risk fund. I would not recommend any investor to invest in any sector / thematic fund. Diversified equity funds are the best option
________________________________________
vikas asked, Hi Himanshu, I can invest 20k every month. Please suggest me good mid-cap/small-cap funds which can give me high returns. i am prepared to handle high risks.
Himanshu answers, hi, i have given the name of 2 large cap funds at the start of chat. In the midcap category you can conisder investing in Sundaram BNP Praibas Select Midcap
________________________________________
shekhar asked, Hi, I want to save a corpus of 1 core for retirement. I have started investing in HDFC LT advantage sip of 4000 per month for the past 2 years and plan to continue it for the next 25 years. Please advice if this will help me achieve my corpus in 30 years.
Himanshu answers, hi, I appreciate the fact that you have developed the habit of regualr investing through the SIP. But do not invest only in one scheme. Diversify your portfolio to include equity funds that are not tax savings (i.e. ELSS)Have atleast 4-5 funds in your portfolio. HDFC Long Term Advantage is a midcap biased fund and hence may not be the ideal fund. Also it is a tax saving fund hence subject to lock in of 3 years. Avoid such funds in your portfolio and invest only to the extent required for tax savings purpose
________________________________________
rahul asked, hi I want to invest 75 thousand for short term say 1-2 yrs wht r best options
Himanshu answers, hi, you can consider investing in Monthly Income Plans (MIPs)offered by mutual funds. MIPs typically invest 20-25% in equity and rest in debt. The returns however are not assured and linked to the performance of both the equity and debt markets. If you are looking for safe and assured returns on your investments, you should consider investing in Bank FDs
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raghu asked, i have spare 5 lakhs , which i want to invest now , could you please advice some good investing tools .. i can take moderate risks
Himanshu answers, hi, since your risk apetite is moderate you can ideally divide your portfolio 50:50 in debt and equity. For equity, you should consider investements in diversified large cap biased equity funds. For debt you can consider bank FD among other options like debt mutual funds which may not be the right choice as of now. Enusre that your investment horizon is atleast 3 years
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HimanshuMultani asked, Could you please suggest me the good return child plans in current market
Himanshu answers, hi, answer to your question lies in first determing the goals which can include higher education and post graduation. It may also incude pllaning for the child's marriage. In such a case you need to ascertain the cost of education and marriage in today's value and inflate it by atleast 10% for number years the goal is away. This will give you the amount required and then start saving in a mix of equity and debt depending upon the monthly/annual investment as suggested by the plan
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xavier asked, Sir, I want to invest Rs 5000/pm as SIP in mutual fund . Kindly sugeest some good fund. Also suggest which will be a good MF for th edivident payout options ( as a separate investment )
Himanshu answers, hi, you should invest in well diversified and well mangaed funds like Franklin Inida Bluechip Fund and HDFC Top 200 Fund. Ensure that your time horizon is atleast 3 years and risk apetite high. If you are not in need of regular income in the form of dividend, then go for the growth option
Tuesday, August 25, 2009
Homing in on value
The middle class, is looking for lower prices, if market response is anything to go by. And in a market like Bangalore, where jobs are on a shaky ground, it is the affordable segment which seems to be going strong. With banks also kicking in special interest rates, the revived interest in the housing sector, particularly the sub-Rs 30-lakh category, was apparent at the recent realty expo held by the Confederation of Real Estate Developers’ Association of India (CREDAI), Karnataka.
The two-day exposition brought together 32 leading property developers and housing financial institutions under one roof offering homes at competitive prices. The properties on display were not only from Bangalore, but also from Mysore, Chennai, Hyderabad, Pune, Goa and Kochi. There were 18,000 apartments on offer.
‘Time to buy’
According to Mr Kamal Sagar, Chairman, CREDAI Realty Expo, real estate prices in Bangalore from reputed developers are still lower than equivalent locations in Chennai and Hyderabad.
“This is the best time to pick up a good property in Bangalore. The builders have decided to work on thin margins and even the financial institutions have reduced the home loan interest rates by 0.5 per cent to attract buyers.”
The trend is tilted towards the sub-Rs 30 lakh segment. Bangalore has seen the launch of quite a few projects in this segment with more reputed builders wanting to enter the fray.
Real estate consulting firm Knight Frank’s recent research estimates that the middle-income population in Bangalore needs 3.27 lakh housing units by 2011, at an average unit size of 800 sq ft. “About 80 per cent of the total middle-income housing requirement falls in the Rs 3-5 lakh income segment.” And it is this sizeable pie that the developer community is vying for now.
For instance, Provident Housing, a subsidiary of Puravankara Projects, which is involved in the affordable housing segment, launched Provident Welworth City with 3,360 apartments in Bangalore last month. Prices start at Rs 14.90 lakh for two-bedroom apartments and Rs 18.90 lakh for three-bedroom. “We opened bookings for 1,000 apartments three weeks ago, and 50 per cent have been booked (cheques received so far),” said Mr Jayakar Jerome, IAS, Managing Director, Provident Housing.
Middle income group
At the CREDAI realty expo, Provident Housing saw about 500 walk-ins, and 20 cheques were received.
Similarly, CSC Constructions, launched three projects in the Rs 4-19 lakh range in Bangalore — at Attibele near Electronics City, Devanahalli, and Sarjapur Road — a few months ago. According to Mr Abhinand Patil, General Manager - Sales and Marketing, CSC Group response to the projects has been good.
In the last two months, CSC Group has sold 80 units across projects. “We will be re-launching the Devanahalli project in about 45 days, but with a slight hike in prices,” said Mr Patil.
CSC Group has plans to launch homes in the Rs 1.5 lakh - Rs 3.5 lakh price category, but the unit sizes would be about 200 sq.ft, and the location would be “pretty far away from the city,” said Mr Patil.
In fact, the company plans to come out with such projects in Bangalore, Hyderabad and Mumbai, with each project comprising 1,000-1,200 units. According to Ms Kalpana Murthy, Regional Manager, Residential Services, at real estate services firm Cushman & Wakefield, “Majority of urban households across India, including Bangalore, earn less than Rs 5 lakh per annum and hence, their affordability is for houses below Rs 20 lakh. The inherent demand from this segment has always been there by the sheer virtue of their numbers and this unmet demand would without doubt constitute the largest segment in the city today,”
Banks provide booster
Banks have pitched in with attractive rates just at the right time. Mr Albert Tauro, Chairman and Managing Director, Vijaya Bank, said the affordable home segment has seen a robust growth in the April-June quarter in comparison with the January-March quarter of 2009. “There has been more than 50 per cent growth in the sub-Rs 20 lakh category of home loans in the June period compared to March,” he said. In the higher bracket, Rs 40-50 lakh loans, the growth has not been robust, he added.
According to Mr Sreenivas Rao, Area Manager, LIC Housing Finance, which took part in the CREDAI Realty Expo, “It is at the right time that we have reduced our rates in August. The fixed rate category will be at 8.9 per cent for three years for loans up to Rs 75 lakh, whereas the floating rate is 8.75 per cent up to Rs 35 lakh and 9.5 per cent for loans between Rs 30 lakh and Rs 70 lakh.”
Also, the stamp duty rate for sale transactions of new apartments in Karnataka which has come down from 7.5 per cent to 6 per cent seems to be working well with buyers.
Mr Irfan Razack, Chairman and Managing Director, Prestige Group, which is evaluating houses in the Rs 12-25 lakh range says, “We must get land at reasonable prices. Obviously, the size of the unit will reduce.
“We can’t go high rise — the houses will be spread horizontally and they will be in the outskirts of Bangalore, at least 30 km from the city. But we will provide the same ambience as in other residential projects.”
‘Affordability’ defined
The debate is on as to how one defines affordability and by what yardstick. While low-cost housing is primarily targeted at the lower income group (households having annual income of less than Rs 1.5 lakh), affordable housing is for all income categories.
According to the Knight Frank report, “The affordability of a household in a given location is an interactive outcome of the house price, household income, spending and saving behaviour and other demographic factors such as household size. Definition of affordable housing is a challenge for real estate players.”
HDFC says 5.1 times annual income is the maximum affordability of a household. For instance, for a household with an annual income of Rs 3 lakh, an affordable house would cost Rs 15 lakh.
According to Ernst and Young survey ‘Realty Pulse 2008’, developers believe that considering the city, location and product offering, the price of an affordable house ranges between Rs 10 lakh and Rs 25 lakh.
The two-day exposition brought together 32 leading property developers and housing financial institutions under one roof offering homes at competitive prices. The properties on display were not only from Bangalore, but also from Mysore, Chennai, Hyderabad, Pune, Goa and Kochi. There were 18,000 apartments on offer.
‘Time to buy’
According to Mr Kamal Sagar, Chairman, CREDAI Realty Expo, real estate prices in Bangalore from reputed developers are still lower than equivalent locations in Chennai and Hyderabad.
“This is the best time to pick up a good property in Bangalore. The builders have decided to work on thin margins and even the financial institutions have reduced the home loan interest rates by 0.5 per cent to attract buyers.”
The trend is tilted towards the sub-Rs 30 lakh segment. Bangalore has seen the launch of quite a few projects in this segment with more reputed builders wanting to enter the fray.
Real estate consulting firm Knight Frank’s recent research estimates that the middle-income population in Bangalore needs 3.27 lakh housing units by 2011, at an average unit size of 800 sq ft. “About 80 per cent of the total middle-income housing requirement falls in the Rs 3-5 lakh income segment.” And it is this sizeable pie that the developer community is vying for now.
For instance, Provident Housing, a subsidiary of Puravankara Projects, which is involved in the affordable housing segment, launched Provident Welworth City with 3,360 apartments in Bangalore last month. Prices start at Rs 14.90 lakh for two-bedroom apartments and Rs 18.90 lakh for three-bedroom. “We opened bookings for 1,000 apartments three weeks ago, and 50 per cent have been booked (cheques received so far),” said Mr Jayakar Jerome, IAS, Managing Director, Provident Housing.
Middle income group
At the CREDAI realty expo, Provident Housing saw about 500 walk-ins, and 20 cheques were received.
Similarly, CSC Constructions, launched three projects in the Rs 4-19 lakh range in Bangalore — at Attibele near Electronics City, Devanahalli, and Sarjapur Road — a few months ago. According to Mr Abhinand Patil, General Manager - Sales and Marketing, CSC Group response to the projects has been good.
In the last two months, CSC Group has sold 80 units across projects. “We will be re-launching the Devanahalli project in about 45 days, but with a slight hike in prices,” said Mr Patil.
CSC Group has plans to launch homes in the Rs 1.5 lakh - Rs 3.5 lakh price category, but the unit sizes would be about 200 sq.ft, and the location would be “pretty far away from the city,” said Mr Patil.
In fact, the company plans to come out with such projects in Bangalore, Hyderabad and Mumbai, with each project comprising 1,000-1,200 units. According to Ms Kalpana Murthy, Regional Manager, Residential Services, at real estate services firm Cushman & Wakefield, “Majority of urban households across India, including Bangalore, earn less than Rs 5 lakh per annum and hence, their affordability is for houses below Rs 20 lakh. The inherent demand from this segment has always been there by the sheer virtue of their numbers and this unmet demand would without doubt constitute the largest segment in the city today,”
Banks provide booster
Banks have pitched in with attractive rates just at the right time. Mr Albert Tauro, Chairman and Managing Director, Vijaya Bank, said the affordable home segment has seen a robust growth in the April-June quarter in comparison with the January-March quarter of 2009. “There has been more than 50 per cent growth in the sub-Rs 20 lakh category of home loans in the June period compared to March,” he said. In the higher bracket, Rs 40-50 lakh loans, the growth has not been robust, he added.
