INVESTOR FRIEND: June 2008

Monday, June 30, 2008

Save tax through investments

As an incentive for making savings and enhancing the public investment, the IT Act provides various options of investment to save taxes.
Under section 80C, individuals and HUF are allowed a deduction up to Rs. 100,000 on certain specified amounts paid or deposited towards –
·Subscription to the units of approved mutual funds
·Contribution to Provident Fund
·Life Insurance Premium
·Contribution to Approved Superannuation Plan
·Fixed deposit of minimum 5 years with scheduled banks, etc.
·Repayment of principal amount of Housing Loan.
·Subscription to any such security of the Central Government or any such deposit scheme as the Government may specify by notification in the Official Gazette
·Subscription to any National Saving Certificates (VII issue)
·Subscription to any such deposit scheme of:
(a)a public sector company which is engaged in providing long-term finance for construction or purchase of houses in India for residential purposes; or
(b)any authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both,
as the Central Government may, by notification in the Official Gazette, specify in this behalf;
·As tuition fees (excluding any payment towards any development fees or donation or payment of similar nature), whether at the time of admission or thereafter:
(a)To any university, college, school or other educational institution situated within India;
(b)For the purpose of full-time education of two children.

Save tax through investments

Cement shares hit 52-week lows

Slump in the demand for cements due to a rise in interest rates and on aggressive monsoon across the country dragged cement stocks to their new 52-week lows on Monday. Margins of cement companies are getting affected due to the rise in raw material prices, Government intervention and rising inflation, said market men.
As these companies cannot pass on the extra burden to the consumers it is further affecting their margins due to which most broking houses have either given a neutral or a sell order to the clients holding cement stocks, added market men.

Homeowners struggle to keep up with rate hike

Over the last four years interest rates on home loans have been steadily increasing and while income earners in all age groups have had to pay a steep price for their home investments, it is people in their 40's who have been the hardest hit.
From 7 per cent to 12 per cent - that is the leap in Rama Kirpal's interest rate on her home loan in just 6 years. “We started with an EMI of Rs 15,000 but now I pay almost Rs 21,000 every month. Had we taken the loan when we were young or newly married then our EMIs could have spread over longer period. I have taken an education loan for my son who studies abroad and now we don’t know how to manage,” said Rama Kirpal, a school teacher.
Increasing interest rates mostly affect such borrowers who take home loans in their forties because banks refuse to relax the tenure for such customers leaving them with no option but to pay higher EMIs with every interest rate increase.
Over the last 10 years, home buyers in Delhi have become much younger. The average age has fallen from 45 to 32.
Banks allow these younger clients to extend the duration of their loan for no extra cost but older clients who are closer to retirement don't get the same option.
So Rama has transfered her loan several times from one bank to another. But banks charge a hefty penalty when you settle with them ahead of schedule with the help of a new bank. “We ended up paying 2.25 per cent as pre payment charges, which translated into Rs 30,000 for LIC and almost the same amount when we shifted from ICICI bank to SBI,” said Kirpal.
So as interest loans keep rising, what is an older home owner to do? Experts say instead of transferring loans to new banks, use savings if possible to make payments on time.
“Whatever extra amount one has saved and kept as fixed deposit or in the capital market should be used to return the loan,” said Malay Ray, Business Head, DCM Services.
Thus the interest rates hike will cost Kirpal a little more every month than she had originally bargained for

Combo on offer

Take a look at funds that offer a combination of tax savings and pension after retirement
टेक अ लुक अत फुन्ड्स ठाट ऑफर अ कॉम्बिनेशन ऑफ़ टैक्स सविंग्स एंड पेंशन आफ्टर रेतिरेमेंट

If you thought equity-linked savings schemes (ELSS) were the only mutual fund (MF) products you could invest in to save tax under Section 80C, here’s a surprise. Mutual fund pension plans, targeted towards your retirement corpus, can also help you in your tax planning. These are debt-oriented balanced funds that take equity exposure of up to 40 per cent (as opposed to 65 per cent equities in regular balanced funds), while keeping the remaining in ‘safer’ debt instruments.
Currently, there are two MF pension plans on offer—Templeton India Pension Plan (TIPP) and UTI-Retirement Benefit Pension Fund (UTI RBPF). Both these schemes offer section 80 C tax benefits.
For instance, if your taxable income is Rs 3 lakh, and if you invest Rs 1 lakh in TIPP or UTI RBPF, your taxable income comes down to Rs 2 lakh. As these schemes target your retirement, they mandate that you stay invested till the age of 58. Early withdrawals attract a high exit load. Of the two, we suggest you take a look at TIPP.
Consistent performance

Sunday, June 29, 2008

'IT companies face infrastructure problems in small cities'

IT and IT enabled services (ITES) companies, which are planning to make investments in small cities, face serious infrastructure problems there, said a top industry official here on Saturday. Speaking at an IT conference 'SEZ-India 2008' organised by MMG Worldwide here, BPO major FirstSource's infrastructure and administration vice-president Nakul Subramanyan said: "Even the basic building design is not very conducive to set up a unit. The structures are not convenient for housing facilities like air conditioning vents, service shafts and other things." He said the major challenge faced by IT and ITeS units in Tier II and III cities was the less availability of grade A and B buildings. Nearly 80 per cent of the commercial space absorption in the country is by the IT and ITeS units. According to Subramanyan, IT and ITeS units have taken around 130 million square feet commercial space and this is expected to go up further. He added that climate change was another major challenge for real estate developers as they have to change the designs and construction models. According to Raghypathy Vaidyanathan, facilities head of Cognizant Technologies, the issues related to work environment, employees' work convenience are also important as many European companies are now outsourcing their work to India.

'IT companies face infrastructure problems in small cities'

Saturday, June 28, 2008

Uncertainties in the realty sector are windows of opportunity for those looking to buy a house of their own. Here’s how

Bad Times Can Be Good Times
After the stockmarket turmoil started in the first half of January this year, realty experts, for the first time since 2003, began predicting a possible correction of 20-25 per cent in capital values in the real estate sector, especially in areas where speculative interest was very high. This has unnerved investors with very strong positions in the sector.
“The correction of 20-25 per cent has already happened in many markets. A further softening may happen, even in markets with genuine demand,” says Sanjay Dutt, joint managing director, Cushman & Wakefield India, a real estate consultancy. “The next 3-6 months are a brilliant opportunity for those looking to buy a house.” What is bad news for investors therefore, translates into good news for end-users. “This is the ideal time to consolidate investments to create liquidity and hunt for opportunities,” says Dutt.
But before we look at strategies to cobble together the down payment, it’s important to understand how the realty market—especially the residential property market—can behave going forward. Which way will prices move? “I would not rule out a correction of 10-15 per cent in key markets from present levels. This is the minimum, it could be much more,” says Dutt.
Many factors govern the movement of capital values. To begin with, most experts believe that capital values have peaked. There is also a liquidity crunch in the market. Developers are finding it increasingly difficult to raise debt. Investor-confidence has taken a hit from the general expectation of an economic slowdown.
However, the most important factor that impacts the sector is inflation. In fact, when inflation touched 6.68 per cent (for the week ended 15 March), the finance minister spoke of sacrificing some growth as a control measure. If inflation continues to rise, the regulator will go out of its way to control it. “If interest rates increase further, it will put the housing sector under severe threat,” says Dutt.
Additionally, the lull in the real estate market is expected to last for all of 2008. In many places, it may extend to two-three years.
How would you benefit? Most realty investors took their positions in the hope of booking profits on a later date. However, with capital values expected to correct, instances of capital appreciation are very rare. “When investors realise this, they will be ready to cut their losses, especially as capital values may soften further,” says Dutt.
This is where homebuyers can benefit. They should look for investors who want to pull out of their investments. For this, you will have to do some planning and also deal with sellers, property brokers and even developers.
The planning process. The first step is raising the down payment, also called margin money. When you buy a house on loan, you are usually required to raise 15 per cent of the cost on your own. If you have a good credit profile, the lending institution may reduce this amount to only 10 per cent. The lending institution puts in the balance amount.
There are five things you can do to raise the down payment without depleting your investment portfolio too much.
Rationalise insurance cover. Even now, most people buy insurance to save on tax. We also tend to buy products pushed by insurance agents, such as moneyback, endowment and unit-linked insurance plans, rather than what we need. As a result, we end up paying a high price for comparatively low cover. If you have such insurance products, you could surrender them in favour of a term plan.
“This way you can get a higher cover at a much lesser cost,” says Veer Sardesai, a Pune-based financial planner.
For instance, endowment policies of Rs 20 lakh for a 25-year-old and a 35-year-old for 20 years would cost Rs 92,570 and Rs 95,730 per annum, respectively, excluding service tax. In comparison, a term policy for a 25-year-old and a 35-year-old would cost just Rs 5,290 and Rs 7,010, respectively, excluding tax.
You can divert these savings towards the down payment.
Liquidate debt products. If you have bank fixed deposits (FD) and post office schemes like Time Deposits, liquidate them as the post-tax returns from such instruments are very low. With inflation hitting 7 per cent (for week ended 22 March 2008), the returns would be further minimised. On a 8.5 per cent bank FD, the post-tax return for someone in the 30.6 per cent tax bracket would be 5.87 per cent. With inflation at 7 per cent, the returns would be negative.
Moreover, the returns on such instruments are lower than the effective cost of borrowing. For example, if you take a home loan at 10.25 per cent for 15 years, the effective cost of borrowing will be 5.10 per cent, thanks to tax benefits on interest and principal repayments.
Have one bank account. Close all accounts but one (ideally the oldest one, as the length of credit history impacts your credit score). Take out all the money, except the emergency corpus, and use it for down payment.
Sell some gold. If gold is a part of your portfolio, look into cutting down that exposure a bit. Gold prices have gone up around 47 per cent between August 2007 and March 2008. You can divert the profits towards the down payment. “However, make up for this shortfall as soon as possible,” suggests Sardesai.
Touch these last. Well-chosen stocks and equity funds have the potential to deliver high returns over the long term. Ideally, you shouldn’t touch them. But, if some holdings have already exceeded your return expectations, consider selling them to raise the money. In fact, use each market rally to clean out your portfolio of the losers and selectively book profits in some well performing stocks, if you still need the money.
Steer clear. There are some instruments, including your provident fund, that you should not touch at any cost. Let’s face it, most of us do not replenish withdrawals that we do make from these funds. Also, while liquidating assets, do consider the potential redemption loss.
How much should you borrow? Try and raise as much down payment as you can. To ensure that your EMI does not become a financial burden, follow this formula: Check the size of the loan you can service with an EMI of 40 per cent of your net salary. Then work out the worth of all your assets, including the house you will buy, and take 50 per cent of that. The lower figure of the two should be the size of the loan you take.
“If you are not able to find a house of your choice in that budget, settle for a smaller house (not a bigger one, which could stretch you financially in the future),” says Gaurav Mashruwala, a Mumbai-based financial planner.
Which property to look for? The best option would be a ready-to-move-in property as the risks in such cases are the lowest. However, if you opt for an under-construction property, do not commit to a project where the development is not taking place or where construction is slow or there is no clarity on infrastructure around the project.
Identify properties with a number of apartments on sale. There is room for better negotiation in these cases.
Last, but not the least, bargain hard. Due to uncertainties about the future, some sellers may be ready to take a cut on the quoted price.
Towards The Base Amount
To collect the 10-15 per cent of the cost of the house you can take the following steps:
Rationalise your unnecessary life insurance cover. Surrender insurance plans like endowment or moneyback, and opt for a term plan.
Liquidate debt products, especially those where the returns are lower than the effective cost of borrowing.
Close all accounts except the oldest one. Pull out all the money except emergency funds.
Reduce exposure to gold for the time being

