Some basics about SENSEX

Q.1 What is SENSEX?
The SENSEX, short form of the BSE-Sensitive Index, is a "Market Capitalization-Weighted" index of 30 stocks representing a sample of large, well-established and financially sound companies. It is the oldest index in India and has acquired a unique place in the collective consciousness of investors. The index is widely used to measure the performance of the Indian stock markets. SENSEX is considered to be the pulse of the Indian stock markets as it represents the underlying universe of listed stocks at The Stock Exchange, Mumbai. Further, as the oldest index of the Indian Stock market, it provides time series data over a fairly long period of time (since 1978-79).


Q.2 What are the objectives of SENSEX?

The SENSEX is the benchmark index of the Indian Capital Markets with wide acceptance among individual investors, institutional investors, foreign investors and fund managers. The objectives of the index are:

To measure market movements
Given its long history and its wide acceptance, no other index matches the SENSEX in reflecting market movements and sentiments. SENSEX is widely used to describe the mood in the Indian Stock markets.

Benchmark for funds performance
The inclusion of blue chip companies and the wide and balanced industry representation in the SENSEX makes it the ideal benchmark for fund managers to compare the performance of their funds.

For index based derivative products
Institutional investors, money managers and small investors all refer to the SENSEX for their specific purposes The SENSEX is in effect the proxy for the Indian stock markets. The country's first derivative product i.e. Index-Futures was launched on SENSEX.


Q.3 What are the criteria for selection and review of scrips for the SENSEX?
A. Quantitative Criteria:

1. Market Capitalization:
The scrip should figure in the top 100 companies listed by market capitalization. Also market capitalization of each scrip should be more than 0.5 % of the total market capitalization of the Index i.e. the minimum weight should be 0.5 %. Since the SENSEX is a market capitalization weighted index, this is one of the primary criteria for scrip selection. (Market Capitalization would be averaged for last six months)

2. Liquidity:
(i) Trading Frequency: The scrip should have been traded on each and every trading day for the last one year. Exceptions can be made for extreme reasons like scrip suspension etc. (ii) Number of Trades: Number of Trades: The scrip should be among the top 150 companies listed by average number of trades per day for the last one year. (iii) Value of Shares Traded: Value of Shares Traded: The scrip should be among the top 150 companies listed by average value of shares traded per day for the last one year.

3. Continuity:
Whenever the composition of the index is changed, the continuity of historical series of index values is re-established by correlating the value of the revised index to the old index (index before revision). The back calculation over the last one-year period is carried out and correlation of the revised index to the old index should not be less than 0.98. This ensures that the historical continuity of the index is maintained.

4. Industry Representation:
Scrip selection would take into account a balanced representation of the listed companies in the universe of BSE. The index companies should be leaders in their industry group.

5. Listed History:
The scrip should have a listing history of at least one year on BSE.

B. Qualitative Criteria:

Track Record:
In the opinion of the Index Committee, the company should have an acceptable track record.


Q.4 What is the beta of SENSEX scrips?
Beta measures the sensitivity of a scrip movement relative to movement in the benchmark index i.e. SENSEX. A Beta of one means that for every change of 1% in index, the scrip moves by 1%. Statistically Beta is defined as: Covariance (SENSEX, Stock )/ Variance(SENSEX)
Note: Covariance and variance are calculated from the Daily Returns data of the SENSEX and SENSEX scrips.


Q.5 How is SENSEX calculated?

SENSEX is calculated using a "Market Capitalization-Weighted" methodology. As per this methodology, the level of index at any point of time reflects the total market value of 30 component stocks relative to a base period. (The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company). An index of a set of a combined variables (such as price and number of shares) is commonly referred as a 'Composite Index' by statisticians. A single indexed number is used to represent the results of this calculation in order to make the value easier to work with and track over time. It is much easier to graph a chart based on indexed values than one based on actual values.

The base period of SENSEX is 1978-79. The actual total market value of the stocks in the Index during the base period has been set equal to an indexed value of 100. This is often indicated by the notation 1978-79=100. The formula used to calculate the Index is fairly straightforward. However, the calculation of the adjustments to the Index (commonly called Index maintenance) is more complex.

The calculation of SENSEX involves dividing the total market capitalization of 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the SENSEX. It keeps the Index comparable over time and is the adjustment point for all Index maintenance adjustments. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate SENSEX every 15 seconds and disseminated in real time.


Q.6 How is the closing Index calculated?

The closing SENSEX is computed taking the weighted average of all the trades on SENSEX constituents in the last 15 minutes of trading session. If a SENSEX constituent has not traded in the last 15 minutes, the last traded price is taken for computation of the Index closure. If a SENSEX constituent has not traded at all in a day, then its last day's closing price is taken for computation of Index closure. The use of Index Closure Algorithm prevents any intentional manipulation of the closing index value.


Q.7 How are adjustments for Bonus, Rights and newly issued Capital carried out in SENSEX?
The arithmetic calculation involved in calculating SENSEX is simple, but problem arises when one of the component stocks pays a bonus or issues rights shares. If no adjustments were made, a discontinuity would arise between the current value of the index and its previous value. The Index Cell of the Exchange periodically adjusts the base value to take care of such corporate announcements.
Adjustments for Rights Issues:
When a company, included in the compilation of the index, issues right shares, the market capitalisation of that company is increased by the number of additional shares issued based on the theoretical (ex-right) price. An offsetting or proportionate adjustment is then made to the Base Market Capitalisation (see ' Base Market Capitalisation Adjustment' below).
Adjustments for Bonus Issue:
When a company, included in the compilation of the index, issues bonus shares, the market capitalisation of that company does not undergo any change. Therefore, there is no change in the Base Market Capitalisation, only the 'number of shares' in the formula is updated.
Other Issues: Base Market Capitalisation Adjustment is required when new shares are issued by way of conversion of debentures, mergers, spin-offs etc. or when equity is reduced by way of buy-back of shares, corporate restructuring etc.
Base Market Capitalisation Adjustment: The formula for adjusting the Base Market Capitalisation is as follows:

New Base Market Capitalisation = Old Base Market Capitalisation X (New Market Capitalisation/Old Market Capitalisation)

To illustrate, suppose a company issues right shares which increases the market capitalisation of the shares of that company by say, Rs.100 crores. The existing Base Market Capitalisation (Old Base Market Capitalisation), say, is Rs.2450 crores and the aggregate market capitalisation of all the shares included in the index before the right issue is made is, say Rs.4781 crores. The "New Base Market Capitalisation " will then be: Rs.2501.24 crores = 2450 X (4781+100)/4781

This figure of 2501.24 will be used as the Base Market Capitalisation for calculating the index number from then onwards till the next base change becomes necessary.


