Budget 2013 : Where to Invest

Budget 2013 : Where to Invest

Union Budget 2013 is out and finance minister Mr. P. Chidambaram has several different proposals for investors to invest in the specific areas. Here are some of the areas where the amount can be invested

1. Tax Free Infrastructure Bonds

The Finance Minister has given permissions to several institutions to issue tax free infrastructure bonds for one more year. As many as four infrastructure debt funds have been registered. So, for investors who want to earn tax free income, this is a place where they can put some of their funds. But the thing that is to be kept in mind is the nature of these infrastructure bonds. These are long term investments and are typically for a period of 10 and 15 years

2. Equity Mutual Funds

The Security Transaction Tax (STT) that was levied on equity oriented mutual funds has been brought down significantly. This is valid for the transactions done through stock exchange as well as directly with the mutual fund. This reduces some of the additional expenses that an investor used to incur earlier and hence it becomes a suitable low cost investment for an investor to park some of his/her funds. The finance minister has reduced the STT on mutual fund sale and purchase at the counters from 0.25% to 0.001%. For mutual funds sold on the exchange, the STT will be 0.001% compared to 0.1% earlier, for the seller side only

3.       Inflation Linked Bonds

With the rising inflation, investors would like to ensure that their fixed income investments are protected against the rise in inflation. In the Union Budget 2013, the finance minister announced the introduction of inflation linked bonds in the Indian market. This will enable protection for investors against the inflation so some part of their funds can be allocated to these investments. These kinds of investments are known to have a “real rate of return”. Removing the effects of inflation from the return of an investment allows the investor to see the true earning potential of the security, without external economic forces. For example, say an investor held a bond that returned 4% over one year. Examining only the return shows that this bond earned a positive income. However, if inflation for the year was 5%, the real rate of return on the bond becomes -1%. This is an approximate measure. The exact measure is given by the following formula:-

Real Rate of return = (1+ rate of return) / (1+ inflation rate) – 1

In India, the Inflation linked bonds are linked to the Whole Sale Price Index (WPI). Here, WPI is the average inflation of common commodities pertaining to household, power and manufactured items, giving a fair figure of inflation level in the market.

Let’s say that you buy a regular bond for Rs. 100 with a coupon rate of 3%. Consider that the inflation rate is 5% when the bond matures. Therefore, the actual value of the bond is Rs. 105 but the coupon payment is Rs. 103. Thus, in actual terms we are at a loss of Rs. 2. With Inflation-Indexed Bonds such problems are taken care of. This is because the bond is indexed to the inflation rate. This means that for the same situation as above, the bond is indexed to the inflation rate of 5%. Therefore, the face value of the bond increases to Rs. 105 instead of Rs. 100. The coupon rate of 3% is now calculated on this Rs. 105. Therefore, the payment comes to Rs. 108.15. In this manner the buyer of bond does not incur any loss. Same is the case during a depression when the rate is low, except that the process is reversed. The face value is reduced below Rs. 100. In this way the issuer does not face any loss.

For stronger inflation indexed bonds, indexation is applied on interest also.  In the above scenario the 5% inflation is applied on the coupon rate, increasing it to 3.15% from 3%, giving you a net return of Rs.108.30.


4. Rajiv Gandhi Equity Savings Scheme

In Union Budget 2012, the finance minister announced the introduction of Rajiv Gandhi Equity Savings Scheme (RGESS). This scheme was meant for the new investors who either do not own a Demat account or for the investors who have opened a Demat account but haven’t made any transaction till the announcement of scheme. The deduction under this Scheme shall be available to individual investor whose Gross total income for the financial year is less than or equal to Rs. 10, 00, 000. Maximum investment amount under this scheme is 50,000 and the deduction allowed is 50 % of the investment amount.

In Union Budget 2013, the finance minister announced an extension to this scheme. Individuals with Gross total income up to Rs. 12, 00, 000 can avail the benefits of this scheme. Scheme is now available for three successive years so that an individual can invest Rs. 50, 000 each in these three years in the specifies securities and funds


A Bumpy Ride for FDI

A Bumpy Ride for FDI


Indian politics and media in the latter half of 2012 put FDI in retail on center stage. The reasons were quite vivid. In a show of audacity, the United Progressive Alliance government has decided to further open up the retail trade sector to foreign investment. Foreign investors will be permitted to enter the hitherto prohibited multi-brand retail segment and hold equity of up to 51 per cent in the units established. Other sectors to open up FDI in India are Aviation, Pharmaceuticals, Insurance and Pension.

