Wednesday, January 30, 2013

Impact of RBI's rate cut


Impact of RBI’s Rate Cuts on the common person

Yesterday, Reserve Bank of India (RBI) has slashed repo rate and CRR 25bps point each on the occasion of its 3rd quarter monetary policy review for FY 2013-13. How can the investor get benefit from it. On short, Repo rate is the rate at which banks borrow from the central bank (RBI in India) and CRR (Cash Reserve Ratio) is the amount of deposit which banks keep deposit with RBI. After cut the rate now repo rate and CRR are at 7.75% and 4% respectively.

Interest rate factor play very significant for home loan borrower, equity investor, debt fund investor and fix deposit investors. Indian banks has given already some indication about base loan rate cut yesterday. After the base rate cut all home loan borrower will get benefit definitely but it depend on the timing of the rate cut announcement of the particular bank. If your bank is charging already high interest on home loan then it would be better transfer your balance loan amount to other bank. The bank would charge some minimal conversion charges for the loan amount transfer.

The equity investor would also get benefit of rate cut. As corporate will borrow at lower cost and it would increase profitability of the companies. It means working capital will available to companies at cheaper rate compare with earlier cost. Equity investor should invest through SIP.

Fixed income investors have better option to long term bank FD and long tenure income fund with a 12 -24 months time horizon. There is much expectation rate cut further within 1 year point of view so bond investor can make a capital appreciation with interest income. Bond investment is very suitable option for higher tax bracket investor in tax saving point of view.

Feel free to ask any queries related investment

 Regards,

Arvind Trivedi
Certified Financial Planner

Friday, January 25, 2013

How to get the best from equity market ?

How to make great return from Equity Market?


Today, I have got a very interesting and useful mail for investors. It has appeared Outlook Business magazine. It is article about art of compounding. I am going to just share with all of you.

Why is the average investor confused by equities? And why doesn’t he earn anywhere close to fair returns from his investments? It’s not rocket science: equities are a remarkably simple asset class, in fact. But in the 20 years that I have been in the markets, I have lived through three major cycles — and in each one of these, the majority of investors mistimed their investments. That’s, in fact, a very disturbing statistic.
As the Sensex went up from 3,000 levels in 2003 to a peak of above 21,000 in January 2008, before ending close to 15,600 levels in March 2008, net sales of equity mutual funds increased from just Rs 118 crore in FY03 to Rs 53,000 crore in FY08. Since then, in down markets and at lower P/E multiples over the past four years (FY09-12), cumulative flows into equity funds have been negative Rs 6,000 crore. In simple terms, when P/Es were high, more than Rs 50,000 crore worth of equity funds was purchased in one year and when P/Es were lower, nearly Rs 6,000 crore worth of equity funds was sold or redeemed by investors across the country.
That’s a basic, return-unfriendly approach to investment so it’s really not surprising that most investors aren’t satisfied by the return on equities. But in an all-too human way, they blame the market when it’s their investment strategy that needs work. And as long as they continue investing disproportionately large amounts after strong past returns and at high P/Es and investing close to nothing after poor market returns and at low P/Es, investors will continue to gain less from equities and will continue to feel dissatisfied.
They’re certainly going about the same way even now, going by the current lack of flows in equity funds for the past several quarters and, in fact, some redemption. Albert Einstein summed it up very nicely: “Insanity is doing the same thing, over and over again, but expecting different results.” But why do otherwise astute individuals show such poor timing when it comes to equities? In my opinion, the key reason is that a majority of equity investments are done with a short-term view, despite the fact that the best equities have to offer is only over long periods.
And by taking a short-term view, investors miss out on what Einstein referred to as the “eighth wonder of the world” — the power of compounding. Just think about it: at 15% CAGR, 1 becomes nearly 2 in 5 years, 5 in 11 years, 10 in 17 years, 20 in 22 years and so on. Returns from equities mimic economic growth in nominal terms (real growth plus inflation) over long periods and, thus, equities have a high compounding potential, particularly in high-growth economies such as India.