Q.8 With what frequency is SENSEX calculation done?
During market hours, prices of the index scrips, at which trades are executed, are automatically used by the trading computer to calculate the SENSEX every 15 seconds and continuously updated on all trading workstations connected to the BSE trading computer in real time.

Difference between Shares and Mutual Funds

Someone has asked, on a forum: What's the difference between shares and mutual funds?

And here's my elevator explanation:

Shares: When companies look for money for their business, they can get it in two ways - either they borrow from a bank and pay interest ("debt") or they ask people like you and me to invest and give us shares ("equity"). A share is a part of a business.

Then let's say a friend named Sarath wants to buy a share of this business but the company has got all the money it needs. So Sarath asks us to sell our shares to him, at a higher value than we bought it. So he will own our share of the company, but he's willing to pay more because he thinks the company will do well. Now we make a profit and then Sarath perhaps sells it to someone else at even higher values etc. The company doesn't really get affected because it isn't seeing the money, but the share price goes up as the company starts doing better, and as more people begin to want the shares.

Why does the share price go up? The answer is: Perceived value. I may think the company is worth 1 crore, but someone else might think it's worth 2 crores. When my shares reach my valuation I sell, but someone else will think it's a good deal and buy.

To organise such buying and selling, there are commercial "stock exchanges". BSE and NSE are some of them, though there are a number of other, smaller exchanges in India. An exchange provides a common place for people to buy or sell shares, with sales happening on an auction basis - buyers bid for shares at a price they are willing to pay, and sellers "ask" for a price from buyers. Exchanges match these prices and share exchanges happen along with payments. "Brokers" facilitate these exchanges, and you pay them a fee as brokerage, part of which goes to the stock exchange as well.

Mutual funds: When a lot of shares are available on stock exchanges, you and me don't know which companies to invest in. But let us say a guy named Sandip Subherwal knows, and keeps track of the market daily. So we give him our money and he buys and sells stocks for us. This is a mutual fund - it's our money (mutual), and Sandip is a Fund Manager. There is a structure to this in India, so a fund manager is part of an "asset management company (AMC)". To protect Sandip from running away with our money, SEBI has some rules in place, and there are "trustees" for every fund. With this structure the AMC issues "units" to us for the money we have invested, and tells us how much our units are worth daily (NAV). We can then choose to exit by selling our units back to the AMC ("redemption").

Mutual funds are not just restricted to shares. They are mutual investments, therefore they can be anywhere. The common ones are equity (stocks and shares) and Debt. Debt markets are where companies borrow money, but they want to borrow huge sums of money that you and I don't have. Therefore, we pool in our money (mutual fund) and give the big whole lot to the company at an interest. Even the government borrows, but again, only large sums of money. Mutual funds can invest there too. Debt is traditionally "safer" than equity since there is a fixed valuation and good rating mechanisms to curb risk; and in the same vein, the profits (and losses) are usually much lesser than equity.

Mutual funds can also invest in other investment avenues, like Gold, Real Estate, Commodities and even in Windmills! Of course, in India only a few of these are available.

Shares are a part of a business, mutual funds are cumulative investment. I hope this helps.

All about "Z" group stocks

Stay away from Z group stocks

The key criteria for selecting stocks for investment should be the quality of management and its adherence to corporate governance. What is the point in investing in companies that do not even bother to send annual reports to their shareholders?

Stock exchanges use various provisions in the listing agreement to regulate companies’ corporate governance practices. Stocks that fail to comply with the various provisions of the listing agreement are clubbed under various categories. The Bombay Stock Exchange (BSE), the largest stock exchange in terms of number of stocks listed, classifies such stocks into the Z group, and the trade-to-trade segment. It monitors these stocks on an ongoing basis.

Stocks that have not complied with or breached provisions of the listing agreement of the BSE are pushed into the Z group. Those stocks witnessing lot of volatility, suspicious trading pattern and high speculative interests are shifted to the trade-to-trade category.

The Z category was introduced by the BSE in July 1999. The governing board of the BSE came out with important amendments to the criteria for shifting stocks to the Z group in January 2002. The guidelines specify seven parameters for shifting stocks to the Z category. The exchange considers any three of the seven parameters of non-compliance for shifting a company to the Z group. The seven criteria are as follows:

Required notice of book closure and record dates (Listing Clause 15 & 16).

Yearly submission of annual reports (Listing Clause 31(1)(a)).

Quarterly submission of shareholding pattern (Listing Clause 35).

Payment of annual listing fees (Listing Clause 38).

Publication of audited / unaudited results on a quarterly basis (Listing Clause 41).

Redressal of investors’ complaints such as share transfers (Listing Clause 3, 12, 21).

Implementation of corporate governance, if applicable (Listing Clause 49).

Additionally, the exchange may shift certain companies to the Z group based on its discretion: companies that are fundamentally weak in terms of net worth, sales, market capitalization and profitability. Those companies that fail to make dematerialisation (demat) arrangement with both the depositories — Central Depository Services (CDSL) and National Security Depository (NSDL) — are also shifted to the Z group. However, as and when the company makes demat arrangements, the stock is shifted back to the original group after three months from compliance.

Companies in the Z group are reviewed on a quarterly basis by the governing board or the listing committee of the stock exchange. Besides, the surveillance department of the exchange has discretionary powers to add or remove companies from the Z group based on its own investigation or complaints filed by investors or any kind of suspicious trading pattern. The Investors’ Service Cell also has the powers to add or remove companies from the Z group. Not only this, the exchange can take into consideration any punitive actions taken by any regulatory authority against a company as basis for shifting the stock to the Z category.

How are investors affected when a stock is shifted to the Z or trade-to-trade category? First, such companies do not follow basic minimal corporate governance norms. Many of these companies do not even bother to submit annual report or shareholding pattern regularly. They may not even pay attention to investors’ complaints as regards to share transfer. Investing in such companies simply means buying a worthless piece of paper.

In the Z or trade-to-trade segment, selling or buying results in giving or taking delivery of shares at the ‘gross level’. Gross level means no intra-day netting off or squaring off is permitted. Thus, no investor can indulge in intra-day trading in such stocks. For instance, an investor buys 100 shares of stock ABC, shifted to either the Z or the trade-to-trade category, and further sells another 100 shares in the same trading session. End of the day, his purchase and sales would not be netted. The investor would need to give delivery of 100 shares against his sale transaction and would also need to pay for the purchase of 100 shares.