Two sides of the coin

Facing the threat of having its credit rating downgraded to junk, the Indian government has been running out of time to show it is serious about fixing an economy that has been hard-hit by a global economic crisis and political gridlock at home. Finally, despite all the opposition and without having the consensus of alliance, UPA opened up the gates for the foreign companies in a desperate attempt to save the sinking economy. This move is nothing short of a declaration that UPA would proceed with implementing its agenda of economic reform, irrespective of whether there is majority support for, let alone a consensus on, that agenda.

The claims that FDI will bring in loads of employment and solidify the looming economy are contrary to the fact that the immediate and direct effect of FDI would be a significant loss of employment in the small and unorganised retail trade which would be displaced by the big retail firms. Prices paid to and returns earned by small suppliers, especially in agriculture, would be depressed because a few oligopolistic buyers dominate the retail trade. Moreover, once the retail trade is concentrated in a few firms, retail margins would rise, with implications for prices paid by the consumer, especially in years when domestic supply falls short.

Even if the postulations made by the UPA government turn out to be true, as vivid from the fact that India’s foreign direct investment inflows grew by over 65% year-on-year to $1.94 billion in October, according to the Department of Industrial Policy and Promotion (DIPP), yet the scenario won’t turn around overnight.

Hurdles in the way

The decision of implementing the FDI has been left to the states and most of the states have already rejected the concept as whole. Due to such strong opposition, most of the organizations have decided to wait till the clouds of mystification disperse and the scenario becomes clear for investment.  Even after the state’s blessings, which is unlikely to happen in most of the cases, large retailers would need to acquire large swathes of land in prime areas, which is a monumental task. Secondly, companies like Walmart are able to reap supply-chain efficiencies in the U.S. because of a strong infrastructure. The same thing can’t be said of India. Thirdly, taking into account that Indian consumer is a very complex persona, organized retail seems to be a small fish that would neither threaten the livelihoods of “kirana” shops, as portrayed by the Opposition, nor restore the financial health of the nation, as hoped by the government.

The road for FDI turned out to be quite a rough one in India. Whether it was inside the parliament or outside it, the issue turned out to be a centre stage for all the controversies. The step to let FDI in multi-brand retail didn’t go down well with Opposition parties and erstwhile UPA ally Trinamool Congress, which decided to withdraw support from the government over the issue and others, including hike in diesel prices. The issue stalled proceedings of Parliament till the government agreed to a voting on allowing of FDI in multi-brand retail that it managed to win, thanks to the abstention of Samajwadi Party and Bahujan Samaj Party.

Just when the government thought it was done with the issue, Wal-Mart’s disclosure in the US that it spent close to $ 25 million since 2008 on its various lobbying activities, including on issues related to “Enhanced market access for Investment in India”, created furor again. The company, however, stressed that it did not pay bribes to anyone in India. It was IKEA that made news continuously in the single-brand segment. The Scandinavian retailer wanted the government to relax the clause for mandatory sourcing of 30 per cent from MSMEs. After months of dialogue, the government relented and relaxed it for single brand segment which seems to be a favor done to IKEA.

On one side exist the exaggerated claims made by the government that FDI will be beneficial for the economy as well as common man and on the other side stands the small retailer who is genuinely worried about his livelihood supported by the opposition. Now that the foreign retailer have been granted a foothold in the market, only time will tell if the arrival will kill the neighborhood kirana stores or they will co-exist.

