The Golden Rules For Investing In Equities

1. The First Major Axiom: ON RISK Worry is not a sickness but a sign of health.If you are not worried, you are not risking enough.
2. The Second Major Axiom: ON GREED Always take your profit too soon
3. The Third Major Axiom: ON HOP When the ship starts to sink, don't pray. Jump.
4. The Fourth Major Axiom: ON FORECAST Human behaviour cannot be predicted. Distrust anyone who claims to know the future, however dimly.
5. The Fifth Major Axiom: ON PATTERNS Chaos is not dangerous until it begins to look orderly.
6. The Sixth Major Axiom: ON MOBILITY Avoid putting down roots. They impede motion.
7. The Seventh Major Axiom: ON INTUITION A hunch can be trusted if it can be explained.
8. The Eighth Major Axiom: ON RELIGION AND THE OCCULT It is unlikely that God's plan for the universe includes making you rich.
9. The Ninth Major Axiom: ON OPTIMISM AND PESSIMISM Optimism means expecting the best, but confidence means knowing how you will handle the worst. Never make a move if you are merely optimistic.
10. The Tenth Major Axiom: ON CONSENSUS Disregard the majority opinion. It is probably wrong
11. The Eleventh Major Axiom: ON STUBBORNNESS If it doesn't pay off the first time, forget it.
12. The Twelfth Major Axiom: ON PLANNING Long-range plans engender the dangerous belief that the future is under control. It is important never to take your own long-range plans, or other people's, seriously.

You will find many investors entering the market at high levels and making a quick exit as the market witnesses a correction. Unfortunately, such investors seldom think of investing in stocks again. Thus, they ignore an excellent opportunity to earn above average returns.

In short, investing in equities can be a difficult proposition for retail investors. However, equity must form a part of every investor’s portfolio. The proportion could vary, depending on the investor’s age, monetary requirements, risk appetite, etc.

To cope with volatility, it is important to have a disciplined and systematic approach to equity investment. Set your own rules and more importantly, follow them religiously. Indeed, the mantra for successful equity investment is a well thought-out, disciplined investment strategy.

A long term monetary commitment, adherence to discipline in investment and decisions based on company fundamentals are essential ingredients for successful equity investment.

Here are golden rules for safe equity investment, which could help you to sail through different market scenarios
1. Be a long term investor
This is the first and most important rule of equity investment. Timing the market - entering the market at low levels and exiting at higher levels - is almost impossible. Though often heard on the street, this strategy is difficult to implement, as it is nearly impossible to gauge when the market has peaked and when it has bottomed out. Do not play the guessing game; it is more sensible to put money into the market with a long term commitment.

Trading or speculating seldom helps in equities. You could make quick bucks by trading in 10 deals, but you could lose whatever you have earned in just one deal. This is the risk you take when you try to trade and make easy money from the stock market. Apart from incurring financial losses, it also involves a lot of mental stress. Trading could give you sleepless nights.

Globally, economies follow seven year business cycles of boom and bust. Thus, when you are investing, invest for a fairly long term, say three to seven years. Indeed, it is a proven fact that over the long haul, equities tend to outperform all other asset classes.

2. Invest time and efforts in doing your homework
Investing in equities is not a one time affair. You need to invest a lot of time and efforts, apart from money, to understand industries, economic trends and so on. Further, you should dedicate time to analyse companies, as this will help you to avoid costly mistakes. You need to develop the habit of reading first hand information - such as company annual reports, company announcements and so on. Annual reports of large companies are easily available on the web. Reading business dailies is also a must for equity investors.

Get your basic concepts and fundamentals right. Revisiting financial fundamentals periodically would be a good idea. You need to understand basic concepts like the Price-Earning ratio (P/E ratio), operating margins, earnings per share, etc. Analysing balance sheets and profit and loss accounts is a must. A short term course on ratio analysis would be of immense help.

Further, understand technicalities of investment, like how the stock market operates, how to buy or sell, settlement procedures, etc.

Also focus on domestic economic and policy development. These factors are also of immense importance as they lead to structural changes in the economy that would benefit certain industries. For instance, the boom in the telecom sector in the domestic market is driven by government policy initiatives over the years.

Lastly, you also need to keep yourself abreast with key global developments. With liberalisation and subsequent integration of economies, global factors also impact domestic industries and the stock market.

The stock market is said to be all about sentiments. However, in this mad rush you need to stay focused and maintain a lot of discipline in executing your investment strategy. Thus, irrespective of which way the market moves, you need to stick to your investment strategy without getting swayed by market sentiments.

In short, discipline in your investment approach will protect you from the herd mentality. Most investors are tempted to buy when everyone is on a buying binge and sell when the market is moving southwards. But if you have decided as a rule to buy a particular stock only when the overall market corrects by one per cent, this rule could kill your temptation to jump on the stock when the market is overheated.

3. Pay the right price
It is essential to buy at the ‘right price’, that is, the price that you are comfortable paying. Do not buy because others are doing so. This will help you to hold the stock for a longer duration.

Conversely, when you have to decide when to sell, if you feel that the market is overheated and prices have reached unrealistic levels, exit; Don’t stick on hoping for a little more. It helps to limit your own greed.

4. Portfolio diversification
Diversion is a very old and popular investment strategy, applied to reduce portfolio risk. Actually, before you start investing in equities, you should consider various factors like your age, monetary requirements, etc, to determine how much risk you can take on. For instance, if you are around 30 years old, you can invest a greater portion of your portfolio in equities than a retired person. Once you have determined how much risk you can take on and how much you can invest regularly in equities, try to achieve diversification in your portfolio.

To reduce risk, diversify within equities by investing across sectors. Do not invest in one or two sectors or any negative development pertaining to those sectors could severely impact the profitability of your portfolio.

Secondly, ensure a good blend of small, mid and large-cap stocks in your portfolio. While large cap stocks would lend stability to your portfolio, small and mid cap stocks would give you an above average appreciation. Basically, growth potentials are higher in the case of small and mid cap stocks. Thus, just having large cap stocks could be safe but also mean that returns are just about at the same level as market returns.