As a result, the price discovery mechanism of stocks shifted to the ‘Z’ group or trade-to-trade category is poor as volatility is high. The investor could find some of the stocks hitting upper circuit continuously for many days and, subsequently, may tumble down in a matter of a few trading sessions. No wonder the BSE specifies higher margin for trading in such stocks. Hence, institutional investors like mutual funds, insurance companies, and foreign institutional investors stay clear of such stocks. Thus, these stocks lack liquidity.

This is also reflected in trading activity. The average turnover of the Z group stocks is less than 1% compared with the overall turnover of the BSE. On 30 March 2007, the combined turnover of the Z and the trade-to-trade categories stood at a minuscule 0.52%. Though there are more than 7,500 listed companies, only around 2,600 stocks are actively traded, while the balance are in the Z group or illiquid or suspended from trading.

One of the obvious strategies for investors is to stay away from stocks belonging to the Z or trade-to-trade group. More importantly, investors should not fall prey to penny stocks. Penny stocks trade below their face or par value. Even the exchange’s trading terminal displays a pop-up caution message when an order for a stock in the Z or the trade-to-trade group is entered.

Moving with the times

Life for the retail investor in India should be easier now. In the ’90s, information was a scarce commodity; so informed decisions were the privilege of a few. Investment decisions were made on a hunch, word of mouth and whatever little data was available. Price data was not easily available, and it was tough getting real time access to company results. This information is now available online. Also, there is real time access to basic data.

All this should have made the task of investing simpler, and it has. But the new information age also has its own complications. Instant information has shortened the window of opportunity to react to data. Analysing business has become complex. Results are announced every quarter, compared to biannually earlier. In the past, companies earned revenues only from domestic and export markets. Now you have standalone and consolidated results, which involve two sets of calculations.

Then, segment results need to be analysed. Companies have substantial operations abroad; so you need to keep an eye on that country’s economy too. Earlier, investors only interacted with the company at its AGM. Now, they have web sites where they are bombarded with information. Share price information has also multiplied.

Besides, you have to track the futures market. This flood of information is good for the investor. But the quality of analysis has become more important. From the ’90s till now, a lot has changed for the retail investor. This has made investing less treacherous, but making money is still a difficult art.

Stocks/Equity

• Equity Investment Basics

• Some basics about SENSEX Some basics about SENSEX

• Key to Equity Trading

• How Share price goes up in stock markets

• Why Share Price is Not Important

• Allocating your ASSETS to Good Use

• The best bet in Stock Market: “MIDCAPS”

• Why the Indian Stock market tumbled down?

• Mutual Funds v/s Direct Stocks Investing

• How to pick Stocks and build portfolio

• How is P/E of SENSEX calculated???

• Understanding EPS

• CAPITAL GAINS TAX

• OPEN INTEREST explained!!!

• Invest in a Company serious about CSR & Corporate Governance

• All about "Z" group stocks

How to pick Stocks and build portfolio

Being a low risk operator, your leitmotif in life is to avoid anything hot. Touching anything hot will not only scald you but could well burn a hole in your pocket. Rumor mills in our bourses will always provide grist to the mill, but suggest you not to get pounded inside it. Here it would be pertinent to talk about ''momentum investing'' or buying what is going up and thus, has the momentum. Simply put, it means ''join the gang''. If everybody thinks stock “x” is a good buy, then it has to go up because everybody will buy it. Yes, it works fine for a month or two. But the only problem is that you are likely to be one of the last people to join the herd and will not know when the momentum reverses. And then the herd becomes a stampede. So, stay away from ''hot stocks''.

Look at the management quality

Thou shall keep away from a company run by management with a track record of incessant wealth dilution or corporate misgovernance. It is all the more relevant in India as there have been numerous cases where fraudulent promoters have literally flown with cheap equity money. But how do you judge management quality? The best place of course is the annual report. A company’s attitude towards minority shareholders is important. And this is not reflected in discount coupons or soft drinks at Annual General Meetings. Good indicators to consider are level of disclosures in the annual report, levels of investments in group/ associate companies, etc. However, the only exception to this commandment you can make if you have a reliable report that the management is changing for good.

Do not buy stocks of the same feather

Putting one’s eggs in a single basket is naive. So also keeping a large portfolio. This could turn unwieldy and is a sure recipe for below average returns. But how on earth would you choose stocks in a market with more than 6,000 scrips? Well, the choice will remain confined to those scrips, which are frequently traded. But then nowadays most Real estate and media stocks are well traded. So does that mean that one’s portfolio should contain only Real estate and media companies? Nah¿ To limit risks it is important that you don''t go gung-ho on some sectors as their fortunes change without taking your permission. You shall choose such scrips, which represent the broad spectrum of industries and confine your choice to those who are proven market leaders in their field of business. You buy businesses and companies. You do not buy the market or stock prices. An exception to the market leader rule can be made only if there is a big turnaround or restructuring story.


Strong industry and company position

You are known by the company you keep. Similarly, a company is known by the industry it is in. A company's performance can be as good as the industry it is in. Look at what happened to a blue chip company like Tata motors in the last 6-7 years. It is the among the largest manufacturer of commercial vehicles in the world. It is the market leader in the Indian commercial vehicles market. Telco fell to Rs. 60 from Rs. 500 due to pathetic results, What went wrong? The industry went into a recession. But as its backed by a great pedigree it came back strongly with robust numbers, the industry turnarounded, from 60 it shot up to 900.So even the best company in the sector can turn on to bad times. Hence, it is important to understand industry dynamics and industry prospects.

Positive cash flows

You shall invest only in companies that are expected to have a positive cash flow in the next 3 to 5 years. In other words, the companies that will have ''operating'' cash flows higher than their requirements for capital expenditure and investments, only merit a look. The important phrase is of course ''operating cash flows''. Operating cash flow is the profit after taxes (net profit) plus depreciation (a non-cash expense). It represents the money left with the company after meeting all its regular expenses and therefore belongs to the shareholders.


I know the devils would never listen to the scriptures. Its very easier said than done. But even if one get a bit meticulous on to these aspects, atleast he would not be in a position to loose money, guranteed...

GOLD

• Gold, a better option!!! Think about it….

• Buying gold from your bank? Beware!

Real Estate

• Should you rent or buy a FLAT?

• Ten Tips For First Time Home Buyers

• Black Money Cushioning Real Estate

Black Money Cushioning Real Estate

Swaminathan writes:

But Indian borrowers do not walk away from their homes — and loans — if prices dip. This is because a large proportion, often half, of almost all home purchases is paid in black money. If a house is sold for Rs 100 lakh, the official registered value will typically be only Rs 50 lakh, with the balance paid under the table in cash.