Eat nuts to prevent asthma

Eating a healthy diet including plenty of fruits and nuts could help protect children from respiratory allergies and asthma.
This benefit is thought to be linked to the vitamins and antioxidants they contain. Eating oranges, apples, tomatoes and grapes each day was shown to have a protective effect against wheezing and allergic rhinitis, according to a study in the international journal of respiratory medicine Thorax.
Similarly, nuts are rich sources of vitamin E and those who eat them at least thrice a week are less likely to wheeze. Vitamin E is the body's main defence against cell damage caused by free radicals.
Nuts also contain high levels of magnesium, which was earlier shown to protect against asthma and boost lungpower.
Scientists were curious to know why children in some parts of Britain get asthma while others in places like Crete do not.
Experts from the National Heart and Lung Institute in Britain, the University of Crete, Venezelio General Hospital in Crete and the Centre for Research in Environmental Epidemiology in Barcelona looked at the incidence of asthma symptoms, such as wheezing, and of allergic rhinitis, caused by dust mites or pet allergies.
The researchers assessed the diet and health of almost 700 children living in rural areas of Crete, where such conditions are rare and found those with a diet rich in fruit and vegetables were protected against both conditions.
The research, reported in the online edition of BBC News, found 80 per cent of the children ate fresh fruit and over two-thirds of them fresh vegetables at least twice a day.
"The results of this study add to the existing evidence which indicates that a healthy diet can play an important role in the control of asthma symptoms," Leanne Male, assistant director of research at Asthma UK, was quoted as saying.

Eat nuts to prevent asthma

Unsafe Deposits

NBFCs may not be able to accept deposits
To ensure that depositors’ interests are well-protected, even away from the regular banking channels, the Reserve Bank of India (RBI) is considering a proposal to gradually weed out deposit-taking non-banking financial companies (NBFC).
The caretaker. Factors forcing the RBI’s hand are the increasing concerns being voiced that the public deposits are not secure in NBFC hands. This is clear from the fact that the RBI does not accept any responsibility as far as repayments of public deposits by an NBFC are concerned. Therefore, in case a NBFC defaults on repayment, all that the depositor can do is approach the Company Law Board or a consumer forum, or file a civil suit.
The supporter. V. Leeladhar, deputy governor, RBI, says: “The RBI is looking to further strengthen the NBFC sector so as to help it grow. It had given them an option to voluntarily move out of public deposits acceptance activity. In case an NBFC voluntarily chose to get out of public deposits, the RBI would help the NBFC.”
The followers. That NBFCs are on a sticky wicket, is clear from the fact that their number has fallen from 710 at the end of June 2003, to 376 at the end of March 2008. V. Ravi, chief finance officer, Mahindra Finance, says: “We have stopped taking deposits more than five years ago.” Other companies are joining this list.
A Tata Investment Corporation spokesperson explained: “We are now an investment company and our major source of income consists of dividend income and profit on sales of investments.”
In short, NBFCs will now have to depend on alternate sources of funds, among which could be direct investments, insurance, and mutual funds.
The innovators. The real effect of the proposal would, however, be seen in residuary NBFCs, which are finance companies that depend exclusively on public deposits. For example, Kolkata-based Peerless is converting itself into a financial product distribution entity, as per the notice posted on its website.
The RBI is looking to protect the public’s interest, the only question is whether the NBFCs will manage to adapt to the change?

Nano to hit showrooms by Durga Puja

Tata Motors said its ambitious Nano project was facing cost overrun but maintained the Rs one lakh car could be rolled out from its Singur facility by Durga Puja.Company Managing Director of the company Ravi Kant, who met West Bengal Chief Minister Buddhadev Bhattacharjee at Writers' Buildings here, told reporters that the entire project had been reworked at the plant site at Singur due to floods last year which had led to the cost escalation."We have already sunk in Rs 2000 crore", Kant said, adding earlier the project cost was pegged at Rs 1700 crore.Stating that Tata Motors was fully committed to the Singur project, Kant said if everything went well as planned, then the Nano car would be rolled out from the plant during Durga Puja."We hope to start trial production during July or August" he said.Asked whether there was a possibility of Nano being rolled out from any other plant of Tata Motors, Kant said, "Nano will be produced out of West Bengal".Kant had visited the Singur plant yesterday to review progress and held long discussions with suppliers and vendors.

Drinking 'has negative effect on kids'

Parents, beware! Guzzling alcohol at home "to escape" from depression or tension could have a negative effect on kids, irrespective of the amount of the drinks, a new study has revealed. In their study, researchers in Philadelphia have found that children of mothers who drink are much more averse to the smell of alcohol than others, regardless of the amount of the drinks the mothers consume. The researchers divided 145 children aged five to eight years into two groups according to whether their mothers reported using alcohol to escape from feelings of tension and depression. The children were presented with two odours and asked to pick the one they preferred -- one of the odours was always beer and the other was either an odour that the children had previously identified as pleasant, such as chocolate or odour previously identified as unpleasant, such as coffee, cigarette smoke or rotten food. The researchers found while all the children chose the pleasant odours over beer, those whose mothers drink to escape were more likely to choose the unpleasant odours in preference to the smell of beer.