5 Common Mistakes That Young Investors Make

5 Common Mistakes That Young Investors Make


Procrastinating(the act of replacing high-priority actions with tasks of lower priority)

Procrastination is never good, but it can be especially detrimental while investing because the markets move so quickly. Good investment ideas are not always easy to find. If, after doing research, a good investment idea arises, it is important to act on it before the rest of the market takes note and beats you to it. Young investors can be prone to not acting on a good idea out of fear or inexperience. Missing out on a good idea can lead a young investor to two very bad scenarios:

The investor will revise his opinion upward and still buy an asset when it is not warranted. Perhaps the investor rightly develops an opinion that an asset priced at Rs.250 should be worth Rs.500. If it moves up to Rs.500 before he or she buys it, the investor may artificially revise the price target to Rs.600 to rationalize the purchase.
The young investor will look for a replacement. In the previous example, the investor who failed to buy the asset that rose from Rs.250 to Rs.500 may quickly try to identify the next asset that will double. As a result, the investor might purchase another asset quickly, without doing the proper work and research, in order to try to make up for the previous “missed opportunity.” Young investors often find themselves with too many options and not enough money. Read more in Competing Priorities: Too Many Choices, Too Few Dollars.

Speculating Instead of Investing

A young investor is at an advantage in his or her investing life. Holding the level of wealth constant, an investor’s age affects how much risk an he or she can take on. So, a young investor can seek out bigger returns by taking bigger risks. This is because if a young investor loses money, he or she has time to recover the losses through income generation. This may seem like an argument for a young investor to speculate, but it is not.
Young investors will have an inclination to speculate if they do not fully understand the investment process. Speculation is often the equivalent of gambling, as the speculator does not necessarily have a reason for a purchase except that there is a chance that it may go up in value. This can be dangerous, as there are many experienced professionals waiting to take advantage of their less-experienced counterparts.

Instead of speculating and gambling, a young investor should look to invest in companies that have higher risk but greater upside potential over the long-term. So, while a diversified portfolio of small-cap growth stocks(higher risk hence higher return) would not be appropriate for an investor nearing retirement, a young investor is better equipped to take on that risk and can take advantage accordingly.

Using Too Much Leverage (The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment)

Leverage has its benefits and its pitfalls. If there is ever a time when investors have the ability to add leverage to their portfolios, it is when they are young. As mentioned earlier, young investors have a greater ability to recover from losses through future income generation. However, similar to speculation, leverage can shatter even a good portfolio
If a young investor is able to stomach a 20-25% drop in his or her portfolio without getting discouraged, the 40-50% drop that would result at two times leverage may be too much to handle. The consequences of such a drop are similar to those resulting from a loss due to speculation: the young investor may become discouraged and overly risk averse for the rest of his investing life. (Want to learn more about leverage? See Leverage’s “Double-Edged Sword” Need Not Cut Deep for more.)

Not Asking Enough Questions

If a stock drops a lot, a young investor might expect it to bounce right back, but more often than not, it is down for good reason. One of the most important factors in forming investment decisions is asking why. If an asset is trading at half of an investor’s perceived value, there is a reason and it is the investor’s responsibility to find it. Young investors who have not experienced the pitfalls of investing can be particularly susceptible to making decisions without locating all the pertinent information

Not Investing

As mentioned earlier, an investor has the best ability to seek a higher return and take on higher risk when they have a long-term time horizon. Investors have their longest time horizons, and a high tolerance for risk, when they are young. Young people also tend to be less experienced with having money. As a result, they are often tempted to focus on how money can benefit them in the present, without focusing on any long-term goals (such as retirement). Spending money now instead of saving and investing can create bad habits and contribute to a lack of savings and retirement funds. For more on this, read Young Investors: What Are You Waiting For?

The Bottom Line

Young investors should take advantage of their age and their increased ability to take on risk. Applying investing fundamentals early can help lead to a bigger portfolio later in life. There are also many risks that a young/less-experienced investor will face when making decisions. Hopefully, avoiding some of the common mistakes above will help young people learn investing early and embark on a fruitful investing career.




5 Tips for Young Investor

5 Tips for Young Investor

You’re a twenty something, just out of college or a few years into working life. It’s time to start some serious investing. That’s because time is the young investor’s best friend, and you have plenty of it — perhaps two decades to save for a child’s college costs, and probably four decades to build a nest egg for retirement. I know — retirement seems eons away and thinking about it makes you feel so settled and middle-aged.

But look at it this way: If you invest a little each month starting now, you won’t have to invest as much as you would if you were to wait another 10 or 20 years to get going.

Imagine, for example, that you want to have 1 crore rupees by the time you retire in 40 years. That would be enough to provide an annual retirement income of 4,00,000 for the rest of your life.