A bank may loan Rs 50 lakh, covering the entire formal price. However, the owner's contribution is not zero: he has paid Rs 50 lakh in black. To preserve that black investment, he will keep paying his installments even if house prices dip.

...

The reason is that banks enjoy, without asking for it, a huge safety margin provided by the black money invested by every home owner. To preserve this black investment, borrowers will do their level best not to default and lose their property. Ironically, black money enforces loan discipline in India, far more effectively than formal contracts or legal processes.

This very black money also acts as a cushion for price falls. What seems to be happening (entirely hearsay) is that as home prices come down in India, sellers are looking for a lower "black" component. The "white" part - the actual registered value of the house - remains the same. Two good things come out of it.

One, lowering the black component requires less hoarding, saving etc. Black money needs to be hidden from the government for obvious reasons, so it tends to be in rupee bills. Hiding bills in your mattress etc. is of little use, because there is a fear that someone else may rob you. So people have done things like take a loan on insurance policies paid in cash, bought dollars in cash etc. - but the government has plugged most, if not all, of these loopholes through PAN requirements or KYC norms. The other options are buying gold or to put cash in bank lockers, which isn't very helpful either, because gold has a huge price (which can be higher than paying the tax!). Even storage is seemingly safe locations has risks, as noted by a man whose money was eaten by termites. (Hat Tip: Madhu Menon) Heck, even the Sheikh of Abu Dhabi had his money eaten by rats. (From a conversation with Nitin Pai)

He refused to accept checks from the oil companies, at first kept his cash under his bed. When the bedsprings began to bulge, he had the cash carted to a palace dungeon. It was only after rats began nibbling at the treasure chests and insects started eating the folding money that Shakhbut reluctantly agreed to accept the principle of banking.

Two, the registrars and the income tax department are unlikely to probe further. A reduction in the "white" component necessitates a lower registration value, which can be construed by the registrar or the IT department (to which the registrar must file all registrations above Rs. 30 lakh in value) as a ploy to avoid paying income tax or stamp duty. A subsequent probe might unveil any black money, on which there is the liability of a huge penalty, tax and all sorts of criminal charges.

The by-product of the reduction of the "black" component is affordability. If you liked a house and it listed at Rs. 75 lakh, of which you could put up 15 and get the remaining 60 lakhs as a loan, you would be tempted to buy the property. But if the seller demanded half the money in cash, you would need 37.5 lakhs in cash, and then a further down payment of say Rs. 7.5 lakhs for the registered value of the house, and then a loan of 30 lakhs.

That means you needed to have 45 lakhs to buy a 75 lakh house, a 60%+ down payment which is very unsustainable. The IT/BPO managers, the highly salaried employees of large organisations get all their money in "white" - meaning, all taxes are prepaid. They may qualify for higher loans, but putting in 60% down is simply beyond reach. As the black component comes down, more such people can afford real estate and therefore there is an intermediate cushion.

Is then my view that the real estate bust is over? Hardly. We still have way too much supply compared to demand, even if this black component goes to zero. (which it has, when you buy from most established builders today) There is little, if any real estate available for the lower-middle class, and there lies the largest demand. Real estate companies would rather hoard land than give in to lower middle class development; not just because of lower margins (must sell more flats for the same overall area and less price per flat). It also is a community thing - build one such tenement and you will find the entire area branded as such and therefore no high margin "luxury" development can happen there. Local developers will stoop to any levels to prevent that happening.

This is stupid, apart from being unfair. There is way too much luxury supply so anything new in that level makes things even more unprofitable. And if you have an area with only luxury apartments, where do the staff live? (Most Indian "luxury" households have an entourage of personal staff, from chauffeurs to maids to baby-sitters to odd-job-errand-runners).

I hope this brings to builders some sense that lower income housing is as important and the lower margin creates wealth in the long term. Plus, we don't want to see some people left behind, do we - speaking politically, that is a nightmare you don't want. When the lower income people - the real voters if you may - feel left behind only one thing happens. Increased regulation and cost across the board, which makes sure EVERYONE is left behind. Suffering is a great leveller.

Ten Tips For First Time Home Buyers

Are you like most Indians? If so, chances are that you have never bought a home before, i.e., you are a first time buyer. Buying a home is going to be the biggest investment that you will make in your life. No wonder this process is financially and emotionally draining. These tips will help you during your home buying experience.

1. Don’t budge from your budget

There is too much choice in the real estate market in India – you must understand what is your budget so that you can narrow your search into a manageable process. Otherwise, your real estate broker will spin you around. Give the broker your budget and tell them that its not movable. Don’t believe them when they say your budget is too low. There are properties of all types available in India today.

The budget is not just the cost of the property – it must include numerous non-obvious costs such as broker fees, lawyers fees, stamp duty, registration fees and home insurance premium. All these payments will come out of your pocket.

If you are buying a new home, you will also need furniture, fittings and gadgets for the home. Alternatively, if you are getting an old home, there might be renovation or redecoration costs involved. In either case, these are upfront costs that many people ignore during the home buying process but should be factored in.

2. Affordability – “I have a great home, but no money to eat”

There is no point in searching for the house of your dreams if you cannot afford to live there - you must also think about whether you have enough cash flow to support your lifestyle, after you have paid for the property.

Do not stretch yourself and take a personal loan to fund the down payment towards the property. This will only increase your risk exposure. Rather, you should ensure that you can naturally afford the down payment through your savings.

Additionally, don’t stretch your budget to get a more expensive home because that will mean stretching your EMI payments. Remember to keep your EMI manageable so that you can continue to afford the lifestyle that you are accustomed to and to pay other bills that you will incur.

3. Location, Location and Location – the three most important rules of real estate

Location is key. It will affect the quality of life that you have in and around your home. Additionally, a better located property will get a much better resale value if you decide to sell.

Before you put in your life’s saving into buying a property, you might want to consider renting in your desired location for a few months. It will give you a good flavour of what life could be like in the area.

When thinking of location you must consider the following: proximity of schools, your commuting time to and from work, modes of transport around the property, local amenities and shopping convenience, proximity to family, friends and your community, noise levels around the area and avoiding undesirable irritants (such as the proximity of garbage dumps, electrical sub-stations, sewage canals).

Finally, if you are viewing the property on a weekend, the traffic and noise situation might often be very different from the weekdays, so do check the desirability of the location at different days and times of day.