Friday, June 27, 2008

Leave your worries behind

Get travel insurance to ensure safe holidays
The most frequently asked question by families going on an overseas holiday is whether to take a travel insurance or not. If you are flying to countries like the US or any western European country, you don’t have a choice as it is must. However, if you are going on a vacation to destinations in South or South-East Asia, Africa, South America, Western and Central Asia, travel insurance is not mandatory.
Need for travel insurance. Most people going on a holiday abroad do not take insurance as they are visiting relatives or friends and think the hosts can take care of them. But this is not the best way to cover risks. Also, there are various benefits to taking travel insurance. Not only does it take care of your medical expenses and repatriation if you fall ill, but also covers you against personal accident, loss of checked baggage, loss of passport, personal liability, cash-less service and trip delay.
Various options. Travel insurance products come with various options and you can choose the one that meets your needs. If you think that you and your family would require a travel insurance to cover only unforeseen hospitalisation expenses in an alien country, then you can choose a plain vanilla cover. Here, the premiums would be much lesser than if you choose to be insured against other losses as well.
Cost factor. Here is a ballpark figure. Travel insurance premium is likely to be less than Rs 2,500 for a family of four for a 14-day trip for a basic plan that covers risks like medical expenses, personal accident, loss of checked baggage or passport and cashless service. If you travel as a family, insurance companies provide discounts on the overall premiums.
The premium depends on the age of the travellers and the duration of the trip. But there are some exceptions. For example, if the trip is to the US, then premiums are double than to elsewhere in the world since medical costs are high in the US.
Even if the chances of you meeting with an accident or losing your baggage or your trip getting delayed are small, having insurance will save you from endless frustration if such a mishap does occur. Having an insurance plan can make your holiday that much easier.
It takes about a week to 10 days to get the policy documents. You can also buy travel insurance online. If you have arranged your trip through a dedicated tour and travel company, travel insurance usually comes at a discount, depending on the tie-up between the tour operator and the insurance company.
If adventure-based activities like bungee jumping, parasailing or deep sea walking are going to be a part of your holiday, then all the more reason to get insurance. Although insurers offer cover for such activities, the premiums are much higher as the risk associated with such sports is also high.
A word of caution. Most people opt for insurance for $50,000 or $1,00,000 or an even larger sum to cover all risks. However, in the event of loss of checked baggage or passport the claim amount to be paid is capped at $100 to $500 (depending on the company), irrespective of the sum insured.
Check list. Before you sign on the dotted line be sure to get answers to these questions. How much is the sum assured? What is the exact nature of the insurer’s payout? Insurance companies have specific payout for a particular claim and may not pay the entire sum insured for it. Check whether your policy covers medical expenses and repatriation. Check the claim payout for loss of checked baggage or passport. Be sure to understand the procedure to follow in order to make a claim. Most importantly, keep the toll free number of the company for any emergency. Happy holidays!

nflation rises to 11.42%

Pushed by higher prices of food articles including milk, cereals, tea, edible oils and some manufactured items like soaps and detergents, inflation soared to 11.42 per cent for the week ending June 14. The inflation number was higher by 0.37 p er cent over the figure recorded during the previous week.
Inflation was 4.13 per cent in the corresponding week a year ago. At 11.42 per cent, it has breached a high of 11.11 per cent witnessed on May 6, 1995, but was still below 16.9 per cent recorded in March that year.
During the week, the prices of tea went up by three per cent, milk by one per cent, sunflower oil by four per cent, vanaspati by two per cent and imported edible oil, salt mustard oil by one per cent each.
At the same time, items of daily use like soap became expensive by eight per cent, detergents by nine per cent, hair oil by one per cent. Besides, fuel items especially lubricants became dearer by 19 per cent, while prices of steel products like wire ro pes and steel wire shot up by 36 and 25 per cent respectively.
Galloping inflation may further prompt government and the RBI to take steps to tame price rise

nflation rises to 11.42%

Thursday, June 26, 2008

Taxation - Planning

Calculate your Deductions
You can reduce your taxable income by investing in specified instruments. You can work that out in 15 minutes

“If you beat us in a game of cricket, we will forgive your tax for three years. If you lose, you’ll have to pay triple the taxes.”
This was the condition the British administrator put before Bhuvan (Aamir Khan) in the film Lagaan. The Lagaan episode holds true even for you! Some of your tax is waived if you invest in specified areas. This is the crux of allowing deductions from your gross total income. The smaller the income on which tax is levied, the lesser is the tax. Under Section 80C of the Income Tax Act, you can reduce your total income by up to Rs 1 lakh by making specified investments. There are other sections of the Act as well wherein you can reduce your total income. These investments are mentioned below.
section 80C products
Bank deposits. Term deposits in a scheduled bank with a minimum period of five years notified under the Bank Term Deposit Scheme, 2006, not only give you a fixed and assured return (around eight per cent), but also a tax advantage. Term deposits are a one-time investment and there is no commitment to pay in the future. But remember that the entire interest income from such deposits is taxable. State Bank of India (SBI) and HDFC currently offer 8 and 7.75 per cent interest, respectively, over five years, while ICICI Bank offers 8.25 per cent.
Employee Provident Fund (EPF). This is a forced saving for employees and helps them save for retirement. Every month, 12 per cent of your basic salary is deducted and put into a kitty maintained either by the government or your company’s trust. The contribution currently earns a tax-free return of 8.5 per cent. The rate of return is fixed by the government every year in March-April. Your employer also pitches in with 12 per cent of your salary every month. Of this, 8.33 per cent is diverted to your pension fund, the remaining amount is put in the provident fund.
Public Provident Fund (PPF). This is a self-directed investment option. It is essentially a 15-year investment that gives a tax-free return of eight per cent as of now. The rate is subject to change. Investments of Rs 500-70,000 qualify for a tax deduction under Section 80C.
Home loans. The total amount eligible for deduction is up to Rs 1 lakh a year for the principal amount.
Children’s fees. Parents can claim a deduction for tuition fees for a maximum of two children within the overall limit of Rs 1 lakh. However, payment towards development fees or donations to the institution are excluded.
National Savings Certificates (NSC). These are for those who are less averse to risk. This government-backed security is available at post offices and gives an interest rate of eight per cent, compounded half-yearly as of now. The interest is entirely taxable. NSCs are good for those in lower tax slabs with an investment horizon of six years.
Equity-linked savings schemes (ELSS). These are mutual fund products and carry market risk. Like all tax saving options, these plans have a lock-in period of three years. Therefore, it makes sense to go in for funds with good track records rather than the new fund offers, especially in this category. Choose the ‘growth’ option for an optimal investment (see Get Tax Sops, Reap Returns, page 38).
Life insurance. Your life cover premium is eligible for a tax deduction up to Rs 1 lakh under Section 80C. If the premium paid in any of the years is more than 20 per cent of the sum assured, then deduction will be allowed only up to 20 per cent of the sum assured. This applies to all term, endowment and unit-linked plans.
Pension plans. If any investment is made under this section, then the qualifying amount under Section 80C stands reduced to that extent. Investment in insurance and mutual fund pension plans also comes under this section with an overall limit of Rs 1 lakh.
other deductions
Health insurance. Under Section 80D, medical cover premium is tax-deductible up to Rs 10,000, with an additional deduction of up to Rs 5,000 if the policy is in the name of a senior citizen (65 years or older) and the premium is paid by him. If someone below 65 buys a plan for his dependents, he can avail benefit upto Rs 15,000.
Educational loan. The interest on loans taken for higher education are also eligible for deduction from your total income under Section 80E. There is no monetary ceiling on the interest you can claim as a deduction. The loan must have been taken from a financial institution or an approved educational institution. Remember, repayment of loan or interest on loans taken by parents for higher education of their child is not eligible for deductions.
Charity. To avail tax benefits under Section 80G, donations must be made only to specified trusts. The tax breaks vary according to the trust to which you have donated.
Medical treatment. Any expenditure for the medical treatment (including nursing) of a handicapped person, training and rehabilitation of a person suffering from a permanent physical disability (including blindness) or from mental retardation, qualifies for a deduction under Section 80DD upto Rs 50,000. A life insurance policy bought for the benefit of such a handicapped person is also eligible for this benefit up to Rs 50,000. In case the disability is severe, the claim can go up to Rs 75,000.
What to do. US radio comedian Fred A. Allen once said, “An income tax form is like a laundry list—either way you lose your shirt.” The law, indeed, takes its own course, and cares little whether you are left with your shirt on or not. But the law just became better this year, by removing caps on investments in the avenues mentioned above, except for PPF, where deductions are available only up to Rs 70,000. Thus, investors can invest in line with their risk appetites and needs.
Investments in tax instruments should never be done merely to save taxes. The value derived through liquidity, returns and security over the next few years should guide your investment decision.
The Income Tax Act does not treat all kinds of savings uniformly—the taxability of contributions, accumulations and withdrawals differs from one instrument to another. In a PPF scheme, for instance, you can avail deductions, and the interest and the money you get on maturity is not taxed. This is the ‘exempt-exempt-exempt’ (EEE) method of taxation, since all three stages—contribution, accumulation and withdrawal—are exempt from tax.
On the other hand, while contributions to, and accumulations in pension plans are not taxable, lump sums withdrawn or periodical pension are taxed in the year of receipt. This is the ‘exempt-exempt-tax’ (EET) method of taxation.
Don’t forget to keep the records of your investments and tax deduction certificates, since you will have to attach them with your returns.
If you think the tax rates are skewed, American explorer Jeff Rich will give you company. He said: “We are all are equal, but some pay higher tax rates than others.” And you thought tax was invented to make life fair for everybody.

