Saturday, April 22, 2017

Are you a lay investor? Trading in derivatives could make your money vanish...

Courtesy: Economic Times
Those who study narcotics addiction have invented the term ‘gateway drug’. It seems that many drug-users start with mild narcotics like marijuana and gradually move up to harder stuff like heroin and crack. It so happens that there’s an almost exact equivalent to this in equity investing as well, except that the first stage is actually beneficial.

The default Indian saver saves all of his or her money in deposits with banks or post offices or the government. Some of these people—perhaps about two crores of them—start investing in equity funds. The gateway investment to equity funds is often a tax-saving fund—one of the so-called ELSS funds.

As ELSS investments come with a lock-in, they are forced to stay put for three years, which is a reasonably long period to see good gains. For most of these investors, the idea that equity funds can get you good returns becomes an obvious. So far, so good.
A certain proportion goes beyond this gateway stage—generally with the help of equity investment’s equivalent of a drug dealer. This person often goes by the name of a wealth manager or a relationship manager or something like that and is generally employed by a bank or a stockbroker.
The logic given is simple: why are you wasting your time? Since you know that equity returns are better than a bank deposit, let me introduce you to the form of equity that can get you the highest possible returns from equity, which is effendo.
Even though ‘effendo’ sounds like a magical spell from Harry Potter (like Confundo or Diffindo), it is not. It is actually the popular way to pronounce F&O, otherwise known as futures and options, or derivatives. Effendo is closely related to a Harry Potter spell called Evanesco which makes things vanish.

Effendo can make money vanish as if by magic, as it regularly does for investors lured into short-term trading using these types of investment avenues. Actually, effendo does not make money vanish, as much as it transfers it magically into the bank accounts of your broker.
Now I know the whole shpiel about how derivatives provide depth and breadth to the stock markets, but for a vast majority of small investors, they are none of that. Instead, as Warren Buffet pointed out, they are nothing but financial weapons of mass destruction. But aren’t derivatives meant to be a good thing?

The answer to that question lies in one of the distortions that have crept it into the Indian stock markets ever since derivatives trading began. Derivatives like futures and options can be used to protect traders against risk, acting like an insurance policy.

However, they can also be used to enhance risk and returns, effectively as an instrument that offers a chance of higher gains, but also a high risk of huge losses, including completely wiping out the investor’s capital.

The real problem is not that using futures and options in this manner is possible, but that almost every part of the equities trading industry is dedicated to getting customers into this kind of trading. Practically every broker—and that definitely includes banks’ ‘wealth management’ units—does this and certainly, all the stock exchanges have spared no effort in getting as many people to trade as speculatively as possible.

This kind of institutional behaviour is certainly disappointing, but not surprising. So much of the behaviour of India’s big financial players is sub-ethical that one suffers from a bit of outrage fatigue.

However, the important point is that savers should save themselves from being herded into such kind of trading. It’s certainly not a natural extension of safe and sensible investing of the kind that one does in a tax-saving or other equity fund. There will be people who will try and tell you stories and earn fat commissions out of your money but it’s your job to show them the door.

Those who study narcotics addiction have invented the term ‘gateway drug’. It seems that many drug-users start with mild narcotics like marijuana and gradually move up to harder stuff like heroin and crack. It so happens that there’s an almost exact equivalent to this in equity investing as well, except that the first stage is actually beneficial.

Monday, April 10, 2017

7 Stock Buying Mistakes And How To Avoid Them



Courtesy : Investopedia

Making mistakes is part of the learning process. However, it's all too often that plain old common sense separates a successful investor from a poor one. At the same time, nearly all investors, new or experienced, have fallen astray from common sense and made a mistake or two. Being perfect may be impossible, but knowing some of common investing errors can help deter you from going down the well-traveled, yet rocky, path of losses. Here are some of the most common stock buying mistakes.