4. Define your specifications – “I want a mansion, overlooking the hills, with mango orchard around me”

Prioritize what is important to you. If you are married, collectively agree with your spouse on what you are willing to compromise on. Otherwise, smooth talking real estate salesmen will take advantage of you by showing you too many different properties on criteria that will not be important to you.

Is a large kitchen important to you? Do you need an attached bathroom to every room? Do you want lots of storage capacity? Do you need a study for your home office? Do you need a terrace or garden for the kids to play in? Do you want to buy an old home which might have old construction and aged plumbing, or you will only look at new homes which will be modern but you will pay a premium for the freshness?

5. Be patient – resist the urge to get angry and break things around you

The home buying process can be time consuming and complicated. If something can go wrong, it will. But, if you are mentally prepared for it, then you will not be surprised when delays happen. Budget at least 3 to 6 months for the process, especially keeping in mind the timing of when you absolutely need to move into the new home.

Do not get frustrated if you do not feel fully in control of the process. Remember, that you are going to be at the mercy of the real estate brokers, the developer, the home loan lenders, lawyers and other intermediaries. Money, documents, contracts and agreements need to move around all these different players in the process. Things will not always move at your pace, but at the pace that these intermediaries choose.

Just remember to keep smiling through the process - think about how much you are going to enjoy living in your own house when you finally can call it home.

6. Viewings – if you like it, see it twice!

Of course you are not going to buy a property without seeing it. But, don’t make the mistake of taking your entire family with you the first time around. If they get over excited, the real estate broker is going to sense this, and then will exploit this to his/her advantage.

You must also visit the property at least a few times. After all, this is a big decision for you. You are going to be spending the next few years of your life here. Go to the property 2-3 times, at different times of day. Note how you instinctively feel about the property. Why do you feel this way? Can you really call this place home? Maybe at your second or third visit you can take the extended family with you to get their reactions as well.

Maintain a viewing checklist on which you can rank the different properties you are visiting on the criteria that you have prioritized. Remember, you do not want to regret that you were forced into a decision to buy under pressure from a real estate broker or because you had very little time to view the property.

7. Jadoo – learn how square footage can magically disappear

Get familiar with the language and conventions used in real estate. When some one gives you an area for the property, always ask them what definition of area they are using. Here is why this is important.

Typically, the area that you pay for is higher than the area that you actually get. For instance, you will pay for a 2,000 square feet flat, but your usable area might only be 1,500 square feet. You will face a reduction in the area. In this example its 25%, but it could even be more in actual cases.

No need to worry, you have not been defrauded. The square footage that you have lost is your share of the communal facilities on the floor like walls, corridors, lifts etc.). But, you will have to pay for the entire area, including the area that is lost.

Always ask what is the carpet area that you will get, i.e., the area over which you can actually spread carpet across the entire floor if you so wanted to do it. This, effectively, is the area that you will have for your end use.

8. Show me the money - review your financing options simultaneously

Just finding the right home is of no use to you if the deal falls through because you have not organized your funding. Often you will need to demonstrate that you have access to the funds to finance your purchase. Therefore, organize your funds before you need them.

If you are self-funding your purchase, ensure that you have enough funds that you can access at short notice if your deal comes through and you are required to pay immediately.

If you will need a home loan, file an application with your chosen lender and get approved for the loan. You can get approved even if you have not yet identified the property. This will save you time and emotional hassles later on in the process. Typically, such approvals last for 6 months which should give you sufficient time to identify a property.

9. Black, white and grey areas - buying directly from the developer vs. the investor

These are boom times for real estate development in India. Developers are coming up with new projects all the time. Many investors have bought many properties for investing purposes. You need to understand that there is a difference in buying directly from the builder versus from the investor in a property.

If you buy property directly from a developer in a project that is under construction or nearing completion, its likely that you will not have to pay any cash component, and the entire payment can be in cheque.

On the other hand, if you buy from an existing owner of the property (even if its under-construction), the owner will expect to earn a return on his/her investment, and might expect a large part of the payment in cash. You need to be aware whether you are capable of making cash payments. This is a reality in India and in many cases you will not be able to avoid it.

10. You are going to live long – your current purchase doesn’t mean “game over”

As your you and your family grow, so will your needs. You might get married, have kids, your parents might move in with you. Some unplanned events might also occur; for instance, you might get transferred to a new city.

Don’t see your current purchase as a dead end. You can upgrade to a different property in a few years. Maximise what you need to fulfill over the next few years. Nobody has seen the future - you will not be able to ascertain whether this property will suitable for your 10 years from now. Remember, you can always sell this property and use the sale proceeds to get another property.

You might feel nervous about your first home purchase. With a little bit of attention to detail and awareness, you can become more confident even before you start the process. And of course when the deal finally closes, savour the positive emotions. There is absolutely no substitute for the joy and pride that you will experience at your first home purchase.

Myths & facts of filing your tax returns

The fiscal year-end is around the corner and many choose to make tax-related investment decisions around this time. Despite this being a regular, annual ritual, several tax payers have some misconceptions, some of which are listed below:

Misconception No 1

Filing tax returns is a complex and cumbersome process. I need a Chartered Accountant to help me file my tax returns. Contrary to popular belief, preparing and filing tax returns is actually quite simple.

If you have a digital signature you can accomplish the entire process sitting at home on your computer thanks to the e-filing facility on the I-T website (www.incometaxindiaefiling.gov.in).

Alternatively, you can submit the returns online, print a one-page receipt, sign it and drop it off at the income tax office within fifteen days of submitting the returns.

No documents are required to be submitted with the receipt. However, if you want help, there are several third party service providers who offer tax preparation and filing services for a fee as low as Rs 200.

Misconception No 2

The interest I pay on a home loan is deductible from my income from house property up to a maximum of Rs 1,50,000 per year.

This is true if you have taken a home loan for a single house and it is self-occupied. However, if you take a home loan on a second house, the entire interest paid on the loan can be claimed as a deduction from your income on house property.

If you expect that the property would appreciate in value over time, you could take advantage of the above rule. Thus a smart investment strategy would be to take a home loan on a second house, rent out the house and claim interest paid on the loan as a deduction from rental income, thus reducing your borrowing costs significantly.

Misconception No 3

I receive tax exemption on the actual rent I pay for my rented home.

This is not entirely accurate. Section 13 A of the Income Tax Act states that the maximum amount that is exempt from tax is the lower of the following amounts:
(i) The House Rent Allowance given by the employer
(ii) 50% of your basic salary if you live in a metro
(iii) Actual rent paid minus 10% of your basic salary.