But in fact, you’ll need 7 crore rupees, because if inflation averages 5 percent a year, that’s how much it will take to buy what 1 crore rupees buy today. 7 crores should produce an annual income of 28,00,000 rupees — equal to 4,00,000 today.

Start investing now and earn an average annual return of 10 percent — ambitious, but possible — and you’d have to invest about 1,58,000 a year to get to 7 crores in 40 years. But if you wait 10 years to start investing you’ll have to set aside nearly 4.25 lacs a year.Start early with whatever you can afford. It will make life much easier later.So what are the key things to know as you launch a long-term investing plan? Here are five tips:

Stocks, stocks, stocks

Stocks are riskier than bonds or bank savings, so in any given year you could lose money. But overall, the stock market doesn’t often lose money over periods longer than five years, because there are fewer losing years than winning ones.

Over long periods, returns in the stock market have averaged about 10 percent a year, while bonds earn a little over 7-8 percent. Cash, such as bank accounts or money market funds, averages about 4-5 percent.

Every young investor should keep in mind that investing in stocks is a long-term strategy, not something you do with next month’s rent money. If you can whether the downturns you should be pleased with the results.

But remember, when you hear that stocks have returned an average of 10 percent a year, it refers to investments that were left alone, with all dividends and other earnings reinvested. If you make 15 or 20 percent one year, leave it all in the account to continue growing. Don’t take out the “extra” earnings to spend, because they’re needed to offset the years when you make less than 10 percent.

Look at mutual funds

Though the stock market offers good returns over time, many individual stocks lose money and never recover.

You would need at least 20 or 30 different stocks to safely “diversify” your money — spread it around to cut risk. To find them you might have to read prospectuses, annual reports and news accounts on 200 or 300 stocks. Even if you know enough to do this — and most investors don’t — it’s an enormous amount of work.

Fortunately, we have mutual funds, which are investment pools run by professionals. Even if you have just a few thousand dollars to invest, with a single fund you can spread your money among dozens of stocks, sometimes hundreds. For a small fee, the fund manager does all the hard stock picking.

Focus on fees

The average stock-owning mutual fund charges investors annual fees equal to about 1 percent of assets — Rs.1 for every 100 rupees in your account. That little bit adds up. If your fund held stocks that returned 10 percent, the fee would cut your fund’s return to 9 percent. Instead of making 10 rupees for every 100 rupees invested, you’d make 9 rupees. You’d take a 10 percent pay cut.

Suppose you invested 1,000 rupees today in a fund that earned 9 percent once fees were figured in. You’d end up with about 31,000 after 40 years. Now suppose you can find a fund owning the same stocks but charging only 0.2 percent. Your 1,000 rupees will grow to about 43,000 rupees.

It’s an enormous difference. That’s why millions of investors turn to index-weighted funds that charge 0.2 percent or less. Instead of trying to find hot stocks, they simply buy and hold the stocks in a broad market index.

Many studies have shown that index funds actually beat most “managed” funds over time, because most fund managers can’t successfully pick enough winners to overcome the damage from their high fees. Index funds also tend to produce lower annual tax bills. And because their investing strategy is essentially automated, you don’t have to worry that your fund manager will quit or retire.

Minimize taxes

Since taxes chew away at returns the same way fees do, savvy investors use a variety of tax strategies.

You should open a PPF (Public Provident Fund) account as soon as you get into job even if you are investing through EPF (Employee Provident Fund). We are not suggesting young investors that they should put the maximum amount permissible. But one should open the PPF account and just put little bit so that at least the account completes its lock-in period as soon as possible.

Also one must start SIP (Systematic Investment Plan) in Diversified Equity Funds. This should be at least 10% of your monthly income.

Also, there’s no annual tax on investment profits, meaning money that otherwise would be used to pay taxes can instead keep growing as an investment.

Also one must start SIP (Systematic Investment Plan) in Diversified Equity Funds. This should be at least 10% of your monthly income.

Loans for Young People

Loans like Education Loan or Home loan are good but in case one takes loan for buying expensive Car or exotic holidays that is a wrong approach. Also use of credit card should only be to substitute handling of cash  and ease of payment and strictly it should not be used as tool to get loan.