Feb 22, 2009

When is the best time to invest?

When the stock market is volatile, it can be very tempting to move out. For example, if you think that the market is likely to fall even more, you might consider selling investments so that you can buy them back when they are cheaper. This may sound like a good strategy in theory, but in practice it is extremely difficult. Even expert fund managers who spend all their time watching the market cannot tell for certain when prices have reached either their top point, when it might be good to sell, or their lowest point, when it would be good to buy. The problem is compounded by the fact that markets tend to rise very soon after they fall, and the rises are often concentrated into short periods of time. For example, on 13th October 2008, in the midst of the recent market upheavals, the BSE Sensex leapt by 781 points – one of the biggest one-day rises it had recorded to that point. If you try to time the markets, it is all too easy to miss days like that. Of course, you should always remember that the value of investments can go down as well as up, so you may not get back as much as you invest.

Think about time, not timing

Because it is difficult, if not impossible, to predict how the stock market will move from day to day, Fidelity believes it is time, not timing, that is the key to investment success. By this we mean that the longer you stay invested, the more opportunity you will have to benefit from the stock market’s potential for impressive long term growth. If you put off making an investment because you think prices have further to fall, there is a risk that you will miss out on the significant rises that often occur in the early days of an upward trend. Conversely, if you sell an investment because the markets are falling and the news is full of gloomy predictions about the economy, you may find you have come out of the market at exactly the wrong time, just before the start of a recovery. It is worth remembering that markets tend to move in advance of the economy. In other words, share prices can start recovering before the economy shows signs of emerging from the doldrums. The best course is to choose investments that you feel confident about and take a long term view, accepting that there will almost certainly be difficult times along the way.


Feb 21, 2009

Strategies For Successful Investing

Ensure that your investments are right for you

Different investments suit different people at different stages in their lives. And each one has its own level of risk and reward. The basic rule of thumb? The greater the risk, the greater the potential reward. And vice versa.

It is also important to think about your own temperament – if you find it too worrying that your investment might occasionally go down in value, you should perhaps weight your portfolio towards more secure holdings. Here is a broad description of some investment options:

Gold and Real Estate are traditional investments and due to their 'physical' nature are not liquid. PF, PPF, NSCs and Post Office Savings are long term national savings avenues that help you save for retirement besides offering tax benefits. But when it comes to true blue financial investments, there are three main asset classes: Cash, Bonds and Equities.

Cash is good for an emergency fund or a short term goal like a holiday, but you may find the returns disappointing over the long term, and you need to remember that their value will be eroded by inflation.

Bonds (or loans issued by the government and large companies) can provide better returns than bank accounts but cannot offer the same level of security. Although bond funds do not have as much growth potential as stock market investments, they tend to be less volatile. Investors often opt for bonds when they need to reduce risk – perhaps in the years leading up to their retirement.

Equities offer the most growth potential over the long term, but you need to accept that there may be periods when the value of your investment falls sharply.

As the years go by, it is important to check your portfolio regularly to make sure that it still suits your long term strategy. If an investment has done particularly well, you may find that it now accounts for a disproportionate share of your overall portfolio and you need to do some rebalancing. In addition, you will probably need to adjust the weights of your investments from time to time – for example, reduce the amount of risk you are exposed to as you get nearer to retirement.

Keep calm
If you are confident about your long term strategy , you do not need to react to short term movements in the market. You will know that your investments have time to ride out the storm and perhaps even go on to take advantage of any further growth. It is important to be patient with the stock market and to avoid knee-jerk reactions and rash decisions in response to worrying news.

“The worst mistake a private investor can make is to be sucked into markets when they are high and the prevailing mood is the most optimistic, only to then get shaken out at times like this when prices are falling and the outlook is uncertain. It normally takes many years to recover from this experience.”

Read: When is the Best Time to Invest? >>


Feb 20, 2009

A place for cash

It is always a good idea to have some money set aside in case of emergencies. Enough to cover three months’ living expenses is often a rough guide to how much you may need. And for most of us a bank account is a safe place to keep cash. It is also useful for short term savings – putting money aside for a new car,a holiday or the deposit on a house. However, with a long term investment, the security of cash has to be balanced against the risk that it will not generate the level of returns you are hoping for.

The spectre of inflation
A potentially more serious threat to your bank account is the damage that inflation can cause. Rising prices could mean that the real return on your savings is very small. For instance, if your account pays 8% but inflation is 6%, you are only making 2% in real terms. You then have to take tax into account – for an investor in the highest tax bracket, this will result in a negative real return. If inflation is higher than 6%, as it is at the moment, the effect on your real returns will be even worse. A reduction in interest rates would also cut into the returns on your savings.