According to Mr Sreenivas Rao, Area Manager, LIC Housing Finance, which took part in the CREDAI Realty Expo, “It is at the right time that we have reduced our rates in August. The fixed rate category will be at 8.9 per cent for three years for loans up to Rs 75 lakh, whereas the floating rate is 8.75 per cent up to Rs 35 lakh and 9.5 per cent for loans between Rs 30 lakh and Rs 70 lakh.”
Also, the stamp duty rate for sale transactions of new apartments in Karnataka which has come down from 7.5 per cent to 6 per cent seems to be working well with buyers.
Mr Irfan Razack, Chairman and Managing Director, Prestige Group, which is evaluating houses in the Rs 12-25 lakh range says, “We must get land at reasonable prices. Obviously, the size of the unit will reduce.
“We can’t go high rise — the houses will be spread horizontally and they will be in the outskirts of Bangalore, at least 30 km from the city. But we will provide the same ambience as in other residential projects.”
‘Affordability’ defined
The debate is on as to how one defines affordability and by what yardstick. While low-cost housing is primarily targeted at the lower income group (households having annual income of less than Rs 1.5 lakh), affordable housing is for all income categories.
According to the Knight Frank report, “The affordability of a household in a given location is an interactive outcome of the house price, household income, spending and saving behaviour and other demographic factors such as household size. Definition of affordable housing is a challenge for real estate players.”
HDFC says 5.1 times annual income is the maximum affordability of a household. For instance, for a household with an annual income of Rs 3 lakh, an affordable house would cost Rs 15 lakh.
According to Ernst and Young survey ‘Realty Pulse 2008’, developers believe that considering the city, location and product offering, the price of an affordable house ranges between Rs 10 lakh and Rs 25 lakh.
There is more to investing in gold than the jewellery
Would you ever say no to shop for gold jewellery? Frankly, I can’t. For some, just gazing at the exquisite pieces of ornaments is an excellent stress therapy. But what may be strenuous (especially if you are the “tending-to-economy” types about spending) is to see a few thousands or lakhs of rupees vanishing from your bank balance.
No doubt your money gets converted into another asset class — jewellery, but it is not easy to shell out those large chunks of cash for what could turn out to be a bauble.
So if your interest is to invest in gold and you are a well-informed investor who keeps tracks of gold prices, here is an option that lets you stagger the spending and yet bask in the yellow shine.
Take a plunge into the commodities market. The concept of commodities futures is not new to India as it has been around for four years.
However, it is only in two years that it has gained a lot of prominence. Particularly, more importance was given to the market after gold hit its peak price in March 2008.
India has 25 commodity exchanges, the most popular ones being the Multi Commodity Exchange (MCX) and the National Commodity and the Derivatives Exchange (NCDEX). The first step into the commodities market is to open accounts with registered commodity brokers (such as Religare Securities or Karvy Comtrade). A demat account used for equity trading cannot be used for commodity trading.
Commodities exchanges tease you with a load of choices, just like jewellery shops. Take for example products offered by the MCX, which is rated second among all the commodity exchanges in the world that trade in gold. You have three products to pick from – Gold Guinea (where the trading unit is 8 gm), Gold Mini (100 gm) and Gold HNI (1 kg). Depending on your requirements you can select the future contract that fits your bill. Well, if you’re the type who expects meenakari, filigree or kundan jewellery, then the commodities futures route may be a disappointment as deals here are only going to fetch you gold bars. So you’ll have to spend a little more money to transform your investment into stunning pieces of jewellery.
What then is the advantage of buying gold in the commodities market?
The buying process
Let’s assume one gm of gold is available for Rs 1,500 today and it is expected to move up in the coming months. Though you may not need gold now, you feel there would be a need in three to four months.
Instead of locking-in money today by making a gold purchase, you can buy a futures contract on gold from an exchange.
This gives you an opportunity to lock-in today’s gold price against its actual purchase at a later date.
When you buy 100 gm of gold from a jeweller, you need to pay up Rs 1,50,000 right away (1,500 x 100 gm).
On the other hand, when you buy one lot of November 2009 contract for Gold Mini from MCX, you are entering into a contract to buy 100 gm of gold in November at today’s price. ]
In this case, your immediate payment would be just restricted to the margin money payment of 4 per cent that you are required to make.
Your initial money outflow is contained to Rs 6,000 (4 per cent x Rs 1,50,000) and this is adequate to fetch you the three months forward contract.
If gold prices move up the way you thought it would and touches Rs 1,800 by November, you are at the gaining end. During the delivery period you need pay another 25 per cent delivery period margin and the remaining 71 per cent should be paid at expiry of the contract.
So the payment of Rs 1,50,000 is spread over three parts, and on each gm of gold that you buy though the commodities market, you make a gain of Rs 300. But if gold prices unexpectedly take a beating to touch, say, Rs 1,200, you have two options.
You can choose to continue with the contract and take delivery, in which case you will be incurring a loss of Rs 300 on each gm. Otherwise, you can roll over your contract and buy a new 100 gm contract at Rs 1,200 a gm.
For a long time, trading in commodities was perceived to be a “rich man’s domain” as the smallest contract size was 100 gm.
Most commodity exchanges are trying to break this perception by making the futures market affordable even to small-time investors. MCX’s Gold Guinea is a good example for this effort.
However, just like the equities market, you need to have a close look at the price movement and be well-informed about all types of orders (for instance, stop-loss order and limit order), to ensure that you get the best bang for buck.
Spotting the shimmer
The commodities market has recently allowed spot trading, which is identical to spot trading in equities.
NCDEX Spot and National Spot Exchange are the spot markets promoted by NCDEX and MCX, respectively. You can buy gold just the way you would buy stocks of, say, Reliance Industries or State Bank of India. However, the minimum contract size starts at 100 gm, making spot market buying no-so-affordable to all.
Spot prices of gold closely follow the international prices. Delivery is mandatory in both the futures and spot markets.
From an investment perspective, Gold ETFs (exchange traded funds) traded on stock exchanges are also an option. But they don’t offer you gold in physical form; a reason why commodities market score a little more over ETFs.
No doubt your money gets converted into another asset class — jewellery, but it is not easy to shell out those large chunks of cash for what could turn out to be a bauble.
So if your interest is to invest in gold and you are a well-informed investor who keeps tracks of gold prices, here is an option that lets you stagger the spending and yet bask in the yellow shine.
Take a plunge into the commodities market. The concept of commodities futures is not new to India as it has been around for four years.
However, it is only in two years that it has gained a lot of prominence. Particularly, more importance was given to the market after gold hit its peak price in March 2008.
India has 25 commodity exchanges, the most popular ones being the Multi Commodity Exchange (MCX) and the National Commodity and the Derivatives Exchange (NCDEX). The first step into the commodities market is to open accounts with registered commodity brokers (such as Religare Securities or Karvy Comtrade). A demat account used for equity trading cannot be used for commodity trading.
Commodities exchanges tease you with a load of choices, just like jewellery shops. Take for example products offered by the MCX, which is rated second among all the commodity exchanges in the world that trade in gold. You have three products to pick from – Gold Guinea (where the trading unit is 8 gm), Gold Mini (100 gm) and Gold HNI (1 kg). Depending on your requirements you can select the future contract that fits your bill. Well, if you’re the type who expects meenakari, filigree or kundan jewellery, then the commodities futures route may be a disappointment as deals here are only going to fetch you gold bars. So you’ll have to spend a little more money to transform your investment into stunning pieces of jewellery.
What then is the advantage of buying gold in the commodities market?
The buying process
Let’s assume one gm of gold is available for Rs 1,500 today and it is expected to move up in the coming months. Though you may not need gold now, you feel there would be a need in three to four months.
Instead of locking-in money today by making a gold purchase, you can buy a futures contract on gold from an exchange.
This gives you an opportunity to lock-in today’s gold price against its actual purchase at a later date.
When you buy 100 gm of gold from a jeweller, you need to pay up Rs 1,50,000 right away (1,500 x 100 gm).
On the other hand, when you buy one lot of November 2009 contract for Gold Mini from MCX, you are entering into a contract to buy 100 gm of gold in November at today’s price. ]
In this case, your immediate payment would be just restricted to the margin money payment of 4 per cent that you are required to make.
Your initial money outflow is contained to Rs 6,000 (4 per cent x Rs 1,50,000) and this is adequate to fetch you the three months forward contract.
If gold prices move up the way you thought it would and touches Rs 1,800 by November, you are at the gaining end. During the delivery period you need pay another 25 per cent delivery period margin and the remaining 71 per cent should be paid at expiry of the contract.
So the payment of Rs 1,50,000 is spread over three parts, and on each gm of gold that you buy though the commodities market, you make a gain of Rs 300. But if gold prices unexpectedly take a beating to touch, say, Rs 1,200, you have two options.
You can choose to continue with the contract and take delivery, in which case you will be incurring a loss of Rs 300 on each gm. Otherwise, you can roll over your contract and buy a new 100 gm contract at Rs 1,200 a gm.
For a long time, trading in commodities was perceived to be a “rich man’s domain” as the smallest contract size was 100 gm.
Most commodity exchanges are trying to break this perception by making the futures market affordable even to small-time investors. MCX’s Gold Guinea is a good example for this effort.
However, just like the equities market, you need to have a close look at the price movement and be well-informed about all types of orders (for instance, stop-loss order and limit order), to ensure that you get the best bang for buck.
Spotting the shimmer
The commodities market has recently allowed spot trading, which is identical to spot trading in equities.
NCDEX Spot and National Spot Exchange are the spot markets promoted by NCDEX and MCX, respectively. You can buy gold just the way you would buy stocks of, say, Reliance Industries or State Bank of India. However, the minimum contract size starts at 100 gm, making spot market buying no-so-affordable to all.
Spot prices of gold closely follow the international prices. Delivery is mandatory in both the futures and spot markets.
From an investment perspective, Gold ETFs (exchange traded funds) traded on stock exchanges are also an option. But they don’t offer you gold in physical form; a reason why commodities market score a little more over ETFs.
REAL ESTATE CHENNAI
Would allowing hospitals greater built-up area per unit area of land help bring down congestion and risk of infection? How do you increase security in a hotel or hospital, where visitor comfort and speed of entry is a prime consideration? Where lies the balance between security and personal liberty? When will our roads be safer for commuters?
These were some of the points debated on Saturday at a round-table workshop on ‘Safe Chennai’ where participants looked at various aspects of making the city a better place to live in. The topics covered safety and security aspects in five sectors identified as key to making a city more liveable — transport, hospitality, industries, healthcare and education.
Organised on the Madras Formation Day, by the Confederation of Indian Industry, participants are to give a set of recommendations on making the city a safer place to live in.
Safety drive
Over 11,000 people die in traffic accidents every year, says Mr T.V. Somanathan, Managing Director, Chennai Metro Rail Ltd. The State Government put in place a road safety policy in 2007 and is moving towards enhancing safety on the roads. By year-end, a project would be in place to use computer modelling, satellite systems, including GPS, and detailed data collection to identify the location, causes and context of an accident to put in place appropriate solutions. This could be more traffic lights, signages or other regulations, he says.
A key factor would be increasing the public transport infrastructure and safety and security. Statistics clearly show commuters are safer in public transport than in individual vehicles, he said.