Thirdly, invest across value and growth stocks. Growth stocks are risky but also offer higher returns while value stocks are likely to be less volatile.

In brief, when you spread your investments over a larger number of stocks and sectors, if a few stocks/sectors under-perform, this is compensated by other stocks/sectors which perform well.

5. Do not buy on tips or rumors rather focus on fundamentals
Tips and rumors are an integral part of the stock market. Always remember that these could be engineered by a group of traders or punters. Therefore, a sharp rally based on rumors could fizzle out in a short time.

You should strictly stay away from rumors, suggestions or tips received from your broker or friends or the investor circle. Investments based on tips could lead to huge losses. Rather, you would be better off investing based on industry and company fundamentals. Furthermore, generally such tips pertain to small and mid cap stocks, where liquidity is extremely limited. If you invest in such stocks, you could get trapped in an illiquid investment for a very long time.

6. Buy shares of companies whose business you understand
In the long run, the stock market rewards companies with strong fundamentals and good financial performance. Therefore, it is essential for you to invest in companies whose industry dynamics and business models you understand. This will help you to gauge whether a transformation in an industry is positive or negative, at an early stage itself, and its likely impact on the company’s fundamentals. Your understanding of industry dynamics would help you to evaluate industry trends.

7. Don’t sell in panic
Markets go through cycles of boom and bust and volatility is a way of life in equities. Do not sell your holdings in a hurry and panic just because your stocks have witnessed a sudden correction. Always focus on company fundamentals; if they are intact, there’s nothing to worry about.

8. Do not borrow money to invest in equities
It is true that equities tend to outperform other investment avenues in the long run. However, there is no guarantee that you will make money on your stocks either in terms of dividends or capital gains, if your sale of shares is time-bound. Therefore, if you borrow funds to invest in equities, it might be difficult for you to repay the interest or principal on the loan, on time.

What really matters in equity investment is your withholding power. So, invest your surplus money in equities and only invest an amount that you will not need in the immediate future. If you borrow and invest, your withholding power to stay invested for the long term could be limited.

9. Do not marry a stock
If you feel your investment decision has gone wrong, exit the counter; don’t try to average. It is prudent to cut losses, rather than lower the average purchase price. Particularly in cases where the stock is witnessing a continuous sell-off, it is better to offload your position and book losses. You can use the same money to invest in other opportunities.

10. Invest regularly and gradually build up your position
Just as you put money into fixed interest bearing investments regularly, also invest in equities on a periodic basis. Further, do not invest at one go. Rather, buy on a regular basis and in small lots. This will help you to buy stocks at a reasonable price.

11. Monitor your portfolio
Investing in equity is not a one time affair. Buying shares is perhaps the smallest part of the overall investment activity. It is important to periodically monitor and review your investment portfolio. It is always prudent to sell a stock if you feel that the fundamentals have deteriorated and the stock is overpriced in comparison to its fair value. Money has an opportunity cost and by selling an overvalued stock you can investment the same money elsewhere, for better capital appreciation opportunities.

What is the procedure for selling dematerialized securities?

What is the procedure for selling dematerialized securities?
The procedure for selling dematerialized securities is very simple. After you have sold the securities, you would instruct your DP to debit your account with the number of securities sold by you and credit your broker's clearing account. This delivery instruction has to be given to your DP using the delivery instruction slips given to you by your DP at the time of opening the account. Procedure for selling securities is given here below:

1. You sell securities in any of the stock exchanges through a broker;
2. You give instruction to your DP to debit your account and credit the broker's (clearing member) account before the deadline time specified by your DP;
3. Before the pay-in day, your broker gives instruction to its DP for delivery to clearing corporation;
4. Your broker receives payment from the stock exchange (clearing corporation);
5. You receive payment from the broker for the sale of securities.

How can I purchase dematerialized securities?
For receiving demat securities you may give a one-time standing instruction to your DP. This standing instruction can be given at the time of account opening or later. Alternatively, you may choose to give separate receipt instruction every time some securities are to be received. The transactions relating to purchase of securities are summarized below:

• You purchase securities through a broker;
• You make payment to your broker who arranges payment to clearing corporation on the pay-in day;
• Your broker receives credit of securities in its clearing account (clearing member account) on the pay-out day;
• Your broker gives instructions to its DP to debit its clearing member account and credit your account;
• You receive shares into your account. However, if standing instructions are not given at the time of opening the account, you will have to give 'Receipt Instructions' to your DP for receiving credit.

You should ensure that your broker transfers the securities from its clearing member account to your depository account, before the book closure. If the securities remain in the clearing account of the broker, the company will give corporate benefits (dividend or bonus) to the broker. In that case, you will have to collect the benefits from your broker.

What is a Demat A/c?

What is a Demat A/c?
Investors who wish to trade in the market need to have a dematerialized, or demat, account. In India, the government has mandated two entities –National Securities Depository, or NSDL, and Central Depository Services (India), or CDSL – to be the custodian of dematerialized securities.

• 5.1 What do you mean by dematerialization?
  Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited in the investor's account with its DP.
• 5.2 Can I dematerialize any share certificate?
  You can dematerialize only those certificates that are already registered in your name and are in the list of securities admitted for dematerialization.
• 5.3 What is a depository?
  A depository can be compared to a bank. A depository holds securities like shares, debentures, bonds, government securities, and units, among others of investors in electronic form. A depository also provides services related to transactions in securities.
• 5.4 How can I avail the services of a depository?
  A depository interfaces with the investors through its agents called depository participants, or DPs. If an investor wants to avail of services offered by the depository, the investor has to open an account with a DP. This is similar to opening an account with any branch of a bank in order to utilize the bank's services.
• 5.5 What are the benefits of opening a demat account?
  The benefits of opening a demat account are:
  1. Immediate transfer of securities;
  2. No stamp duty on transfer of securities;
  3. Elimination of risks associated with physical certificates such as bad delivery, fake securities, etc.;
  4. Reduction in paperwork involved in transfer of securities;
  5. Reduction in transaction cost;
  6. Nomination facility;
  7. Change in address recorded with DP gets registered electronically with all companies in which investor
  holds securities eliminating the need to correspond with each of them separately;
  8. Transmission of securities is done by DP eliminating correspondence with companies;
  9. Convenient method of consolidation of folios/accounts;
  10. Holding investments in equity, debt instruments and government securities in a single account;
  11. Automatic credit of shares into demat account, arising out of split/consolidation/merger etc.
• 5.6 How do I select a DP?
  