But instead of targeting meaningful returns over long periods from compounding, most investors due to improper understanding of equities, target only small gains over short periods. As the investment horizon is short term, the focus is on guessing near-term market movements. This inevitably leads to extrapolating the markets in either direction and, therefore, in rising markets, the expectation is that markets will keep on rising. The greed for quick returns leads to higher inflows in equities and as the trend sustains, confidence and greed levels keep on increasing, leading to even larger inflows.
Similarly, in downward-moving markets, investor expectation is that the markets will keep on moving lower, leading to lower inflows. The lower the markets move or the longer the markets do not move, the greater is the conviction among investors that markets will fall further or that markets are going nowhere, resulting in drying up of fresh investments or even redemption of existing investments.
Also, when markets are moving up, the news flow is generally good and vice versa. Therefore, generally, in rising markets the perceived risk is low whereas the actual risk is higher as valuations are high. On the other hand, in adverse times, when the markets are not doing well and the news flow is not good, the perceived risk is high whereas the actual risk is lower as valuations are attractive.
The net result is that, time and again, a majority of investors end up investing large amounts at high valuations and small amounts at low valuations. Clearly, such an approach to investments is not conducive to generating good returns and if followed, is likely to lead to disappointing results time and again.
A practical approach to investing
While no approach is perfect, it would be better if investors base their investments in equities not on news flow or past returns but simply on P/E multiples. Investors should practise low P/E investing with a long-term view — that is, investments in equities should be steadily increased as long as the P/Es are low. It sounds simple but isn’t — low P/Es are typically available only in adverse environments, when the news flow is negative, when markets have not done well and when the sentiment is not good. In such an environment, fear of losing money prevents a majority from investing in equities. Subjecting yourself to a plan of staggered investments in a low P/E environment or SIPs should be effective in at least partially overcoming the handicap of poor timing by investors.
Market outlook
Equities are hard to forecast over short to medium periods but are fairly reliable over long periods, more so in a secular growth economy such as India. Past experience suggests that P/Es tend to move between 10 times and 12 times at the lower end, and between 20 times and 25 times at the upper end. The journey from bottom to peak and back again takes considerable time (a cycle) and investor patience at lower P/Es is well rewarded over time. At present, though the markets are up 25% from the lows, keep in mind that the markets are lower compared with levels seen in 2007. In this period of five years, the economy has grown, profits of companies have increased and multiples are lower than long-term averages. Further, interest rates are likely to move lower and this is also supportive of higher P/Es.
It is no doubt true that the economy is still facing challenges, notably of high fiscal and current account deficits. But, I believe, the worst of these is behind us and the current year and the future years should see a steady improvement. Investors should maintain or increase allocation to equities in line with their risk appetite and with a long term view.
Here, it may be worthwhile for investors to keep in mind Sir John Templeton’s comment: “Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.” In May 2012, we had mentioned that pessimism is all that one sees all around. Things have changed since then. I believe we’re now in the scepticism phase. So you know what to expect next.

Feel free to ask any queries related investment

Regards,
Arvind Trivedi
Certified Financial Planner
(Article by Mr. Prashant Jain, Chief Investment Officer, HDFC Mutual Fund This article first appeared in Outlook Business magazine, Jan 05, 2013.)

Tuesday, January 22, 2013

Import gold duty hike and link gold ETF to gold lending

Good news for gold ETF investors
Increasing gold import bill and crude oil bill are the biggest cause of  worry to govt of India today. The government announced to raise duty on gold from 4% to 6% yesterday as the demand of gold is not reducing in our country and current account deficit is not coming down. To combat this situation the government has increased the duty on imported gold.
When we import the gold, our foreign reserve went out of the country. India has already imported gold worth 38 billion $ till third quarter of financial year 2012-13. This step is towards reducing demand and the improve the of forex reserves no.  
While it is still uncertain how much of an impact this 2% hike will make. Earlier such type of step we have already seenThe high price is driving the demand, and if the price goes any higher that will drive demand higher as well.
The other step is good news for ETF gold schemes investors. Apart gold duty hike, the other important announcement is linking gold ETF schemes to bank’s gold deposit schemes. When we buy a unit of a gold ETF, it represents about a gram of gold and the gold ETF sponsor buys and stores gold on your behalf with a custodian. This gold is lying idle and give no return at all.  The ETF’s gold will be linked to gold deposit schemes where gold merchant or jeweller can borrow the gold from banks and pay interest on this gold, and at a future date pay the money equivalent to the gold that they borrowed at the then prevailing price.
This will help reduce the import of gold to the extent that it is borrowed, but in the long term if the demand for gold doesn’t come down then it will not reduce imports, it will perhaps play a small role in delaying the imports but not make a long term impact on lowering gold imports or the current account deficit.
However, this would be good news for ETF owners because any interest or earning that the ETF earns out of lending gold will ultimately accrue to the owners and it would reflect in their schemes returns. The more details are still awaited, but if the lending starts, it would be good news for gold ETF investors.
Feel free to ask any queries related investment