Read: Strategies for successful investing>>


Investing can be rewarding but is often uncomfortable!!!

Nothing ventured, nothing gained” applies just as much to the stock market as it does to other aspects of life. Most investors realize this in theory, but may not feel so sure about it when they have to face the reality of a falling market. This is only human – when markets are buoyant and your portfolio is going up in value, you probably feel you have made a good choice. But that won’t stop you questioning your investment decisions when things are more volatile and you see your investment fluctuate in value.

When stock markets are going through one of their inevitable periods of turmoil, it can be reassuring to take a long term perspective and remember that you are investing for years, rather than days or months. This may remind you that there is plenty of time for the markets to recover from any temporary setbacks. And you will see that the only way to benefit from the stock market’s potential for significant long term growth is to endure periods when things look a bit more worrying.

Another benefit of taking a long term view is seeing for yourself that the general trend in stock markets has been positive, even though there have been sharp falls. The Indian market has grown since 1979, when the BSE Sensex was launched. It is interesting to note that the largest fall in the Indian stock market - on 6th March 1986 - barely registers as a blip, even though the market fell by more than 13% on a single day. This is because it recovered in a matter of weeks.

The market decline of 2000–03, which is when the tech bubble burst is clearly visible on the chart. However, when seen in the context of a 28-year view, the boom of the 1990s seem to be a distortion, after which market performance corrected itself and then returned to the long term upward trend.

The real value of investing for the long term

Research by Fidelity shows that over the last 28 years, the probability of investors losing money over a one-year or three-year period would have been relatively high - 30% and 15% respectively - if they had invested in a fund tracking the Indian stock market. However, the probability of losing money on a similar investment over ten years would have been as low as one percent - this has also been true for most international investments. The message is that the longer you invest for, the more likely it is that you will benefit from the long term growth potential of the stock market.
Read A place for cash>>


Feb 14, 2009

Market Fall - How To Recover Losses?

THE market's blows are only getting harder. The bad news is that the worst may not be over yet. Amidst all this turbulence, only one thing can save you: The right advice.
Here’s how you can limit the damage, straight from wealth's experts.

Scenario 1: I invested in the markets for the short term; what should I do now?
Right now, the markets are driven by global sentiment. And, financial planners reckon that it may take up to the fourth quarter of 2009 for the global market to pull up. On the domestic front too, things may look brighter only in the third or fourth quarter of 2009. "This is mainly because of the huge input costs and high interest rates as of now, " they say.
In such a scenario, you have 2 options:

Option 1:
If you are hard pressed for money, you have no choice but to withdraw. PV Subramanyam, financial domain trainer, says, “If you need money soon, say in a year or two, it is better to sell now even if that means booking losses. There’s no way of predicting how the markets would behave.”

Option 2: Sandeep Shanbhag, investment expert and Director, Wonderland Consultants, says, “If you initially invested for the short term but can weather the storm, then wait, provided you have fundamentally good stocks. However, if you need funds, then exit as early as possible and treat this as a mistake not to be repeated.”

Caution: Do not play the markets on a short term basis simply because of the looming uncertainty.

Scenario 2: I am a long term investor: What to do now?

To begin with, relax. If you have invested, you should continue doing so. India has a number of things going in its favour:

-- Among all emerging economies, our export to GDP ratio is the lowest. Consequently, even a full blown US recession will shave only around 40 to 60 basis points off our GDP growth rate, which was a healthy 7.9 per cent for the first quarter. Our economy is fundamentally strong; the situation right now is nothing but a slowdown and it will recover soon.

-- Commodity prices have started to decline, with oil last being traded at USD 90 per barrel. So, going forward, inflation will not be a big threat.

-- Our regulators, SEBI and RBI are proactively taking measures to control the situation and ease capital flows into India.

Long term investors need not worry. In fact, it’s a good time to invest since stocks, expensive at one time, are now available at huge discounts.

You can file away a proportion of your money for the long-term through SIPs. If you are single and salaried, put 70 per cent of your money in large cap stocks and the remaining 30 per cent in mid cap stocks. Shabhag suggests that this is an ideal time to average out and make piecemeal investments on every fall. "You can invest around 20 per cent of investible funds into equity / equity MFs. Another 20 to 25 per cent of your surplus can be invested in gold through gold exchange traded funds (ETFs)."

There’s a simple theory behind investing: You invest your way up, and you invest your way down.

What NOT to do?
-- Don't enter the market for a quick buck.

-- Don't look at borrowings for a while, since interest rates are quite high. Especially stay away from borrowing to invest in volatile assets like equities or even property.