If actual rent paid is lower than 10% of your basic salary, you receive no exemption. Also, you cannot claim any exemption under this section if you live in your own house or if you are not paying any rent.

Misconception No 4

Section 80C benefits are available only on making an investment or saving or paying a premium on insurance.

You can claim a deduction for the school or university tuition fees you pay for your children (maximum of two) provided they are enrolled in a full-time course at any institute in India.

In addition you can claim a deduction for the repayment of principal on any home loan in India that you may have taken. Both these deductions have to, of course, be within the overall annual Section 80C cap of Rs. 1 lakh.

Misconception No 5

If I avail of tax-free medical reimbursement from my employer up to Rs15,000, I cannot claim deduction on health insurance premium paid.

Tax-free medical reimbursement by your employer up to an amount of Rs 15,000 per year for your family’s medical expenditure is separate from the Rs 15,000 deduction available under Section 80D for the premium paid on health insurance.

Both these exemptions are covered under different sections of the Income Tax Act. The former covers cost of your daily medical needs and outpatient treatment (OPD), while the latter protects you from expenditure for hospitalisation.

Misconception No 6

My friends tell me that the only interest payment I can claim an exemption for is the interest paid on home loans. There is a section of the Income Tax Act called 80E that permits deduction on interest paid on loans taken for higher education for self, spouse and children.

There is no limit on the amount of deduction you can claim. The only thing to keep in mind is that the programme for which the loan is taken should be a graduate or post-graduate program in engineering, medicine or management or a post-graduate course in the pure or applied sciences.

Compared to many other jurisdictions, our personal income tax code is fairly straightforward with not too many options. However, in order to take full advantage of the existing tax laws, it helps to be somewhat familiar with how the rules work.

Even a basic understanding of tax planning can help you save substantial amounts of money in legitimate ways.

The best bet in Stock Market: “MIDCAPS”

The small and midcap rally is taking root in an unprecedented way in the Indian stock markets. High liquidity, decent valuations, good prospects are contributing to this phenomenon. Many people are suspicious of the manner in which small and mid-caps stocks have run up lately. However, those claiming to be value investors believe that small and midcaps truly holds tremendous future for long term investors. Both maybe deemed correct depending upon ur risk appetite and investment horizon. Amidst great volatility in the past 7 years, I have discovered that investments in midcap stocks have given much higher returns than large cap stocks provided investors held on to their investments amidst the occasional panic. Also investors should have bot stocks in companies with genuine business model and at reasonably low valuations.

If simple criteria like low PE multiple, good promoter background, genuine business operations and a reasonable dividend yield are followed for stock picking. It is unlikely that an investment would go wrong over a 2-3 year time frame. Those who burnt their fingers in the tech bust of 2000 and the IPO boom of 1994 would recall that most of their money was lost in chasing stocks that quoted at a high PE multiples with no dividend track record and doubtful promoter groups. One of the most reliable methods of checking whether a company has genuine operations is to find out how much income tax and other taxes it pays, if a company is paying taxes then there is more likely that its business would be genuine. In addition, if the company is known for its promoters or products, then investors can be more comfortable while investing. It seems likely that in the months ahead, broader indices like Sensex and Nifty may not make significant moves, while midcap stocks could show more activity. This would attract attract retail investors and HNI individuals to invest in these companies.

While it may be advisable for small investors to look at midcap stocks for more gains, they would need to follow a disciplined approach and remain cautious. Small and Midcap stocks are highly prone to sharp falls when the mood turns bearish. In bad times if the indices fall 10% the midcap stocks can fall upto 25%. And the worst part is that volumes in these counters dry up when prices fall. Therefore small investors panic and exit their investments at huge losses. Sometimes they make not exit the investment and see the company completely vanish. My advice is that if u have invested in a genuine company with good promoters and a long track record, then short term volatility should not cause panic. Even if we look t huge falls in September 2001 or in April 2004, stock prices have climbed back to more reasonable levels within a short time.

Why the Indian Stock market tumbled down?

In last 4-5 years or so, Indian Stock Markets had been zooming up non-stop (barring the January 08 fall), crossing one milestone after another. This rise had defied law of gravity and law of average. Better economic conditions, higher GDP and greater liquidity from retail investors as well as FII were main drivers. However, during this period, good news was being given extra premium and negatives were being brushed under the carpet. Irrational exuberance and excessive greed through rationality and caution to the wind. Under such circumstances, a healthy correction was expected.

However, never-before crash (rather a vertical fall in Jan) took everyone's breathe away. Yes, global markets also turned weak but in the past, Indian markets rose even when global markets were dull. Well i feel that there is more than what meets the eye.

Repeated and aggressive media exposure to select FIIs and technical analysts appear to be the major cause for this state-of-affairs. Corporate earnings have not nosedived. Fundamentals of Indian Economy continued to be as strong (or as weak) as it was in April 2006. However, markets tanked as if Indian Economy was in the grip of 1929 type depression.

1) Finding a small ray of hope, Bears jumped into the fray who knew mentality of Indian investors that in general, investors are not so rational and act blindly upon whatever they hear or see: Came one of the respected gentleman of first flobal who said that sensex should be 10000.With due and full regards to his experience, talent and knowledge, does such a statement make any sense? 10000....??? It should be prudent to note that the same gentleman just some months back sounded as bullish as one can get. Investors, Research Analysts, Brokers stopped applying their own mind, stopped looking at fundamentals and valuations of the scrips and started singing same tune as Marc faber and the above mentioned gentleman.

2) Technical Analysts also were very successful in pulling down psyche of the investors. Strangely, when market is going up, most technical analysts predict further new highs (without any time frame). Similarly, when market is going down, most technical analysts predict further new lows (again without any time frame). I always feel the contrary and believe in rationality and law of average.

3) Normally, investors retain some liquidity. However, buoyed by the mind boggling returns, all were fully invested without any liquidity. Even many investors took leveraged positions. Instead of paying their loan installment, they took loan and invested in equity. This resulted in panic among retail investors.

So when markets crashed, F&O margin money calls came but no money. It accentuated the market fall as shares had to be sold like flood to meet margin money obligations.

4) It led to lower valuations of LAS Accounts with banks and banks were forced to sell LAS shares of their clients to keep adequate margin.

5) Many investors, in order to meet their obligations to the broker, resorted to redemption from mutual funds and fixed deposits, and more sort of stuffs were there in the offing.

6) All this led to a situation where investors, brokers were selling their shares as if they were board on a sinking ship. Its clearly proving that behaviour of investors swings wildly between bouts of irrational exuberance and irrational depression.