Regards,
Arvind Trivedi
Certified Financial Planner

Thursday, January 17, 2013

GAAR update

Recent announcement on GAAR from government
During the last budget a very controversial act GAAR (General Anti Avoidance Rule) had been introduced in hurry. After much pressure from everywhere government had postponed at that time after extreme criticism. The announcement of GAAR at that time had impacted very badly on FII investment and share market largely. We had already discussed about GAAR in detail at that time in our blog.
In short, these rules applicable on any transaction or business arrangement with intention of tax avoiding. When this rule invoked, that particular transaction or business arrangement would be impermissible & denied the claimed tax benefit.
After the much flip flop on the GAAR, the government has announced at last on Monday some significant changes and defer its implementation by two more year. It will apply only to investments made after 30 August, 2010. The other most important change is it will not apply on non resident investor in FIIs. GAAR will not apply on those FIIs who do not claim any double taxation benefit. GAAR will apply only when tax benefit exceeds Rs 3 Crore.
The one critical issue is still not clear that after GAAR implementation whether India–Mauritius Tax Treaty would be continued or not.
Regards,
Arvind Trivedi
Certified Financial Planner

Thursday, January 10, 2013

Available Tax Saver option in Section 80C

When we talk about tax planning, most common term flash in mind is Section 80C. The Section 80C offers various options to fulfill people’s different need. In Jan-March quarter most of the person rush for tax saving instrument and often make wrong decision in hurry. They don’t even realize that they have invested their money in those products which is really not suited them. The right time to make tax plan is the beginning of fiscal year (April-May).Today I am throwing some light on those products which are available in under section 80C.
Provident Fund: It is the very common and popular in service class people. As employer deduct the some portion of money for contribution in provident fund from employee’s salary. PF gives 8.5% per annum and is very secure in terms of safety. Employee can liquidate it at the time of retirement. However, partial withdrawal is also permitted with some condition. 
Public Provident Fund or PPF: It is very good option available with low risk and offer tax free return after maturity. It offer return market linked for current year it is 8.8%.The lock-in period is 15 year but partial withdrawal is possible after fifth year.
Bank Fix Deposit: The 5 year bank fix deposit is also available. Various bank offer return 8-9% this year (See earlier blog). The return is taxable as per one’s tax slab. The lock in period is 5 year. It is low risk product but keep in mind the post tax return also before investing in fix deposit.
National Saving Certificates or NSCs: It offer 8.5% return and is very safe investment. The lock in period of these instruments are 5 and 10 years. The person can choose any maturity 5 or 10 year based on their need.
Senior Citizen’s Saving Scheme: It offer 9.3 % return and added in taxable income. It is the most suitable option for senior citizens (above age 60 year) as it gives regular interest income in each quarter. It has no risk and very safe investment option. The lock-in period is 5 year.
Insurance Policies: It is long term product and lock in period depend on plan’s maturity. It has highest degree of safety but its average return around 6-7% only.
ULIP or Unit Linked Insurance Plan: The return is market linked as no fix return offer. Partial withdrawals possible. It is in the form of bundle which offer insurance, tax exemption and return also. The cost and charges is high compare with other products. The risk is depend on which option you have chosen.
ELSS or Equity Linked Saving Scheme: It is market linked product. There is no fix return. The lock in period for this product is 3 year. It has shortest lock-in period among all Section 80C options. It is high risky investment product.
NPS or National Pension Scheme: It is retirement goal oriented product. No withdrawal allowed before retirement. The return is market linked and it has very low expense ratio means low cost product.
Besides the above mentioned investment products which are in under section 80C, there are some expenses also eligible in under this section.
Home loan repayment: Principal portion of EMI is eligible for deduction till Rs 1,00,000 limit.
School Fees: Tuition fees of up to two children in a recognized educational institute for eligible for Section 80C
Home Purchase: During the purchase of home whatever stamp fee and registration fee you pay is also deductible from taxable income.
There is also other option available for tax deduction other than Section 80C which we will discuss later. If you want more clearity on these products pleas ask through email
Regards,
Arvind Trivedi
Certified Financial Planner