Chennai Metro Rail, which is putting up the metro rail project, is looking to industry bodies such as CII to give their inputs on making it a safe and secure mode of travel. Security comes at a cost not just in terms of expense but also personal liberty. Should security be stepped up to levels that infringe on individual rights? Baggage checks may be the norm for air travel but in surface transport where anybody can access the facility anywhere along the line, would baggage scanning be relevant? It would only add to the cost without significantly helping to add to safety, he pointed out.
Simple steps, big results
Mr N. Prakash, Chairman, CII – Chennai Zone’s Task Force on Arts, Culture & Entertainment, felt that immediate solutions and short-term measures could be put in place to improve the quality of life even as the authorities worked on long-term planning.
Chennai needs a decent taxi service and a commuter-friendly auto-rickshaw service. Could these not be addressed fast, he wondered. These would go a long way in making domestic and international tourists and visitors comfortable. Chennai is a business and tourist hub. Maintaining not just safety and security but also preserving the monuments in a better condition would help. Implementing simple measures such as these are the ‘low hanging’ fruits that could be harvested fast to great benefit, he said.
If residents wish to opt for making an individual home a safe refuge, the constraint would only be cost and not technology.
Mr S. Ramakrishnan, Chief Executive Officer, Real Estate, Marg Ltd, a leading infrastructure and real-estate developer, pointed out that in the last few decades population density in Chenani has increased from about 6,000 a sq.km to about 24,000 and is set to grow to over 32,000 in a few years. Natural calamities, epidemic outbreaks and physical security would all impact a larger number of people.
Physical security could be addressed through increased use of technology that provided for surveillance and monitoring. Laws would be needed to ensure quality in construction — providing earthquake resistant buildings. Health and well-being could be ensured through hygiene and sanitation laws that ensure adequate open space and greenery.
These were some of the points debated on Saturday at a round-table workshop on ‘Safe Chennai’ where participants looked at various aspects of making the city a better place to live in. The topics covered safety and security aspects in five sectors identified as key to making a city more liveable — transport, hospitality, industries, healthcare and education.
Organised on the Madras Formation Day, by the Confederation of Indian Industry, participants are to give a set of recommendations on making the city a safer place to live in.
Safety drive
Over 11,000 people die in traffic accidents every year, says Mr T.V. Somanathan, Managing Director, Chennai Metro Rail Ltd. The State Government put in place a road safety policy in 2007 and is moving towards enhancing safety on the roads. By year-end, a project would be in place to use computer modelling, satellite systems, including GPS, and detailed data collection to identify the location, causes and context of an accident to put in place appropriate solutions. This could be more traffic lights, signages or other regulations, he says.
A key factor would be increasing the public transport infrastructure and safety and security. Statistics clearly show commuters are safer in public transport than in individual vehicles, he said.
Chennai Metro Rail, which is putting up the metro rail project, is looking to industry bodies such as CII to give their inputs on making it a safe and secure mode of travel. Security comes at a cost not just in terms of expense but also personal liberty. Should security be stepped up to levels that infringe on individual rights? Baggage checks may be the norm for air travel but in surface transport where anybody can access the facility anywhere along the line, would baggage scanning be relevant? It would only add to the cost without significantly helping to add to safety, he pointed out.
Simple steps, big results
Mr N. Prakash, Chairman, CII – Chennai Zone’s Task Force on Arts, Culture & Entertainment, felt that immediate solutions and short-term measures could be put in place to improve the quality of life even as the authorities worked on long-term planning.
Chennai needs a decent taxi service and a commuter-friendly auto-rickshaw service. Could these not be addressed fast, he wondered. These would go a long way in making domestic and international tourists and visitors comfortable. Chennai is a business and tourist hub. Maintaining not just safety and security but also preserving the monuments in a better condition would help. Implementing simple measures such as these are the ‘low hanging’ fruits that could be harvested fast to great benefit, he said.
If residents wish to opt for making an individual home a safe refuge, the constraint would only be cost and not technology.
Mr S. Ramakrishnan, Chief Executive Officer, Real Estate, Marg Ltd, a leading infrastructure and real-estate developer, pointed out that in the last few decades population density in Chenani has increased from about 6,000 a sq.km to about 24,000 and is set to grow to over 32,000 in a few years. Natural calamities, epidemic outbreaks and physical security would all impact a larger number of people.
Physical security could be addressed through increased use of technology that provided for surveillance and monitoring. Laws would be needed to ensure quality in construction — providing earthquake resistant buildings. Health and well-being could be ensured through hygiene and sanitation laws that ensure adequate open space and greenery.
Map your portfolio to lifestyle needs
We recently received an interesting question from a reader: How should investors map the core-satellite portfolio to their lifestyle decisions?
This article explains the three-tier lifestyle structure. It then discusses appropriate investment choices for each tier and shows how this three-tier lifestyle-investment structure morphs into a typical core-satellite portfolio.
Three-tier process
Investors typically desire a three-tier lifestyle process. The first tier is to protect the basic standard of living. The second tier is to maintain the present lifestyle. And the third tier is to enhance lifestyle. They do not construct Markowitz-efficient diversified portfolios to achieve this lifestyle process. Instead, they typically follow a tiered investment process geared towards achieving these lifestyle needs.
Take the first tier. The desire to protect the basic standard of living necessitates two financial decisions.
One, maintaining some desired level of cash for emergency purpose. And two, protecting basic cash flow to manage the household in the event of loss of income.
The portfolio constructed to meet the lifestyle needs of this tier is appropriately called protection assets, for the investor prefers asset exposure to that helps protect the basic standard of living. These assets are essentially cash equivalents and insurance contracts.
An investor has to set aside cash equal to at least three months’ expenses to meet emergency requirement such as medical expenses and/or temporary loss of income. The objective is to invest in assets that provide liquidity and carry near-zero downside risk. Money market mutual funds that invest in call money, T-bills and commercial papers should be selected, not the ones that carry exposure to short-term bonds.
The insurance contracts protect the basic standard of living by hedging mortality risk and disability risk. The risk is that the investor could die or face permanent disability. The insurance contract so purchased would provide cash flows necessary to manage the expenses following the death or disability of income-earning investor.
Lifestyle assets
The investment process that an investor has to follow to maintain the current lifestyle is called the lifestyle assets. This includes investments made for funding children’s education, buying a house and funding exotic vacation expenses.
An investor should take exposure to traditional asset classes such as stocks and bonds. The asset allocation decision would depend on the desired returns, investment horizon and the risk tolerance level of the investor.
It is important to make a distinction between investment in real estate and buying a house for self-occupation. The lifestyle portfolio helps finance the investor’s desire to maintain present lifestyle, of which buying a house for self-occupation is one. Investment in real estate, however, means buying real estate with a purpose of earning returns through rentals and/or capital appreciation.
Aspiration assets
The final tier of the investment-lifestyle process is the investor’s desire to enhance her lifestyle. The investor has to construct a portfolio that carries exposure to markets that are not yet fully exploited (exotic beta exposure). The strategy would also be to generate excess returns over a benchmark index through market timing and security selection skills (alpha returns).
The portfolio will be geared towards alternative asset classes such as commodities and alternative strategies such as private equity, market-neutral portfolios and concentrated stock portfolios. The objective is to generate higher returns to improve the lifestyle.
Conclusion
The three-tiered lifestyle structure does not require the investor to carry three separate portfolios. An investor can simply morph the various assets in each tier to form a macro portfolio. Such a comprehensive lifestyle-investment portfolio would have emergency funds for protective assets, core portfolio for lifestyle assets and satellite portfolio for aspiration assets. Investors can use a proportion of their core portfolio to purchase annuity at retirement for post-retirement lifestyle needs.
This article explains the three-tier lifestyle structure. It then discusses appropriate investment choices for each tier and shows how this three-tier lifestyle-investment structure morphs into a typical core-satellite portfolio.
Three-tier process
Investors typically desire a three-tier lifestyle process. The first tier is to protect the basic standard of living. The second tier is to maintain the present lifestyle. And the third tier is to enhance lifestyle. They do not construct Markowitz-efficient diversified portfolios to achieve this lifestyle process. Instead, they typically follow a tiered investment process geared towards achieving these lifestyle needs.
Take the first tier. The desire to protect the basic standard of living necessitates two financial decisions.
One, maintaining some desired level of cash for emergency purpose. And two, protecting basic cash flow to manage the household in the event of loss of income.
The portfolio constructed to meet the lifestyle needs of this tier is appropriately called protection assets, for the investor prefers asset exposure to that helps protect the basic standard of living. These assets are essentially cash equivalents and insurance contracts.
An investor has to set aside cash equal to at least three months’ expenses to meet emergency requirement such as medical expenses and/or temporary loss of income. The objective is to invest in assets that provide liquidity and carry near-zero downside risk. Money market mutual funds that invest in call money, T-bills and commercial papers should be selected, not the ones that carry exposure to short-term bonds.
The insurance contracts protect the basic standard of living by hedging mortality risk and disability risk. The risk is that the investor could die or face permanent disability. The insurance contract so purchased would provide cash flows necessary to manage the expenses following the death or disability of income-earning investor.
Lifestyle assets
The investment process that an investor has to follow to maintain the current lifestyle is called the lifestyle assets. This includes investments made for funding children’s education, buying a house and funding exotic vacation expenses.
An investor should take exposure to traditional asset classes such as stocks and bonds. The asset allocation decision would depend on the desired returns, investment horizon and the risk tolerance level of the investor.
It is important to make a distinction between investment in real estate and buying a house for self-occupation. The lifestyle portfolio helps finance the investor’s desire to maintain present lifestyle, of which buying a house for self-occupation is one. Investment in real estate, however, means buying real estate with a purpose of earning returns through rentals and/or capital appreciation.
Aspiration assets
The final tier of the investment-lifestyle process is the investor’s desire to enhance her lifestyle. The investor has to construct a portfolio that carries exposure to markets that are not yet fully exploited (exotic beta exposure). The strategy would also be to generate excess returns over a benchmark index through market timing and security selection skills (alpha returns).
The portfolio will be geared towards alternative asset classes such as commodities and alternative strategies such as private equity, market-neutral portfolios and concentrated stock portfolios. The objective is to generate higher returns to improve the lifestyle.
Conclusion
The three-tiered lifestyle structure does not require the investor to carry three separate portfolios. An investor can simply morph the various assets in each tier to form a macro portfolio. Such a comprehensive lifestyle-investment portfolio would have emergency funds for protective assets, core portfolio for lifestyle assets and satellite portfolio for aspiration assets. Investors can use a proportion of their core portfolio to purchase annuity at retirement for post-retirement lifestyle needs.
Saturday, August 22, 2009
INVESTING IN FDS READ THIS FIRST
If going for FDs
The following info shud be there in your mind.
1. Diff in rates within Nationalised banks (even if 0.5%) will have difference in short term returns. Always compare rates - Do not take things for granted.
2. RBI guarantees 1L per depositor. So, split FDs between banks
3. To maximise returns get it in name of your parents or well wishers jointly, so you will get higher returns (Some banks give 1% extra and some 0.5% extra) this makes a difference in short term investing
4. To avoid TDS, Give Form 15G (anycase Sr Citizens won't have major source of income generally). This means Extra 1 or 2%.
5. Banks offer Overdraft accounts against FD. This means you get liquidity at very low interest.
6. Negotiate with banks on Pre Payment penalty clause - many banks waive that.
The following info shud be there in your mind.
1. Diff in rates within Nationalised banks (even if 0.5%) will have difference in short term returns. Always compare rates - Do not take things for granted.
