MONEY MATTERS

3 Ways to Control Unnecessary Spending

2011-04-15T05:21:00.000-07:00

"The safest way to double your money is to fold it over once and put it in your pocket." - Kin Hubbard

Kin Hubbard is right in saying that if we do not spend money unnecessarily we would be able to save money and double it. However most of us like to spend and would find it difficult to not spend at all. We feel that it could stress us further. However far to the contrary, accepting the challenges to not spend money on 1 day, not using credit cards for a week and not dining out for a month could help render certain important lessons for life.

Here are the challenges:

The challenge to eliminate the use of credit cards for a week. We all tend to spend a lot on small and big purchases with using the credit card that carry a high rate of interest. Credit card tends to make us spend excessively on unwanted purchases. This creates stress of paying back the credit that includes the amount spent and interest. It is true that the use of credit cards have pushed many into bankruptcy and decreased their credit-worthiness.

Buying things on cash would only make us spend on things that we absolutely consider necessary. It is found that sometimes postponing the purchase and preferring to pay cash could make us realize that the need was just momentary. It is also true that buying with credit cards causes financial stress and spoiling of important life relationships. So avoiding plastic money could reduce stress, save relationships and safeguard your credit worthiness.

The next challenge of not spending for a day could be difficult, but could help save and render some important life lessons. It is true as most of us have regular daily expenses on coffee, tea, lunch, snack at regular intervals and fuel to travel to and from work. Effective planning with implementation of this challenge involves ensuring that your fuel tank is full on the earlier day. Then setting the coffee vending machine the night before could ensure you refreshing brewed coffee to enjoy before you leave for work. Similarly, carrying homemade lunch and healthy snacks like salads, nuts, seed and snack bars could help you eat healthy and save money. It is not important how much you saved, but that you saved and also learnt some of life’s most important lessons.

The last challenge of not dining out for a month could be difficult for many today, with some feeling that there is propaganda against restaurants and cafeterias. This is difficult but you would realize on implementation that it saves you a lot of money that is usually spent eating out in restaurants and cafeterias. Some of us eating in cheap fast food joints may not realize it immediately, however its long-term health consequences would prove you wrong.

Avoiding eating in restaurants would not only effect huge savings, but also would help you avoid excesses in foods. In addition eating out only on special occasions as a family would help you enjoy the food. It would make the family realize the value of spending money lavishly when you have it or would like a change from homemade food.

The last thought:

This does not mean that you should not spend at all on dining out or on getting good things of life. It only means you should have enough money and savings to spend it. This self-control would only help you save and prepare you psychologically for a consumerism behavior when you cannot spend. I am sure you would learn a lot with these spending challenges once you try them.

The above article is a guest post by Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners, a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

Please feel free to share your thoughts about this article in the comments section.

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How to create a workable budget that gives you money and life?

2011-03-31T12:20:00.000-07:00

"Modern man drives a mortgaged car over a bond-financed highway on credit-card petrol."

Taking control of your cash inflow and outflow is the base for financial planning. Budgeting is important to gain control over your financial life, be prepared and avoid surprises, save for a major purchase, get out of debt and stay out of debt, expand your lifestyle, and to retire early.

Thiruvalluvar, a much celebrated Tamil poet emphasizes budgeting through his following lines:

Incomings may be scant; but yet, no failure there,
If in expenditure you rightly learn to spare. (Kural: 478)

Who prosperous lives and of enjoyment knows no bound,
His seeming wealth, departing, nowhere shall be found. (Kural: 479)

Most of us hesitate to make a budget because we think it is about cutting all the fun in life. Budgeting is not about cutting all the fun; it is about conscious allocation of funds. Once we start spending consciously, our mind will find out a whole new way of having fun within the budget.

Making Budget: A step by step guide

There is a saying, “God is in the details”. Detail every bit of your financials while creating a budget.

1. Check your financial statements:

It could be your utility bills, d’mat account statement, other investment receipts, ITR, Form 16A, Form 16, bank statement, credit card statement etc. The idea is to make out the monthly average of income and expenses. Therefore the more details you can get the more relevant and accurate will the budget be.

2.Listing out income from all sources:

It is very easy for us to list down the income from employment or self employment. Normally we will lose track of income from investments, rental income and other miscellaneous income. Also check is there any annual income. Don’t forget to record the incomes received by way of cash equivalents like meal voucher and credit card reward points.

3.Finding out your total expenses:

We can easily list down the major expenses. But listing out the miscellaneous and petty expenses would be difficult. This is where the collected financial statements would help. Don’t forget the annual expenses like car insurance and property tax. Once you have recorded all the expenses then split them into fixed expenses and variable expenses. This classification will provide much more clarity.

Most people are surprised to learn that it may go for things that we do not need at all. Writing your expenditures down provides us with the unique opportunity to visualize and find out if any money goes for things that we do not need or want.

4.Are you saving or over spending?

Now you have your total income as well as total expenses. Deduct the total expenses from the total income. You will know whether you are saving some money or doing over spending. If you are saving some money channelize that money into the priority areas such as clearing your credit card outstanding or any other loan to become debt free or retirement savings or childrens' future plan. If you are on over spending, then you need to make some adjustments to expenses.

5.Review your spending pattern:

On your expenses list, pay close attention to the variable expenses. This is where you can cut short a few expenses.Every month we need to keep aside appropriate amount for the proportionate annual expenses. You can find out the reasons for over spending. Most of the cases it would be emotional buying or unplanned shopping. Once you have pointed out the reasons for overspending, then find out the steps or precautions to be taken to rectify the same.

6.Are you on the track? Check monthly:

Every month set aside an hour to compare the actual expenses with the budgeted expenses. If there is a negative deviation, find out the measures to control them.

Why your earlier budgeting attempts failed?

Budgeting is not a onetime activity. It is a continuous process. Normally we start budgeting with a genuine motive. But after a few months it may get off-tracked like our attempts on dieting or exercising. Therefore one needs to understand the behavioural aspects of budgeting.

a. Positive Approach:

Never focus on the negative aspects. Focus on the benefits of successful budgeting. What will you accomplish by creating a budget? It could be becoming debt free, some money for vacation, planning for retirement or children’s future.

b. Keep your enthusiasm alive:

Budgeting may over a period of time become routine and hence boring. Set a few short term goals like trying to repay the personal loan in 18 months instead of 36 months. If you achieve it reward yourself. Recognition could be a good motivating factor. Inform all your family members, friends and well wishers about your progress on budgeting. You can also join in some of the forums related to money management.

c. Have a realistic expectation:

One needs to keep realistic expectation on the outcome of the budget. Over expectation may demotivate you. Budgeting is not a magic. It is an art like singing and dancing. You will be able to progress it only over a period of time with constant practice.

If you have not done budgeting for yourself and family so far, then now is the right time to take action. The fact that you are reading this article shows you have decided to stop procrastinating, and have answered the ancient question, “If not now, when?” with “NOW!”.

Please feel free to share your thoughts about this article in the comments section.

If you find the contents of MONEY MATTERS useful and interesting, then subscribe to the FREE UPDATES FROM MONEY MATTERS.

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What is Hawala ? All you want to know about Hawala

2011-03-10T12:20:00.000-08:00

“Hawala” , a word which is making headlines very often these days and can be easily associated with Naresh Jain, Madhu Koda, Hasan Ali Khan and many other Hawala Kings. But, What exactly is Hawala? How it works? and Why is this illegal ? These are some of the questions which I was bombarded with by one of my friends . So here goes a set of FAQs (Frequently Asked Questions) about the ever eluding Hawala.

What is Hawala?

The word "Hawala" means trust. Its is an alternative or parallel remittance system, which works outside the circle of banks and formal financial systems. Hawala is an ancient system of money transfer which originated in South Asia and is now being used across the globe. This system mainly developed in India, before the introduction of western banking practices. It is also sometimes referred to as “Underground Banking”. Though it is being used across the world to remit funds, but it is not a legal system. It works on the basis of many middle men called the hawaldars or the hawala dealers. The reason, why Hawala is extensively used inspite of the fact that it is illegal, is the inseparable element of trust and extensive use of family or regional affiliations.