7) More shocking that these most respected Gurus and Institutions in one swipe rated Indian Equities as overpriced. How it can be? There may be overpriced counters which have P.E. Ratio of 20, 30 or more. But they did not bother to give devil its due which means that they should have atleast pointed out that there are still some scrips worth buying whose P.E. Ratio is less than 10 or 8 or 5 and who are going to report better results.

8) There is a saying that "Tongue hardly weighs anything but still so few people can hold it". This aptly applies to a stock tipster whose stock tips are published everyday in Business Standard. Some Examples:

Bulls go for vacation for 3-4 months.
Bears will kill the market.
Sell even now.

Same Analyst, until few days ago, was screeching from the rooftop, howling at the investors to buy so many new stocks everyday with words like "Will be 20% freeze for 3 days, 10% freeze for 5 days" etc. etc.

Conclusion:. Rationality may not be in vogue now but it would be someday........... (not assured but guaranteed)

Key to Equity Trading

Remember the following points when investing in the market:

1. Sentiments change overnight as people are emotional.
2. If analysis really worked all the time market would have become very boring. They are interesting because we cannot predict human behavior.
3. When you get information on a stock find out if market already knows it. Know your level of information ladder.
   
4. Life is never fairy may find incompetent people being highly successful. Don’t feel bad, they are reaping the rewards of their past karma,lolz……
5. You cannot get investment opportunities everyday.5-6 of them in a quarter would be great. Patience is always rewarded.
   
6. The law of firm is applicable in walks of life. Control your emotions.
   
7. Do not follow the herd blindly. You never miss the bus in the markets. If you have the money opportunities would always come. Preserve your money and don't forget "Cash is the King".
   
8. Bear markets offer better investment opportunities than bull markets.
   
9. Avoid margin trading. You are only enriching your broker. Ask your margin trading friends how they are treated in the present market situation.
10. Derivatives are good hedging instruments. Unfortunately they are used as speculative instruments. They only enrich the intermediary at the expense of the investor. Avoid them.

The devils would never listen to the scriptures of "TECHNICAL ANLYSTS" isnt it?

Higher Inflation: Whom to blame and the way ahead…

Is an inflation rate of 6 - 8 percent is bad news for India when countries like Zimbabwe have hyper-inflation of 100,000 percent?

In 1981 we had an inflation rate of 10.4 percent when GDP growth was over six percent. In 1991, inflation was as high as 13.1 when GDP growth was just one percent. Why are the common man and the policy makers worried about inflation?

Let's take an update on the current inflation trends. Inflation has surged to over three-year high of 7.8 per cent in the second week of May, mounting pressure on the Reserve Bank to further tighten money supply in its forthcoming annual credit policy later this month. More alarming is the continued rise in the food prices where the inflation is higher at 6.8%.

The measurement of the price level is a difficult task and, therefore, so is the measurement of the inflation rate. For example, many economists believe that the consumer price index has overstated the rate of inflation in recent decades because improvements in the quality of goods and services are not adequately reflected in the index. An index that held quality constant, according to this view, would show a smaller rate of price increase from year to year, and thus a smaller average rate of inflation.

It is important to recognize that a positive rate of inflation, as measured by a price index, does not mean that all prices have increased by the same proportion. Some prices may rise relative to others. Some might even fall in absolute terms, and yet, on average, inflation is still positive.

In the Indian context what are the factors influencing the rate of inflation? According to what I read in the papers, it should be global rise in the price of commodities, the crude oil prices, our erratic monsoon, RBI's monetary policies, credit and money supply and maybe the statistical base taken for calculation of the inflation rate.

What if there is no inflation? We have observed that when there is overproduction of crops, farmers are forced to sell below production costs. A few years ago when there was overproduction, tomatoes were sold for Rs 1 per kilo which is bad for producers. But in a rising inflation scenario all people suffer, some more than the others.

In India, inflation is a political issue but a lower inflation rate does not guarantee success in elections which the Congress government learnt in 1996 when the rate climbed down to 6.5 percent as against 13 percent in 1991.

However, political parties need to go by public sentiments, which are often against a rising inflation.

Look at the official reactions. Finance Minister P Chidambaram in Singapore blamed US for creating commodity inflation by diverting food crops for bio-fuel and also creating global financial uncertainties by sub-prime lending.

At the same time he announced in the Budget that the country is going to have a record output of food grains this year. So where are the bottlenecks really?

It could be the rising oil prices both edible oil and crude oil or some other global trends over which the FM or RBI has no control. So the question why have a tight monetary policy?

In terms of action also the government cannot be blamed -- it has made exports difficult by raising the minimum export prices of essential commodities and imports by reducing duty on edible oils.

T Nanda Kumar, Secretary, Food, Consumer Affairs and Public Distribution said in an interview that supply side bottlenecks for essential commodities are being addressed.

From the technical point of view, inflation now is different from inflation experienced before because of high foreign exchange reserves that put pressure on rupee to appreciate.

These are tough times for the industry and policy makers then. For the industry, productivity gains have to be long enough to compensate the rising rupee and inflation levels that make them uncompetitive, according to an analyst.

History shows that high inflation rates could correct itself over a period of time through a combination of market forces and government regulation. Or perhaps it is god's way of letting people know the value of money.

U.S. fundas that are different in India

The number of Indian financial bloggers are few and far away, and when you search for financial information you might hit more U.S. based bloggers who tell you about their experiences. Unfortunately some concepts just don't apply here - perhaps for the reason that our financial system is created differently - here's a few instances where things are different.

Checking and Savings accounts Ramit Sethi talks about how he negotiated out of bank feesU.S. has "checking" and "savings" accounts that are different; you write cheques from the former, and only the savings account earns interest. - he has a "checking account" which he overdrew (used more than the funds he had) and the bank charged him an overdraft fee for this. The

The Indian banking system allows for both checking and savings accounts to be the same - you write cheques that moves funds from the same account that yields you interest. (Okay it's just 4% interest). In fact many banks will allow you to link a savings account to a fixed deposit - that yields higher interest than the savings account - and allows you to "sweep in" any amount that you overdraw from this deposit. The remaining part of the deposit continues to earn higher interest.

"Current accounts", which are usually given to businesses, are the equivalent of zero-interest checking accounts.

IRA accounts, 401(K)
People in the US seem to love numbers. When you ask them the route to someplace it usually contains instructions like "Take 426 east, and at exit 27 turn on 42 North and then it merges with 57 North..." and stuff like that. That's perhaps better than instructions you get in India ("Take second right and ask the paanwaala where Tumkur road is") but you'll still get a little perturbed with numbers.