2. RBI guarantees 1L per depositor. So, split FDs between banks
3. To maximise returns get it in name of your parents or well wishers jointly, so you will get higher returns (Some banks give 1% extra and some 0.5% extra) this makes a difference in short term investing
4. To avoid TDS, Give Form 15G (anycase Sr Citizens won't have major source of income generally). This means Extra 1 or 2%.
5. Banks offer Overdraft accounts against FD. This means you get liquidity at very low interest.
6. Negotiate with banks on Pre Payment penalty clause - many banks waive that.
Wednesday, August 19, 2009
INVESTMENT ADVICE - NEW DELHI BASED INVESTMENT CONSULTANT SHAMMI ARORA REPLIES TO QUEIRES
mihir asked, sir, how would u rate TATA INFRASTRUCTURE FUND? is it worth investing?
Shammi Arora answers, hi, TATA Infrastructure Fund is a thematic fund. The fund is not well diversified and the performance of the fund depends on the performance of the sectors that constitute the underlying theme. I would not recommend that you invest in any sectoral or thematic funds. Instead invest in a well managed diversified equity fund with a track record of atleast 5 years to show for.
ams asked, How are the MIP's of MF Taxed?
Shammi Arora answers, hi short term capital gains from MIPS are clubbed with your total income and tax according to your income tax slab. Long term capital gains from MIPs are tax as follows: 10% without tax or 20% with indexation, whichever is lower
Adi asked, Dear Shammi , I am working as a project manager and have invested in stocks with a long-term goal in mind. I have invested around 6 lacs mostly in Small and midcap stocks and also 15k in Reliance infra mutual fund. I am looking for some good returns (200 to 300 % looking at the trend in the last 7 to 8 years) may be in the next 7 to 8 years. Do you think my plan is right and the market will actually give me the returns I am expecting. Thanks in Advance.. Kind Regards Adarsh.
Shammi Arora answers, hi, it is important to link your investment to your life goals, retirement being one of them. In my view 15% return from a well managed and diversified equity funds is a reasonable expectation. 200-300% returns over the next 7-8 years are on the higher side and you need to tone down your expectation. Invest as per your investment plan and keep your return expectation from equity within 15%
maoxlnc asked, hi Shammi ,we had 2 lic polices of jeevan anand and 1 jeevn mitra all put together 4 lakhs.do you suggest me to go for one more or put the amount in ppf to pacify the 80c limit
Shammi Arora answers, hi , the insurance cover should be taken to cover the risk in case anything happens to you.
Mahesh asked, As per earlier IT act, I had invested in some tax saving schemes. But as per proposed Direct tax code, these will be taxable at maturity. This will upset my goal based investments. In future how to take care of similar changes, so that it does not affect the calculations significantly?
Shammi Arora answers, hi, yes the new direct tax code will result in lot of changes and more so the goal based plans as all your post tax returns are likely to change. Hence, it is important for your review the plan in light of the possible changes in your post tax income and rates of tax on capital gains and retirement benefits like EPF/ Gratuity
abhi asked, I want investment in PPF .... can i do it through ECSShammi Arora answers, hi, investment in PPF cannot be done through ECS.
srinivas asked, should i make investments in Sbi Magnum Taxgain, Sundaram Tax scheme Dividend options at this movemebt for Tax Saving purpose?
Shammi Arora answers, in the ELSS category I recommend Franklin India Taxshield and Fidelity Tax Advantage Fund
dude asked, Hi Shammi Arora. Do you think debt funds are a good alternative to a savings or fixed deposit account? If so, can you please suggest the most appropriate kind of debt funds in the current scenario? How do debt fund returns change with respect to interest rate movements?
Shammi Arora answers, hi, bank FDs offer fixed rate of interest. Returns from debt funds are linked to the movement of interest rates in the economy. Debt funds do well when the interest rates are falling. These should be avoided when the rates are set to move up. This means returns of debt funds are market linked and not assured
ff asked, Is it advisable to put majority of the tax saving investments in ULIPs rather than in ELSS?
Shammi Arora answers, hi, I would not recommend ULIPs at all. For tax savings you should have a combination of insurance premium (term plan), ELSS and PPF though PPF under the new direct tax code may not be attractive
ghd asked, want to invest in MFs rs.5000/- per month. I want to take HDFC Top 200, HDFC Tax Saver. What is growth of these funds
Shammi Arora answers, hi, invest in HDFC Top 200 Fund and for tax saving you can consider fund like Franklin India Taxshield
mubsy asked, I have a home loan for which am paying an interest of 1.6 lakhs annually now. I have money to preclose the whole loan amount too. Here what do u suggest , shall i preclose the home loan and save interest money OR continue with the home loan to get tax benefit of 1.5 laks and invest the money i have some where else ? what’s the best option to do here
Shammi Arora answers, hi, there are 2 answers to your questions. One is based on mathematics - if you are able to save tax and it leaves you with more disposable income which can be invested in other investment instruments, then continue with the loan. The second answer depends more on your mental make up. Debt is always been considered burdensome. If you prepay your loan, you will move faster towards peace of mind though you may have to pay more in taxes. However, the EMI which you would have paid otherwise can be channelised in to mutual funds etc
Kumar asked, I am at 42 and have a corpus of Rs.60 lacs to invest. I want retire from job and start looking for business opportunity with investment of not more than 10 lacs. I don’t have any liability other than LIc premium @ Rs.1 lac per annum. I want to have a fixed monthly income by way of interest or dividend. Also what is the max amt I can expect to receive per month on a investment of Rs.50 lacs.
Shammi Arora answers, hi, from the details provided by you, I suggest that you make a post retirement cash flow for yourself. The cash flow should take into account all your income and expenses for the next 30-40 years. You should then calculate how long will your existing investments last. It will also help you decide how much should be invested in equity and debt. If you find this exercise too complex, take help of an investment planner/advisor
sanjay asked, dear sir i have invested 04 lacs in mf debt schemes from last 1 year can u confirm it is good time to switch in equity scheme or not kindly confirm
Shammi Arora answers, hi, yes its a good time to enter stock markets but before you do that assess your risk appetite. While debt is relatively safe, equities offer higher return with higher risk. Also your investment horizon should be atleast 3 years if you wish to invest in equity funds.
vinodloka asked, With respect to Life Insurance, which one is better from 'risk' coverage point of view - 1) Buy a standalone Term Plan (life insurance) policy and a standalone Accidental Death (General Insurance) policy. 2) Buy an Endowment/Money back policy.
Shammi Arora answers, hi, as far as insurance is concerned, you should only consider term plan. Term plan offer only risk cover. Term plans are cheap and one go for larger sum assured compared to the endowment or money back policies.
Ajay asked, What is a good option to invest money for a short term of 1 to 2 year, which will give more returns ?
Shammi Arora answers, hi, if you are willing to invest for atleast 18-24 months and take some risk, invest in Monthly Income Plans (MIPs)offered by mutual funds. These funds typically invest 75-80% of the corpus in safe fixed income securities and the balance in equities. For investment horizon of one year and less, I would recommend that you opt for a bank FD.
B.Bindu asked, Dear Shammi Arora, I am 25, is it a good time to start investing in Pension Plan or Retirement Plan? If yes....which plan should I go for? Please suggest.
Shammi Arora answers, hi, in my view get a retirement plan made for yourself and invest as per the same. A pension plan is not the answer to plan for your retirement. When you plan for your retirement, you need to ensure that you maintain the same standard of living post retirement as was before the retirement. A pension plan may not be able to generate sufficient income fo you to maintain your standards of living. Since you are young, you can afford to take risk with your money. According to me if you maintain an asset allocation of 70% in equity and balance in debt for the next few years it will help you grow your money faster. Invest in good quality equity funds.
raj asked, I want to invest for my 2 yr old child. Kindly suggest an Insurance plan into a children's scheme a children's policy that provides cover on the life of the parent and not of the child. thks
Shammi Arora answers, hi, assuming you are investing for your child's higher education and marriage, I would not recommend any insurance plan. Rather invest in a mix of equity and debt funds. Get a investment plan made for your child's education and marriage goal and invest as per the asset allocation suggested by the plan.
Murali asked, Hi Sir, Good Afternoon I am 38 year old and working as IT consultant and my wife is central govt employee, We have 2 kids ages are 6years and 3years. Could you please help me how i can invest now onwards so that i want to retire after 10 years. at present Iam having 10lakhs ready cash now and also can save 30000 per month now onwards. Could you please let me know where I can invest this, My previous investments were as follows. 1. 35000 / Year LIC 2. 11800 EMI on house loan of 14 lakhs(paying from 2003) 3.30000 MF 4.10000/year Prulife ICICI 5. 10,00,000 in stocks in which 30 % are lost
Shammi Arora answers, hi, you have many financial goals to achieve like your children higher education, their marriage and you and your wife's retirement. In my view you should get a comprehensive financial plan made for yourself and your family. The plan will help you decide on how you should invest your current investments as also the future savings.
mani asked, What is gold etf? kindly say abouts its + and -'es? give tips on some great performers? Thanks in advance.
Shammi Arora answers, hi, Gold ETFs are exchange traded mutual fund that invest in gold. Its a convenient way of investing in gold. These are listed on the stock exchange and can be bought and sold like a equity share. Since MF buy gold in large quantities, the overall price is less compared to buiyng gold from a bank or a jeweller. Among the better performing gold ETFs you can consider funds like Quantum Gold ETF and Benchmark Gold ETF
khokon asked, Most of the top HDFC equity funds have more investment in ICICI bank than HDFC Bank. Can you make out any reason ?
Shammi Arora answers, hi, the decision to invest in a particular stock rest with fund manager who in turn takes a call based on the future growth prospects of the company under consideration. If the company's growth prospects look good and the price of the share is at a attractvie level then it will make it to the portfolio. I cant make out any specific reason. Its the call of the fund manager
Paresh asked, looking to new tax code, should I still go for housing loan for investment purpose
Shammi Arora answers, hi, if buying a house is a necessity then there is no option but to buy. In my view the direct tax code will result in more tax saving in the hand of the tax payer. This, however, will vary from individual to individual. You should calculate the tax payable under the current tax lawa with the tax payable under the new code and see the difference. The decision to take a loan for tax saving purpose will depend on the results thrown by the comparative analysis
saleem asked, Hi Shammi Arora, I am willing to invest some 15 K pm in MFs, Can you please suggest some good MFs. and als o instead of putting funds in banks i want to go liquid/debt funds. Any good liquid/debt funds for parking my money.
Shammi Arora answers, you can consider fund like HDFC Cash Management Fund - Savings Plan to park your money for few days to months
Shammi Arora answers, hi, TATA Infrastructure Fund is a thematic fund. The fund is not well diversified and the performance of the fund depends on the performance of the sectors that constitute the underlying theme. I would not recommend that you invest in any sectoral or thematic funds. Instead invest in a well managed diversified equity fund with a track record of atleast 5 years to show for.
ams asked, How are the MIP's of MF Taxed?
Shammi Arora answers, hi short term capital gains from MIPS are clubbed with your total income and tax according to your income tax slab. Long term capital gains from MIPs are tax as follows: 10% without tax or 20% with indexation, whichever is lower
Adi asked, Dear Shammi , I am working as a project manager and have invested in stocks with a long-term goal in mind. I have invested around 6 lacs mostly in Small and midcap stocks and also 15k in Reliance infra mutual fund. I am looking for some good returns (200 to 300 % looking at the trend in the last 7 to 8 years) may be in the next 7 to 8 years. Do you think my plan is right and the market will actually give me the returns I am expecting. Thanks in Advance.. Kind Regards Adarsh.