How Hawala works?

Hawala works by transferring money without actually moving it. In a hawala transaction , no physical movement of cash is there. Hawala system works with a network of operators called Hawaldars or Hawala Dealers. A person willing to transfer money, contacts a Hawala operator at the source location. The hawala operator at that end collects the money from that person who wishes to make a transfer. He then calls upon his counterpart or the other Hawala operator at the destination place/country was the transfer has to be made. Now the hawala operator at the tranferee’s end, hands over the cash to the intended recipient after deducting a certain amount of commission. The best way to understand Hawala is through understanding a single hawala transaction. For example, Chinappa is a taxi driver staying at UK on an expired tourist Visa. He wants to remit some money for his family in India. Chinappa cannot approach an authorized money transfer agent/bank there as he is an illegal immigrant in the UK. Thus Chinappa finally lands up at a hawala operators office, who not only promises him to deliver the cash to his native place in India at a reasonable commission , but also in a very short period of time. Chinappa then hands over the cash to the UK hawala operator. The UK hawala operator then calls his Indian counterpart and asks him to deliver funds to Chinappa’s family member. Any member of Chinappa’s family can now collect cash from the Indian Hawala operator, after deduction of commission charges and on producing an authentication code, which is generally used in all hawala transactions. A reverse Hawala transaction can also be initiated, where a father approaches the same Indian hawala operator for remitting funds for his son studying in UK through the UK hawala operator. In this manner, money never actually moves. The position of the hawala operator’s in each others books gets squared off.

Is Hawala Illegal?

Yes, Hawala has been made illegal in many countries, as it is seen to be a form of money laundering and can be used to move wealth anonymously. As hawala transactions are not routed through banks they cannot be regulated by the government agencies and have thus emerged as a major cause of concern. This network is being used extensively across the globe to circulate black money and to provide funds for terrorism, drug trafficking and other illegal activities. In India, FEMA (Foreign Exchange Management Act) 2000 and PMLA ( Prevention of Money Laundering Act) 2002 are the two major legislations which make such transactions illegal.

Why people still use Hawala?

Inspite of the fact that hawala transactions are illegal, people use this method because of the following reasons:

The commission rates for transferring money through hawala are quite low

No requirement of any id proof and disclosure of source of income is there

It has emerged as a reliable and efficient system of remittance

As there is no physical movement of cash, hawala operators provide better exchange rates as compared to the official exchange rates

It is a simple and hassle free process when compared to the extensive documentation being done by the banks

It is the only way to transfer unaccounted income

So, the next time you come across the word Hawala, I am sure you will be able to draw a picture about the transaction in your mind.

Please feel free to share your thoughts and experience(if any) about the hawala route here.

Discalimer : MONEY MATTERS does not recommend you to use the Hawala method for money transfer. This article is meant solely for the purpose of quenching your Hawala thirst.

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Financial analysts – How do they help you in personal finance planning?

2011-02-23T10:30:00.000-08:00

With a little knowledge and willingness to follow a particular financial plan, most people are successful in handling their personal finances. Despite of many people handling their personal finances on their own, there are some others who cannot get a grip on their finances. As budgeting is usually the first step that must be taken towards your personal finances, there are many who seek the help of an online budget planner to develop an effective budget that could assist them in tracking their income. Similarly, the financial analysts help the consumer keep away from debts by managing their personal finances. Here are some ways in which a financial advisor must help you out.

Set realistic benchmarks to achieve: Once you have already signed up with your financial advisor, the first and the most important thing that you must do is to sit together and create some realistic benchmarks for you to follow throughout your life. It is very necessary for everyone to set some financial goals so that you can tread on a path where you may achieve it. However, you need to make sure that the goals must be realistic, which means that you must be able to attain them within this life.

Set up a practical budget: The role of a financial advisor is not complete unless he sets up a financial budget for you. You can even take help from an online budget planner to create a budget that’ll help you track your monthly income and expenses so that you can monitor your monthly savings. Without saving money and leading a frugal life, a consumer can never get back a grip on his personal finances.

Advise you on effective money management: As you enroll yourself with a financial advisor, you will have to disclose your financial picture to the analyst so that he can assess your finances and know where you stand financially. Unless you know how to manage your personal finances, you may not be even able to reach your desired financial goals. This kind of help can only be got from a financial analyst who will even prove his teachings with effective monetary results.

Before you can even begin to look for a financial analyst, make sure you shop around to get in touch with the most authentic financial planner in the market. Utilize their expert financial advice and help yourself lead a tension free life.

Please feel free to share your experience with a financial planner here

This is a guest post by Angela Brown who is a contributing writer for a US-based debt communities. Brown’s expertise in the consumer debt industry has given her the opportunity to contribute her work to several financial websites.

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Tata Steel FPO : Review & Analysis

2011-01-15T06:57:00.000-08:00

Tata Steel FPO Review : Primary market in the first month of the new decade is all set to taste a big ticket public issue in the form of Tata Steel’s Follow on Public Offer (FPO). This public issue of India’s largest steel maker will hit the capital markets between January 19 to 21. Tata Steel has fixed the price band of Rs. 594-610 per share for its follow on public offer (FPO) of 5.7 crore shares. At the higher end of the price band of Rs. 610 per share, the company is expected to raise Rs.3,477 crores from the FPO, while at the lower end of price band at Rs. 594 per share, it will raise Rs. 3,385 crores. The company has fixed a bid lot of a minimum of 10 equity shares and in multiples of 10 shares thereafter for the issue which comprises a net issue to the public of 5.55 crore shares and a reservation of 15 lakh shares for subscription by eligible employees.

Objects of the Issue : Tata steel, the seventh largest steel maker in the world, will utilize the share proceeds for the following purpose :

To part finance the Company’s share of capital expenditure for expansion of existing works at Jamshedpur

To pay for redemption amounts on maturity of certain redeemable non-convertible debentures issued by the Company on a private placement basis

The expansion work at the Jamshedpur plant, which is scheduled for completion by March 2011, will augment the steel production capacity of the plant to 10 million tonnes per annum. Also the redemption of non-convertible debentures held by other Tata Group companies will help in deleveraging Tata Steel’s Balance Sheet.

Financials : Tata Steel has grown significantly in recent years with its steel production capacity increasing from 5.0 mtpa in FY 2006 to 27.2 mtpa currently. This growth was primarily due to the acquisition of Corus Group Plc. In April 2007. As seen in the table, the net sales of Tata Steel have been constantly on the rise. As of September, 2010, Net sales stand at Rs.13,658 crores. The Net Profit of the company has also been growing steadily except for the FY2010, where some pressure is visible on the margins leading to a meagre fall in profitability. Also, the PAT of the half year ended stands at Rs. 3,645 crores keeping up with the upside trends in profitability. The Balance of the company reveals a mounting debt pressure from FY 2009 onwards, which is primarily there as a result of overseas mergers and acquisitions. It is to ease this debt liability in the form of non-convertible debentures, that the company is coming up with a public issue. Tata Steel had total assets of Rs.1,21,368 crores and a total net worth of Rs.27,742 crores as of September 2010.

Valuation (Pricing of the issue) : Price of the FPO, in which Tata Steel is off loading its 5.94 per cent stake, is offered at a discount of 5 to 8 per cent from stock price of the date of announcement, which stood at Rs 647.6 a share. Considering an EPS of Rs. 57.3 for Tata Steel (standalone) and a composite steel industry P/E multiple of 10.9, the issue within a price band of Rs. 594-610 seems fairly priced. Also the Net Asset value per equity share of Tata Steel as of September 2010 stands at Rs. 463.6. However this being an FPO, meaning that the share is already listed on the Indian stock exchanges, pricing is always a tricky task. Since the announcement of this issue, Tata Steel’s stock price has fallen by around 4% and closed at Rs. 621.71 on Friday.