  1. You can select your DP to open a demat account just like you select a bank for opening a savings account. Some of the important factors for selection of a DP can be:
  2. Convenience - Proximity to the office/residence, business hours.
  3. Comfort - Reputation of the DP, past association with the organization, whether the DP is in a position to give the specific service you may need?
  4. Cost - The service charges levied by DP and the service standards.

Introduction to Primary Markets

Introduction to Primary Markets

Most listed companies are usually started privately by their promoter(s). However, the promoters’ capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running the business over a long term. So, companies invite the public to contribute towards the equity and issue shares to individual investors. The way to invite the public to subscribe to the share capital of the company is through a ‘Public Issue’. Once this is done, the company allots shares to the applicants as per the prescribed guidelines laid down by SEBI.

The Primary Market is, hence, the market that provides a channel for the sale of new securities to issuers, which may can be the Government or corporates, to raise resources to meet their fund raising requirements. The securities may be issued at face value, or at a discount/premium and may take a variety of forms such as equity, debt etc. They may be issued in the domestic and/or international market.
Issue at Face Value:
The nominal value of the share, assigned to it by the issuer, is called the Face Value or Par Value. It is the original cost shown on the share certificate and the extent to which the shareholder is liable to the company. In case of equity shares, the value is generally quite small; for instance Rs 1, Rs 2, Rs 5, Rs 10 etc. Hence, if shares are offered at this value then it is said they are being offered at Face Value or at Par.

Issue at a premium or at a discount:
When shares are offered at more than the Face Value, then it is said that the issue is at a premium. The premium is the amount charged over the Face Value. Conversely, if shares are offered at a price lower than Face Value, then the issue is at a discount. The difference between the Face Value and the Offer Price is the discount.
What Are The Types of Issues?
Primary market Issues can be classified into four types.

1. Initial Public Offer
2. Follow on Offer
3. Rights Issue
4. Preferential Issue

Who Are The Various Intermediaries In A Public Issue?
AThe Issuing Company has to appoint various intermediaries for the issue process. The various intermediaries involved are:

• Book Running Lead Managers (BRLMs)
• Bankers to the Issue
• Underwriters
• Registrars to the Issue etc.

Does everybody who has a demat account invest in the stock market?

Does everybody who has a demat account invest in the stock market?
The answer is No. Why?

Trading and Investing essentially involves some amount of risk, hence the number of people who are getting involved in this risky affair is less when compared to the rate at which markets in India are growing. People therefore hesitate to take the first step towards investments, fearing the results. This uncertainty is due to lack of information and understanding of investment basics. Observing the on-going market trends and learning the fundamentals of investment will definitely enable one to be a successful investor.

How to be an intelligent investor

How to be an intelligent investor
When do we like to purchase any goods or services - when their prices are high or when they are low? Are discounts good for us or are they bad? While all of us run when we hear word discount and sale, our actions are exactly opposite when it comes to equity investing.

Legendary investor Benjamin Graham in his book “The Intelligent Investor” has stated that stocks become more risky when prices are high and less risky when prices are low. This we know is also true for all our purchases. Goods and services are less attractive when prices are high and more attractive when prices are low. However while investing in equity markets we sell our stocks when prices are falling (low) and when they are rising we feel safe to invest.

Investing is a strange business. It's the only one we know of where the more expensive the products get, the more customers want to buy them - Anthony M Gallea

In year 2002 when equity markets were at its bottom after technology bubble had busted, one of my new client was shocked when I recommend 25% of his allocation into equity. According to him equity market was speculation den. Same client about six months ago called me up to check if it was alright to park his entire PPF maturity proceeds into equity.

Another interesting observation made by Benjamin Graham is that an individual considers someone a speculator if that person was to invest in equity markets after they have fallen massively – say may be after a bubble burst. Same individual will treat someone as an investor when that person invests into equity markets after they have risen sharply. What is more speculative in nature - to invest at low levels or high levels?

Since it is difficult to see future, we take shelter in past to predict future. It is like driving the car by only looking into rear view mirror. Rear view mirror only reflects the road, which has already been traveled. The reason we consider an investor speculator when he invest after markets have fallen is because we are referring our judgment on past events. The same is true when we refer to someone as an investor after markets have risen. However we all know that “past performance may or may not be repeated” – To drive ahead we need to look in front and not in rear view mirror.

It is common sense that to earn good returns we need to buy low and sell high. This also means sailing against the tide. Buy when everyone is selling and sell when everyone is buying. This strategy is called contrarian strategy.

It takes patience, discipline and courage to follow the contrarian route to investment success: to buy when others are despondently selling, to sell when others are avidly buying - Sir John Templeton

The reason Sir John Templeton says it requires courage to be contrarian is because as human beings we prefer being with the crowd. We are not comfortable being seen opposite the crowd. When we are on opposite side of the crowd whole world can see us. We feel that if we make mistake then crowd will laugh at us. On the other hand if we are with the crowd and even if our strategy goes wrong nobody will laugh as everybody would have gone wrong.

Finally ending with one more quote from Benjamin Graham “Individuals who cannot master their emotions are ill-suited to profit from the investment process”.

Re falls most in 2 months

The rupee reached its lowest level in two months on Wednesday to close at Rs 39.35/36 against the US dollar, but foreign exchange traders felt the currency could continue to rise in the medium term.