Oil is not yet fully priced in stock market’

Markets are battered. Thanks to the two-digit inflation and three-digit oil prices, Sensex has lost 33 per cent value from January highs. “While most of the fears have already been priced in, if oil rises, it can spook the markets again,” says Mr Mitesh Mehta, Head (Institutional Sales), Enam Securities Direct.
The Business Line caught up with him on the sidelines of a presentation on equity markets, which also marked the official launch of wealth management and privilege client services for high net-worth investors in Chennai. Here is his take on the way forward for stock market, inflation and specific sectors.
Outlook on markets
Well, to be very honest, there is no a sure-shot call from here. But I think we have seen most of the correction taking place in the market. So basically now, time is the issue — from when markets start moving up. We feel that most of the negatives are priced in. But, if oil really blasts out from the current levels, markets may go down. We need to wait for a while to take a decisive view.
On inflation fears
The market has already factored in (inflationary pressures)and it may not present a further shock, which may pull the markets further down. While markets have corrected substantially because of inflation and oil, we feel oil is not yet priced in fully. So, basically, the focus should be more on the oil side.Some downside left?
It will be difficult to give you a number such as 10 or 15 per cent. We really don’t know how far the oil is going to go. If oil goes above $150 a barrel or even higher, we might have a serious correction on our hands going forward. We think the (stock) markets are negatively correlated with oil.Investors should…
The best advice for an investor, who is looking at the market with a one-year perspective, would be to bet 30-40 per cent in the equities. It’s a good time for them to shop. He/she should have money so that they are prepared to buy more if the markets correct further from here. We would advice investors to buy stocks, which are available at great prices. We think the entry point is crucial. What is good is no more an issue, but the price sure is.Index or companies?
The market is in such a phase that to give a Sensex bet is going to be difficult. Being optimistic, 15-20 per cent upside from current levels should make me happy. Individual companies are a better play. Sensex would have lot of IT and banks which have lost value. FMCG, on the other hand, even if does well will not show up so much on the benchmark. Stock-picking is advised, rather than a Nifty or for that matter, Sensex.
At this point of time, large-caps look a better choice. The others (mid sized companies) would have problems in raising money. Servicing their debt at 14-16 per cent (per year) would be a big issue for smaller companies. If one’s call goes wrong, one would easily exit from large-caps. In mid-caps and small-caps, the exit option is limited, even when it comes to booking profits.
Preferred sectors
We think investors can get good bargains in certain sectors. Banks have been battered very badly and provide good opportunity for entering. For contrarians, the best bet would perhaps be cement, which as we know is presently viewed with pessimism. I would like to stay away from real estate, since there are a lot of execution issues and properties would be difficult to sell. IT sector is more related to the dollar-rupee. IT has a lot of overheads and a global slowdown could affect them badly. As a business, I am not extremely bullish on them.
Banks, power, auto?
Bet more on the PSU banks. Exposure to real estate and agricultural loans is a crucial factor to look at. Higher exposure enhances risks of such stocks. Power has been de-rated and is expected to stay like that for a while. For auto, I don’t think people would stop using cars because of fuel. Input prices have risen, but they will be passed on as we have seen.
Pharmaceuticals
It appears to be a safe haven, but is fully valued. Pharma as a sector is valued at 20 price-to-earnings multiple, while companies from other sectors are available at 5-10 times. Plus, why would one want to look at a sector with such high valuations, especially when a number of them have a lot of internal issues as well as concerns on sustainable growth? It’s more of a defensive play, but at this juncture looks less worthy of the premium that it demands.
On FII inflows
Dwindling fund inflows is a worry but I don’t see any other country challenging India’s position. As soon as all this noise goes down, we will see fund managers looking back at us with more interest. We will still grow by 8 per cent and money always chases growth. Globally, as soon as the dust settles down, the money can come in pretty fast.
8% growth still achievable?
I don’t think we will have a problem this year. If at all there is a problem, it might be next year, when the elections come up. In such times, a lot of important issues go out of the window

Good times continue for Aban Offshore

Aban Offshore has won a contract for the deployment of ‘Deep Driller 2’, its jack-up rig, for drilling three wells in offshore Malaysia. Contracted at a day rate of about $1,89,000, this order will earn the company over $17 million over a period of 90 days. This reiterates the strong demand environment for jack-up rigs in the near-term, since the day rates procured under the new contract are on par with the rates commanded under its contract with Chevron Offshore.
In December 2007, ‘Deep Driller 2’ had been deployed for use by Chevron Offshore at a day rate of about $1,90,000 for seven months. The new contract, which will come into effect as soon as the rig’s current contract lapses in July 2008, not only ensures a high-utilisation level, it also does away with any opportunity loss, which would have arisen, had the rig been left idle.Near-term demand
The sustenance of the firm day rates for ‘Deep Driller 2’ highlights that demand for jack-up rigs continues to be strong. Buoyed by a demand-supply mismatch, Aban has been able to command day rates in the range between $1,80,000- $2,25,000 for its rigs. Further, the company has also contracted the same rig for use by another operator after the 90-day period, when the new contract would lapse. The second contract for ‘Deep Driller 2’ has been procured for approximately $38 million for a period of 210 days. This translates into a day rate of about $1,80,000, which is over 4 per cent lower than the rate sealed under the first contract.Rates to taper
Day rates for jack-up rigs were expected to taper down over the medium term and the dip in rates secured under the second contract may be construed as early signs of the moderation in rates. An increase in supply of rigs over the next few years, in addition to the shift in focus towards deepwater offshore-spending may temper demand and this may reflect on day rates for jack-up oil rigs, which are primarily used for shallow water offshore drilling.

We love Rani Mukerji, but...

We love Rani Mukerji, a very talented actress in the Hindi film industry. But we wish she would pay as much attention to her outfits, as she does to her performances.
And we're not just talking real life here. Even in reel life, Rani doesn't seem to pay much attention to her fashion and figure.
Her dresses in her latest film, Thoda Pyaar Thoda Magic are getting worse from her previous onscreen disasters. Here's why Rani needs a stylist and pronto

We love Rani Mukerji, but...

Laughter Yoga: Laugh your way to good health!

It starts with some chuckles, grows into giggles and then launches into belly laughs. And, when mixed with yoga, it becomes 'laughter yoga' -- the fun way to reduce stress.
According to University of Michigan Health System fitness experts, laughter yoga -- part of a growing trend in parts of the United States, India and other countries -- can really make a difference in your overall health.
Not only is it fun to laugh, but laughter yoga (also known as Hasya yoga) can provide many health benefits: help to reduce stress, enhance immune system, improve cardiovascular function, and even tone muscle, the experts said.
Barb Fisher, a certified laughter yoga leader and the instructor of the laughter yoga class offered by the U-M Health System's MFit health promotion division, said that the students in their course group are re-learning something children already know instinctively: that laughter makes you feel better.
"Kids laugh about 400 times a day, and adults only about 15. Laughter is a gift that has been given to us to make us feel better," Fisher said.
Hasya yoga can provide many health benefits -- it serves to reduce stress, enhance the immune system, strengthen cardiovascular functions, oxygenate the body by boosting the respiratory system, improve circulation, tone muscles and helps with digestion and constipation.
"Studies have shown that 20 seconds of a good, hard belly laugh is worth three minutes on the rowing machine," Fisher said.
"However, that does not mean we want to stop doing all other exercises. It means that incorporating laughter yoga can add to the benefits we see from our regular exercise routine," he added.
Like more traditional fitness classes, laughter yoga requires a warm-up period. Since students can't necessarily start a class prepared to break out into deep laughter, they begin with the clapping and chanting mentioned above. Then they perform breathing exercises, followed by stretches and laughing games.
The students in Fisher's class have discovered the mental and physical benefits of these and other laughter exercises.
"The biggest effect that I've gotten from laughter yoga is what it's done for me mentally, and that it has lightened up my day and my week," says Deborah Slosber

Wednesday, June 25, 2008

Sensex seen set to sink below 13,000 soon

Technical analysts say no level has any sanctity any more and claim the bears are tightening their grip on the market