1. Using Too Much Margin


Margin is the use of borrowed money to purchase securities. Margin can help you make more money; however, it can also exaggerate your loses - a definite downside. The absolute worst thing you can do as a new investor is become carried away with what seems like free money - if you use margin and your investment doesn't go your way, you end up with a large debt obligation for nothing. Ask yourself if you would buy stocks with your credit card. Of course you wouldn't. Using margin excessively is essentially the same thing (albeit likely at a lower interest rate).Additionally, using margin requires you to monitor your positions much more closely because of the exaggerated gains and losses that accompany small movements in price. If you don't have the time or knowledge to keep a close eye on and make decisions about your positions and the positions drop, your brokerage firm will sell your stock to recover any losses you have accrued.As a new investor, use margin sparingly, if at all. Use it only if you understand all its aspects and dangers. It can force you to sell all your positions at the bottom, the point at which you should be in the market for the big turnaround.

2. Buying On Unfounded Tips.


We think everyone makes this mistake at one point or another in their investing career. You may hear your relatives or friends talking about a stock that they heard will get bought out, have killer earnings or soon release a groundbreaking new product. Even if these things are true, they do not necessarily mean that the stock truly is "the next big thing" and that you should run to the nearest phone to call your broker.Other unfounded tips come from investment professionals on TV who often tout a specific stock as though it's a must-buy, but really is nothing more than the flavor of the day. These stock tips often don't pan out and go straight down after you buy them. Remember, buying on media tips is often founded on nothing more than a speculative gamble.Now this isn't to say that you should balk at every stock tip. If one really grabs your attention, the first thing to do is consider the source. The next thing is to do your own homework. Make sure you "research, research and research" so that you know what you are buying and why. Buying a tech stock with some proprietary technology should be based on whether it's the right investment for you, not solely on what some mutual fund manager said on TV.
Next time you're tempted to buy a hot tip, don't do so until you've got all the facts and are comfortable with the company. Ideally, obtain a second opinion from other investors or unbiased financial advisors.

3. Day Trading.


If you insist on becoming an active trader, think twice before day trading. Day trading is a dangerous game and should be attempted only by the most seasoned investors. In addition to investment savvy, a successful day trader needs access to special equipment that is rarely available to the average trader. Did you know that the average day-trading workstation (with software) can cost in the range of $50,000? You'll also need a similar amount of trading money to maintain an efficient day trading strategy.The need for speed is the main reason you can't start day trading with simply the extra $5,000 in your bank account: online brokers do not have systems fast enough to service the true day trader, so quite literally the difference of pennies per share can make the difference between a profitable and losing trade. In fact, day trading is deemed such a difficult endeavor that most brokerages who offer day trading accounts require investors to take formal trading courses.Unless you have the expertise, equipment and access to speedy order execution, think twice before day trading. If you aren't particularly adept at dealing with risk and stress, there are much better options for an investor looking to build wealth.

4. Buying Stocks that Appear Cheap.


This is a very common mistake, and those who commit it do so by comparing the current share price with the 52-week high of the stock. Many people using this gauge assume that a fallen share price represents a good buy. But the fact that a company's share price happened to be 30% higher last year will not help it earn more money this year. That's why it pays to analyze why a stock has fallen.Deteriorating fundamentals, a CEO resignation and increased competition are all possible reasons for the lower stock price - but they are also provide good reasons to suspect that the stock might not increase anytime soon. A company may be worth less now for fundamental reasons. It is important always to have a critical eye since a low share price might be a false buy signal.Avoid buying stocks that simply look like a bargain. In many instances, there is a strong fundamental reason for a price decline. Do your homework and analyze a stock's outlook before you invest in it. You want to invest in companies which will experience sustained growth in the future.

5. Underestimating Your Abilities.


Some investors tend to believe they can never excel at investing because stock market success is reserved for sophisticated investors. This perception has no truth at all. While any commission-based mutual fund salesmen will probably tell you otherwise, most professional money managers don't make the grade either - the vast majority underperform the broad market. With a little time devoted to learning and research, investors can become well equipped to control their own portfolio and investing decisions - and be profitable. Remember, much of investing is sticking to common sense and rationality.
Besides having the potential to become sufficiently skillful, individual investors do not face the liquidity challenges and overhead costs large institutional investors do. Any small investor with a sound investment strategy has just as good a chance of beating the market, if not better, than the so-called investment gurus.Never underestimate your abilities or your own potential. That is, don't assume you are unable to successfully participate in the financial markets simply because you have a day job.