Officials and market analysts, however, felt that the Reserve Bank of India (RBI) was likely to maintain status quo on the overall interest-rate regime, but could engage in more “active management” of foreign inflows in the short-term to prevent appreciation of the domestic currency beyond a certain limit. The trend has already been visible in the past few months. The RBI’s purchases of the dollar have increased from $4.42 billion in May to $11.4 billion in July this year. During the first eight months of the current calendar year, the apex bank has purchased $39.9 billion.

Foreign money flow to continue in India: Merrill

Putting at rest stock market fears that there may be a flight of capital invested by foreign institutional investors (FIIs) in the face of a draft proposal by the Securities and Exchange Board of India (Sebi) to curb the flow of Participatory Notes (PNs), global investment banker Merrill Lynch has said more money was expected to flow into India and China due to high growth.

The flow of foreign money into Asia remains strong, Merrill Lynch's Investment Strategy Report for Asia-Pacific said. India witnessed $6 billion of net foreign buying since the sub-prime led credit crisis spread to the global markets in July, compared with $8 billion flow since January this year.

Pension funds and insurance companies have missed out on the Asia story so far this decade and are facing diminishing returns elsewhere. They are getting interested in Asia and when they do, a large amount of money will flow in, the study has said.

China and India are still small at just 2.5 per cent of MSCI World Index, while Europe and US account for 69.5 per cent. However, China and India remain the prime growth markets, which often drives valuations rather than size, the report said. The MSCI World Index is a market capitalisation index designed to measure global developed market equity performance.

Highlighting the high-growth prospects for domestic companies, the report said, “Where else could you build 25,000-MW of power capacity, which Reliance Power is going to do, except China.”

Merrill Lynch has moved India from an underweight to a marketweight in its recommended asset allocation.

Inflation remains unchanged at 3.07 per cent

Inflation, measured by the wholesale price index (WPI), remained unchanged at 3.07 per cent for the week-ended October 13 and remained at its lowest since October 2002, despite global crude oil trading at a worrisome $92 per barrel.

Analysts, however, felt the Reserve Bank of India (RBI) was unlikely to change key rates in busy season monetary policy next week. With a series of interest rates hikes in quick succession, the RBI has quite aggressively tightened the monetary screws.

While the government has cut import duty on several items, including cement and edible oils, RBI has adopted a policy of monetary tightening via hikes in the cash reserve ratio (CRR) and the repo rate to contain the price line.

Finance Minister P. Chidambaram said in Washington recently that inflationary pressures from the supply side remain strong, but said that better supply management coupled with fiscal and administrative measures and a gradual removal of monetary accommodation have had a favourable impact on inflationary expectations. “Oil prices continue to touch record highs. The potential adverse impact of elevated oil prices on oil importing developing countries merits more focused attention than what has been given so far,” he said.

During the week-ended October 13, food items like fruits and vegetables, pulses, eggs meat and fish became expensive. Prices of flour, maida fell.

The RBI had pegged average annual inflation rate for 2007-08 at 5 per cent and said that it would be in the range of 4.0-4.5 per cent over the medium term.

Can’t get there from here: China - India business travel

I’m in Hong Kong tonight, en route from Beijing to next week’s Fortune Global Forum in Delhi. My transition between mainland China and India, Asia’s two rising giants, affords ample time to ponder the things they have in common. But at the moment, I’m thinking about something they DON’T share: an easy way for business travelers to get from one to the other.

If your job requires you to make regular visits to Asia’s two emerging powerhouses, here’s my advice: Don’t live in either one. Set up camp instead in Hong Kong or Singapore. I know: As the crow flies, this makes no sense. But if you happen not to be a crow (or CEO with dibs on the G-V), the logic is brutally clear. To connect directly from Beijing or Shanghai to Delhi or Mumbai (or vice versa), the options are all grim. Basically you can choose from among the two countries’ clunky state-owned carriers or — for reasons I won’t even pretend to understand — Ethiopian Airlines. Most of these flights are red-eyes, leaving or arriving in the wee hours of the night. So even though China and India share a border, it’s virtually impossible to get a direct connection from one to the other that leaves in the morning and arrives in the evening. Beijing and Delhi are separated by a time difference smaller than that separating New York and LA. But fly direct from one to the other and you’re doomed to a day of nasty jet lag.

Most of the folks I know whose job requires them to both Chase the Dragon and Ride the Elephant, shun the direct flights and revert to some combination of flights on Singapore Airlines, Thai Airlines or the new Cathay Pacific/Dragon Air alliance. China-India routes on those carriers, though far more civilized, are chronically overbooked. If I ring any less than a week in advance for a seat on one, Angela, my Hong Kong-based travel agent, throws up her hands in despair.

So forget geography. For now at least, a passage to India remains far more comfortable if it originates from London than from any city in North Asia. The improbable exception to this rule: Tokyo. On Sept. 1, Japan’s All-Nippon Airlines launched a direct all-business-class flight between Mumbai and Tokyo’s Narita International Airport. Flights run six days a week. Almost by accident, Angela booked me on this flight on its second day of operation. I couldn’t believe my luck. There were only 36 seats, so boarding in Mumbai was a snap. The plane is a Boeing 737-700, so pretty small, but with so few seats, the interior feels surprisingly roomy. In-flight service was impeccable and the food was five-star. There was even an electrical port for my Mac. True, it was an overnight flight, but I barely noticed. We left Mumbai at 8:15 pm sharp. I had dinner, flipped through a magazine, dozed off for a few hours, and the next thing I knew I was slurping somen noodles for breakfast over Mt. Fuji. We touched down at 8:30 am. Totally painless!

On my last India trip, Angela pointed out to me that, in fact, the new ANA flight isn’t just the fastest way between Mumbai and Tokyo but, depending on the day, can also be the quickest way to get from Delhi to Beijing. You fly first to Mumbai (hundreds of miles in the wrong direction), catch the ANA flight to Tokyo (hundreds of miles too far east), hop a second ANA connection backtracking to Beijing — and can still arrive in the Chinese capital more than an hour before the next best connection via Singapore. Japanese media report that as of Oct 28, Japan Airlines will begin operating daily flights between Tokyo and Delhi, up from four flights a week now. My guess is that these new connections will do as much — if not more — than former prime minister Shinzo Abe’s recent visit to Delhi to boost commercial ties between Japan and India. As a new Beijing resident, I can only pray that Sonia Gandhi’s pending visit to China achieves a comparable commercial aviation breakthrough.