Strengths : Tata Steel has its principal operations in India, Europe and Asia Pacific. It enjoys a very strong position in India as compared to its Indian peers like JSW Steel, Sail and Bhushan Steel. Europe, which is a key market for the company accounts for almost 47% of its net sales. Regular supply of raw materials and cost competitiveness have given it an edge over other steel majors. With the acquisition of Corus in 2007 and utilizing its operational best practices, Tata Steel now has diversified product offering and that too at a highly competitive price.

Risk Factors : Though Tata Steel is a global heavy weight in the steel industry, but still it is exposed to a large number of operational risks. Steel industry is greatly affected by global economic conditions. A slower than expected recoverycan materially effect the steel industry and Tata Steel is no exception. Also, the steel industry is highly cyclical and a decrease in steel prices can adversely effect the financial health of the company. In addition to the risk factors associated with entities working in the core industrial sector, Tata Steel is also exposed to the uncertainties associated with the implementation of the Mines and Minerals (Development and Regulation) Bill, 2010 (the MMDR Bill). The new bill proposes to provide for ownership of the mining companies by allotting 26% of the shares to the stakeholders as compensation. It also seeks to rationalise royalties, taxes, cesses and auction procedures of mining blocks. Mines and steel cannot be analysed in isolation, as the former provides the raw material for the latter.

Looking at the strong fundamentals of the company, it appears to be a long term investment option. However, looking at the choppy markets and the nature of the issue (being an FPO), it may not lead to huge listing gains. So take a call after analysing your risk appetite and financial goals.

Please feel free to share your thoughts about the upcoming public issue and its. Your feed back would be highly appreciated.

Disclaimer : All the information and financial numbers published in the above review have been obtained from the RHP of Tata Steel filed with SEBI. MONEY MATTERS has only reproduced those numbers in a simple manner to assist you in taking better informed investing decisions.

If you find the contents of MONEY MATTERS useful and interesting, then subscribe to the FREE UPDATES FROM MONEY MATTERS.

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Happy Half Anniversary

2011-01-01T06:59:00.000-08:00

Dear MONEY MATTERS, Happy Half Anniversary to you.

Six months back, on July 1^st, 2010, MONEY MATTERS was born. Today it is six months old. Along with MONEY MATTERS, I also complete six months of blogging. These six months have been a great learning experience for me. When i started bloging, SEO, HTML, Java, CSS, etc. were all alien terms to me. But, I learned and moved forward. I don’t remember a single day when I didn’t learn some thing new, be it related to blogging or my niche. Despite an ultra low reader base in the initial days, technical snags and time constraints, I managed to pass that phase with a smile. I am not sure what has been my source of inspiration for these last six months, which motivated me to carry on with my blog, but may be it was my love for finance which made me stick to it. And here I am, with my very own MONEY MATTERS. I have seen many bloggers sharing their Blog-Stats on achieving a mile stone. As I am also a blogger, so I think I should follow their footsteps and would like you to have a look at certain vitals of my blog

Happy Half Anniversary MONEY MATTERS

Email Subscribers : 55 (You can leave your e-mail id here and help me in improving this number)

Facebook Fans : 582 ( :-) )

Twitter Followers : 2 (Yes, just 2, joined twitter a few days back but need to work on it )

Google Followers : 67 (Is it so difficult to follow??)

Alexa Rank (Global) : 2,80,606 (lesser the better, has been improving on a daily basis)

Alexa Rank (India) : 17,292 (same as above)

Google Page Rank : 0 (still a distant dream)

Indirank : 74 (may improve on Jan.3^rd)

That was my blog’s report card. I would not call it a stupendofantabulouslyfantastic(give pauses at the right place while reading) performance, but still I can look forward to better numbers from here on. And yes, how can I forget you, yes you, the one who is reading and has been reading for the past six months. I assure you that at MONEY MATTERS, I will continue to spread knowledge and help you to improve your F.Q. (Finance Quotient), after all its all about your money, and I know , that money matters a lot. Very soon, you will see an all new and revamped MONEY MATTERS with some new features.

Thank you so much for being there with MONEY MATTERS for the past six months. Stay here and keep following MONEY MATTERS. After six months, I would love to see these numbers improve by ‘n’ times and for this I need your support.

Thank you readers, guest bloggers, followers, fans and of course, Google.

HAPPY NEW YEAR

IPO Review & Analysis : C. Mahendra Exports Ltd.

2010-12-30T11:52:00.000-08:00

IPO Review : C Mahendra Exports Ltd.(CMEL) turns out to be the last public issue of the decade. The issue will open on December 31^st 2010 and will remain open till January 6^th 2011. The price band of the issue has been decided at Rs. 95-110. A minimum bid of 60 shares can be placed, with further bids in multiples of 60 thereafter. Thus, a retail investor can bid for a maximum of 2100-1800 shares. CMEL is expected to raise Rs. 142.5 to 165 crores through the public issue . (Download : CMEL ASBA Application Form)

CMEL, which is an integrated diamond and diamond jewellery player encompassing sourcing of rough diamonds, trading of rough and polished diamonds, processing of diamonds and manufacture of diamond jewellery, will be utilizing the issue proceeds for the following purposes :

Setting up of a diamond processing unit at Gujarat Hira Bourse, SEZ, Ichchhapore, Surat.

Setting up of a jewellery manufacturing unit at Mumbai.

Setting up new retail outlets

Investment in overseas subsidiary C. Mahendra BVBA (Belgium)

Brand development

CMEL was initially promoted as a partnership firm in the year 1974. Over a period of years, it has established itself as one of the leading exporters of CPDs (Cut and polished diamonds) from India. CMEL caters to the export as well as the domestic markets, with exports accounting for the bulk of its revenues (78% in the FY 2009-10). It now has two 100% EOU manufacturing facilities at Surat and owns a retail brand called “Ciemme”. Its sales and distribution networks are spread across major diamond trading centres of the world like Hong Kong, Chicago, Houston, Los Angeles, New York, Dubai, Antwerp and Bangkok.

Financial Position : CMEL, on a standalone basis has reported a healthy CAGR of 14% over the last five fiscals. The growth was driven primarily because of the rise in CPD business, but from FY 2008-09 onwards it dropped due to recessionary trends in key export markets. Similalrly, the operating margin of the company also dropped significantly in the FY 2008-09, however it managed to gain some ground partially because of increase in volumes and price of polished diamonds. The Net profit Margin, however has always been modest due to high borrowing costs. CMEL is a highly leveraged company with its Debt-Equity ratio of around 5:1. Even on considering the consolidated figures, it comes out to be 2.60, which is much higher when compared to its peers. This gearing effect is clearly visible on the extremely low Net profit Margins.

Another major area of concern about the financial health of C Mahendra Exports Ltd. is its high working capital requirement. Cost of rough diamonds can account for upto 85% of the total product cost and there is almost negligible credit period available on the purchase of raw diamonds from DTC. Whereas the the work-in-progress inventory tends to be very high because of the sophisticated production process and at the same time the company’s average debtors collection period has also been on the rise due to recession and delay in realization of export bills. During the FY 2007-08 and FY 2008-09, the company had negative cash flows from operations on a consolidated basis. If this trend continues, then it will become extremely difficult for the company to augment its working capital requirements.

Valuation (Pricing of the IPO) : The weighted average EPS of CMEL based on the restated consolidated financial statements is 6.85. Considering the average industry P/E of 10.50, the market price of the issue comes out to be Rs. 71.93, thus making the valuation of the issue an attractive one. Also the Net Asset Value (NAV) per share of CMEL as on 31-3-2010 is Rs. 87.97 per share, further strengthening the rationale behind the price band of Rs. 95-110. However, the above figures of valuation are slightly screwed as the auditor has given a qualified opinion with respect to the valuation of inventories (AS 2) and fixed assets ( AS 10) in both the standalone and consolidated financial statements of CMEL, indicating that proper accounting policies for the same have not been followed.