6. When Buying a Stock, Overlooking the "Big Picture"

For a long-term investor one of the most important - but often overlooked - things to do is qualitative analysis, or "to look at the big picture." Fund manager and author Peter Lynch once stated that he found the best investments by looking at his children's toys and the trends they would take on. Brand name is also very valuable. Think about how almost everyone in the world knows Coke; the financial value of the name alone is therefore measured in the billions of dollars. Whether it's about iPods or Big Macs, no one can argue against real life.So pouring over financial statements or attempting to identify buy and sell opportunities with complex technical analysis may work a great deal of the time, but if the world is changing against your company, sooner or later you will lose. After all, a typewriter company in the late 1980s could have outperformed any company in its industry, but once personal computers started to become commonplace, an investor in typewriters of that era would have done well to assess the bigger picture.Assessing a company from a qualitative standpoint is as important as looking at the sales and earnings. Qualitative analysis is a strategy that is one of the easiest and most effective for evaluating a potential investment.

7. Compounding Your Losses by Averaging Down.


Far too often investors fail to accept the simple fact that they are human and prone to making mistakes just as the greatest investors do. Whether you made a stock purchase in haste or one of your long-time big earners has suddenly taken a turn for the worse, the best thing you can do is accept it. The worst thing you can do is let your pride take priority over your pocketbook and hold on to a losing investment, or worse yet, buy more shares of the stock since it is much cheaper now.Remember, a company's future operating performance has nothing to do with what price you happened to buy its shares at. Anytime there is a sharp decrease in your stock's price, try to determine the reasons for the change and assess whether the company is a good investment for the future. If not, do your pocketbook a favor and move your money into a company with better prospects.Letting your pride get in the way of sound investment decisions is foolish and it can decimate your portfolio's value in a short amount of time. Remain rational and act appropriately when you are inevitably confronted with a loss on what seemed like a rosy investment.

The Bottom Line



With the stock market's penchant for producing large gains (and losses) there is no shortage of faulty advice and irrational decisions. As an individual investor, the best thing you can do to pad your portfolio for the long term, is to implement a rational investment strategy you are comfortable with and willing to stick to. If you are looking to make a big win by betting your money on your gut feelings, try the casino. Take pride in your investment decisions and in the long run, your portfolio will grow to reflect the soundness of your actions.

Monday, April 3, 2017

RAMKY INFRASTRUCTURE - UPDDATE

As per company's today's announcement submitted to stock exchanges , Ramky reduced more than Rs.200 Cr debt by way of selling one non core asset of its subsidiary . I believe ,it is an important step in the right direction and it  indicating  management's intention to bring back the company  into the right track once again.

Disc: Holding Shares of Ramy Infrastructure

Saturday, February 25, 2017

What are international funds?


Courtesy : Economic Times

Investors looking for geographical diversification in their portfolio can consider investing in international markets through mutual funds. Termed as international funds, they invest in equities of a region or country, or fixed income securities.

What are the various types of international funds?

Of the international funds available to investors in India, there are country-specific, region-specific and thematic funds. For example, there are funds that invest in the US, Brazil or Europe. Apart from this, there are theme based funds investing in sectors such as consumption, energy and real estate. As a resident Indian investor, you have to invest only in Indian rupees. Like any other mutual fund, you can select fund, write a cheque and submit the application form to a fund house. You may even invest online.

How do global funds invest?
 
Funds on offer to Indian investors invest in international markets either directly or have the option to invest in other funds in those markets.The latter way is called a feeder route and is in the form of a fund of funds.
What is the advantage of international funds?

There are many stocks or businesses which are not available in the listed space in India. For example, cola companies. You can be part of the growth stories of such companies through international funds that also help you diversify across geographies. For example, when the Indian economy isn't doing well, global markets may give you higher return.
Are there any risks of investing in these funds?