Beware of MF dividend declarations

Beware of MF dividend declarations
“XYZ Scheme is declaring 100% dividend and my distributor is telling me to invest in this scheme” . “This is important information which I have received from my relationship manager that ABC Scheme is declaring a dividend of 50%”. I come across statements like this every now and then where dividends declared by mutual funds are used as a bait to get investors to invest. The scenario is presented in a manner that if you invest Rs. 1 lakh today , you will receive a Rs. 30000 as dividend or some other amount based on the NAV of the fund. Nothing could be further from the truth.

Dividends are not any form of additional gains that you can expect. In fact, dividend in Mutual Funds is a function of Capital Appreciation. Let's say you invest on 20th September Rs. 5 lakh at an NAV of Rs. 50. This means you end up getting 10000 units (have excluded Entry load for simplicity).
Investment
Rs. 500000
NAV
Rs. 50
Number of Units
10000
Dividend Declared
100% (i.e Rs. 10)
Dividend Received
Rs.10 * 10000 = Rs. 100000








Happy aren’t you to receive Rs. 1 Lakh as dividend. I wish it was this simple and easy to make money in just a few days . There would be far more billionaires and millionaires than we have now.

Now for the catch, after the dividend is declared the NAV of the fund falls down from Rs. 50.00 to Rs.40.00

Value of your holding = 10000*40= Rs. 400000. This along with the dividend already received of Rs. 1 lakh will translate into your original investment of Rs. 5 lakh. So you see things are not as rosy as they are projected to be.
POST DIVIDEND
NAV
Rs. 40.00
Number of Units
10000
Investment
Rs. 400000
Dividend Received
Rs.10 * 10000 = Rs. 100000
Total Amount in hand
Rs. 5000000 same as earlier










So how should one react to these advertisements that a 100% dividend is being declared or should anyone invest just on the basis of this information. The answer is an outright no. However, People have utilized a strategy called Dividend Stripping on the basis of this information. This was more rampant when Mutual Funds used to declare dividends a month or so before the record date.

The way it works is as follows. Suppose you have a short term gain of around Rs. 100000 . Instead of paying a short term capital gains tax of Rs. 10000 (considering 10 % short term capital gains), you make an investment of Rs. 100000 in a fund to declare a dividend of say around 25% (NAV= Rs. 25 ) .

Number of Units you have : 4000
Dividend per unit = Rs. 2.50 (25%)
Total Dividend Received : Rs. 10000
Value of your investment now : 4000 units * NAV (RS. 25-10%) Rs. 22.50 = Rs. 90000
Redeem your investment now for Rs. 90000 and you have a Rs. 10000 Short Term Capital Loss.
POST DIVIDEND
NAV
Rs. 22.50
Number of Units
4000
Investment
Rs. 90000
Dividend Received
Rs.2.50 * 4000 = Rs. 10000
Total Amount in hand
Rs. 100000 same as earlier










Here you have received tax free dividend and you have been able to offset this against your short term capital gains.

Now your short term gain is around 90000 instead of earlier Rs. 100000. This results in a saving of around Rs. 1000 or 10% for you.
Short term Capital Gain
Rs. 1,00,000
Loss from sale of investment post dividend
Rs. 10,000
Net Short term Capital Gain
Rs. 90000
Saving in Short term Capital Gains tax
10% of 10,000 = Rs. 1,000










IT Department through its annual budget have tried to fix this loophole by increasing the holding period of the investment post the record date based on whether it was bought 3 months before the record date or within 3 months of the record date.

SEBI on the other hand issued guidelines that required the AMC to issue a notice communicating the decision to distribute dividends within 1 calendar day of decision by the trustees. At the same time the record date should be 5 calendar days from the issue of this notice. Though these are steps in the right direction and dividend stripping has been slowed to a certain extent, AMCs in the race to gather more assets are still using this as a ploy.

Don’t fall for this or any such trick as your purpose of investing in equity oriented funds should be capital appreciation and not because a dividend is being declared. Dividend Payout, Dividend Reinvestment and Growth are options to choose based on your situation and need. Mutual Funds can only pay out dividends if they have made gains on the portfolio. Dividends are like fruits on a tree...If you do not give enough time for the tree to grow...where will the fruits come from...Don’t know about this but your dividend will certainly come out from your principal.

How to optimize your tax using mutual funds?

How to optimize your tax using mutual funds?

Mutual Funds by their very nature are not tax saving instruments but investment products that may offer tax concessions. But the question is whether these should be looked at as tax saving instruments?

Moneycontrol tells you how to kill two birds with one stone - how to optimize tax while getting the best from mutual funds.

Equity Linked Savings Schemes (ELSS) Are Strong Favorites:

ELSS schemes give twice the benefit as compared with diversified equity schemes. They give you tax sops on investments and are also exempt from long term capital gains tax.

These are special equity funds, which have to invest at least 80% of their corpus in equity, and investments are locked in for a period of 3 years. Investments can get you benefits under Section 80 C i.e. investments of upto Rs 1 lakh in such schemes can be reduced from your gross income.

Hemant Rustagi, CEO, Wiseinvest Advisors believes that ELSS is the best example of an investment option that provides you a very simple way of investing in stock market and save taxes while doing so. “Being equity oriented schemes, ELSS have the potential to provide better returns than most of the options under section 80C. Also, as per the current tax laws, an ELSS investor is not only entitled to earn tax free dividend but also the long term capital gains are not taxable”, he adds.