Shammi Arora answers, hi, it is important to link your investment to your life goals, retirement being one of them. In my view 15% return from a well managed and diversified equity funds is a reasonable expectation. 200-300% returns over the next 7-8 years are on the higher side and you need to tone down your expectation. Invest as per your investment plan and keep your return expectation from equity within 15%
maoxlnc asked, hi Shammi ,we had 2 lic polices of jeevan anand and 1 jeevn mitra all put together 4 lakhs.do you suggest me to go for one more or put the amount in ppf to pacify the 80c limit
Shammi Arora answers, hi , the insurance cover should be taken to cover the risk in case anything happens to you.
Mahesh asked, As per earlier IT act, I had invested in some tax saving schemes. But as per proposed Direct tax code, these will be taxable at maturity. This will upset my goal based investments. In future how to take care of similar changes, so that it does not affect the calculations significantly?
Shammi Arora answers, hi, yes the new direct tax code will result in lot of changes and more so the goal based plans as all your post tax returns are likely to change. Hence, it is important for your review the plan in light of the possible changes in your post tax income and rates of tax on capital gains and retirement benefits like EPF/ Gratuity
abhi asked, I want investment in PPF .... can i do it through ECSShammi Arora answers, hi, investment in PPF cannot be done through ECS.
srinivas asked, should i make investments in Sbi Magnum Taxgain, Sundaram Tax scheme Dividend options at this movemebt for Tax Saving purpose?
Shammi Arora answers, in the ELSS category I recommend Franklin India Taxshield and Fidelity Tax Advantage Fund
dude asked, Hi Shammi Arora. Do you think debt funds are a good alternative to a savings or fixed deposit account? If so, can you please suggest the most appropriate kind of debt funds in the current scenario? How do debt fund returns change with respect to interest rate movements?
Shammi Arora answers, hi, bank FDs offer fixed rate of interest. Returns from debt funds are linked to the movement of interest rates in the economy. Debt funds do well when the interest rates are falling. These should be avoided when the rates are set to move up. This means returns of debt funds are market linked and not assured
ff asked, Is it advisable to put majority of the tax saving investments in ULIPs rather than in ELSS?
Shammi Arora answers, hi, I would not recommend ULIPs at all. For tax savings you should have a combination of insurance premium (term plan), ELSS and PPF though PPF under the new direct tax code may not be attractive
ghd asked, want to invest in MFs rs.5000/- per month. I want to take HDFC Top 200, HDFC Tax Saver. What is growth of these funds
Shammi Arora answers, hi, invest in HDFC Top 200 Fund and for tax saving you can consider fund like Franklin India Taxshield
mubsy asked, I have a home loan for which am paying an interest of 1.6 lakhs annually now. I have money to preclose the whole loan amount too. Here what do u suggest , shall i preclose the home loan and save interest money OR continue with the home loan to get tax benefit of 1.5 laks and invest the money i have some where else ? what’s the best option to do here
Shammi Arora answers, hi, there are 2 answers to your questions. One is based on mathematics - if you are able to save tax and it leaves you with more disposable income which can be invested in other investment instruments, then continue with the loan. The second answer depends more on your mental make up. Debt is always been considered burdensome. If you prepay your loan, you will move faster towards peace of mind though you may have to pay more in taxes. However, the EMI which you would have paid otherwise can be channelised in to mutual funds etc
Kumar asked, I am at 42 and have a corpus of Rs.60 lacs to invest. I want retire from job and start looking for business opportunity with investment of not more than 10 lacs. I don’t have any liability other than LIc premium @ Rs.1 lac per annum. I want to have a fixed monthly income by way of interest or dividend. Also what is the max amt I can expect to receive per month on a investment of Rs.50 lacs.
Shammi Arora answers, hi, from the details provided by you, I suggest that you make a post retirement cash flow for yourself. The cash flow should take into account all your income and expenses for the next 30-40 years. You should then calculate how long will your existing investments last. It will also help you decide how much should be invested in equity and debt. If you find this exercise too complex, take help of an investment planner/advisor
sanjay asked, dear sir i have invested 04 lacs in mf debt schemes from last 1 year can u confirm it is good time to switch in equity scheme or not kindly confirm
Shammi Arora answers, hi, yes its a good time to enter stock markets but before you do that assess your risk appetite. While debt is relatively safe, equities offer higher return with higher risk. Also your investment horizon should be atleast 3 years if you wish to invest in equity funds.
vinodloka asked, With respect to Life Insurance, which one is better from 'risk' coverage point of view - 1) Buy a standalone Term Plan (life insurance) policy and a standalone Accidental Death (General Insurance) policy. 2) Buy an Endowment/Money back policy.
Shammi Arora answers, hi, as far as insurance is concerned, you should only consider term plan. Term plan offer only risk cover. Term plans are cheap and one go for larger sum assured compared to the endowment or money back policies.
Ajay asked, What is a good option to invest money for a short term of 1 to 2 year, which will give more returns ?
Shammi Arora answers, hi, if you are willing to invest for atleast 18-24 months and take some risk, invest in Monthly Income Plans (MIPs)offered by mutual funds. These funds typically invest 75-80% of the corpus in safe fixed income securities and the balance in equities. For investment horizon of one year and less, I would recommend that you opt for a bank FD.
B.Bindu asked, Dear Shammi Arora, I am 25, is it a good time to start investing in Pension Plan or Retirement Plan? If yes....which plan should I go for? Please suggest.
Shammi Arora answers, hi, in my view get a retirement plan made for yourself and invest as per the same. A pension plan is not the answer to plan for your retirement. When you plan for your retirement, you need to ensure that you maintain the same standard of living post retirement as was before the retirement. A pension plan may not be able to generate sufficient income fo you to maintain your standards of living. Since you are young, you can afford to take risk with your money. According to me if you maintain an asset allocation of 70% in equity and balance in debt for the next few years it will help you grow your money faster. Invest in good quality equity funds.
raj asked, I want to invest for my 2 yr old child. Kindly suggest an Insurance plan into a children's scheme a children's policy that provides cover on the life of the parent and not of the child. thks
Shammi Arora answers, hi, assuming you are investing for your child's higher education and marriage, I would not recommend any insurance plan. Rather invest in a mix of equity and debt funds. Get a investment plan made for your child's education and marriage goal and invest as per the asset allocation suggested by the plan.
Murali asked, Hi Sir, Good Afternoon I am 38 year old and working as IT consultant and my wife is central govt employee, We have 2 kids ages are 6years and 3years. Could you please help me how i can invest now onwards so that i want to retire after 10 years. at present Iam having 10lakhs ready cash now and also can save 30000 per month now onwards. Could you please let me know where I can invest this, My previous investments were as follows. 1. 35000 / Year LIC 2. 11800 EMI on house loan of 14 lakhs(paying from 2003) 3.30000 MF 4.10000/year Prulife ICICI 5. 10,00,000 in stocks in which 30 % are lost
Shammi Arora answers, hi, you have many financial goals to achieve like your children higher education, their marriage and you and your wife's retirement. In my view you should get a comprehensive financial plan made for yourself and your family. The plan will help you decide on how you should invest your current investments as also the future savings.
mani asked, What is gold etf? kindly say abouts its + and -'es? give tips on some great performers? Thanks in advance.
Shammi Arora answers, hi, Gold ETFs are exchange traded mutual fund that invest in gold. Its a convenient way of investing in gold. These are listed on the stock exchange and can be bought and sold like a equity share. Since MF buy gold in large quantities, the overall price is less compared to buiyng gold from a bank or a jeweller. Among the better performing gold ETFs you can consider funds like Quantum Gold ETF and Benchmark Gold ETF
khokon asked, Most of the top HDFC equity funds have more investment in ICICI bank than HDFC Bank. Can you make out any reason ?
Shammi Arora answers, hi, the decision to invest in a particular stock rest with fund manager who in turn takes a call based on the future growth prospects of the company under consideration. If the company's growth prospects look good and the price of the share is at a attractvie level then it will make it to the portfolio. I cant make out any specific reason. Its the call of the fund manager
Paresh asked, looking to new tax code, should I still go for housing loan for investment purpose
Shammi Arora answers, hi, if buying a house is a necessity then there is no option but to buy. In my view the direct tax code will result in more tax saving in the hand of the tax payer. This, however, will vary from individual to individual. You should calculate the tax payable under the current tax lawa with the tax payable under the new code and see the difference. The decision to take a loan for tax saving purpose will depend on the results thrown by the comparative analysis
saleem asked, Hi Shammi Arora, I am willing to invest some 15 K pm in MFs, Can you please suggest some good MFs. and als o instead of putting funds in banks i want to go liquid/debt funds. Any good liquid/debt funds for parking my money.
Shammi Arora answers, you can consider fund like HDFC Cash Management Fund - Savings Plan to park your money for few days to months
Tuesday, August 18, 2009
IS THE STOCK MARKET A GAMBLING DEN .. READ WHAT PEOPLE HAVE TO SAY
Yes stock market is official satta bazzar!!! by dilleep d
I have no doubt in mind the stock market is an official gambling Den works purely on one nature of humans that is Greed, Greed for better returns on investment. The long term investment theory by the so called experts is just to make common people fool. I have seen that only people who make money in market are who spot and buy the momentum stock and sell before before it falls.
95%only earned money by nailesh kumar
according to survey only 7% of people has only seen profit rest 93% where losers.
Can anyone explain by Atul Neogi
Why Nikkei which was at 39K in late 80s and now slid down to 8K plus. Like 20 years is not "long" term or Indian market will stay as emerging for next 20 years.
If you have money start a venture, why get into gambling arena of markets
Some moNey power is making the markets move .. it is not natural
by s
If you follow the stock market reviews and tips given on TV and in media you can see that the movement of trading is generally opposite to what has been predicted and the same person after an hour gives a totally reverse views.
Quoting from a leading website today :
====
The market bounced back today after yesterday's selloff aided by positive global cues.
Nifty now has support at 4240-4100 and these are screaming buy levels, he feels.
The market is looking tired at higher levels and realty stocks are dragging the index down.
The market opens on a flat note, after an unhappy close yesterday, and is trading volatile now. Global cues continue to be weak with US closing down and Asia trading weak.
=======
The stock brokers give tips and send mail.. SL triggered.
I feel that some people are playing games .. not the gambling ... others have to just watch.
You can see that a stock suddenly gains 2 -3 percent in two minutes flat.
Is it not a intentional move? and by the time watchers try to enter the scrip the players exit by selling the stock and then in next two minutes the stock falls by 1-2 percent.
Manipulation at its best in indian stock market by pradeep agarwal
The way it is behaving & steep changes are explained by experts on account of global cues is nothing short of a looming disaster waiting for investors.The money mostly coming is from Swiss accounts belonging to well known nexus & will ontinue the drama till por investors are trapped & ownership shiftes to them from so called FII. We are in for another correction of at least 200 points by Sept'09.
It is only Gambling by kumarrvce kumarrvce
HI..This is full of Gambling..
Sometime technicals, sometime liquidity and some time global market..all terminalogies are used...to make full of the people..People who really make money are only FIS
Many things are here, however would not like to waste my time on this.....
I know in and out of the stock...But this is nothing than Gambling..
Is the stock market a gambling arena? by JGN
The stock market is not a gambling arena but informed decision making at the right time is required to minimize the losses. Many Stock Brokers now offer the "Stop Loss" option. Morre over the principle of investing in stock market is, invest only as much as you can afford to loss. The Stock Market is not meant for "innocent investers" as many advocate/lament!!