Look at a time frame of at least three years for equity investments

Credit market crisis — Lessons that the West can learn from India

Spectacular financial crashes have become far too common in the last 10-12 years. The Asian currency crisis, that hit Malaysia, Thailand, Indonesia, et al, the Long-Term Capital Management collapse, Barings Bank, Enron and WorldCom, Amaranth Advisors and, most recently, Bear Stearns, are well-known to discuss.
Beyond these, there are those who got away but had their unexpectedly high risk exposures exposed. Northern Rock, Bankers Trust, Citibank, UBS, Merrill Lynch and JP Morgan are all near-misses. India has been largely left unscathed — can there be possible remedies in this experience to avoid such upheavals?Main Culprit
Excessive leverage (too much debt compared to equity) is the common culprit in all financial market crashes – be it in 1929 (leverage by investment trusts) or 1987 and 1994 (leverage through collateralised debt and mortgage obligations and junk bonds) or 1998 (excessive leverage by LTCM and other hedge funds) or 2001 (leveraged bets on dotcoms) or 2008 (world-wide leveraged bets that US housing prices would not go down; and that interest rates won’t fall).
We laughed at South Korean chaebols that crashed under the weight of 500:1 leverages through combinations of low interest and crony-banking. From the vulnerability the banking sector has shown globally in the last two quarters, it is likely that the world’s major banks have leverage ratios in that range, if off-balance-sheet exposures to derivative instruments, investments in SIVs/SPVs, and negative exposures to yen-carry trades were to be accounted for.
Most of these innovations tend to create downside exposures to assets they do not own. And it remains hidden because off-the-books leverage through exposures to swaps and so-called Special Investment Vehicles are rarely disclosed; when disclosed, net exposures (not gross) to derivative contracts are disclosed cryptically in a note somewhere in fine print.
Gross exposures are relevant because in an endemic downturn, you can get hit on both sides – due to market price risk on one side, and counter-party risk (of the other party refusing to or being unable to honour his obligations) on the other.
While banks traditionally have higher leverage than other businesses, countries where banks either avoided, or were barred from investing in difficult-to-value derivatives, and consequently did not leverage excessively, have been left relatively unscathed. In India, only ICICI Bank has reported significant losses in the sub-prime crisis.
There is a strong case to limit total (including off-balance-sheet) leverage, because bailouts perpetuate a moral hazard. If taxpayers have to bail out commercial and investment banks (witness the US Fed’s intervention to protect Bear Stearns; and Bank of England’s bailout of Northern Rock), governments must impose tighter limits on risks banks can take. Two as yet unresolved risky leveraged exposures of global financial markets are:
Massive amounts of “carry trades” (short-term borrowings in “cheap” currencies used to make long-term investments in jurisdictions where returns are “higher”), mostly in Japanese yen; and
Mountains of debt raised by PE players.
Before the dust dies down on the sub-prime crisis, the world’s central bankers need to think of mechanisms to soften the global impact of the inevitable denouement of these exposures.
Financial innovation that insidiously creates overleveraged exposures needs to be tempered. Suggestions (such as The Economist made in a recent article) that attempts to curb financial innovation would do more harm than good need to be debunked.
All financial innovations should pass through strict regulatory filters — terms of structured notes/offerings have to fall within approved strictly defined categories, or be specifically approved.
This prevails in India, and is partly why, in spite of being more globally integrated than before in living memory, India remains stable and insulated from the recent goings-on in world markets.
India has managed political consensus in economic decision-making (in spite of the frictional forces inherent in a true democracy), maintained the strength of its currency within acceptable bounds to all interest groups, and managed inflation at home while growing at a blistering pace consistently in the last 7-8 years. Hence, it would seem that it is time for the West to take some lessons from India.Lessons to learn from India
Lending without moral hazard : In India, most lending is like a marriage between the borrower and the banker — until death do us part. In the West, thanks to securitisation, it is a marriage of convenience, or even a one-night stand. Banks in the West can — and almost always do — reduce exposure to any single client by “passing the parcel” — because a predominant portion of debt is structured in form of tradable debt securities.
This is good for a bank, but not good for the economy — a typical “Tragedy of the Commons”. The bank that floats an issue has no incentive to see that the borrower honours obligations till maturity, because very shortly, its exposure to that client gets reduced to near-zero.
This creates a moral hazard — “sub-prime” borrowers find it easy to raise money because of banks’ appetite for debt securities. With rating agencies being dependent on more issues, there is an in-built moral hazard there too, that exerts an upward pressure on ratings. This is why no bank now believes that AAA+ rated debt is really that.
Maternal Wisdom : To teach fairness, our mothers asked one child to cut the apple, and the other sibling to choose the piece. This effectively eliminated fights about who got the bigger piece.
Applying this principle to derivative offerings, one can force issuing bankers to not transfer till maturity the riskiest part of any securitised bond offering — called “nuclear waste” by Wall Street veterans. This could enforce honesty about riskiness of the offer, and circumspection in their structuring.
Avoid Turf Wars : In India, as in the UK, there have been no serious regulatory turf wars. Regulation in the US has been ineffective partly because structured notes and tradable debt securities with complex covenants often fall between the turfs of the CFTC and the SEC.
Buy Gold: Indians have bought gold for decades when the whole world was selling it. Privately owned gold inventory in India is largest in the world.
With gold touching record highs, the increase in its value has had a security-net impact. For decades, we saw gold as a poor investment, but thanks largely to our womenfolk and religious beliefs, Indians have ignored this and invested in gold. This is now paying off.
Live within your means : Indians have internalised the benefits of thrift; the average US citizen has never postponed gratification, and is now learning the ills of profligacy. Americans are being hit by several forces at once: fall in house prices, rising unwillingness of banks to extending “sub-prime” loans, their own free-spending habits, rise in oil and food prices, and increasing flight of jobs overseas.
Many American home owners are highly leveraged – even small rises in EMIs force them to default. They also fear bankruptcy less, because they can begin life anew. In India, a debt once incurred cannot be ducked.
Have less interlinked systems : Banks in the West have predominance of tradable securities that are heavily traded on their asset side. Asian banks have more non-transferable loans, which makes them “loosely coupled”. Western financial markets are “tightly coupled”; that is, systems are inextricably intertwined with no “play” to adjust exposures, and work very well when everything behaves predictably.
Unpredictable behaviour creates the financial equivalent of highway pileups. In India, these hardly used to happen because Indian drivers and bankers alike are more alert to the unexpected. Automated stop-loss limits and programme trading, inter alia, cause markets to slide incredibly fast. Indian stock markets are seeing that regularly nowadays – FIIs are carriers of this infection.
There is wisdom in this: tightly coupled, “efficient” markets are not necessarily good for long-term survival. India being more informally, and therefore, less tightly coupled, it gets more small hits but is capable of avoiding bigger crashes.
Finally, one prescription for India. Reject Fair Value Accounting
Fair value accounting (as against historical cost) causes volatility in income statements in a vain attempt to make the balance sheet look fair. An oversimplified example: a small restaurateur owns a shop (the major asset on its balance-sheet), and earns its income from, say, selling dosas.
The gyration in the shop’s fair value from quarter to quarter will cause dizzying percentage jumps and drops in reported earnings of his business, which makes no sense because the shop is where it is, it still houses the business that sells crisp, fresh dosas, and there is no real change.
Fair value accounting should be relaxed to exempt companies from marking-to-market those assets it intends holding indefinitely.
This will incentivise them to insulate their income statements from volatility, making reported earnings more predictable. It may be good for the Institute of Chartered Accountants of India to re-assess the concept of fair value accounting

Loans set to become dearer

Corporates and individual consumers, who are already bearing the brunt of high prices and input costs, could soon be paying more for their loans.
Interest rates are set to go up further with the Reserve Bank of India on Tuesday hiking both repo rates and Cash Reserve Ratio by 50 basis points each.
While the repo rate has been hiked with immediate effect to 8.50 per cent, the CRR will be hiked in two tranches, to 8.5 per cent on July 5, and to 8.75 on July 19.
The double-stroke anti-inflationary measures are expected to tighten the liquidity in the system, as the CRR hike would suck out around Rs 19,000 crore.
CRR is the proportion of deposits mobilised by banks and parked with the RBI for statutory requirement.
Banks do not earn any interest on the cash reserves. Repo rate is the rate at which RBI lends money to banks. Clear signal
Most bankers said they would have to take the cue from the RBI signal, which is very clear and on expected lines.
The last time RBI hiked repo rate was on June 11, by 25 basis points to 8 per cent. The CRR was last hiked in April 2008.
With inflation touching 11.05 per cent as on June 7, the highest in 13 years, the RBI had indicated immediate measures to combat inflation. In fact, the Governor, Dr Y.V. Reddy, had meetings with both the Prime Minister and the Finance Minister on Saturday.
In a statement issued late on Tuesday, RBI said, “At this juncture, the overriding priority for monetary policy is to eschew any further intensification of inflationary pressures and to firmly anchor inflation expectations.”
The hike in the repo rate, the second this month, is a definite indication to banks to hike lending rates, as it makes raising funds more expensive, said an analyst.Costs to rise
Mr T.S. Narayanasami, Chairman and Managing Director, Bank of India, said that both the cost of deposits and lending rates are set to rise.
“Banks will have to take a balanced view and examine the impact of inflation before loading an increase in interest rates so that their asset portfolio is not impaired. Banks will now have to live with lower net interest margins,” he said.‘Brakes on growth’
Mr D.K. Joshi, Director and Principal Economist, Crisil, said that the RBI had now slammed the brakes harder on the economy’s growth. “The RBI’s move is not aimed at reducing the current inflation rate, but more on stemming inflationary pressures which could have an impact in the future.
“Monetary measures can work with a lag of one year and this move could have a sharp impact on GDP growth next year. This year, GDP growth could be in the range of 7.5-8 per cent,” he said.
The increase in interest rates will, however, aid the appreciation of the rupee and improve interest rate arbitrage for foreign investors. However, post sub-prime crisis, the risk appetite of global investors remained low, Mr Joshi said

Tax collections up 43% in Q1

Even as oil marketing companies are reporting losses on rising crude oil prices, state-owned oil producer ONGC has emerged as the largest taxpayer in the country by paying as much as Rs 1,333 cr advance tax for the first quarter this year. Th e oil major had paid Rs 1,010 cr as advance tax during the same period last fiscal.
Belaying fears of industrial slowdown, the Government's revenue collections from direct tax such as corporate and income tax continued the growth momentum and was up by 43.45 per cent at Rs 49,411 cr during the April-June 21 period over the corresponding period last fiscal.
"The collection from corporate income tax and personal income tax as on June 21, 2008 is Rs 49,411 cr, exhibiting a growth rate of 43.45 per cent over previous year,'' said a Finance Ministry statement.
State Bank of India and steel major SAIL are also among the highest taxpayers. Despite rising interest rates, SBI's tax payments rose by about 32 per cent to Rs 663 cr for the first quarter this fiscal, against Rs 503 crore a year ago. SAIL also seems to be benefiting from rising steel rates as its advance tax payments stood at Rs 457 cr, against Rs 450 cr a year ago, said a Finance Ministry official.
The collection from corporate income tax stands at Rs 30,655 cr, growing by 39.81 per cent over previous year, while the collection from personal income tax stood at Rs 18,756 cr showing a growth rate of 49.82 per cent over the previous year.
The buoyancy in tax collection is significant considering the fact that refunds to the tune of Rs 10,810 cr have been issued till date at a growth rate of 33.7 per cent over previous year, the statement added