	Absolute Returns
ELSS	3 Year	5 Year	Assets (Rs in cr)
Magnum Tax Gain Scheme	836.6%	603.1%	464.02
HDFC Long Term Advantage	530.0%	805.9%	348.39
HDFC Tax Saver	562.7%	692.9%	323.28
Pru ICICI Tax Plan	602.9%	671.2%	280.96
Franklin India Tax Shield	390.9%	424.4%	236.51

But should an investor go the whole nine yards and put in the entire permissible amount of 1 lakh in ELSS? Probably not!

Ranjeet Mudholkar, Head - Certified Financial Planners Board, cautions that Sec 80 C covers your principal on housing loan, PF, pension plan, life premiums, so only what is left after that can give you a benefit if invested in ELSS.

All Smiles From Equity Funds:

Apart from ELSS schemes, diversified equity schemes are a good investment considering that capital gains in equity funds below one year are taxed at a rate of 10% and over a year are tax-free. This option can be best excercised using a Growth Plan offered by mutual funds. The primary objective of a Growth Plan is to provide investors long-term growth of capital.

Dividend paid in Dividend Plans is tax free, and no distribution tax is deducted. However, every time we buy or sell equity shares a Securities Transaction Tax, STT, of 0.25% is paid and further when you redeem your investment, again STT is deducted from your redemption price.

So what strategy will help to reduce the burden of STT to the minimum possible extent?

Investment expert Krishnamurthy Vijayan advises to choose the dividend option, while it remains tax-free. “Though both decisions are by and large tax-neutral, your STT will go down if your profits have already been taken out by you in the form of dividend”, he adds.

	Absolute Returns
Equity Diversified Scheme	3 Year	5 Year	Assets (Rs in cr)
HDFC Equity Fund	453.50%	645.50%	2,657.90
Reliance Growth Fund	664.50%	1010.60%	2,496.41
Franklin India Prima Fund	578.10%	933.60%	2,418.55
Franklin India Bluechip	384.30%	428.70%	2,107.56
Reliance Vision Fund	461.80%	931.40%	1,694.92

Debt Funds Can Benefit From Indexation:

Debt funds have lost their sheen thanks to falling interest rates and paling tax sops when compared with equity schemes.

Any fund wherein the average holding in equity is 65% (as per Budget 2006) or below is treated as a debt fund. If you invest for less than 1 year in the growth option of a debt fund, you will have to pay Capital Gains Tax on your "profits" at the rate at which you pay income tax on your income. But, if you stay invested for over a year, you can either pay 10% tax on the profits or pay 20% after reducing the rate of inflation (indexation benefit). So if you are invested for three or four years, your tax may become much, much lower than 10%.

Nevertheless for the risk averse, there are ways to reduce the tax burden on returns.

Investors can also benefit from double indexation benefit (when you invest late in one financial year say on March 28, 2005, and redeem early in the next financial year say on April 2, 2006, you use the index of both Financial Year ending March 2006 and March 2007 to get this benefit for as little as 366 days) provided the two financial years' index adds up to more than 10%.

In the dividend option, dividend is tax free in your hands. But the dividend distribution tax deducted at source also comes out of your NAV. So you end up paying a tax of 10%. Further any increase in NAV over and above the dividend distributed, is taxed as in the case of the growth option.

Vijayan advises most debt fund investors who have a reasonable horizon to invest for at least one year or more, in any case and choose the growth option, since by and large this would prove most tax efficient for retail investors in the lower tax brackets.

10 must-reads in an MF offer document

10 must-reads in an MF offer document
You would have come across this line in all Mutual Fund advertisements, “Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing.” It’s an open secret that this 80 to 100 page bulky document is not simple to read and the legal information it contains is not easy to understand for most investors.

However, Sebi has made the investor’s job easier by evolving an abridged form, the Key Information Memorandum. Also, Sebi has served the cause of investors by stipulating standard sections and standard disclosures in all Offer Documents. Hence, the Offer Document can be the friend and guide of an enlightened investor. Here is a guide to what an Offer Document is, why it is important and what are the 10 Most Important Things to Read in an Offer Document for investors.

What is a Mutual Fund Offer Document?

It is a prospectus that details the investment objectives and strategies of a particular fund or group of funds, as well as the finer points of the fund's past performance, managers and financial information. You can obtain these documents from fund companies directly, through mail, e-mail or phone. You can also get them from a financial planner or advisor. All fund companies also provide copies of their ODs on their websites.

10 Most Important Things to Read in an Offer Document:

Date of issue
First, verify that you have received an up-to-date edition of the OD. An OD must be updated at least annually.

Minimum investments
Mutual funds differ both in the minimum initial investment required, and the minimum for subsequent investments. For example, equity funds may stipulate Rs 5000 while Institutional Premium Liquid Plans may stipulate Rs 10 crore as the minimum balance.

Investment objectives
The goal of each fund should be clearly defined — from income, to long -term capital appreciation. The investors need to be sure the fund's objective matches their objective.

Investment policies
An OD will outline the general strategies the fund managers will implement. You'll learn what types of investments will be included, such as government bonds or common stock. The prospectus may also include information on minimum bond ratings and types of companies considered appropriate for a fund. Be sure to consider whether the fund offers adequate diversification.

Risk factors
Every investment involves some level of risk. In an OD, investors will find descriptions of the risks associated with investments in the fund. These help investors to refer to their own objectives and decide if the risk associated with the fund's investments matches their own risk appetite and tolerance. Since investors have varying degrees of risk tolerance, understanding the various types of risks in this section( eg credit risk, market risk, interest-rate risk etc.) is crucial. Investors must raw be familiar with what distinguishes the different kinds of risk, why they are associated with particular funds, and how they fit into the balance of risk in their overall portfolio. For example, a Post Office Monthly income plan assures an 8% monthly income payment for its 6 years tenure. A Mutual Fund MIP invests in a portfolio of 80% to 90% bonds and gilts and 10% to 20% of equities, to generate capital appreciation, which is passed on to customers as monthly income, subject to availability of distributable surplus. In 2004, a lot of mutual fund customers underestimated this market risk and were caught by surprise when the MIPs gave low/negative returns.