I have no doubt in mind the stock market is an official gambling Den works purely on one nature of humans that is Greed, Greed for better returns on investment. The long term investment theory by the so called experts is just to make common people fool. I have seen that only people who make money in market are who spot and buy the momentum stock and sell before before it falls.
95%only earned money by nailesh kumar
according to survey only 7% of people has only seen profit rest 93% where losers.
Can anyone explain by Atul Neogi
Why Nikkei which was at 39K in late 80s and now slid down to 8K plus. Like 20 years is not "long" term or Indian market will stay as emerging for next 20 years.
If you have money start a venture, why get into gambling arena of markets
Some moNey power is making the markets move .. it is not natural
by s
If you follow the stock market reviews and tips given on TV and in media you can see that the movement of trading is generally opposite to what has been predicted and the same person after an hour gives a totally reverse views.
Quoting from a leading website today :
====
The market bounced back today after yesterday's selloff aided by positive global cues.
Nifty now has support at 4240-4100 and these are screaming buy levels, he feels.
The market is looking tired at higher levels and realty stocks are dragging the index down.
The market opens on a flat note, after an unhappy close yesterday, and is trading volatile now. Global cues continue to be weak with US closing down and Asia trading weak.
=======
The stock brokers give tips and send mail.. SL triggered.
I feel that some people are playing games .. not the gambling ... others have to just watch.
You can see that a stock suddenly gains 2 -3 percent in two minutes flat.
Is it not a intentional move? and by the time watchers try to enter the scrip the players exit by selling the stock and then in next two minutes the stock falls by 1-2 percent.
Manipulation at its best in indian stock market by pradeep agarwal
The way it is behaving & steep changes are explained by experts on account of global cues is nothing short of a looming disaster waiting for investors.The money mostly coming is from Swiss accounts belonging to well known nexus & will ontinue the drama till por investors are trapped & ownership shiftes to them from so called FII. We are in for another correction of at least 200 points by Sept'09.
It is only Gambling by kumarrvce kumarrvce
HI..This is full of Gambling..
Sometime technicals, sometime liquidity and some time global market..all terminalogies are used...to make full of the people..People who really make money are only FIS
Many things are here, however would not like to waste my time on this.....
I know in and out of the stock...But this is nothing than Gambling..
Is the stock market a gambling arena? by JGN
The stock market is not a gambling arena but informed decision making at the right time is required to minimize the losses. Many Stock Brokers now offer the "Stop Loss" option. Morre over the principle of investing in stock market is, invest only as much as you can afford to loss. The Stock Market is not meant for "innocent investers" as many advocate/lament!!
Saturday, August 15, 2009
NEW INCOME TAX CODE
What are the changes made with reference to residential status by the proposed Direct Taxes Code, 2009?
The Act presently classifies individuals into resident and ordinarily resident, resident but not ordinarily resident and non-resident.
In the case of a resident but not ordinarily resident (RNOR), income accruing or arising or deemed to accrue or arise outside India or received or deemed to be received outside India is not taxable in India unless such income is from a business or profession set up and controlled in India.
The tax code proposes to do away with the classification resident but not ordinarily resident. This would mean that Indians working abroad would be classified as resident even if they fall under the category of resident but not ordinarily resident and, consequently, such income would be taxable in India.
How is income classified under the draft code?
Income is to be classified as income from ordinary sources being (A) income from employment, (B) income from house property, (C) income from business, (D) capital gains, (E) income from residuary sources and as income from special sources which in the case of a resident assessee would be income by way of (i) any lottery or crossword puzzle, (ii) race, including horse race or (iii) card game or any other game or gambling or betting.
What are the changes with regard to computation of capital gains?
The distinction between short-term and long-term capital gains is done away with and the income from transfer of an investment asset is to be computed under the head capital gains.
The term investment asset is defined to mean a capital asset not being a business asset.
A capital asset is defined to mean every property other than a business trading asset.
In computing capital gains the deductions are (a) the amount of expenditure incurred wholly and exclusively in connection with the transfer of the asset (b) the cost of acquisition of the asset and (c) the cost of improvement of the asset.
If the investment asset has been held for more than one year the deductions that are permitted are (a) the amount of expenditure incurred wholly and exclusively in connection with the transfer of the asset, (b) the indexed cost of acquisition of the asset, (c) the indexed cost of improvement of the asset and (d) the amount of relief for rollover of the asset.
The base year for the benefit of indexation is to be taken as the financial year 2000-01 and if an assessee has acquired an asset prior to April 1, 2000, the fair market value as on April 1, 2000, can be substituted as the cost of acquisition at the option of the assessee.
Deduction in respect of rollover of investment asset is computed for an individual or Hindu Undivided Family on the basis of the formula {A * (B+C+D)}/ E.
A is the amount of capital gains arising from the transfer of the original asset; B is the amount invested for purchase or in construction of the new asset within one year before beginning of the financial year in which the transfer of original investment asset is effected; C is the amount invested for purchase or in construction of the new asset during the financial year in which the transfer of original investment asset is effected.
D would be the amount deposited in an account in post office in accordance with the Capital Gains Deposit Scheme of the Centre in this behalf, by the end of the financial year in which the transfer of original investment asset is effected and E is the net consideration received as a result of the transfer of the original asset.
The deduction is permissible in respect of investments in certain new assets (such as land, residential house or investment in capital gains scheme) specified in the bill.
What are the deductions that are permissible to an individual under the code?
An individual can claim a deduction in respect of the following:
- Rs 3 lakh in respect of permitted savings, which would be taxed when withdrawn.
- Tuition fee paid for full-time education of two children in a university, school or educational institution situated in India
- Interest on loan taken for higher education of the individual or his relative for eight years
- Health insurance premium of up to Rs 15,000. In case of the insurance taken by an individual for a senior citizen, Rs 20,000 would be allowed as deduction.
This deduction is available in respect of premium paid for the individual, the spouse, any dependent child of the individual and any member of the Hindu Undivided Family.
- Expenses on medical treatment in respect of prescribed diseases and ailments of the individual, the spouse of such individual, the dependent children or dependent parents of the individual of up to Rs 40,000, and if the ailing person is a senior citizen, then the amount would be Rs 60,000.
- Expenses on medical treatment, nursing or training and rehabilitation of a disabled dependent suffering from specified disabilities of up to Rs 50,000 and in case of a person suffering from severe disability of up to Rs 1 lakh.
- Rs 50,000 as deduction to a person suffering from certain disabilities and if the disability is severe, Rs 1 lakh
How are loans treated?
An amount of loan or deposit borrowed or repaid otherwise than by an account payee cheque or account payee draft and exceeding Rs 20,000 including interest thereon at the time of repayment is to be treated as income in the hands of the recipient.
The Act presently classifies individuals into resident and ordinarily resident, resident but not ordinarily resident and non-resident.
In the case of a resident but not ordinarily resident (RNOR), income accruing or arising or deemed to accrue or arise outside India or received or deemed to be received outside India is not taxable in India unless such income is from a business or profession set up and controlled in India.
The tax code proposes to do away with the classification resident but not ordinarily resident. This would mean that Indians working abroad would be classified as resident even if they fall under the category of resident but not ordinarily resident and, consequently, such income would be taxable in India.
How is income classified under the draft code?
Income is to be classified as income from ordinary sources being (A) income from employment, (B) income from house property, (C) income from business, (D) capital gains, (E) income from residuary sources and as income from special sources which in the case of a resident assessee would be income by way of (i) any lottery or crossword puzzle, (ii) race, including horse race or (iii) card game or any other game or gambling or betting.
What are the changes with regard to computation of capital gains?
The distinction between short-term and long-term capital gains is done away with and the income from transfer of an investment asset is to be computed under the head capital gains.
The term investment asset is defined to mean a capital asset not being a business asset.
A capital asset is defined to mean every property other than a business trading asset.
In computing capital gains the deductions are (a) the amount of expenditure incurred wholly and exclusively in connection with the transfer of the asset (b) the cost of acquisition of the asset and (c) the cost of improvement of the asset.
If the investment asset has been held for more than one year the deductions that are permitted are (a) the amount of expenditure incurred wholly and exclusively in connection with the transfer of the asset, (b) the indexed cost of acquisition of the asset, (c) the indexed cost of improvement of the asset and (d) the amount of relief for rollover of the asset.
The base year for the benefit of indexation is to be taken as the financial year 2000-01 and if an assessee has acquired an asset prior to April 1, 2000, the fair market value as on April 1, 2000, can be substituted as the cost of acquisition at the option of the assessee.
Deduction in respect of rollover of investment asset is computed for an individual or Hindu Undivided Family on the basis of the formula {A * (B+C+D)}/ E.
A is the amount of capital gains arising from the transfer of the original asset; B is the amount invested for purchase or in construction of the new asset within one year before beginning of the financial year in which the transfer of original investment asset is effected; C is the amount invested for purchase or in construction of the new asset during the financial year in which the transfer of original investment asset is effected.
D would be the amount deposited in an account in post office in accordance with the Capital Gains Deposit Scheme of the Centre in this behalf, by the end of the financial year in which the transfer of original investment asset is effected and E is the net consideration received as a result of the transfer of the original asset.
The deduction is permissible in respect of investments in certain new assets (such as land, residential house or investment in capital gains scheme) specified in the bill.
What are the deductions that are permissible to an individual under the code?
An individual can claim a deduction in respect of the following:
- Rs 3 lakh in respect of permitted savings, which would be taxed when withdrawn.
- Tuition fee paid for full-time education of two children in a university, school or educational institution situated in India
- Interest on loan taken for higher education of the individual or his relative for eight years
- Health insurance premium of up to Rs 15,000. In case of the insurance taken by an individual for a senior citizen, Rs 20,000 would be allowed as deduction.
This deduction is available in respect of premium paid for the individual, the spouse, any dependent child of the individual and any member of the Hindu Undivided Family.
- Expenses on medical treatment in respect of prescribed diseases and ailments of the individual, the spouse of such individual, the dependent children or dependent parents of the individual of up to Rs 40,000, and if the ailing person is a senior citizen, then the amount would be Rs 60,000.
- Expenses on medical treatment, nursing or training and rehabilitation of a disabled dependent suffering from specified disabilities of up to Rs 50,000 and in case of a person suffering from severe disability of up to Rs 1 lakh.
- Rs 50,000 as deduction to a person suffering from certain disabilities and if the disability is severe, Rs 1 lakh
How are loans treated?
An amount of loan or deposit borrowed or repaid otherwise than by an account payee cheque or account payee draft and exceeding Rs 20,000 including interest thereon at the time of repayment is to be treated as income in the hands of the recipient.
REAL ESTATE SCENARIO - KOLKATA WEST BANGAL
Prospective buyer Arun Mitra had been thinking of buying a second-hand flat since February. Following the downturn, he was sceptical about timely completion of projects under construction. Even the bank he approached for a home loan had then given him the impression that it was keen on lending towards a completed project rather than one under development. Five months down the line, he has changed his mind and booked a flat in a project under construction in Rajarhat.
Homebuyers in Kolkata are slowly but steadily regaining their confidence in green-field and brown-field housing projects, according to developers and industry experts.
“Between January and June this year, nearly 60-70 per cent of the transactions we registered were in the ready-to-move-in properties and resale flats. The trend has now shifted towards projects under construction with nearly 90 per cent of the bookings being done in the segment,” Mr Mayank Saxena, Associate Director, Jones Lang La Selle Meghraj, Kolkata, said.
The initial trend of higher demand for ready-to-move-in flats is natural, he said, as resale of used flats picks up first in any upturn. The first wave of reviving demand comes from end-users looking to move in immediately, he pointed out.