Tuesday, June 24, 2008

RBI hikes key rates by 50 bps

In a bid to check run-away inflation, the Reserve Bank of India (RBI) on Tuesday hiked both repo rate and CRR by 50 bps each.
In a statement the RBI said that the CRR rate would be hiked by 50 bps to 8.75 per cent in two stages.
In another move the central bank also hiked the repo rate by 50 bps to 8.5 per cent, the highest level since 2002.
On Monday the RBI Governor Y V Reddy indicated that the central bank was monitoring the inflation situation and would take the necessary steps whenever appropriate.
Repo rate is the rate at which banks borrow money from the RBI, while reverse repo rate is the rate at which RBI borrows from the commercial banks

TCS wins $11.5 million project

Software exporter Tata Consultancy Services on Tuesday said it has won a contract worth $11.5 million from the Uganda Revenue Authority to design and install an integrated tax administration system. The new system would manage all domestic t axes and duties for the Uganda Revenue Authority (URA), including income tax, value-added tax, withholding tax and other excise duties.
URA has received financial support from DFID of the United Kingdom, Netherlands, Belgium and Government of Uganda to fund this project. Under the project, a suite of applications would be developed for monitoring key activities of a tax administration l ike registration, returns, payments, assessment, tax-payer accounts, audit, compliance, objections, appeals and investigations.
"With our strong domain expertise in executing tax administration systems for various tax authorities across the globe, TCS will assist Uganda Revenue Authority in business process re-engineering, capacity building and change management to improvise and optimise the business process execution jointly with URA management,'' said Mr Mr N Chandrasekaran, Chief Operating Officer and Executive Director, TCS.
TCS shares closed at Rs 843.95, nearly 1.61 per cent down at the Bombay Stock Exchange

Sunday, June 22, 2008

INVEST IN MUTUAL FUND OR ULIP INSURANCE BY SIP

Simply put, investing via an SIP entails making regular investments (generally) in smaller denominations as opposed to making an one-time lump sum investment. The intention is to capitalise on the volatility in equity markets by lowering the average purchase cost. While few would dispute the utility that an SIP can offer, there is a flipside to the same as well. In this article, we discuss the pros and cons of SIP investing.
How an SIP helps…
1. Lowers the average purchase costPerhaps the single most important advantage offered by an SIP is the opportunity to lower the average purchase cost. This is achieved in periods when equity markets experience a turbulent patch. Since the investment amount for each installment is fixed, the investor gains by receiving a higher number of units. An example will clarify this better. Suppose the monthly investment installment is Rs 1,000 and the fund’s net asset value (NAV) is Rs 50; this will lead to 20 units of the fund being credited to the investor. However, in the next month on account of the volatile markets, the fund’s NAV falls to Rs 40. This will lead to a lowering in the average purchase cost; as a result, the investor will have 25 units credited to his account. In other words, an SIP can help investors benefit from volatility in equity markets.
2. Induces disciplined investingLack of disciplined investing is one of the major reasons for investors not achieving their financial goals. For example, often monies that are kept aside for investment purpose end up getting used for extraneous purposes. As a result, the investor is even further divorced from his goals. An SIP ensures that the investor continues to be invested in a disciplined manner and thereby stays on course to achieve his financial goals.
3. Lighter on the walletAn often heard excuse for not investing is lack of monies. SIP takes care of this problem by lowering the minimum investment amount. For example, while the minimum investment amount for a lump sum investment in a diversified equity fund could typically be Rs 5,000, for an SIP it can be as low as Rs 500. As a result, investing via the SIP route becomes lighter on the wallet.
4. Makes market timing irrelevantAlongwith cricket and movies, timing the market ranks as a popular pastime. Investors have an inexplicable urge for timing markets and trying to get invested when markets have bottomed out. It’s a different matter that timing markets to perfection and doing so consistently is beyond most investors. An investment via the SIP route makes market timing irrelevant. On account of the on-going investments, investors can afford to bid adieu to one of their favourite pastimes and concentrate on more pressing matters.
When an SIP won’t deliver…
1. In rising marketsAn SIP could fail to deliver on its proposition of lowering the average purchase cost, if equity markets rise in a secular manner. Such a scenario is fairly possible over shorter time periods. As a result, investing via an SIP could prove to be more expensive vis-à-vis a lump sum investment. Hence, the solution lies in opting for an SIP that runs over an appropriate time frame, say at least 12-24 months.
2. A directionless SIPBy a directionless SIP, we are referring to an SIP that is not a part of an investment plan or an aimless SIP. It should be understood that an SIP is not an ‘end’; instead, it is the ‘means’ to achieve an end. Hence starting an SIP in isolation is unlikely to be of too much help. Instead, the SIP should form part of an investment plan aimed at achieving a predetermined objective.
3. An SIP in the wrong fundInvesting via the SIP mode doesn’t improve the prospects of a wrong fund. A poorly managed fund stays that irrespective of the investment mode. Its shortcomings will not be eliminated by an SIP. Hence the key lies in first selecting a well-managed fund that is right for the investor and then investing in it via an SIP.
As can be seen, the SIP mode of investing has a fair number of advantages to offer; conversely, there can be instances when it may not deliver as expected. Investors on their part should make well-informed investment decisions after acquainting themselves of both the pros and cons.

Saturday, June 21, 2008

World Bank sees further slowdown in India’s growth

Infrastructure sector growth dips to 3.6% in April

The growth rate of the six core infrastructure industries witnessed a major slide in April this year compared to the same month last year.
The combined growth registered by the six core sector industries dipped to 3.6 per cent in April as against 5.9 per cent in April 2007.Steel, cement improve
A more than 10 per cent growth in coal production along with improved performance by the steel and cement sector prevented the infrastructure index from dipping further under pressure from poor growth in electricity generation, crude oil production and petroleum refinery output.
Coal production went up by 10.3 per cent in April (0.6 per cent in the same month last year), cement output gained by 6.9 per cent (5.8 per cent) while crude steel production improved by four per cent (2.7 per cent).Downtrend
The three industries that created the downward pressure on the index are crude oil (from 1.4 per cent in April 2007 went down to 0.9 per cent in April 2008), refinery output (from 15.1 per cent to 4.3 per cent) and electricity generation (from 8.7 per cent to 1.4 per cent).
In absolute terms, crude oil production in April 2008 was 2.81 million tonnes (2.79 mt in April 2007), petroleum refinery output was 12.13 mt (11.64 mt) and electricity generation was 58,815 GwH (58,030 GwH). Coal production went up to 34.98 mt (31.72 mt), cement output increased to 15.52 mt (14.52 mt) while steel production was 4.13 mt (3.97 mt).Industrial production
For fiscal 2007-08, the growth in industrial production stood at 5.6 per cent as against 9.2 per cent in fiscal 2006-07.
Only the growth in coal production during 2007-08 was higher compared to the corresponding figure last fiscal. All the five other sectors witnessed a dip. Growth in crude oil production dipped from 5.6 per cent in 2006-07 to 0.4 per cent in 2007-08, petroleum refinery products (from 12.9 per cent to 6.5 per cent), electricity (from 7.3 per cent to 6.3 per cent), cement from (9.1 per cent to 8.1 per cent) and finished steel (from 13.1 per cent to 5.1 per cent). Only production in the coal sector improved marginally during 2007-08 to touch six per cent as against 5.9 per cent in 2006-07

No room for panic, more measures to stem prices: Chidambaram

Under severe attack for the runaway inflation, the Finance Minister, Mr P Chidambaram on Friday said that there is no room for panic and promised more measures both from the government and the RBI to stem prices.
Immediately after meeting the RBI Governor, Dr Y V Reddy, who also met Prime Minister, Dr Manmohan Singh, Mr Chidambaram said: "We should not give room for panic. We should take steps to quell inflationary expectations...that is precisely the course that the government has adopted in the past and will adopt in future too.''
In a statement circulated to the media by the Finance Secretary, Mr D Subbarao, Mr Chidmabaram said he had met the Prime Minister, Dr Manmohan Singh last night even as the political parties, including the Left allies, pilloried for what they called failu re in management of prices.
Mr Chidambaram also met the Congress President, Ms Sonia Gandhi, to appraise her of the situation and the steps that were being taken to tackle inflation, 94 per cent increase in which was due to hike in fuel prices.
First line of defence would be the monetary policy and the RBI is expected to take appropriate steps to keep a lid on inflationary expectations, Mr Subbarao told reporters while fielding a barrage of questions on the government's course of action.
"Price management will be priority in a trade-off between growth and inflation,'' he said, but added that inflationary pressures would be felt for next few months because of the base effect.