In addition to the normal risks of investing in stocks, international funds also come with currency risks. This could happen due to fluctuations in the value of other markets' currency against the Indian rupee. While you will invest in rupee, the fund house will have to take exposure to international stocks in various currencies. Therefore, investors have to be prepared for currency risks because any fluctuation will directly impact the Net Asset Value (NAV) of the fund. For example, if the rupee depreciates against the dollar, you will get more rupees for every dollar invested, and your NAV could be higher. On the other hand, if the rupee appreciates against the dollar, you get fewer rupees for every dollar invested.
What's the tax treatment of international funds?
From the taxation point of view, international funds are treated on a par with debt mutual funds.For a holding period of less than three years, an investor is required to pay short-term capital gains tax on the profits as per his tax slab. When it is held for more than three years, the investor will get indexation benefit as the profit is treated as long-term capital gains. Post indexation, the gain is taxed at 20 per cent.

Investors looking for geographical diversification in their portfolio can consider investing in international markets through mutual funds. Termed as international funds, they invest in equities of a region or country, or fixed income securities.

Investors looking for geographical diversification in their portfolio can consider investing in international markets through mutual funds. Termed as international funds, they invest in equities of a region or country, or fixed income securities.

Investors looking for geographical diversification in their portfolio can consider investing in international markets through mutual funds. Termed as international funds, they invest in equities of a region or country, or fixed income securities.

What are the various types of international funds?
Of the international funds available to investors in India, there are country-specific, region-specific and thematic funds. For example, there are funds that in ..

Saturday, February 18, 2017

8 secrets of making money from investing in stocks ...

Courtesy : Economic Times

The stock market is a great place to make money. According to Motilal Oswal’s Annual Wealth Creation Study, the top 100 wealth creators added Rs 28.4 lakh crore to shareholder’s wealth during 2011-16. What’s even more interesting is that this value creation happened when the markets were not exactly seeing fireworks. The Sensex grew at a tardy pace of 5% CAGR during 2011-16, but the Motilal Oswal study shows that the top 100 wealth creators grew shareholder wealth by a dizzying 18% CAGR. Ajanta Pharma, the fastest growing stock, multiplied investors’ wealth by 53 times in five years.
At the same time, some stocks also destroyed wealth. PSU giant BHEL alone has destroyed more than Rs 75,000 crore of wealth. Its market cap has fallen 70% from Rs 1,07,380 crore in February 2011 to Rs 31,598 crore now. Indian Overseas Bank is trading 84% below its 2011 price. Motilal Oswal estimates that almost Rs 15 lakh crore worth of wealth was destroyed during 2011-16, led largely by the downturn in metals, mining, PSU banks, capital goods, real estate and construction. So, while you can make heaps of money in the stock market, you can also lose your shirt.

What can ensure success in stocks? Our sixth anniversary issue looks at some basic attributes that can help make money in stocks. We reached out to experts and asked them to explain why a certain trait or skill is critical for success in stocks. The simplest way to make money is to buy a great company when the stock price is low. But this is easier said than done. When Infosys came out with its IPO in 1993, the issue was undersubscribed. Morgan Stanley bailed it out by picking up 13% of the equity at the offer price of Rs 95 per share. Very few small investors can be like Morgan Stanley and look into the future. But fundamental analysis, which assesses the prospects of a company, does exactly this.
To analyse a company’s prospects and assess its potential, one needs to be conversant with the financial terms used in research reports. According to tax and investment expert Balwant Jain, a successful investor should be able to read balance sheets and decipher the quarterly and annual numbers reported by the company.


But more than anything else, stock investors must demonstrate monumental patience if they want to make serious money from stocks. They should learn to withstand volatility and hold tight when the going gets rough. Legendary investor Warren Buffett says his favourite holding period is “forever”. But though small investors are enamoured of Buffett’s ability to create wealth, they are not willing to listen to his advice.The age data of stock ownership is not available, but mutual fund statistics give a fair idea of the average Indian’s investing horizon. According to AMFI data, small investors withdraw 27% of the investments in equity funds within a year. Almost 47% of the investments in equity funds are redeemed within two years. “Small investors just don’t have the patience or the long-term vision required to make money from equity investments,” says a senior fund manager.Experts say this is not a problem only in India. “Short-termism has become very pervasive in stock markets across the globe. In 1960, the average holding period of stocks by investors on the NYSE was 100 months. By 2015, this average holding period had fallen to eight months,” says Devendra Nevgi, CEO of Zyfin Funds.