So bloggers will keep talking about 401(K) accounts. There is no such thing as a 400(K) or even a 401(J) account - the number and letter refer to a section of their tax code. Like we talk about 80C deductions.

401(K) is like our provident fund. This is a retirement account - an IRA, or an Individual Retirement Account - which yields interest. Unlike in India where the money is invested at a fixed rate of interest, the U.S. allows you to determine where your 401(K) money is allocated (Equities, bonds or the like). And unlike in India, 401(K) withdrawals are taxed. Things like Roth IRAs are just different kind of such accounts, like we have PPF and EPF.

Home loans are "mortgages"
What we call a home loan, they call a mortgage. They'll routinely talk about second mortgages which are essentially top-ups on your home loan.

After all it's your life...

What financial goals should you be thinking about?

Anything you want to do in your life can usually be quantified in terms of the money that you will need to spend on it. All goals have a monetary value attached to them. For instance, if you want to buy a house in India, you can easily quantify whether it will cost you Rs. 20 lakhs or Rs. 40 lakhs. Financial Goals that you should think about can basically be categorized into Foundation Goals (or basic needs) versus Lifestyle Goals (or good to have).

Foundation goals should be given first priority when creating a financial plan. These are common to most people. Foundation goals include:

• Housing need for shelter
• Basic life insurance and health insurance for protection
• Having enough savings to pay for your children’s school and college expenses
• Having enough savings to pay for your children’s marriage expenses
• Maintaining an emergency fund to be able to meet any unexpected expenditure

Depending on your means you have to prioritize as to which goals are most important for you and start saving and investing to meet those goals. Just like a building is constructed on a stable foundation, your financial condition should also be built on a stable foundation.

Once your basic needs are met you can start to think about your lifestyle goals. These goals are somewhat discretionary and could differ greatly from person to person depending upon the type of lifestyle you want for yourself and family. Lifestyle goals are highly personal and are often dependent upon what dreams you have. Examples of lifestyle goals include:

• Owning a vacation home in a hill station
• Buying the latest digital camera
• Taking a cruise in Europe as opposed to holidaying in India

How can you know how much to save or borrow to meet your goals and what to invest in?

First, it is important to quantify your goals. You must estimate how much it is going to cost to achieve your goals. For example, a buying a home in India could cost Rs. 20 lakhs or Rs. 40 lakhs or more depending on what you want.

Second, it is important to know at what point in the future do you want to achieve your goals. Your goals could be short-term in nature (within less than 12 months from now), e.g., buying a TV, prepaying your car loan or creating a contingency fund for an emergency. On the other hand, your goals could be medium term to long term, e.g., like buying a bigger home three years from now, providing for your daughter’s college education twelve years from today and having a retirement corpus 25 years hence.

Once you have quantified your goals and know their time horizon, then based on your risk profile, you can select the appropriate savings and investment instruments and assess your borrowing needs.

Your Savings might be Taxed next year!!!!

An Economic Times article states that some of the 80C deductions, those that helped you make 1 lakh of your income off the taxman's list, may now be removed as part of the next year's budget.

The government's reasoning is simple: Make taxation more transparent and simple, but do not affect collection of tax. Previous year a huge amount of tax were collected. This reason coupled with the fact that this is an election year, government increased the exemption slabs of income tax. Thus the income tax is more affordable now.

But doing so means losing revenue, and money is required by the government to build infrastructure. So a lower tax rate may mean that income tax will apply to a lot of things that are currently out of the tax bracket. Let us see what may face the axe, and reasoning.

Insurance premium: The reason this used to be exempt was to promote insurance. But today most of the insurance premiums paid are for investment. Again, the government wants to promote long term investment as well, so tax benefits were provided if money was locked in for three years. At this point, the government might decide to remove the investment from the tax benefit, and only provide this for the mortality charge premiums. There may be a push to move the investment to the EET regime (explained later).

ELSS Funds: To encourage long term equity investing and therefore build the capital markets, tax sops are given to ELSS fund investments under 80C. Given that there is no shortage of liquidity in either diversified or tax saving funds, or in the market, the government might remove the ELSS scheme from 80C or make it EET based.

Housing loan interest or principal: Interest may still be out of the taxation bracket (it's separate from 80C) but the principal repayment is an 80C saving. That might have to go, meaning you save tax on the interest paid but not on the principal. This might ease the huge investments in the real estate industry, though I don't believe tax-on-principal a big factor at the moment.

PPF and Pension plan investments: Chances are that these will stay, since they are retirement benefits and honestly the government has done nothing to keep you going after retirement, and has no plans to. That's why it incentivises you to save for your own retirement, and I don't believe that should be changed.

EET means Exempt-Exempt-Taxed. This means that your investment is exempt from tax at the point of buying in, exempt at accrual, but taxed at exit. In simple terms it's like this. If you invest Rs. 10,000 in an 80C investment like ELSS or Insurance, it is taken of your taxable income in the year you invest (Exempt at Entry). Then, in the next three years, say it grows to 15,000. The 5,000 Rs. growth is not taxed. (Exempt at Accrual). Then, if you sell the fund at say Rs. 20,000, then what is taxed is the amount of tax you saved. (Taxed at Exit)

Let's see how it goes. The EET regime was supposed to come in 2006, it's not in. One thing is sure which ever party makes the government next time, will think about increasing the revenue from income tax in a larger manner. If in the process we have to lose out on some confusing tax saving schemes, so be it.

Mutual Funds v/s Direct Stocks Investing

Investing in the equity market directly is exciting and sexy. You are in the thick of things and are able to take responsibility for yourself. Though the volatility and the information overload makes it a daunting task.

How about investing through Mutual finds? Doesn't it have its own loading and administrative charges and the fund managers making merry on your hard earned money? And can't we see the best performing mutual funds and follow their portfolio?

Here are some points to ponder:

• We should allocate our time to investment decisions in proportion to our income generation goals.
• Convenience and hassle free investing should be a major factor.
• Fund managers are into it full time. If we able to identify fund managers who have consistently performed over last 3-5 years, nothing like it.
• The fund manager also has the muscle power of crores of Rupees and is able to take entry and exit decisions impartially.
• MFs continuosly churn their portfolio. When MFs buy and sell stocks, they don't have to pay capital gains as you do when you churn.
• We are likely to panic over market crashes. MFs can take advantage of a crash!
• With Systematic Investment plans (SIP), you can start investing with as low as Rs 500 per month.

There is another financial product called ETF: Exchange Traded Funds. They are the least expensive and manage themselves on their own.

Take your call.