Wednesday, June 18, 2008

Cheque clearing goes digital

Instant coffee, instant nirvana, instant entertainment, instant information…time is the singlebiggest factor in this "instant" world we live in. So how could banking stay unaffected? After anytime money and Internet banking, we now have instant cheque clearance.
Until recently, it would take at least three days, going up to an average of 15 days, to clear a cheque. Then there were hassles like missing cheques or clearing related frauds. According to a public interest litigation filed by Delhi-based lawyer, Atul Nanda, last year, banks in India were "illegally" availing of thousands of crores of consumers' money as a free fund float. The complaint, which ran into more than 700 pages, set out that that in a year about 13,000 lakh cheques are transacted. On this amount, on a daily basis, banks earn about Rs 620 crore by delaying the credit of cheques deposited. On an average a bank enjoys five days float, which amounts to Rs 3,500 crore. This is money that customers would otherwise have earned by way of interest.

Ride high on FMCG

Starting from that first cup of coffee in the morning right up to that relaxing malt beverage at night, we rely heavily on fast-moving consumer goods (FMCG). Everything from toothpaste to processed foods and health drinks to body care products comes from FMCG companies. With demand unlikely to really slow, these companies are in a sweet spot, especially when compared with sectors like automobile and real estate.The FMCG sector has always been a reliable performer. In fact, since January 2008, the BSE Sensex lost over 27%, while the BSE FMCG Index fell only by 3.2%. Which is why, as concerns about an overall economic slowdown are becoming widespread, experts are looking at the FMCG sector as the silver lining. “The FMCG industry is normally the last to benefit from high GDP growth and is also the last one to witness a slowdown in case the economy enters a downturn.Hence, they generally act as a good defensive bets particularly in tough economic times as being witnessed now,” says Anand Shah, research analyst at Angel Broking. While the last financial year was not very good for FMCG due to shrinking margins, the sector has regained its pricing power towards the end of the year. This is visible in the latest fourth quarter results where the sector registered an impressive average of 27.49% growth in net profits.“With a basket of premium brands, these companies are geared up to reward customers with on-pack promotional offers or soft discounts if they face any slowdown in sales. In such cases, the companies also mitigate their risk by shifting advertisement spend to below-the-line activities,” says Shirish Pardeshi, research analyst at Anand Rathi.So, what price do you pay for a slice of this definitive earnings growth story with limited scope for downside? With most FMCG companies trading at price to earnings ratio of more than 20 times, they definitely seem expensive, considering a Sensex P/E of 18.8 times.However, experts argue that FMCG stocks always quote at a premium to the Sensex, owing to their rich cash flows, strong return ratios, steady earnings growth and modest dividends. Moreover, being low beta stocks (high beta implies stock moves in tandem with market), FMCG companies command a premium in times of uncertainties as they tend not to follow the market when it goes down.“FMCG stocks generally command 18-25 times one year forward P/E in terms of valuation depending on the size of the firm and its earnings growth. Heavyweights like HUL and Nestle usually quote in excess of 25+ P/E multiples while mid-caps trade in the range of 15-20 times P/E multiple,” says Shah

Monday, June 16, 2008

Cadbury`s, Nestle lose market share to imported chocolates

Sales of imported chocolate brands, such as Mars and Snickers, have outpaced those of Cadbury's and Nestle's locally made chocolate in modern retail outlets, according to top retailers.

As a result, these companies will lose their pricing clout. Imported chocolates are not only in demand but also offer bigger margins as compared with the locally made brands to retailers.
Cadbury is already at loggerheads with the Future Group, the country's largest retailer, on the deals and margins it offers. Seeing the increase in competition, Cadbury India is also looking at introducing more sophisticated forms of chocolates from its global portfolio to boost consumption and retain market share.
"In our stores, the sales of imported chocolates is double the sales of domestic brands. Their sales is growing at triple digits. Imported brands offer newer chocolate formats to consumers, resulting in their higher demand," said Sadashiv Naik, CEO, Food Bazaar, Future Group. Echoing this view, vice-president (marketing) of Spencer's Retail Samar Singh Sheikhawat said, "Sales of imported chocolates has become equal in value to that of the domestic brands put together. Whereas the imported chocolates sales are growing at 100 per cent, made-in-India brands are growing at around 25 to 30 per cent."
Anand Kripalu, managing director, Cadbury India, said, "The competition in the chocolate market has increased significantly. In spite of this, we have been able to hold on to our 70 plus per cent market share. We would look at introducing newer products to boost the consumption of chocolate in India. Chocolates are not consumed on daily basis, so we would look at positioning them for everyday consumption from being consumed only on select occasions."

Life insurance industry sees 7% drop in new sales

Insurance buyers are keeping away from unit-linked insurance plans (Ulips) due to the continous volatility in the stock market.

The life insurance industry, which was growing over 100 per cent last year, registered a negative growth for the month of April this year, reporting a decline of 6.77 per cent. It gathered a new business premium of Rs 2,780.11 crore in April this year as against Rs 2,982.28 crore in April 2007.
Life Insurance Corporation of India continues to witness reduced demand from single premium Ulips. It collected a new business premium of Rs 1,247.89 crore in April this year as against Rs 2,134 crore in the corresponding period last year, a fall of 41.5 per cent in new sales.
LIC lost a substantial market share in April. The public sector behemoth had a share of 44.88 per cent during the month, while the private players increased their market share to 55.11 per cent.
However, the 17 private players have registered 80.69 per cent growth in new business premium for the month of April at Rs 1532.22 crore as against a fresh premium of Rs 847.96 crore in April 2007.
A CEO of an insurance company, said, "Due to the volatility in the stock market, pension products, health insurance and traditional products will sell more."

Yes Bank hikes PLR by 50 basis points

Yes Bank, on Monday announced a 0.50 per cent hike in its Prime Lending Rates (PLR) and above one year Fixed Deposit rates.
Following the revision, Yes Bank's PLR stands at 16 per cent (previously 15.5 per cent) while FDs having a tenure one year to eighteen months will now attract an interest rate of 9.50 per cent (earlier 9 per cent), the bank said in a press release here. All the changes are with effect from today.
"The bank has been observing a keen interest among customers to invest in deposit products and we believe this trend will sustain," said Yes Bank's Managing Director and CEO Mr Rana Kapoor. The bank also increased its FD rates for senior citizens, in the same tenure, to 10 per cent from 9.5 per cent earlier, it said.
Yes Bank is the second bank hiking its PLR after the 0.25 per cent hike in the Repo rate effected by the Reserve Bank last week. State-owned Jammu and Kashmir Bank raised its PLR from 13 per cent to 14 per cent after the Repo rate hike while large banks such as State Bank of India and ICICI Bank have adopted a 'wait and watch' approach prior to revising their rates.

Sunday, June 15, 2008

TECHNICAL ANALYSIS

The market is sort of pushed into the corner, where the shorts are overwhelming. "The markets are unable to go down on any kind of a bad news. So, it probably has its back to the wall. Its quite likely that you could have a 200-250 points bounce on the Nifty going right up to 4,750. The trigger for that is probably not visible right now, but the market is looking quite strong, as it's unable to go down a lot from here. So, just another trigger and you will see a pretty sharp bump up. This is not to say that this is a final low but certainly we are at the end of a spike, before we come back to re-test 4,635 kind of lows."

How to survive the oil shock

If every man is entitled to his two minutes of fame, then T R Raymond has just had his.
This farmer from McMinnville, Tennessee, United States, came to the limelight recently when the media reported his unusual response to shooting oil prices. Raymond is now hitching his farm equipment to two mules Dolly and Molly instead of his tractor after oil became unaffordable for him.
The mules were bought last year and have been trained for their farming duties. To some, Raymond's move would be amusing but for others it would be proof of how hopelessly dependent on petroleum our everyday life is. An overwhelmingly large part of products and services need petroleum or petro-products in some form or the other.
This is the reason that rising oil prices mean higher prices of virtually everything and impact our money in ways we can't even think of.
At the time of going to the press, oil prices are at $126 to a barrel, more than double the April 2007 price of $63 a barrel. The future doesn't look too bright with prophets of doom predicting still higher prices.
International financial powerhouse Goldman Sachs, in its report dated 5 May 2008, said that oil could reach $150-200 per barrel in the next six months to two years. Of course, there are other international experts who feel that this oil price surge is an aberration and the prices will come down in the next one year or so.
In India, we are yet to feel the real impact of the flaring international oil prices even though over 70 per cent of the country's requirements are met through imported oil.
The oil prices in India are government controlled and, so far, the government has kept prices at levels that should have existed had the oil price been at $70, $30 and $25 a barrel for auto fuels, LPG and kerosene, respectively.
High oil prices are here to stay and would require all of us to adapt our personal finances. But before we tell you how to cope up, you need to know why the oil prices have risen so sharply and how this oil shock is different from the previous ones.