Of course, the hold forever strategy comes with caveats. If there is a disruptive change in the external environment for a company, or an internal development alters its fundamentals, it is time to exit the stock. It is here that investors have to fight the behavioural biases that nudge them to act is a certain way. The confirmation bias is one such malady, where one seeks information that confirms one’s view. “Great investors do two things that most of us do not.They seek information or views that are different than their own and they update their beliefs when the evidence suggests they should. Neither task is easy,” says a report by Credit Suisse on the attributes of successful investors. “A seasoned investor has to be flexible because company managements, business strategies and the market conditions keep changing,” says Dinesh Thakker, Chairman and Managing Director, Angel Broking.
This is why successful investing is not just about buying at the right time or holding for a long term but also exiting when the tide turns against the company. “Erosion of cash flow visibility, sharp drop in demand for products and services or a tectonic change in the policy environment are some of the reasons to dump a stock,” says Kunj Bansal, Executive Director & CIO (Equities), of Centrum Wealth Management.
The 8 secrets
1. Fundamental analysis is critical for stock investing

2. Investors must learn to read companies' annual reports, understand financial terms

3. Think long term when investing in stocks

4. Keep updated with world news to take a holistic view when investing in stocks

5. Selling stocks at the right time is as important as buying good ones.

6. Use safeguards when trading in stocks, invest only what you can comfortably risk

7. Be tax-wise when investing in stocks to maximise gains.

8. Use the right parameters when researching stocks.

The stock market is a great place to make money. According to Motilal Oswal’s Annual Wealth Creation Study, the top 100 wealth creators added Rs 28.4 lakh crore to shareholder’s wealth during 2011-16. What’s even more interesting is that this value creation happened when the markets were not exactly seeing fireworks. The Sensex grew at a tardy pace of 5% CAGR during 2011-16, but the Motilal Oswal study shows that the top 100 wealth creators grew shareholder wealth by a dizzying 18% CAGR. Ajant ..

8 secrets of making money from investing in stocks

ET Bureau|
Dec 12, 2016, 06.30 AM IST





Friday, February 10, 2017

PLEASE NOTE ...

Dear Friends

For the past few days receiving lot of queries from my readers asking about spam SMS with the name   'VALUEPICK' .  In this subject , I would like to again clarify that I am NOT SENDING ANY SUCH  SMS , and in no way responsible for any loss arising out of such recommendations provided by the persons/entities using the name 'Valuepick' in their communication.

Saturday, January 21, 2017

Stock-Picking Strategies: Qualitative Analysis


Courtesy : Investopedia

Fundamental analysis has a very wide scope. Valuing a company involves not only crunching numbers and predicting cash flows but also looking at the general, more subjective qualities of a company. Here we will look at how the analysis of qualitative factors is used for picking a stock.


Management 
 
The backbone of any successful company is strong management. The people at the top ultimately make the strategic decisions and therefore serve as a crucial factor determining the fate of the company. To assess the strength of management, investors can simply ask the standard five Ws: who, where, what, when and why?

Who?
Do some research, and find out who is running the company. Among other things, you should know who its CEO, CFO, COO and CIO are. Then you can move onto the next question.

Where? You need to find out where these people come from, specifically, their educational and employment backgrounds. Ask yourself if these backgrounds make the people suitable for directing the company in its industry. A management team consisting of people who come from completely unrelated industries should raise questions. If the CEO of a newly-formed mining company previously worked in the industry, ask yourself whether he or she has the necessary qualities to lead a mining company to success.