At a mature stage of the recovery, however, upcoming projects exert appeal. “The trend of demand during a recovery moves from resale houses to brown-field projects and then to green-field projects,” he said.
Price increase
Indicative of some sort of recovery in projects under construction in Kolkata, some large developers have increased prices of flats recently. The Tata Housing project in Rajarhat has increased prices from Rs 2,700 a sq.ft to about Rs 3,150 over the last three months. “This is mainly because the developer has assured a steady cash flow in the first phase and can now afford to sell slowly at a higher price band for the remaining units,” a real-estate broker said. The size of the flats in the second phase of the project has also been increased by 100 sq.ft, to around 1,400 sq.ft. Unitech too increased the price of flats recently in its Rajarhat Vista project by about Rs 50 per sq.ft.
The prices in some projects in the city were, however, down by about 30 per cent as against the year-ago period, Mr Saxena said, adding that prospective buyers should look at investing before the prices increased further.
Customers prefer wider choice
Customers’ preference for a project under construction might be attributed to wider choice with regard to the layout and position of flats, he observed. Prior declaration of a penalty by developers for a delay in delivery of upcoming projects also helped boost customers’ confidence, he said. The upcoming projects, he pointed out, were at times more optimally priced as the developers used less expensive fittings. For example, smaller vitrified tiles and ceramic varieties may be used in place of large vitrified tiles.
“There is a larger flexibility in payment of loans for projects under construction as the period of payment is stretched over a longer term,” Mr Kumar Shankar Bagchi, Managing Director, Bengal Peerless, said. “In a downturn, banks are keen on extending loans to completed projects as they feel their liquidity is safer in such cases. Efforts by the Centre in recent times to boost lending, lowering of interest rates and the overall revival of the economy have, however, increased bank lending for flats under construction as well,” he added.
It was also difficult to woo customers into making a full down payment by offering discounts, as the rebates (around 5 per cent in case of Bengal Peerless) were much lower than bank deposit rates, Mr Bagchi, pointed out. Faced by considerable demand for its projects under construction in Rajarhat, the company was planning to launch a green field residential project of 1,600 units on E M Bypass, about 50 km from its existing project Avishikta, he said.
Mr Harsh Vardhan Neotia, Chairman, Ambuja Realty, said bookings were going well in both its green field projects — second phase of Uphar near E.M. Bypass and the Ujaas in Lake Town. Flats in Ujaas are priced at Rs 45 lakh and in Uphar between Rs 45 lakh and Rs 1 crore. Both the projects are expected to be completed by March 2011.
Mr Abhijit Das, Joint Managing Director of Kolkata-based real-estate broking firm Lemon Grass Advisory Pvt Ltd, said, “Demand has picked up in upcoming projects in the price band of below Rs 30 lakh and over Rs 70 lakh.”
“One year from now, builders will return to the earlier pricing, and buyers still waiting may miss the bus,” he added.
Homebuyers in Kolkata are slowly but steadily regaining their confidence in green-field and brown-field housing projects, according to developers and industry experts.
“Between January and June this year, nearly 60-70 per cent of the transactions we registered were in the ready-to-move-in properties and resale flats. The trend has now shifted towards projects under construction with nearly 90 per cent of the bookings being done in the segment,” Mr Mayank Saxena, Associate Director, Jones Lang La Selle Meghraj, Kolkata, said.
The initial trend of higher demand for ready-to-move-in flats is natural, he said, as resale of used flats picks up first in any upturn. The first wave of reviving demand comes from end-users looking to move in immediately, he pointed out.
At a mature stage of the recovery, however, upcoming projects exert appeal. “The trend of demand during a recovery moves from resale houses to brown-field projects and then to green-field projects,” he said.
Price increase
Indicative of some sort of recovery in projects under construction in Kolkata, some large developers have increased prices of flats recently. The Tata Housing project in Rajarhat has increased prices from Rs 2,700 a sq.ft to about Rs 3,150 over the last three months. “This is mainly because the developer has assured a steady cash flow in the first phase and can now afford to sell slowly at a higher price band for the remaining units,” a real-estate broker said. The size of the flats in the second phase of the project has also been increased by 100 sq.ft, to around 1,400 sq.ft. Unitech too increased the price of flats recently in its Rajarhat Vista project by about Rs 50 per sq.ft.
The prices in some projects in the city were, however, down by about 30 per cent as against the year-ago period, Mr Saxena said, adding that prospective buyers should look at investing before the prices increased further.
Customers prefer wider choice
Customers’ preference for a project under construction might be attributed to wider choice with regard to the layout and position of flats, he observed. Prior declaration of a penalty by developers for a delay in delivery of upcoming projects also helped boost customers’ confidence, he said. The upcoming projects, he pointed out, were at times more optimally priced as the developers used less expensive fittings. For example, smaller vitrified tiles and ceramic varieties may be used in place of large vitrified tiles.
“There is a larger flexibility in payment of loans for projects under construction as the period of payment is stretched over a longer term,” Mr Kumar Shankar Bagchi, Managing Director, Bengal Peerless, said. “In a downturn, banks are keen on extending loans to completed projects as they feel their liquidity is safer in such cases. Efforts by the Centre in recent times to boost lending, lowering of interest rates and the overall revival of the economy have, however, increased bank lending for flats under construction as well,” he added.
It was also difficult to woo customers into making a full down payment by offering discounts, as the rebates (around 5 per cent in case of Bengal Peerless) were much lower than bank deposit rates, Mr Bagchi, pointed out. Faced by considerable demand for its projects under construction in Rajarhat, the company was planning to launch a green field residential project of 1,600 units on E M Bypass, about 50 km from its existing project Avishikta, he said.
Mr Harsh Vardhan Neotia, Chairman, Ambuja Realty, said bookings were going well in both its green field projects — second phase of Uphar near E.M. Bypass and the Ujaas in Lake Town. Flats in Ujaas are priced at Rs 45 lakh and in Uphar between Rs 45 lakh and Rs 1 crore. Both the projects are expected to be completed by March 2011.
Mr Abhijit Das, Joint Managing Director of Kolkata-based real-estate broking firm Lemon Grass Advisory Pvt Ltd, said, “Demand has picked up in upcoming projects in the price band of below Rs 30 lakh and over Rs 70 lakh.”
“One year from now, builders will return to the earlier pricing, and buyers still waiting may miss the bus,” he added.
BUILDING A PORTFOLIO
Most retail investors make equity investments with an intention to earn healthy returns that can offset inflation. But do we keep this objective in mind while constructing our portfolio of funds? Here, we outline some of the common errors made by mutual fund investors while constructing their portfolios and also discuss the alternatives:
Fancy for new funds: Many investors build their entire portfolio by investing in New Fund Offers (NFOs) as and when they crop up. But if a fund is not based on a theme or idea that is unique, avoid investing in the NFO. Fund houses may offer new products with fancy names to catch your attention, but they may be nothing more than old wine in a new bottle.
Theme funds are often not very different from diversified ones. Remember, currently there are 246 diversified schemes on offer, with to help you decide whether or not to invest in these funds.
With entry loads abolished, there will be fewer NFOs and your distributors will also not push sales as they have less incentive to market the same. All the more reason to look for, and invest in, funds with a track record.
Low NAVs: Choosing an equity fund because its NAV is lower is a mistake. Keep in mind that it is the NAV appreciation that determines your return. The starting NAV has no bearing on this appreciation.
For an investment of Rs 1 lakh you can buy 10,000 units of a fund whose NAV is Rs 10. After two years, if the NAV appreciates to Rs 14 your compounded annualised return is 18.3 per cent.
Now, for the same amount you may be able to buy only 2,000 units of a fund whose NAV is Rs 50. If the fund sees its NAV grow to Rs 75 at the end of two years, the compounded annual return works out 22.5 per cent.
A high NAV shows that a fund has managed good performance over the years.
Don’t buy something just because it’s cheaper.
Invested because I got a lump-sum: This is very common among younger investors. Your decision to deploy money in stocks has to factor in the market levels and valuations at the time of investing.
Choosing to invest a huge sum at one go in the stock markets exposes you to the risk of bad timing, if markets happen to be overheated at that time.
We are not talking about timing the market. However, phasing out investments over a period of time will ensure that you don’t take the plunge at particular Sensex level. Choosing your funds carefully is also important.
If you had invested a lump sum on January 8, 2008 in top-performing large-cap funds such HDFC Top 200 and DSP BlackRock Top 100, your capital could now have eroded by 12 per cent and 20 per cent respectively.
But had you invested in top-performing midcap funds such as Birla Sun Life Mid cap and Sundaram BNP Paribas Midcap, your portfolio would have lost 30 per cent. Had you invested in average performers, the losses could have been still steeper.
If you are investing after a strong rally, spread your investment over a period of time, based on your risk appetite.
Investing fresh money without taking account of your current portfolio: This will create overlaps in your investments. Take stock of the funds and investments you already own while considering a new investment.
Discuss with your advisor and find out whether the schemes are in line with your risk profile. Don’t add too many schemes just for diversification. It is better to restrict the number of schemes too, for easier monitoring. Consider allocating a portion of your portfolio to passive exchange traded funds (ETFs). ETFs mirror market returns as they invest in the same proportion as of the benchmark.
Don’t a dd too many schemes to your portfolio just for diversification.
Timing your systematic investment plan (SIP): The usual mistake many of us make is that we start SIPs when the market has already risen and stop once the market starts to correct.
By doing this, we are actually buying at higher NAV and stopping when it is low. That means that the average entry NAV will remain relatively high, reducing returns when the market corrects from a peak.
For instance, if you had started an SIP in HDFC Top 200 from January 2008 and stopped after 12 instalments, your current return will be minus 49 per cent. But had you continued the SIP even during the market correction, your return today would be plus 38 per cent.
Don’t stop your SIP when the market hits new lows.
Fancy for new funds: Many investors build their entire portfolio by investing in New Fund Offers (NFOs) as and when they crop up. But if a fund is not based on a theme or idea that is unique, avoid investing in the NFO. Fund houses may offer new products with fancy names to catch your attention, but they may be nothing more than old wine in a new bottle.
Theme funds are often not very different from diversified ones. Remember, currently there are 246 diversified schemes on offer, with to help you decide whether or not to invest in these funds.
With entry loads abolished, there will be fewer NFOs and your distributors will also not push sales as they have less incentive to market the same. All the more reason to look for, and invest in, funds with a track record.
Low NAVs: Choosing an equity fund because its NAV is lower is a mistake. Keep in mind that it is the NAV appreciation that determines your return. The starting NAV has no bearing on this appreciation.
For an investment of Rs 1 lakh you can buy 10,000 units of a fund whose NAV is Rs 10. After two years, if the NAV appreciates to Rs 14 your compounded annualised return is 18.3 per cent.
Now, for the same amount you may be able to buy only 2,000 units of a fund whose NAV is Rs 50. If the fund sees its NAV grow to Rs 75 at the end of two years, the compounded annual return works out 22.5 per cent.
A high NAV shows that a fund has managed good performance over the years.
Don’t buy something just because it’s cheaper.
Invested because I got a lump-sum: This is very common among younger investors. Your decision to deploy money in stocks has to factor in the market levels and valuations at the time of investing.
Choosing to invest a huge sum at one go in the stock markets exposes you to the risk of bad timing, if markets happen to be overheated at that time.
We are not talking about timing the market. However, phasing out investments over a period of time will ensure that you don’t take the plunge at particular Sensex level. Choosing your funds carefully is also important.