Saturday, June 14, 2008

The Car File

Expect The Unexpected

The rise in global crude prices may not be a bad thing for everyone. In the US, where gas prices have risen from little over a dollar in 2001 to over $4 now, people are leaving their trucks and SUVs at home and taking buses and trains to work. And big GM and Ford vehicles have lost sales to smaller, more frugal cars. No amount of global warming warnings could have done the trick that expensive oil has achieved.
In India, too, the sooner the government passes on the load, the earlier we will see the shift towards economy, although it will not be as stark as in the US. This is a story that has repeated itself with every oil shock: 1959, 1973, 1980, 1990, and, finally, now.
Leading up to each of these, vehicles have bulked up and then gone out of the market, sometimes taking entire companies with them. That has made way for those with economy in sharp focus.
Oil shocks spell tectonic shifts in the auto landscape. The 1959 shock spelt doom for big European cars. In 1973 the US Big Three were so unprepared that for the first time Japanese cars such as Toyota and Nissan could get a toehold in their own backyard.
This time around, the technology shift is not likely to be large as tough emission norms have pushed manufacturers almost to the limit of efficiency. But when the market shifts towards smaller cars this time, as always, the game could shift to India. Ratan Tata did not build the Nano in anticipation of an oil shock, but he is likely to get big help from it. More so if it can squeeze a few more kilometres out of a litre of petrol—the expected 20-odd km/l may not give it enough of an edge. But add a few more, and Tata could well change the global game once and for all. This time he is the one with the first-mover advantage.

Oil Spills Ahead

Last week, a reader wrote, asking: “Looking at the way crude oil price is increasing, I was wondering which companies would benefit from this and which ones would suffer.” To my mind, that’s two questions in one—first, will oil prices continue to rise; second, if they do, what will be the impact on the fortunes of different Indian companies?
As for the first question, there must be literally millions of first-rate minds across the world trying to figure whether oil will boil or recede. The emerging consensus seems to be that there are real supply-side issues, regarding oil, chief among them being the state of Russia’s oil infrastructure and the deterioration of Iran and Iraq’s extraction and transportation machinery. To a large extent, this is inevitable when a resource is controlled largely by nationalised companies; they tend not to be the most efficient organisations.
This leaves the big question mark of Saudi Arabia, currently the world’s largest exporter of crude oil. Secrecy shrouds the reserves and oil fields of Saudi Arabia, and no one knows whether it is facing constraints in raising its oil production. In a sense, this question has now become an academic one, and two events over the last six weeks have underlined Saudi Arabia’s intent. The first was the Saudi Arabian ruler’s statement in early April that he would like to hold reserves under the ground for future generations. The second was his tepid response earlier this month to a plea by the US president to increase the pumping of oil. Going by these two statements, one can clearly see no immediate upside to oil production. What about the demand side?
While the ongoing price escalation in the US is leading to some contraction in demand, this is barely one per cent year-on-year. Meanwhile, the India scenario is being played out across Asia, where deepening subsidies have insulated consumers from price rises, and demand continues to boom—nearly 10 per cent annum in India and over 12 per cent in China. Unless these countries take strong measures to compress demand, oil looks like being bullish for a while.
This could be disastrous for our economy, both in terms of our balance of trade, as well as our fiscal deficit. Managing inflation may become increasingly difficult and the government may have to take drastic steps on the monetary side. And, if FIIs take flight, the downward pressure on the rupee could be substantial. One thing is certain—increased volatility is on the cards.
My reader specifically asked me about the impact of rising crude prices on oil marketing companies such as BPCL. In the short- to-medium term, one can’t say, as the government’s response is increasingly likely to be driven by political factors, especially after the Congress party’s election losses in Karnataka. Petrol prices will most likely go up, and some excise and customs duties will be cut. But, under-recoveries on account of diesel, LPG and kerosene will continue, and the going for these companies could be increasingly tough. For a long-term investor, though, these companies represent excellent value, and I remain invested in them.
My reader also asked about Reliance Industries. My current reading is that RIL may continue to eke high refining margins from its refinery—high sulphur heavy crude, especially from Iran, is selling at unprecedented discounts of 11 dollars per barrel to sweet crude at last reckoning. Few refineries are able to process this crude into diesel, which is most in short supply, so the comparative advantage for RIL is likely to continue. Having said that, I don’t follow the stock closely, so I wouldn’t go as far as to call a BUY.
As for the rest of our markets, rising oil is clearly a SELL in the short-term

Mumbai property prices to fall

Property prices in Mumbai is likely to fall by 10-15 per cent over the next six to nine months on the back of lacklusture sales.Leading real estate sector players attribute the impending fall to rise in interest rates, escalation of cost, credit squeeze by banks, bearish capital market and weak sentiments globally leading to poor offtake of properties."These will definitely have a negative impact on the property prices in Mumbai and other cities in the country. In my view, the price will go down by 10-15 per cent over the next six to nine months," Indiareit Fund Advisors' Managing Director and Chief Executive officer Ramesh Jogani told PTI.On the positive side, it shows that markets are maturing and the fall in price will again bring resurgence in customer demand, he added.Indiareit Fund Advisors manages a total of USD 450 million domestic and offshore funds.His views were echoed by leading real estate firm Orbit Corporation's Managing Director Pujit Agarwal as he said that there is a total slowdown in the property market at the moment."For the last six months sales were lacklusture. The demand for property will not go up until general election scheduled for next year," Agarwal said.High inflation, increase in cost of capital and widening trade deficit have led to the fall in the stock market, he said adding that real estate market of Mumbai has a significant co-relation with the stock market. "The wealth which had been created during the bull run of the market has got diluted. This has led to cash crunch among the developers who are now fighting to complete their project," Agarwal said. International real estate consultancy firm C B Richard Ellis said increasing lending rates, high inflation and unrealistic property value in Mumbai have led to the fall in prices since the last quarter."People are also prefering now to wait and watch before taking any decision on buying properties. Oversupply is also there. In my view, prices will fall by 15-20 per cent in a year or two from now," Rajesh Prasad, Head, Transaction Management Group, CB Richard Ellis (India) said.CB Richard Ellis Group, a Fortune 500 company headquartered in Los Angeles, is the world's largest commercial real estate services firm in terms of 2007 revenue.

Friday, June 13, 2008

Listen! A wheat boom is coming

Owing to the soaring prices of wheat during the past few months, agriculture fields across the world have witnessed a welcome change. More and more farmers opted to sow wheat in their fields rather than any other crop. This was evident from the story of a Queensland family in Australia. Even though the event has nothing much to do with the rising prices of wheat, there is a message for the world — produce more foodgrains if you want to save the world from starvation. This is precisely what the UN’s Food and Agriculture Organisation (FAO) is also preaching. Now the story. In a record of sorts, the Coggan family in southern Queensland planted about 850 hectares of wheat seeds in 24 hours. The mass planting was not only for the sake of setting a new Guinness World Record but also to raise funds for a hospital that saved the life of a member of the family. Phillip Coggan, his father John and fellow farm workers Les Bruce and Steve Wall planted the seeds using one tractor between them. They worked non-stop on the family’s Meandarra property from noon (Australian time) Wednesday. Phillip Coggan said he estimated they had planted 850 hectares, but was awaiting confirmation. A result is expected to be announced this week. If Coggan’s calculations are correct, the four men have smashed the former Ukrainian record of 642 hectares. “My father had a heart transplant three years ago,” Coggan said. He was given a 10 per cent chance of living. He had to have his chest open 12 or more times. During the seven weeks (before the heart transplant) I was working on the idea of not ever seeing him again.” At 61, John Coggan shows no signs of his brush with death and is fit by any standards to plant seeds for an entire day. The record attempt has raised about $40,000 so far for the Prince Charles Hospital Foundation’s research on artificial hearts. Coggan said the biggest wheat-planting attempt was his nine-year-old son Tom’s idea. “He found it on the internet and said: “Dad I think we can do that,” he said. Even if they don’t break the record, the Coggans stand to make a tidy profit down the track — wheat prices are high, partly due to global food shortages. Many Queensland grain growers are still battling drought, but the Coggans got lucky with decent rains in May and June. The world record bid took place under strict conditions. Seeds were planted at 120 per square metre, scientists monitored the event, and a GPS was used to ensure accuracy. Lobby group Agforce Grains was the chief scrutineer, as required under the Guinness World Records. Even as the Coggans jump on the whet bandwagon, across the world the trend is catching up. In the US also famers are now going for wheat in a big way. There’s been no recorded tally of wheat in New England since 1946. But under the radar, farmers in Maine, Vermont, and Massachusetts have been growing small quantities of wheat for years. Now, lured by high prices and growing consumer demand for breads made with local flours, they’re expanding. The expansion of small acreages in New England reflects a much larger nationwide shift back to wheat. After reaching a low of 57.2 million acres in 2005, farmers are expected to plant 63.8 million this year – an 11.5 per cent increase. The extra boost in production should allow the United States to sell more of its grain abroad. US wheat exports are expected to jump 30 per cent this year. The relative surge in prices has not created a flood of newly minted wheat farmers – at least not yet. One reason for the restraint: The increase in production has brought prices down. Wheat prices have fallen by nearly a quarter since a high of $24 a bushel in late February. Another obstacle: Higher costs are eating into higher profits. And New England appears to be one of the epicenters for artisan, niche bakeries, where much of the demand for locally-grown wheat seems to be coming from consumers.