What and When?
What is the management philosophy? In other words, in what style do these people intend to manage the company? Some managers are more personable, promoting an open, transparent and flexible way of running the business. Other management philosophies are more rigid and less adaptable, valuing policy and established logic above all in the decision-making process. You can discern the style of management by looking at its past actions or by reading the annual report's management, discussion & analysis (MD&A) section. Ask yourself if you agree with this philosophy, and if it works for the company, given its size and the nature of its business.

Once you know the style of the managers, find out when this team took over the company. Jack Welch, for example, was CEO of General Electric for over 20 years. His long tenure is a good indication that he was a successful and profitable manager; otherwise, the shareholders and the board of directors wouldn't have kept him around. If a company is doing poorly, one of the first actions taken is management restructuring, which is a nice way of saying "a change in management due to poor results". If you see a company continually changing managers, it may be a sign to invest elsewhere.

At the same time, although restructuring is often brought on by poor management, it doesn't automatically mean the company is doomed. For example, Chrysler Corp was on the brink of bankruptcy when Lee Iacocca, the new CEO, came in and installed a new management team that renewed Chrysler's status as a major player in the auto industry. So, management restructuring may be a positive sign, showing that a struggling company is making efforts to improve its outlook and is about to see a change for the better.

Why?
A final factor to investigate is why these people have become managers. Look at the manager's employment history, and try to see if these reasons are clear. Does this person have the qualities you believe are needed to make someone a good manager for this company? Has s/he been hired because of past successes and achievements, or has s/he acquired the position through questionable means, such as self-appointment after inheriting the company?

Know What a Company Does and How it Makes Money 

 
A second important factor to consider when analyzing a company's qualitative factors is its product(s) or service(s). How does this company make money? In fancy MBA parlance, the question would be "What is the company's business model?"

Knowing how a company's activities will be profitable is fundamental to determining the worth of an investment. Often, people will boast about how profitable they think their new stock will be, but when you ask them what the company does, it seems their vision for the future is a little blurry: "Well, they have this high-tech thingamabob that does something with fiber-optic cables… ." If you aren't sure how your company will make money, you can't really be sure that its stock will bring you a return.

One of the biggest lessons taught by the dotcom bust of the late '90s is that not understanding a business model can have dire consequences. Many people had no idea how the dotcom companies were making money, or why they were trading so high. In fact, these companies weren't making any money; it's just that their growth potential was thought to be enormous. This led to overzealous buying based on a herd mentality, which in turn led to a market crash. But not everyone lost money when the bubble burst: Warren Buffett didn't invest in high-tech primarily because he didn't understand it. Although he was ostracized for this during the bubble, it saved him billions of dollars in the ensuing dotcom fallout. You need a solid understanding of how a company actually generates revenue in order to evaluate whether management is making the right decisions. 


Industry/Competition
 
Aside from having a general understanding of what a company does, you should analyze the characteristics of its industry, such as its growth potential. A mediocre company in a great industry can provide a solid return, while a mediocre company in a poor industry will likely take a bite out of your portfolio. Of course, discerning a company's stage of growth will involve approximation, but common sense can go a long way: it's not hard to see that the growth prospects of a high-tech industry are greater than those of the railway industry. It's just a matter of asking yourself if the demand for the industry is growing.

Market share is another important factor. Look at how Microsoft thoroughly dominates the market for operating systems. Anyone trying to enter this market faces huge obstacles because Microsoft can take advantage of economies of scale. This does not mean that a company in a near monopoly situation is guaranteed to remain on top, but investing in a company that tries to take on the "500-pound gorilla" is a risky venture.

Barriers against entry into a market can also give a company a significant qualitative advantage. Compare, for instance, the restaurant industry to the automobile or pharmaceuticals industries. Anybody can open up a restaurant because the skill level and capital required are very low. The automobile and pharmaceuticals industries, on the other hand, have massive barriers to entry: large capital expenditures, exclusive distribution channels, government regulation, patents and so on. The harder it is for competition to enter an industry, the greater the advantage for existing firms.


Brand Name
 
A valuable brand reflects years of product development and marketing. Take for example the most popular brand name in the world: Coca-Cola. Many estimate that the intangible value of Coke's brand name is in the billions of dollars! Massive corporations such as Procter & Gamble rely on hundreds of popular brand names like Tide, Pampers and Head & Shoulders. Having a portfolio of brands diversifies risk because the good performance of one brand can compensate for the underperformers.