Friday, January 4, 2013

Tax Saving Bank Fix Deposit : Good option at present
With the beginning of the new year now most of the people has started tax planning.  It is widely expected that RBI (Reserve Bank of India) are going to rate cut in its January Monetary Policy Review. The 5 year tax saving fixed deposit is also a good option for people who want to save using the 80C section as the interest rate is already at high. Under this tax saving fix deposit there is 5 year lock in period. Banks are offering 0.50% more to senior citizen. The list of bank which is offering high interest rate on its tax saving fix deposit among other peer. Before investing in this fix deposit keep in mind the interest you earn is taxable.

Sr
Bank Name
Interest Rate
1
City Union Bank
9.50%
2
Bank of Baroda
9.0%
3
IDBI Bank
9.0%
4
Indian Overseas Bank
9.0%
5
State Bank of Travancore
9.0%
6
Vijaya Bank
9.0%
7
Bank of Maharashtra
8.75%
8
HDFC Bank
8.75%
9
Karur Vaisya Bank
8.75%
10
State Bank of India
8.75%
11
South Indian Bank
8.75%
12
Allahabad Bank
8.5%
13
Canara Bank
8.5%
14
Central Bank of India
8.5%
15
J&K Bank
8.5%
16
Punjab National Bank
8.5%
17
ICICI Bank
8.5%
18
Kotak Bank
8.5%
19
Axis Bank
8.0%




There are many more bank offering such type of fix deposit. Please check it at your end also. If you have any other query about investment and financial planning feel free to ask.

Regards,
Arvind Trivedi
Certified Financial Planner
arvind.trivedi79@gmail.com

Thursday, January 3, 2013

Basic rules for investing

New Year, New Hopes and revisit some basic investment rules

First of all Very Happy and prosperous year 2013 to all of you. New year has already begun with new hope and optimisim in equity market. Yesterday, Nifty and Sensex were closed at 2 year high and now the market sentiments appear quiet positive in near term. Today I will not write lengthy article. At the beginning  of year, it is important to make some financial resolution and don’t repeat past mistakes.
There are few basic investment rules of investing and I am sure many of those rules you already know. I am attempting here to those rule revisit in very compact manner.

1)   Before make any investment decision, first know your networth.
2)   Be clear about your financial goal and honestly asses your needsand income
3)   Don’t investment in hurry and never investment in those products which you don’t understand
4)   If you have not properly insured then calculate your actually needed insurance cover and purchase term insurance online if possible
5)   Purchase mediclaim policy and personal accident policy also as it is very important
6)   Understand your risk appetite. If you cannot see 25% value erosion of your portfolio then stock market is not right place for you.
7)   If you are near about retirement please keep away from ULIP and insurance like product and reduce your equity investment and increase debt portfolio.
8)   Track your portfolio time to time and change your asset allocation according to time frame of your goal and market condition.
9)   Always pay your credit card bill on time as it has very high interest charges.
10)                If you feel any problem to understand or you have not enough time to take care of your investment find one financial planner and discuss with him about your financial planning and doubt.

There are much more basic rules and we will discuss about them this entire year in detail. Once again I wish for all of you a very happy, Healthy and prosperous year.

Regards,
Arvind Trivedi
Certified Financial Planner
arvind.trivedi79@gmail.com