If you had invested a lump sum on January 8, 2008 in top-performing large-cap funds such HDFC Top 200 and DSP BlackRock Top 100, your capital could now have eroded by 12 per cent and 20 per cent respectively.
But had you invested in top-performing midcap funds such as Birla Sun Life Mid cap and Sundaram BNP Paribas Midcap, your portfolio would have lost 30 per cent. Had you invested in average performers, the losses could have been still steeper.
If you are investing after a strong rally, spread your investment over a period of time, based on your risk appetite.
Investing fresh money without taking account of your current portfolio: This will create overlaps in your investments. Take stock of the funds and investments you already own while considering a new investment.
Discuss with your advisor and find out whether the schemes are in line with your risk profile. Don’t add too many schemes just for diversification. It is better to restrict the number of schemes too, for easier monitoring. Consider allocating a portion of your portfolio to passive exchange traded funds (ETFs). ETFs mirror market returns as they invest in the same proportion as of the benchmark.
Don’t a dd too many schemes to your portfolio just for diversification.
Timing your systematic investment plan (SIP): The usual mistake many of us make is that we start SIPs when the market has already risen and stop once the market starts to correct.
By doing this, we are actually buying at higher NAV and stopping when it is low. That means that the average entry NAV will remain relatively high, reducing returns when the market corrects from a peak.
For instance, if you had started an SIP in HDFC Top 200 from January 2008 and stopped after 12 instalments, your current return will be minus 49 per cent. But had you continued the SIP even during the market correction, your return today would be plus 38 per cent.
Don’t stop your SIP when the market hits new lows.
Sunday, August 2, 2009
Mutual funds or unit-linked plans: Horizon matters
Mutual funds or unit-linked plans: Horizon matters
The recent decision by the insurance regulator to cap the charges on insurance products may level the playing field, in terms of effective returns, between mutual funds and ULIPs.
We attempted a comparison of the two products, based on certain return assumptions once the new regime takes effect. The calculation shows that, assuming similar portfolio returns, ULIPs may manage a marginally higher effective return than mutual funds if the investment horizon is 10 years and above. If the investment is for a shorter term of less than five years, mutual funds emerge as a superior option to ULIPs due to the latter’s high initial charges.
While deciding between the two, however, investors should weigh in the much better liquidity offered by mutual funds and the safety of the sum assured offered by insurance products, and make the choice based on need.
SEBI (Securities and Exchange Board of India) and IRDA (Insurance Regulatory and Development Authority) have been trying to make the respective products more cost effective. While the former has cut back on the front-end charge, the latter has capped the back-end charges.
With these changes in recent times, it may be necessary to understand the cost advantage while investing in these financial products.
To begin with, comparing a regular insurance product with mutual fund product is not an apple to apple comparison. However, with ULIPs, which account for 70-80 per cent of sales of insurance companies, having an investment strategy similar to mutual funds a comparison might help understand the characteristics of both investment options after the recent changes.
A quick check on the numbers to capture the return on investments suggests that insurance products’ returns are close to that of mutual funds if the tenor of the investment is 10 years and above. The internal rate of returns (IRR) of insurance products are marginally (20-30 basis points) lesser than those of mutual funds. We have made an assumption that investors apply directly for mutual funds, thus avoiding entry load charges (assuming no fee paid for the distributors). However, the risk cover provided by the insurer provides some cushion for ULIPs as the sum assured is protected from day one of investment.
Over a longer period of 15-20 years, ULIPs may offer returns that are 15-20 basis points higher than mutual funds. In 20-year plans too, there will be slight differences in yields based on the option selected by the policyholders.
There are two types of ULIPs that are currently available. Under type-I the sum insured or fund value whichever is higher is paid to the beneficiary in the event of death of policyholder, whereas type II has dual benefits; in the event of the death of policyholder the beneficiary will receive the fund value and the sum insured.
The type I policy will give higher yield compared with type II as life cover charge deducted on monthly basis will stop once the fund value is equal to sum insured. The premium that was directed towards risk charge will add up as an investment.
In type II, as the cover is provided till the policy term, yield on such products will be lower than type I as a result of continuing life charge.
To illustrate, assume an investor aged 30 years plans to invest Rs 1 lakh per annum in ULIP products for 20 years with sum insured of Rs 5 lakh. A similar sum is invested in mutual fund as well. Assuming both earn a 10 per cent return, the maturity value of the ULIP will be Rs 47.6 lakh with a yield of 7.7 per cent. The maturity value for the mutual fund will be Rs 46. 4 lakh with an IRR of 7.48 per cent. But if the investor opts for type-II ULIP, with a sum insured of Rs 25 lakh for the same premium and tenor, IRR works out to 6.87 per cent – 0.57 percentage points less than the mutual fund. But the positive aspect is that in the event of the policyholder’s death before policy maturity, Rs 25 lakh is paid along with the maturity value of Rs 43.2 lakh, making the plan more beneficial. The lower fund management charge of ULIP is likely to offset the initial charges.
Interestingly, the new guideline of 225 basis points cap on ULIP charges will not be of much benefit to policies with a tenor of 20 years and above. But it can save at least 50 basis points in policies that have maturity tenor of less than 15 years. However, the recent changes will be applicable only for non- guaranteed products (such as ULIPs). ULIPs also come with a guaranteed plan option.
The general perception is that mutual funds and a simple term insurance is a more cost effective option. Assume an investor aged 30 plans to invest directly a sum of Rs 1 lakh per annum in mutual fund for 20 years and if the scheme generates a return of 10 per cent post-charges, the maturity value will be Rs 46.40 lakh. If he prefers to buy a separate term cover for Rs 25 lakh, the entire premium outgo will be Rs 1.56 lakh for entire term where as if he buys type II ULIP from an insurer the outgo will be Rs 1.50 lakh. With the new regulation even type II policies may be attractive.
Methodology
For calculation, we assumed the total charges applied on asset under management at 2.17 per cent (Management charge, marketing and selling, among others) for a scheme with total asset under management (AUM) of less than Rs 700 crore. The reduction on yield based on charges on AUM and service tax is approximately 2.54 per cent (Rs 8.40 lakh and Rs 50,000 for AUM charges and service tax respectively).
If advisory fee is paid to distributors for utilising his service, it will further reduces the yield. Assume if you investor pays fees as one per cent of investment value maturity value likely to fall by Rs 63,000.
For example, if the fund earns 15 per cent, the net effective yield for the investors will be 12.4 per cent. If the scheme manages more than Rs 700 crore, yield is likely to go up by a few basis points due to reduced charge on a larger asset base. ULIP investors are likely to get yield of 12.75 per cent (net reduction yield inclusive of premium allocation charge, policy administration and mortality among others) inclusive of life cover.
The recent decision by the insurance regulator to cap the charges on insurance products may level the playing field, in terms of effective returns, between mutual funds and ULIPs.
We attempted a comparison of the two products, based on certain return assumptions once the new regime takes effect. The calculation shows that, assuming similar portfolio returns, ULIPs may manage a marginally higher effective return than mutual funds if the investment horizon is 10 years and above. If the investment is for a shorter term of less than five years, mutual funds emerge as a superior option to ULIPs due to the latter’s high initial charges.
While deciding between the two, however, investors should weigh in the much better liquidity offered by mutual funds and the safety of the sum assured offered by insurance products, and make the choice based on need.
SEBI (Securities and Exchange Board of India) and IRDA (Insurance Regulatory and Development Authority) have been trying to make the respective products more cost effective. While the former has cut back on the front-end charge, the latter has capped the back-end charges.
With these changes in recent times, it may be necessary to understand the cost advantage while investing in these financial products.
To begin with, comparing a regular insurance product with mutual fund product is not an apple to apple comparison. However, with ULIPs, which account for 70-80 per cent of sales of insurance companies, having an investment strategy similar to mutual funds a comparison might help understand the characteristics of both investment options after the recent changes.
A quick check on the numbers to capture the return on investments suggests that insurance products’ returns are close to that of mutual funds if the tenor of the investment is 10 years and above. The internal rate of returns (IRR) of insurance products are marginally (20-30 basis points) lesser than those of mutual funds. We have made an assumption that investors apply directly for mutual funds, thus avoiding entry load charges (assuming no fee paid for the distributors). However, the risk cover provided by the insurer provides some cushion for ULIPs as the sum assured is protected from day one of investment.
Over a longer period of 15-20 years, ULIPs may offer returns that are 15-20 basis points higher than mutual funds. In 20-year plans too, there will be slight differences in yields based on the option selected by the policyholders.
There are two types of ULIPs that are currently available. Under type-I the sum insured or fund value whichever is higher is paid to the beneficiary in the event of death of policyholder, whereas type II has dual benefits; in the event of the death of policyholder the beneficiary will receive the fund value and the sum insured.
The type I policy will give higher yield compared with type II as life cover charge deducted on monthly basis will stop once the fund value is equal to sum insured. The premium that was directed towards risk charge will add up as an investment.
In type II, as the cover is provided till the policy term, yield on such products will be lower than type I as a result of continuing life charge.
To illustrate, assume an investor aged 30 years plans to invest Rs 1 lakh per annum in ULIP products for 20 years with sum insured of Rs 5 lakh. A similar sum is invested in mutual fund as well. Assuming both earn a 10 per cent return, the maturity value of the ULIP will be Rs 47.6 lakh with a yield of 7.7 per cent. The maturity value for the mutual fund will be Rs 46. 4 lakh with an IRR of 7.48 per cent. But if the investor opts for type-II ULIP, with a sum insured of Rs 25 lakh for the same premium and tenor, IRR works out to 6.87 per cent – 0.57 percentage points less than the mutual fund. But the positive aspect is that in the event of the policyholder’s death before policy maturity, Rs 25 lakh is paid along with the maturity value of Rs 43.2 lakh, making the plan more beneficial. The lower fund management charge of ULIP is likely to offset the initial charges.
Interestingly, the new guideline of 225 basis points cap on ULIP charges will not be of much benefit to policies with a tenor of 20 years and above. But it can save at least 50 basis points in policies that have maturity tenor of less than 15 years. However, the recent changes will be applicable only for non- guaranteed products (such as ULIPs). ULIPs also come with a guaranteed plan option.
The general perception is that mutual funds and a simple term insurance is a more cost effective option. Assume an investor aged 30 plans to invest directly a sum of Rs 1 lakh per annum in mutual fund for 20 years and if the scheme generates a return of 10 per cent post-charges, the maturity value will be Rs 46.40 lakh. If he prefers to buy a separate term cover for Rs 25 lakh, the entire premium outgo will be Rs 1.56 lakh for entire term where as if he buys type II ULIP from an insurer the outgo will be Rs 1.50 lakh. With the new regulation even type II policies may be attractive.
Methodology
For calculation, we assumed the total charges applied on asset under management at 2.17 per cent (Management charge, marketing and selling, among others) for a scheme with total asset under management (AUM) of less than Rs 700 crore. The reduction on yield based on charges on AUM and service tax is approximately 2.54 per cent (Rs 8.40 lakh and Rs 50,000 for AUM charges and service tax respectively).
If advisory fee is paid to distributors for utilising his service, it will further reduces the yield. Assume if you investor pays fees as one per cent of investment value maturity value likely to fall by Rs 63,000.
For example, if the fund earns 15 per cent, the net effective yield for the investors will be 12.4 per cent. If the scheme manages more than Rs 700 crore, yield is likely to go up by a few basis points due to reduced charge on a larger asset base. ULIP investors are likely to get yield of 12.75 per cent (net reduction yield inclusive of premium allocation charge, policy administration and mortality among others) inclusive of life cover.
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