Keep in mind that some stock-pickers steer clear of any company that is branded around one individual. They do so because, if a company is tied too closely to one person, any bad news regarding that person may hinder the company's share performance even if the news has nothing to do with company operations. A perfect example of this is the troubles faced by Martha Stewart Omnimedia as a result of Stewart's legal problems in 2004.

Don't Overcomplicate
 
You don't need a PhD in finance to recognize a good company. In his book "One Up on Wall Street", Peter Lynch discusses a time when his wife drew his attention to a great product with phenomenal marketing. Hanes was test marketing a product called L'eggs: women's pantyhose packaged in colorful plastic egg shells. Instead of selling these in department or specialty stores, Hanes put the product next to the candy bars, soda and gum at the checkouts of supermarkets - a brilliant idea since research showed that women frequented the supermarket about 12 times more often than the traditional outlets for pantyhose. The product was a huge success and became the second highest-selling consumer product of the 1970s.

Most women at the time would have easily seen the popularity of this product, and Lynch's wife was one of them. Thanks to her advice, he researched the company a little deeper and turned his investment in Hanes into a solid earner for Fidelity, while most of the male managers on Wall Street missed out. The point is that it's not only Wall Street analysts who are privy to information about companies; average everyday people can see such wonders too. If you see a local company expanding and doing well, dig a little deeper, ask around. Who knows, it may be the next Hanes.

Conclusion
Assessing a company from a qualitative standpoint and determining whether you should invest in it are as important as looking at sales and earnings. This strategy may be one of the simplest, but it is also one of the most effective ways to evaluate a potential investment.



Saturday, January 7, 2017

5 things one must consider before making fresh Section 80C investment for FY 2016-17

Courtesy : Economic Times



The fag end of the financial year is when we scurry around and grapple with bewildering alphanumeric combinations like Section 80C and 80DD. If your tax-saving efforts are last minute the chances of locking funds in an unsuitable investment are quite high.

Tax-saving investment should never be made on an ad-hoc basis or for an ill-conceived goal. But with the accounts department of your organisation knocking on your door to submit proofs of actual investments, many people try to   make tax saving investments at the last minute.

Here is how you can do last-minute tax planning to not only reduce your tax liability, but also save towards the goals you have set at different life stages.

While choosing the right tax-saver, base your decision on these five important things, among others:
*How much deduction from gross total income can you avail
*The amount of fresh tax-saving investments you need to make
*Kind of tax-saving instrument you should invest in
*Tenure of the investment
*Taxability of income from the investment

Once you have got a fix on these, equally important is to choose a tax-saving instrument which can be linked to a specific goal .
How much deduction can you avail
Section 80C allows deduction from gross total income (before arriving at taxable income) of up to Rs 1.5 lakh per annum on one or more eligible investments and specified expenses. The eligible investments include life insurance, Equity Linked Savings Schemes (ELSS) mutual funds, Public Provident Fund (PPF), National Savings Certificate (NSC), etc., while expenses and outflows can include tuition fees, principal repayment of home loan, among others.
If you have exhausted your annual limit Sec 80C limit of Rs 1.5 lakh, you can also look at National Pension System (NPS) to save towards retirement and, in the process, save additional tax.

From 2015-16 onwards, an additional (additional to Section 80C) deduction of up to Rs 50,000 under Section 80CCD (1b) for investment in NPS is also possible. For someone in the highest 30 per cent income tax bracket, it's an additional annual saving of about Rs 15,000.

Further, the premium paid towards a health insurance plan for self and family members qualifies for tax benefit under Section 80D for Rs 25,000 and Rs 30,000 for those above 60. If one has a home loan, interest payments made towards its repayment can also be claimed under Section 24 of the Income Tax Act. The other deductions include donations under Section 80G, interest payments under Section 80E for education loan, etc.