Significant Risk Factors : Apart from the general risk factors related to a diamond jewellery exporting company like global recession, foreign exchange fluctuation, slack in demand and rising prices of rough diamonds, CMEL is also exposed to the execution risk involved in scaling up the retail business where its track record is limited and the market space is full of established players like Gitanjali Gems. Another major area of concern is its dwindling set of financial numbers like negative cash flows, losses to subsidiaries, high gearing (debt-equity ratio), low net profit margins, increasing cost of raw materials and worsening position of receivables.

IPO Grading : ICRA has assigned it an IPO Grade 2, indicating below average fundamentals. ICRA assigns IPO gradings on a scale of IPO Grade 5 to IPO Grade 1, with Grade 5 indicating strong fundamentals and Grade 1, poor fundamentals. This Grade 2 is very well justified by going through the financial as well as the operational details of the company.

With a business model characterized by high competitive pressures, inherently low value additions and correspondingly modest margins, the road ahead is not going to be smooth. Investors who look at the future only on the basis of the past should stay away from this IPO, but those who can foresee a global recovery and an upward trend in spending on luxury items and jewelleries, can take a calculated risk by going for C Mahendra Export Ltd.’s Public Issue.

UPDATE : 04/01/2011 : C. Mahendra Exports Ltd.'s Public issue has been subscribed by 2.78 times. The Retail portion of the issue has been oversubscribed by 4.82 times and the QIB portion by 1.02 times.

Please feel free to share your thoughts about the upcoming public issue. Your feed back and comments would be highly appreciated.

Disclaimer : All the information and financial numbers published in the above review have been obtained from the DRHP of C. Mahendra Exports Ltd. filed with SEBI. MONEY MATTERS has only reproduced those numbers in a simple manner to assist you in taking better informed investing decisions.

If you find the contents of MONEY MATTERS useful and interesting, then subscribe to the FREE UPDATES FROM MONEY MATTERS.

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New KYC norms for all Mutual Fund Investors

New KYC norms for all Mutual fund Investors

2010-12-27T12:47:00.000-08:00

Come 2011, and you will not only have to change the year old calendar, but also the way you invest in mutual funds. Yes, SEBI and AMFI have come up with a new set of KYC (Know Your Client) norms for all mutual fund investors in association with CVL ( CDSL Ventures Ltd.) . KYC is not a new term for all those who have bank accounts and demat accounts. They must be very well aware of the requirement of submitting copies of PAN card, ID proof, address proof and photographs at the time of opening these accounts. For investing in mutual funds, KYC norms were required to be fulfilled only for investments or additional purchases of Rs. 50,000 or above, but from 1^st January, 2011 onwards, all investors will have to adhere to the KYC norms irrespective of the amount of investment. It implies that even for starting an SIP of as small as Rs. 500 , the investor must be KYCied (KYC complied). So if you are planning to invest some money in an ELSS or to start an SIP in the coming year, then get yourself KYCied by following the following step by step procedure.

Steps for complying with KYC norms :

1. Download the KYC Application form from here and take a printout of the same along with the instructions sheet (Download : KYC Application Form).
2. Read the instructions carefully and complete the KYC Application form by providing the details with respect to your name, date of birth, address, PAN etc.
3. Paste a recent passport size colour photograph and sign across it. Also sign in the signature block provided at the bottom right corner of the form.
4. Attach a self attested copy of your PAN card and address proof (like passport, driving license). Make sure that the details provided by you in the KYC application form are exactly the same as given in the photocopies of the enclosed proofs. Also, do carry the originals with you so that the photocopies can be verified.
5. Submit the KYC application form along with the above mentioned enclosures at the nearest Point of Service (POS). Click here to download the list of POS in your city. ( Download : List of POS )
6. The POS will verify the above copies against the original documents and issue a KYC acknowledgement to you, free of cost. This KYC Acknowledgement letter will contain your Name, PAN and the fact that you have complied to all the required KYC norms.

An investor can verify his KYC status by logging on to www.cvlindia.com and entering his PAN there. It may take upto 10 days for the status to get verified and for the database to get updated. Once KYCied, you will simply have to attach a copy of the KYC Acknowledgement letter at the time of making any new or additional purchase of units, after January 1^st, 2011. You will not have to attach all the proofs everytime you make an investment. Also, the KYC Acknowledgement letter will have to be provided only once to a particular Fund house. For any subsequent purchases from the same Fund House, even this letter will not have to be attached. Post January 1^st, 2011, an investor who is not KYC complied will not be able to make any investment in any of the mutual fund schemes. In future, if there is any change in address or contact details, a KYC change form can be filled up and submitted at the POS, thus doing away with the requirement of intimating the change to each Fund House separately.

My experience with getting KYCied

I also being an investor just like you all, decided to get myself KYCied to avoid any investment related hassles in future. So after filling up the form and enclosing the necessary proofs, I went through the list of the POS available in Bhopal (my place of residence). Out of the three POS available for Bhopal, I decided to go for the UTI centre. One fine afternoon, I ventured out to find the UTI’s POS, but was shocked to realize that the address provided at the website of CVL was months old and now the POS was providing its services from some other place of service. After enquiring about its new location from 3 stock brokers, 2 insurance companies and one paan vendor, I finally managed to find it. A separate window had been set up for accepting the KYC Applications. The lady at the KYC window acted very swiftly, verified all the documents, completed all the formalities and handed over the KYC Acknowledgement letter to me within 10 minutes. (Surprised ???). Click here to see a copy of my KYC acknowledgement letter . ( Download : Sample KYC Acknowledgement Letter )

So you see, that its not very difficult to get your self KYCied, provided you manage to locate the POS and the POS is willing to provide you the services.

If you have anything to ask about the new KYC norms, feel free to do so. Also, if you are a KYC compliant investor, please share your experience here. Your feedback and comments would be highly appreciated.

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Shariah Compliant Mutual Funds in India

2010-12-23T11:42:00.000-08:00

In the recent past, I have had queries about the various options which are available for investing in mutual funds in India, based on the principles of Shariah. But, for the beginners, before knowing about such mutual funds, it is important to know what Shariah is;

What is Shariah ?

Shariah (or the Islamic Law) is defined as a body of divine laws, rules, code of conduct and teachings which are intended to benefit the individual and society. It refers to the Islamic canonical law based on the teachings of the Koran. This law imposes certain strictures on the types of financial and commercial activities that Muslims can engage in. While trade and investment are encouraged, Shariah investing rules prohibit involvement in businesses related to certain haram (prohibited) activities.

What is a Shariah complaint mutual fund ?

Shariah-compliant mutual funds are investment vehicles just like any other mutual fund, but they are fully compliant with the principles of Shariah law. In order to comply with Shariah, the mutual fund scheme should invest only in a Shariah compliant company.A Shariah compliant company, must therefore meet certain criteria based on qualitative and quantitative parameters. Looking at the qualitative parameters first, the company should not engage into activities related to conventional banking and insurance, gambling, pornography, human abortion and cloning, production or trade of non-halal (prohibited) goods, such as alcohol and pork. With many companies having a diversified array of businesses, it becomes difficult to find companies who don’t engage in any of these activities, specially it is difficult to find a company having no interest income. Hence additional criteria are looked into in the case of companies engaging in a mix of activities. First, the public perception of the company is looked into, which ought to be meritorious. Second, the core activity into which the company is engaged must be in public interest, with prohibited elements forming a negligible part of their activity.

The quantitative parameters on the other hand ensure that the non halal (prohibited) activities of the company do not exceed the permissible limit. For example, the total debt to total assets ratio should not exceed 33%, the non-operating interest income to revenue should not exceed 5%. However, if a company is engaged in a considerable amount of non-halal (prohibited) activity, it can purify their profits by donating a percentage of their income to a charitable organisation, before the distribution of dividends to shareholders.