-- Avoid investing in Unit Linked Insurance Plans (ULIPs) if you do not understand the scheme in detail.

-- Don't invest in lump sum.

-- Don't stop your systematic investment plans (SIPs), because market fluctuations can average out your losses with SIPs.


Feb 9, 2009

Tata Capital NCD: Should you invest?

GIVEN the continuing downturn in the economy on the back of what is gradually transpiring into a worldwide recession, safety of capital has become of paramount importance. However, the government on it's part, in a bid to encourage growth, has been releasing massive amounts of liquidity in the economy through its monetary policy. This has resulted in the returns on popular fixed income investments like bank FDs etc steadily dwindling.

In such a scenario, Tata Capital Ltd.’s Non Convertible Debenture (NCD) issue that offers an effective rate of return between 11.5 to 12 per cent pa (depending upon the option chosen) is a very attractive opportunity for investors seeking regular income along with safety.

About the issue

- The issue is open from February 2 to February 24, 2009.
- The issue is open only to resident Indians and NRIs cannot apply.
- These NCDs are issued in demat form only, so you need to have an active demat account.
- The minimum amount that you can invest is Rs 1 lakh in the case of monthly interest option and for the remaining it is Rs 10,000.
- There will be no tax deduction at source (TDS) on the interest earned.
- The debentures are offered in four options: monthly, quarterly, annual and cumulative interest

The rate of return and other features of the issue are detailed in the table below.

Is there a lock-in?

Though the NCDs have a tenure of five years, they do have a liquidity feature in terms of a put and call option as pointed out in the table. (‘Put’ refers to the right of the investor for early redemption whereas ‘call’ refers to the right of the company to call for premature redemption).

The instruments can also be traded on the exchange and the market price would be the cum-interest price as on the date when you sell it.


The interest will be taxable in the usual course. That is, the interest that you receive monthly, quarterly or cumulatively on maturity will be taxed as other income, that is, added to your total income and taxed thereof.

If you decide to sell at the stock exchange, it will be treated as a long-term capital asset if held for more than 12 months immediately preceding the date of sale.

The long-term capital gains tax will be taxed at 10 per cent without indexation of cost. And if you sell within 12 months, short-term capital gains will be applicable in accordance with the Income Tax Act at your regular tax slab.


The safety aspect is what sets NCD apart from its other fixed income counterparts. In legal terms, they constitute direct and secured obligations of Tata Capital Ltd. and shall rank pari passu and with all their other existing direct and secured borrowings. Consequently, the claims of NCD holders will be superior to the claims of other unsecured creditors and other investors. That means,if the company were to wind up, NCD holders will rank above all unsecured creditors and other investors.

You may know that other fixed income investments such as bank or company FDs do not offer such security. Bank FDs are insured for a maximum of Rs 1 lakh whereas a company FD is an altogether unsecured debt. In other words, if the company were to default, the FD holders do not have a legal right on the assets of the company. A relevant example is the fixed deposit of coincidentally another Tata Group entity - Tata Motors.

Though the interest rate is more or less comparable, what makes the NCD score over the FD issue (notwithstanding that both issues are from the same group) is the risk-return factor. In this case, the NCD issue is secure whereas the security of the FD issue depends upon the health of the automobile industry in general and Tata Motors in particular.


Feb 5, 2009

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Sold the Shares; Do I have to Pay Tax???

INCOMES such as salary, rent and business income are regular and recurring. However, these do not cover all sources of income.

Income can arise out of the sale of capital assets such as shares and mutual funds. You will have to pay a capital gains tax on the profits made on the sale of shares/ mutual funds.

What is short term capital gain and long term capital gain?
If you sell a share or a mutual fund within one year of buying it, the profit is called short term capital gain. If you sell it after one year, it is long term capital gain. This distinction is necessary because the tax treatment is different for each of these.

Tax laws are usually stricter for short term capital gains because the government wants to encourage you to stay invested in equities and mutual funds for the long term.

How are the gains taxed?
-- Short-term capital gains tax
In case of equity shares and equity mutual funds, short-term capital gains are taxed at a flat rate of 15 per cent.

In case of debt mutual funds, the short term capital gain is added to your total income and tax is calculated on that total.

Long-term capital gains
-- In its bid to encourage long term investments in equities, the government has abolished long term capital gain tax on equity shares and equity mutual funds.

-- In case of debt mutual funds, long-term capital gains are taxed at a flat rate of 20 per cent irrespective of your income slab. You also have an option to forego the benefit of indexation and pay long-term capital gain tax at 10 per cent instead of 20 per cent. The option that is more beneficial can be determined on a case-to-case basis.


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