Fresh investments you need to make
Before you start looking for the right tax saver, run this simple exercise to evaluate whether you actually need to make any fresh investments for this financial year (2016-17).

Non-Section 80C deductions: First, look at all non-Section 80C deductions like the interest paid on home loan, health plans, educational loan.
Section 80C outflows: Then consider Section 80C-related  expenses like children's tuition fees, principal repayment on home loan, pure term life insurance plans premiums.
Existing Section 80C commitments: Consider all the existing Section 80C commitments to invest/to pay premium such as in Employees' Provident Fund (EPF) and endowment life insurance, respectively

The exercise above gives you a total of existing commitments under Section 80C, 80D and other deductions. Now, from your gross total income, reduce the amount to arrive at the taxable income.

If your net income after doing the above calculation is still above the tax exemption limit of Rs 2.5 lakh then you need to look at further tax saving. To reduce taxable income further and provided the limit of section 80C isn't yet exhausted, look for the right Section 80C investments.
Kind of tax-saving instrument
Within the basket of Section 80C investments, there are two options to choose from: Investments offering "Fixed and assured returns" and those offering "market-linked returns".

The former primarily includes debt assets, including notified bank deposits with a minimum period of five years, endowment life insurance plans, PPF, NSC, Senior Citizens Savings Scheme (SCSC), etc. The returns are fixed for the entire duration and and generally in line with the rates prevalent in the economy and very close to inflation figure. They suit conservative investors whose aim is to preserve capital rather than create wealth.

The 'market-linked returns' category is primarily the equity-asset class. Here, one can choose from ELSS of mutual funds and Unit-Linked Insurance Plan (ULIP), pension plans and the NPS. The returns are not assured but linked to the performance of the underlying assets such as equity or debt.  They have the potential to generate higher inflation adjusted return in the long run to the extent they are based on the equity asset class.
Tenure
All the above tax-saving instruments, by nature, are medium to long term products: From a three-year lock-in that comes with ELSS to a 15-year lock-in of PPF. Some like life insurance require annual payments to be made for a longer duration.

Taxability of income
Another important factor to consider is the post-tax return of the tax-saving investment. For instance, most fixed and assured returns products such as NSC provide you with Section 80C benefits, but the returns, currently 8 per cent (five-year) annually, are taxable. This makes the effective post-tax return equal to 5.52 per cent for the highest taxpayers. Considering the annual inflation of six per cent, the real return is almost zero!

Of all the tax-saving tools, only PPF, EPF, ELSS and insurance plans enjoy the EEE status, i.e., the growth is tax-exempt during the three stages of investing, growth and withdrawal.

Making the right choice
First, identify your medium and long term goals. A market-linked equity-backed tax-saving instrument is good for long term goals as equities need time to perform. And, before considering a taxable investment, see the tax rate that applies to you and consider the post-tax return. A low post-tax return after adjusting for inflation will not help you in achieving your goals in the long run. Inflation erodes the purchasing power of money, especially  
over long term.

Conclusion
Tax planning should ideally begin at the start of every financial year. Remember, the risks of planning tax-saving in a hurry later are manifold. There is, for instance, a high probability of picking up an unsuitable product. Also, there isn't any one instrument that can help you save tax and at the same time also provide safe, assured and highest return. Your final choice should ideally be based on a gamut of factors rather than solely being driven by returns from the financial product.

The fag end of the financial year is when we scurry around and grapple with bewildering alphanumeric combinations like Section 80C and 80DD. If your tax-saving efforts are last minute the chances of locking funds in an unsuitable investment are quite high.

Tax-saving investment should never be made on an ad-hoc basis or for an ill-conceived goal. But with the accounts department of your organisation knocking on your door to submit proofs of actual investments, many people try to  ..

The fag end of the financial year is when we scurry around and grapple with bewildering alphanumeric combinations like Section 80C and 80DD. If your tax-saving efforts are last minute the chances of locking funds in an unsuitable investment are quite high.

Tax-saving investment should never be made on an ad-hoc basis or for an ill-conceived goal. But with the accounts department of your organisation knocking on your door to submit proofs of actual investments, many people try to  ..

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