Shariah compliant investment options in India

Unlike the West, there are not many Islamic Investment opportunities available in India. However, two leading fund houses have launched Shariah compliant Mutual Fund Schemes to cater to the needs of all those who are willing to taste the equity markets without breaking the Islamic laws.

1. Shariah BeES by Benchmark Mutual Fund : It is an open ended scheme which was launched in March 2009. It is a passively managed fund that invests in securities that constitute the S&P CNX Nifty Shariah Index in the exact proportion as in the index. It is having a significant exposure in companies operating mainly in the sectors of energy, technology, metals, healthcare, automobile, engineering, construction, communication and FMCG. The scheme seeks to generate returns that closely correspond to the total returns of the securities as represented by the S&P CNX Nifty Shariah Index by investing a minimum 90% of its assets in securities which are constituents of S&P CNX Nifty Shariah Index in the same proportion as in the Index. 98.89% of the total assets of the fund are allocated towards equity and the remaining 1.11% are also not allocated towards debt, thus eliminating the risk of any interest income accruing directly to the mutual fund. It has given a decent return of 10.41% p.a. and a whooping return of 45.10% since its launch. A minimum amount of Rs. 10,000 is required to start investing in this fund and no facility of SIP (Systematic Investment Plan) is available. Currently, it is managing assets worth Rs. 9o lakhs.

2. Taurus Ethical Fund by Taurus Mutual Fund : It is an actively managed diversified equity fund launched in March 2009. Taurus Ethical Fund invests in the stocks of those companies which are a part of the S&P CNX 500 Shariah Index. The sectors in which the funds are invested, are the similar to those of Shariah BeES. However, stocks of companies in the mid cap space are preferred more here. Also, 91.07% of the total assets are allocated towards equity and the remaining, in areas other than debt. As the fund is actively managed, it has outperformed its category and has generated a return of 23.79% p.a. as compared to its category return of 20.01%. Also, it has grown by leaps and bounds and given a return of 66.15% since its launch. A minimum investment of Rs. 5,000 is required for this fund and an SIP can also be started with a minimum amount of Rs. 1,000. Its assets under management have seen a drastic increase and now stand at Rs. 25.40 crores.

Who can invest in these funds ?

Though the funds are constituted and managed on the principles of Shariah, investment in these funds is open to any individual irrespective of his religion. NRIs, HUFs, companies and other institutions are also free to invest in these funds.

Is there any tax benefit for investing in Ethical/Shariah compliant Mutual Funds ?

No, currently investments in none of these funds qualify for the tax benefits which are available under section 80C of the Income Tax Act.

I have tried my best to cover all the aspects related to Shariah compliant mutual funds in India. If you find any other information or fund belonging to this category, which is not included above, then please share your thoughts here. Also, if you have anything to say, don’t forget to leave a comment. You feedback would be highly appreciated.

UPDATE (27/12/2010) : The Bombay Stock Exchange along with Taqwaa Advisory and Shariah Investment Solutions (TASIS) launched a Shariah compliant index on 27/12/2010. The BSE TASIS Shariah 50 Index includes some of India's leading companies like Reliance Industries, Bharti Airtel, Tata Teleservices etc. This is an answer to rival NSE's Shariah Index. This development by BSE will provide more opportunities to the entities interested in launching Shariah compliant ETF's and Mutual Funds in India.

Disclaimer : All the statistics provided above have been sourced from Value Research and updated till 23/12/2010.

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The Magic of SIPing

2010-12-14T01:44:00.000-08:00

"The Magic of SIPing" has been published in BLOG M, a blogazine. It has also been judged as the second best article of the December edition.

How about sipping a hot cappuccino on a chilly evening, isn’t it magical. But here we won’t be sipping a cappuccino, instead we will be talking about the magical increase in your wealth by investing in mutual funds through the SIP (Systematic Investment Plan) route. So SIPing here means “Investing through SIP”. Investment is a matter of discipline. Those who invest regularly in a disciplined manner never loose. But again a question comes back to our mind that –What is discipline in investments?

It simply means investing a fixed amount of money at regular intervals say a quarter or a month, with a clear financial goal in mind. This regular investment averages out the purchase cost per unit(rupee cost averaging). It is always better to be disciplined while investing rather than making irregular investments by trying to time the markets and judging its highs and lows. This discipline in investment can be achieved by going through the route of Systematic Investment Plan (SIP). An SIP can be started with an amount as low as Rs.500 in an open ended scheme of a fund house. In order to explain how the concept of rupee cost averaging actually works and creates magic, I will take the help of two of my friends – Mr. Smart and Mr. Oversmart.

Mr. Smart invests in a disciplined manner, without timing the market and without relying on the market rumours. On the other hand, Mr. Oversmart, invests only on the basis of tips from his friend and tries to predict the highs and lows of the market. Mr. Oversmart and Mr. Smart, both want to invest Rs. 40,000 in a mutual fund scheme over a period of 4 months.

Mr. Smart has opted for an SIP of Rs. 10,000 each month for 4 months. The NAV of the fund for 4 months is Rs. 20, 18, 22 & 25. By investing Rs. 10,000 each month, Mr. Smart receives 500, 555.50, 454.50 & 400 units respectively each month. In all, he receives 1910 units and the average price per unit comes out to be Rs. 20.94, which is on a lower side when compared to the NAV range of Rs. 18 to Rs. 25.

On the other hand, Mr. Oversmart, who times the market and waits for the NAVs to touch their bottoms, did not invest anything in the first 2 months when the NAV was Rs. 20 and 18, expecting it to fall further. But in the third month, the NAV rises to Rs. 22, then getting the feeling of having missed the bus, he invests Rs. 20000 @ Rs. 22 and receives 909.09 units and next month as the NAV touches Rs. 25, he further invests the remaining amount of Rs. 20,000 @ Rs. 25 and receives 800 units. Thus, Mr. Oversmart receives a total of 1709.09 units and the average cost of purchase comes out to be Rs. 23.40 per unit, which is higher than the average price of Rs. 20.94 of Mr. Smart’s units.

Be a smart investor and not an oversmart investor. A disciplined investor like Mr. Smart never loses, he always enjoys a win-win situation as the cost of investment gets averaged out during the tenure of the investment, thus minimizing the impact of rise and fall in markets. This clearly demonstrates the magic of SIPing. So keep investing in a disciplined manner to maximize your wealth, after all its your hard earned money which is at stake and money matters a lot.

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IPO Review & Analysis: Punjab and Sind Bank

2010-12-08T12:10:00.000-08:00

Punjab and Sind Bank IPO Review : In the last few months, many big ticket IPOs from the public sector like Coal India and MOIL have gone down well with the investors. Another public sector enterprise up for a stake sale is The Punjab and Sind Bank. Punjab and Sind Bank (PSB) is the last Government owned bank to come up with a Public Issue. It is expected to raise Rs. 480 crores through a sale of 4 crore shares. The price band of the issue has been fixed at Rs. 113-120 per share. The subscriptions to the issue will remain open from December 13 to December 16. For QIBs, the subscription will close on December 15.

The object of the IPO is to augment the capital base to meet the future capital requirements arising out of the growth in assets due to the growth of the Indian economy. Through the issue, PSB is also focussing on enhancing the visibility of its brand name among existing and potential customers.

The New Delhi-based Punjab and Sind Bank, having a banking experience of over 100 years, is one of India’s smaller public sector banks, with a total asset size of Rs.58,421 crore as on September 30, 2010. In the annual Business Today-KPMG survey of Best Banks in India 2008, PSB was ranked number one on the list of ‘Small Sized Best Banks in India’. During the last five years, the balance sheet of the bank has grown in size by leaps and bounds. Its financial numbers are also quite impressive and at par or at times even better than the industry average. Over the last five fiscals, PSB’s advances have grown at a CAGR of 36.24% and its total deposits have grown at a CAGR of 28.24% .Significant improvement in asset quality is also seen during the same period with its net NPA getting reduced to 0.36%, compared to the net NPA of 8.11% as on March 31, 2005.