Past Performance data
ODs contain selected per-share data, including net asset value and total return for different time periods since the fund's inception. Performance data listed in an OD are based on standard formulas established by Sebi and enable investors to make comparisons with other funds. Investors should keep in mind the common disclaimer, "past performance is not an indication of future performance". They must read the historical performance of the fund critically, looking at both the long and short-term performance. When evaluating performance, investors must look at the track record of a fund over a time period that matches their own investment goals.

They must check that the benchmark chosen by the fund to compare its relative performance is appropriate. Sebi is doing a fine job of ensuring this as well. In addition, investors should keep in mind that many of the returns presented in historical data don't account for tax. They must look at any fine print in these sections, as they should say whether or not taxes have been taken into account.

Fees and expenses
“Mutual funds have two goals: to make money for themselves and for you, usually in that order.”- Quote from Fool.com. Entry loads, exit loads, switching charges, annual recurring expenses, management fees, investor servicing costs…these all add up over time. The OD lists the limits on these fees and also shows the impact these have had on the fund investment historically.

Key Personnel esp Fund Managers
This section details the education and work experience of the key management of the fund company, including the CEO and the Fund Managers. Investors get an idea of the pedigree and vintage of the management team. For example, investors need to watch out for the fund that has been in operation significantly longer than the fund manager has been managing it. The performance of such a fund can be credited not to the present manager, but to the previous ones. If the current manager has been managing the fund for only a short period of time, investors need to look into his or her past performance with other funds with similar investment goals and strategies. Only then can they get a better gauge of his or her talent and investment style.

Tax benefits information
Mutual funds enjoy significant tax benefits under Sec 23 D and Sec 115 .For example, Equity funds enjoy nil long terms capital gains and nil dividend distribution tax benefits. A close reading of the tax benefits available to the fund investors will enable them to plan their taxes better and to enhance their post tax returns.

Investor services
Shareholders may have access to certain services, such as automatic reinvestment of dividends and systematic investment/withdrawal plans. This section of the OD, usually near the back of the publication, will describe these services and how one can take advantage of them.

Conclusion

After reading the sections of the OD outlined above, investors will have a good idea of how the fund functions and what risks it may pose. Most importantly, they will be able to determine if it is right for their portfolio. If investors need more information beyond what the prospectus provides, they can consult the fund's annual report, which is available directly from the fund company or through a financial planner.

This investment of time and effort would prove very beneficial to investors.

New to Mutual Funds? Tips for a beginner

First time investors in Mutual Funds act in the face of imperfect information and often get overwhelmed by uncertainties characterizing the investment situation. But there’s more to Mutual Fund investing than market timing.

First things first..

The first thing an aspiring unit holder must do is to establish what type of portfolio he wants to build. In other words, to decide the right asset allocation. Asset allocation is a method that determines how you invest your money in different investments with the proper mix of various asset classes. Remember, the type or class of security you own i.e. equity, debt or money market, is much more important than the particular security itself.

The popular thumb rule for asset allocation says that whatever the investor’s age, he should keep that percentage of his portfolio in debt instruments. For example, if an investor is 25, he should have 25% of his investments in debt instruments and the rest in equity. However, in reality, different circumstances and financial position for each individual may require different allocation. Portfolio variable is another factor that one needs to understand to practice asset allocation. These are age, occupation, number of dependants in the family. Usually the younger you are, the more riskier the investments you can hold for getting superior returns.

How to pick the right fund/s?

Next, focus on selecting the right fund/s. The key is to select the fund/s based on their investment philosophy and consistency in terms of returns. To ensure you are selecting the right type of funds that are appropriate for your needs, consider following:

• Determine what your financial goals are.
• Are you investing for retirement? A child’s education? Or for current income?
• Consider your time frame. Do you need money in three months time or three years? The longer your time horizon, the more risk you may be able to take.
• How do you feel about risk? Are you in a position to tolerate the ups and downs of the stock market for the possibility of higher returns? It is necessary to know your own risk tolerance. It can be a guide for choosing the right schemes. Remember, regardless of the potential returns, if you are not comfortable with a particular asset class, you should consider other options.

Fund Candy Diversified equity funds Index funds Opportunity funds Mid-cap funds Equity-linked savings schemes Sector funds like Auto, Health Care, FMCG, IT, Banking etc. Balanced funds for those who are not comfortable with 100% exposure to equity If selected properly, these equity and equity-oriented funds have the potential to deliver returns that could be far superior to other asset classes.

Remember, all these factors will have a direct impact on the fund you choose and the return that you can expect to get. If you are a long-term investor with some appetite for risk and are looking for returns to beat inflation, equity funds are your best bet. MFs offer a variety of equity and equity-oriented schemes (See table ‘Fund Candy’). For a beginner, it makes sense to begin with a diversified fund and gradually have some exposure to sector and specialty funds.

Investment Strategies that will help you make the best of your MF Investment and Traps that you should avoid.

Keeping track..
Filling up an application form and writing out a cheque is not the end of the story. It is equally important to keep an eye on how your investments are performing. While having a qualified and professional advisor helps both in terms of making the right decision as well as measuring performance, it makes sense to know how to do yourself with a little help from these sources:

Fact sheets and Newsletters:
MFs publish monthly fact sheets and quarterly newsletters that contain portfolio information, a report from the fund manager and performance statistics on the schemes managed by it.

Websites:
MF web sites provide performance statistics, daily NAVs, fund fact sheets, quarterly newsletters and press clippings etc. Besides, the Association of Mutual funds in India, AMFI, website, contains daily and historical NAVs, and other scheme.

Newspapers:
Newspapers have pages reporting the net asset values and the sales and redemption prices of MF schemes besides other analysis and reports.

Remember, it is very important for you to be well informed. To achieve this, you need to spend a little time to understand and analyze the information to enhance the chances of success. Even if you spend one percent of the time that you spend on earning money, it’ll be a good beginning. Above all, take help of a professional advisor to select the right fund as well as the right mix of one time investment, SIP and the STP.