PSB has outperformed the group average of various public sector banks as well as all banks on various financial and risk-management parameters. The following table shows the comparison

Return on Advances as well as Return on Assets of Punjab and Sind Bank are better than the All bank’s average and other public sector banks. Also the Net NPA ratio of PSB which stands at 0.32 is significantly better than the all bank’s average of 1.05.

In the FY2010, Profit After Tax (PAT) of PSB stood at Rs. 506.82 crores for a Total Income of Rs. 4326.30 crores. These numbers are far better than its performance in the FY2009 when its PAT was Rs. 430.20 crores for a Total Income of Rs.6330.71 crores. The following table clearly illustrates the remarkable growth in the income as well as the profits generated by the bank during the last five fiscals.

PAT has grown steadily from Rs. 285.68 crores in the FY 2006 to Rs. 506.82 crores in the FY 2010. Also there is a steep increase in the total income of the bank which stood at Rs. 1401.93 crores in the FY 2006 and shot up to Rs. 4326.30 crores in the FY 2010.

Fair Valuation : At a price band of Rs. 113-120 per share, the issue seems to be fairly priced. Assuming the higher end of the price band to be the issue price, i.e. Rs. 120 , with an EPS of Rs. 27.01 for the FY 2010, the P/E ratio of the bank comes out to be 4.44. Taking a more conservative approach and considering the weighted average EPS of PSB at Rs. 16.77, the P/E ratio of the bank now comes out to be 7.15 which is very much near to the average banking industry P/E ratio of 9.20 and the average P/E ratio of its peer group ( i.e. other small sized listed banks) of 8.0.

Risk Factors : Apart from the various internal and external risk factors associated with the Indian economy in general and the banking sector in particular, PSB is exposed to two other risk factors which may hamper its growth as compared to its peers. The first one being its regional concentration in Northern India. Out of a total of 920 branches, 623 branches are located in Northern India, constituting 67.72% of the total branch network. Any adverse economic condition developing in the northern region of the country can severely affect its operations. Secondly, its archaic banking system. The first CBS branch of PSB was rolled out on June 24, 2010, when many of its competitors are working on 100% CBS branches. This backwardness in the field of IT infrastructure can also impact its growth prospects and brand value.

IPO Grading : Further, I would like to add that CARE has assigned a “CARE IPO Grade 4” to the proposed IPO of PSB. CARE IPO Grade 4 indicates ‘above average fundamentals’. CARE assigns IPO grades on a scale of Grade 5 to Grade 1, with Grade 5 indicating strong fundamentals and Grade 1 indicating poor fundamentals. CARE’s IPO grading is an opinion on the fundamentals of the issuer and represents a relative assessment of the fundamentals of the issuer.

After going through the key fundamentals of Punjab and Sind Bank including its financials, valuation and the risk factors, its upto you to decide whether to invest your hard earned money in this IPO or not, after all its your money, and money matters a lot.

Please feel free to share your thoughts about the upcoming public issue and its fundamentals. Your feed back would be highly appreciated.

UPDATE : 29/12/2010 :
Punjab and Sind Bank (PSB) Listing: Punjab and Sind Bank (PSB) will be listed on the bourses on December 30th and may be the last listing of the decade. The issue had received an over whelming response and was over subscribed 50.75 times.

Disclaimer : All the information and financial numbers published in the above review have been obtained from the DRHP of Punjab and Sind Bank filed with SEBI. MONEY MATTERS has only reproduced those numbers in a simple manner to assist you in taking better informed investing decisions.

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14 Must Know Public Issue (IPO) terms

2010-12-06T20:16:00.000-08:00

Public Issues are in the air. You can call it the IPO season. It seems that the Primary Market is competing with Bollywood, releasing new issues every week. But before you share your hard earned money with the promoters of the company, it is very important to get a basic understanding about the various technical terms, abbreviations and jargons used in the primary market ( call it the IPO market). I have tried my best to explain in brief some of the key terms, without making any reference to the various sections and clauses governing the primary market. So here are a certain key Public Issue (IPO) terms :

1. IPO : IPO stands for Initial Public Offer. An IPO is the first sale of shares of a company to the general public. The promoters of the company, after complying with the various guidelines of SEBI (Securities and Exchange Board of India) and The companies Act, ask the public at large to subscribe to their shares so that they can generate capital and utilize the same for expanding their business. A successful IPO can raise a substantially huge amount of capital.

2. FPO : FPO stands for Follow-on Public Offer. Once a company comes with an IPO , it gets listed on the stock exchanges. After a certain period of time, if the company again intends to raise capital from the general public, then it again comes with a public issue which is called an FPO (Follow-on Public Offer ). It is a supplementary issue made by a company once it is listed and established on the stock exchange. In short, the first public issue of a company is an IPO, and any further public issue of the same company is called an FPO. For example, Shipping Corporaton of India (SCI), a listed company, is again coming up with a public issue which will be its FPO ( i.e. a second public issue).

3. Listing : Once the issue gets subscribed and the shares are allotted, they are listed on a recognized stock exchange e.g. BSE, NSE etc. Listing means that company has adhered to the terms and conditions of the stock exchange and its shares are now a part of the list of shares which can be traded on the stock exchange. Post listing, any investor can sell the shares, allotted at the time of the issue, in the secondary market.

4. Bid-cum-Application Form : For applying in any public issue, each investor must fill a standard form providing all the relevant details like Name, PAN, Demat id, Bank account details, Bid price, Number of shares applied etc. Such a form is called a Bid-cum-Application form. It can be submitted through the offline or online mode. An investor must ensure that all the relevant details are filled correctly to avoid rejection of application and to ensure smooth allotment of securities.

5. Price Band : A price band is the range of price within which an investor can place his bid for the securities. The price mentioned by the investor in the bid-cum-application form can neither be less than the lower limit of the price band nor can it exceed the upper limit of the price band. For example, In the recent IPO of Coal India, the price band was Rs. 225-245 per share, which means that an investor can bid only within the range of Rs. 225 to Rs. 245

6. Floor Price : In a price band, the lowest price is called the floor price, below which a bid cannot be placed. In the above example Rs. 225 is the floor price of the Coal India IPO

7. Cap Price : Cap price is the upper ceiling limit in a price band beyond which a bid cannot be placed. Again, taking the same example of Coal India, Rs. 245 is the Cap price, beyond which you cannot place the bid.

8. Minimum order quantity : Minimum Order Quantity is the minimum number of shares which the investor has to apply for in a public issue. For example, in the case of Coal India’s IPO, the minimum order quantity was 25, i.e. an investor has to bid for atleast 25 shares.

9. Market Lot : If an investor wants to bid for shares which are more than the minimum order quantity, then he can do so by bidding in multiples of a certain number of shares which is known as the Market Lot. By continuing the above example, if an investor wants to apply for more than 25 shares of Coal India, then bids can be made in multiples of 25 shares, which is the market lot size in case of the Coal India issue. Thus, applications can be made for 25, 50, 75 …….number of shares until the maximum subscription limit is reached. In case of Coal India, the minimum order quantity and market lot size, both were 25 shares.

10. Maximum Subscription Limit for Retail Investors : Maximum Subscription Limit for Retail Investors is the maximum amount of investment which can be made though a single bid-cum-application form, or simply speaking, by a single individual, in a public issue. Previously, retail investors were allowed to make an application of a maximum of Rs.1,00,000, but now SEBI has increased this limit to Rs.2,00,000. Any application by an retail investor which exceeds Rs. 2,00,000 becomes an application by a High Net Worth Individual (HNI), thus disabling the investor to enjoy the benefits of discount which are offered in some big ticket IPOs to the retail investors.

11. Cut Off Price : In book building issues, the issuer company specifies a price band within which the bids are made. The actual issue price can be any price above the floor price and within the price band. This issue price is called the Cut Off Price. This price is determined after considering the demand for the stock by the investors. Investors, in order to get allotments in big ticket public issues, bid at the cut off price, conveying their intention that they are willing to pay any price for the stock within the price band, at the end of the book building process.

12. ASBA (Application Supported by Blocked Amounts) : ASBA is an alternative mode of making payments in public issues whereby the application money stays in the bank account of the investor until the allotment is made. Only that much amount of funds are debited to the investor’s bank account for which the allotment is made and the rest of the blocked amount is released. In case the application is made using the ASBA facility, the need for refunds is completely obviated. For example : if an investor makes an application for Rs. 2,00,000 , then in the earlier system, he was required to pay the entire sum of Rs. 2,00,000 upfront, either through a cheque or net-banking and then if shares worth Rs. 1,50,000 are only allotted, then Rs. 50,000 used to get refunded. Under the ASBA mechanism, the investor just need to keep Rs. 2,00,000 in his bank account and at the time of allotment only Rs. 1,50,000 would be debited to his account, thus releasing the left over blocked amount of Rs. 50,000 and also doing away with the cumbersome task of issuing refunds.

13. Book Building Process : Book Building is one of the methods of carrying out a public issue, the other being the Fixed Price method. Under the Book Building method, the price at which securities will be offered is not known to the investor. The investor is allowed to bid in a given price range called the price band, and then, after the bids are closed & looking at the demand for the shares at various price levels within the price band, the final issue price is decided by the Merchant Bankers or BRLMs. This process leads to a better price and demand discovery. It is called the “Book Building Process” because during the entire issue period, the book for the offer remains open and keeps building up with the bids collected from investors.

14. BRLM (Book Running Lead Manager) : BRLM are those financial institutions whose names you find at the bottom of the bid-cum-application form like Karvy Securities, Kotak Mahindra, SBI Capital, Enam Securities etc. On a serious note, BRLMs or Merchant Bankers are those financial intermediaries which are involved in the IPO process right from the very first stage and play a vital role in preparation & submission of prospectus, price fixation, application processing, allotment and listing.

If you think that I have not included any key term related to IPOs/FPOs then please let me know, I will incorporate the same here. Also, please don’t hesitate in leaving a comment and sharing this little piece of information. Your feedback would be highly appreciated.

Happy Investing

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Document Identification Number (DIN) : a new number for taxpayers

2010-11-29T20:11:00.000-08:00

After PAN and TAN, the income tax department has finally made up its mind to issue another number i.e. the Document Identification Number (DIN). According to a guideline brought out by the Central Board of Direct Taxes (CBDT), DIN will be mandatory for very notice, order, letter or any tax-related correspondence, including the filing of returns for 2010-11, with the I-T department by the taxpayers. DIN will be generated by the Income Tax Department and will be issued to the assesses from this month onwards. It will be a computer generated number and will have to be compulsorily used by both, taxpayers and tax officials. DIN will have to be mandatorily quoted in every incoming and outgoing communication with the Income Tax Department. Any return or document submitted by the assessee without mentioning the DIN will be invalid and be deemed never to have been submitted. Also, any order issued by the department without mentioning the DIN will be treated as invalid.

Why DIN (Document Identification Number) ?

DIN has been introduced to bring more transparency in the entire system of tax administration as the whole exercise of filing returns, assessment and claiming refunds involves a large number of documents and pro formas. To facilitate this process, a new section 282B was inserted by the Finance Act 2010 for the allotment of DIN. This system will be applicable on a pan-India basis thus streamlining the process of filing and processing of Income tax returns.

What should you do?

As an assessee, you need not to bother. DIN will be issued by the department and communicated to you, However the procedural part as to whether the DIN will be available on the department’s portal or will it be provided by post, is still not very clear. Don’t forget to mention the DIN in the Tax returns for the Financial Year 2010-2011.

Keep checking this space for more updates related to DIN.

A Beginner's Guide to Company Formation - Part 2

2010-10-25T01:09:00.000-07:00

This is a guest post by Danyal Naqvi, a practicing Company Secretary.

As I had promised in my previous article "A Beginner's Guide to Company Formation" that I would brief you about the detailed procedure for the formation of a Private Company; here I am once again to do so. Hope this outlined and brief procedure helps the readers and budding entrepreneurs in understanding the simple, straight forward and an economic way of forming a Private Company.

Incorporation of Companies in India is regulated by the Indian Companies Act, 1956. Since, 2007 Registrar of Companies (ROC) has introduced a new system of e-filing, under which all forms are to be submitted online and the original documents in person. There are a cetain bare minimum requirements which need to be fulfilled before a company is incorporated.

Following Chart would make it clearer

Private Company Public Company

↓ ↓

Min Shareholders required = 2 Min Shareholders required = 7

Min Directors required =2 Min Directors required = 3

Min Paid up Capital - INR 100,000 Min Paid up Capital INR 500,000

Step by step procedure for incorporating a Company in India :

1. Obtain Director Identification Number (DIN) for each of the proposed Director and Digital Signature Certificates (DSC) for any one Director / Promoter before making any application to ROC.

2. Apply for the name availability of the proposed company to ROC. For this one has to fill e-Form 1A and submit online along with requisite fee (Rs.500) with ROC. The ROC generally informs the applicant within seven days from the date of submission of the application, whether or not any of the names applied for is available.

3. Once Name is approved and made available by the ROC it remains valid for 60 Days. If you do not incorporate the proposed company within 60 days you can renew the name by paying prescribed fee. You can choose a maximum of six names for the proposed company in order of your preference.

4. After getting the name approved following documents are prepared:

a. Memorandum of Association (Charter of the Company)

b. Articles of Association (Rules and By Laws of the Company)

Both the above documents are duly prepared by the Company Secretary or the Chartered Accountant and as such the people getting their company formed need not bother about their preparation.

5. Letter of authority (Power of Attorney on a Stamp paper of prescribed value) to a person for carrying out corrections/ alterations or deletions before the Registrar in respect of the documents to be filed for the proposed company.

6. e-Form 1, for Application or Declaration by the Promoter and/or Directors for incorporation of a company. This form contains all the basic details about the promoters, number of shares subscribed by them, the main industrial activity in which the company shall be engaged in etc.

7. e-Form 32 for the Directors. This Form is for the purpose of appointing the first directors of the company who shall manage the affairs of the company on its incorporation. Also these directors are named in the Articles of Association of the Company as the first directors of the company.

8. e-Form 18 for registered office address. This form describes the exact address of the place where the registered office of the Company shall be situated on its incorporation.

9. On the receipt of the documents, ROC will scrutinize the papers and if any modification is required he will direct to make such changes accordingly.

10. Once ROC is satisfied and scrutiny is completed he will issue CERTIFICATE OF INCORPORATION. The company would come into existence from the date of certificate of incorporation. This certificate is conclusive evidence that all the necessary formalities with regard to incorporation have been duly complied with and met and that the company is now existent and competent to commence business as a separate legal entity.

I hope that with this article I am able to answer the probable queries and the misconceptions about the cumbersome procedure of company formation in India. In this modern corporate world, technology has made the process of forming a private company an easier task than learning to ride a bicycle. I have also mentioned earlier and I am also pointing out again that above all it is far better to go in for a company than going in for a sole proprietorship or a partnership.

If you have any query regarding the process and formalities of incorporation of a company in India, please feel free to leave a comment and we will get back to you ASAP

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Related Article :
A Beginner's Guide to Company Formation

A Beginner's Guide to Company Formation

2010-10-09T00:18:00.000-07:00

This is a guest post by Danyal Naqvi, a practicing Company Secretary

Being a Company Secretary", there are a lot of questions which people often ask regarding the word COMPANY. The most common of them are:

Is it really practical for two individuals to form and maintain a private company?
How cumbersome and lengthy it would be to incorporate a new company?
What advantages a company can provide us with over a sole proprietorship or a partnership firm?