Gurgaon to have 10,000 luxury flats in 2 yrs (oversupply of over 300 %)

Now there's oversupply at the high end. In about 2 years Gurgaon will have 10,000 luxury flats. That’s projected oversupply of over 300 %.

DLF’s project Belaire will come up on this plot. Prices here are Rs 7500 a square foot or Rs 3 crore anapartment. Next to it, Emaar MGF will build palm springs apartments, priced at Rs 7,200 a square foot and Parsvnath has exotica under way on this adjacent plot, priced at Rs 6,500 a square foot.

Such luxury apartments, which cost Rs1.5 crore or more, will comprise about 30 % of residential supply in Gurgaon by 2010.

Gurgaon will have 10,000 luxury homes, up from 1500 in 2006. That’s 300 units added every month.

"The average absorption doesn't cross 200 - of these 200 - the demand for high end homes over a one crore is less than 50" says Ankur Srivastava, MD, DTZ

With limited demand for homes of over 2,000 sq feet, Gurgaon will have an oversupply of 300 % in about 2 years. Property consultants DTZ say the impact is evident. There has already been a price correction of upto 25% in the luxury homes segment.

Grow your own money tree

Grow your own money tree

If growing your money is by itself challenging enough, creating everlasting wealth to last you and subsequent generations of your family, is even more so. With much to study, products to know, advice to hear, and decisions to make, it can be hard work.

A little surprise then that people tend to shy away, preferring to take life as it comes. Also, while some people feel they have too little to worry about, others feel they have too much to care.

The fruits of such labour though can be rewarding enough to compensate, and well worth the exercise. Let me provide you with a 17-step guide to creating such a money tree - right from identifying various sources of income, creating strategies for investment, planning fund allocations, nurturing and growing one’s ideas, and finally, distributing your assets in an appropriate manner when the time comes.

Step 1: Multiple sources of income

The most important step - the more you have, the more you can deploy and subsequently reap. Investment made using your basic source of income - be it salary, professional fees or business is done with the objective of making profits or earning interest.

If, instead, you can figure out a way to get a stream of income into your bank account for many years, you have successfully created an additional income stream. Now what do you do with this income stream? Invest it again to create another stream of course!

The important thing to understand is - have alternate sources of ongoing income. Let us first discuss investments, since that is simple to understand. You may have an asset class of your choice - equities, bonds, paintings, house property and so forth.

The questions to ask are:

Will these give me that stream of income?

What stream of income will it generate (ongoing or just appreciation)?

Question this income in terms of taxation, efficiency and periodicity.

Examples

Multiple sources of income may also arise from the nature of your work, services you can offer etc. This is attainable for all -- business, professional and salaried people.

A CA living in a tier II city has his wife running a small business from home, giving finishing touches to shade cards used in the paint industry. They employ 10-12 people, generating a income of about 20-30 k per month.

Or, consider part-time or weekend work, leveraging your hobby skills to generate income, creating a website, writing, publishing, setting up an outsourcing home business etc.

We can all do such things - the options are endless.

So, what should be your ideal first target for generating an additional source of income? You should be able to match your current income, or at least your current expenses.

So, what should be your target make this multiple sources of income concept work for you? Replace your current income. Or at least meet your current expenses from your alternate income source.

Opportunities are everywhere, just look around. It's hard work at first, but when the money starts rolling in, its sweet.

How NRIs can invest in Indian markets

How NRIs can invest in Indian markets
wants to invest his money in the Indian markets. These are his needs:

• He wants to invest in the best options available in India for a period of five years.
• He does not want liquidity. Nor does he want a lock-in.
• He wants to repatriate his money back.
• He has NRO and NRE bank accounts.
• He wants least operational hassles.

But he's not sure in which instruments to invest in and how to go about it.

Here's one good option:Mutual Funds.

One of the easiest, most hassle free routes to invest in the Indian markets, mutual funds, are managed by professional fund managers.

Hence, it is less troublesome choosing mutual funds as compared to direct equity (where one needs RBI Approvals before opening a trading and demat account). Mutual funds need not be looked at daily; a periodic review is more than enough. One has to keep track of the portfolio as a whole. Hence an Investment Advisor (qualified of course!) is the best option.

The procedure is quite simple:

Step 1: The advisor understands your needs and recommends a scheme or multiple schemes, accordingly.

Step 2: The form can then be e-mailed to you, you can sign and send the application form by post/courier

Step 3: A demand draft could be ordered through your bank to be delivered directly to your advisor. This prevents the problem of loss of cheques in transit.

Step 4: The advisor then acknowledges receipt of the forms and drafts to you by e-mail and also scans and sends you a copy of the filled application form for your records.

Step 5: The investment form is sent to the respective fund house and you receive the account statement via e-mail.

The advisor sends you a periodic update of the portfolio and also recommends any changes that need to be made due to any change in the circumstances (Move of the fund manager, markets run up too high, booking losses etc)

In addition, if you have made switches or redemptions, your advisor is also expected to keep record of the switches made and also confirm with you if you have received the redemption proceeds directly in you bank account.

Note the following:

1. Amount invested from NRE account is repatriable.
   
2. Amount invested from NRO account is non-repatriable.
   
3. NRIs are not required to submit PAN Cards (Indian nationals need to submit PAN Card copies for investing more than Rs 50,000).
   
4. NRIs need a correspondence address in India.
   
5. NRIs prefer a comprehensive long term solution.
6. Minimum paperwork.
7. Identifying good long term schemes and advising growth option.
   
8. Support for filing taxes in India.
9. Advice on whether the income from mutual funds need to be clubbed by them internationally (varies for different countries).

NRIs looking to return to India after a couple of years and who are looking to invest a huge sum of money, can look at investing in property.

Money mantras

Mutual Funds are hassle free investments for NRIs.

Growth option is best, as NRIs look for long term growth in assets.

Dollar-Rupee fluctuation must be kept in mind.

Look for a qualified Investment Advisor.

Periodic updates and switches must be sent to you on a regular basis.