Well, my friends, I would love to answer all these questions at one go, but since I cannot do so in a single article I would like to take up the most important points first and they are:

Forming a Private Limited Company with a minimum of two individuals and the procedure involved in it :

Let me make this point very clear to you all that in today’s world where everything happens online and in a secure manner, it takes only about 10 to 12 working days to get a new company registered with the Registrar of Companies and an expenditure (Inclusive of all costs) of around Rs.15000 to Rs.16000 to incorporate a company with a minimum authorized share capital of Rs.1 Lac; and above that it is the Company Secretary or a Chartered Accountant who takes care of all the issues at your end and you need not be bothered even a bit regarding the formation of your company as compared to the hardships involved in registering a sole proprietorship or a partnership Well I suppose for any enthusiastic entrepreneur desirous of venturing into the corporate world this expenditure would be nothing considering the added advantages of corporate form of business. Let us now have a brief glance at the requirements of forming a Private Limited Company:

1. Director Identification Number (DIN): This is a unique identification number allotted by the Ministry of Corporate Affairs. Any individual who wants to be a director in a company needs to get DIN allotted to him/her before he can be appointed as such. However it takes only 2 to3 days to get a DIN registered and its cost is a miniscule amount of Rs.100 (usually included in the cost of incorporation).

2. Digital Signature Certificate (DSC): As I have mentioned in my article that all the procedure is now online; one of the Subscriber amongst the two has to get a DSC for the purpose of filing the various forms. It takes only 20 minutes to get a DSC and its cost is also already included in the cost of company formation.

3. A Registered Business Name: You get to chose six names of your preference for submitting it to the registrar (ROC) online and the ROC will then make available the name which has not yet been taken up by others. The name must be followed by the word ‘Private Limited'. The ROC exercises some control over the choice of name, it cannot be identical or very similar to the name of an existing company.

4. A Registered Office: This need not necessarily be the same address as the business is conducted from. This is the address, through, where all official correspondence will go. It can be any place owned or rented from where you intend to carry on your business.

5. Shareholders: There must be a minimum of two shareholders (also described as `members' or `subscribers'). A private company can have up to fifty shareholders.

6. Share Capital: The company must be formed with a stated, nominal share capital divided into shares of fixed amounts. The as stated above you can form a Private Limited Company with a Minimum Capital of Rs.1 Lac contributed by the two subscribers in any ratio.

7. Memorandum of Association: The memorandum is the company's charter. It states the company's name; the situation of its registered office; its share capital; the fact that liability is limited and, most importantly, the object for which the company has been formed. In theory, the company can only operate in the areas mentioned in the objects clause but in practice the clause is drawn to cover as wide an area as possible, and anyway the members of the company can change the objects whenever they like.

8. Articles of Association: This document contains the internal regulations of the company, the relationship of the company to its shareholders and the relationship between the individual shareholders.

9. Certificate of Incorporation: This is the document, which the registrar of companies issues to you once he has approved your choice of name and your memorandum. When you receive this document your company legally exists and is ready to trade.

10. Auditors: Every company must appoint a qualified auditor. The auditor's duty is to report whether or not the books of accounts the company have been properly kept and that the balance sheet and profit and loss account presents (or doesn't present) a true and fair view of the company's affairs and complies with the Companies Act. Auditors are appointed or re-appointed at general meetings at which annual accounts are presented, and they hold office from the conclusion of the meeting until the next general meeting.

This a general outline of the requirements for the formation of a Private Limited Company. Read A Beginner's Guide to Company Formation : Part 2 to understand the Step by step process of company formation in India.

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Related Article :
A Beginner's Guide to Company Formation - Part 2

An Exercise in Self Reliance

2010-10-03T21:55:00.000-07:00

This is a guest post by Niharika Arun, a finance enthusiast.

SCARED OF THE ECONOMIC TIMES? DOUBT THAT YOU WILL EVER UNDERSTAND THE FINANCIAL WORLD? Don’t be …….

My grandfather, a very principled and systematic person he was, started out with no great fortune, but his discipline, vigilance and interest in the stock markets is evident even today through his investments. He used to send me finance related newspaper cuttings every now and then to encourage me. He is my inspiration.

A few years ago he bought for me some shares of Infosys. I was thrilled, although not actively interested at the time. Then I realized - another few years and I’d be earning for myself, managing my own portfolio, and perhaps not just my own but those of my parents as well. It gave me a sense of pride, of course, but it made me nervous at the same time.

Hard earned money must be steered into right channels. There is also the question of making the decision as to where to channelize it. I believe ‘only you can know your money best' and so I decided to start that very day itself. I decided to track my Infosys shares for a start, but taking the initiative wasn’t easy.

I started going through 'money' magazines and looking out for different options which would be available and applicable to me when I started earning. I began to get the hang of many financial terms and procedures; not all in one go, but one by one. There were times when I couldn’t understand a single sentence in an article. I would get discouraged and wonder how anyone could manage to understand this jargon. And now there are times when my acquaintances wonder how I manage to understand things which they find daunting! I have acquired useful knowledge through persistence.

I continue to read the ‘personal finance’ pages of The Economic Times regularly. It is fun to ‘experiment’ with the idea of `my own’ money. However, despite my sincere intentions, I cannot maintain regularity due to my studies, office and other pressures. (I understand it happens with all new ideas in life.) Yet I have learnt a lot and am more confident today.

It is not just the matter of acquiring knowledge; I also want to apply all that I have learnt. With the help of different concepts and formulae I am learning in my course of studies, I have started chalking out plans for my future. Whenever I feel like taking a break, I look for paper and pen and write down things I see for myself in the coming years like say a car…… YES! A classy big black car (let me pamper myself ). I must take its current cost to the future (say 10 years ahead) and then calculate the savings and analyze the options required as of today to make the car mine after 10 years. This is so exciting and motivating!

This is how I have reasoned:

The expected cost of the car is Rs.12,50,000 and to meet this capital expenditure at the end of 10 years, I would be wise to start saving right from this day onwards. Hence I would have to save Rs.5,440 monthly (assuming rate of return of 12% p.a) to buy the car at the end of 10th year. I should ensure to invest my savings in some suitable financial instrument like SIPs, Mutual Funds, MIPs etc. or their combination so that my savings should continue to earn for me.

I would then have 3 options at the end of 10 yrs:

1) Buy the car against outright cash payment using the accumulated fund created by judicial saving and investments over the past 10 years.

2) Approach a financial institution for a vehicle loan of Rs. 12.50 lacs (the whole cost) at the end of 10 years, and divert the income generated from the corpus towards installment repayment.

3) Take the car loan for the partial cost at the end of 10 years such that the remaining cost can be directly met by the accumulated funds and rest repaid in comfortable installments (the decision as to the amount of loan to be at my discretion depending on circumstances).

I can already see (in my mind’s eye) that shiny new big black car standing at my doorstep, and sense the wonderful feel of those keys in my hand. Ah! What a great feeling!

Do you have a dream of your own? Give your dream a chance. Study the world of finance around you and make it work to achieve your dream.

My message is especially for those who are as I was a few years ago. It’s a harsh truth that most girls are less aware than boys about the financial world. Things like the stock market and financial institutions seem so mysterious and daunting. But this CAN be changed. All it requires is a dream that motivates.

I strongly believe – ‘take the initial step and keep moving, the rest will follow’, after all MONEY MATTERS.

If you find this article interesting, please feel free to leave your feedback in the form of comments

DID YOU KNOW - II

2010-09-26T13:24:00.000-07:00

After starting the DID YOU KNOW section a few days ago, I received some interesting queries, on the basis of which, I keep updating my facebook fans. Here is another set of seven interesting facts, from the fanpage of MONEY MATTERS. Enjoy reading :

1. Bharti Airtel has become the first telecom operator in India to be issued a 'Semi-closed wallet' licence by the Reserve Bank of India. The licence will allow Airtel users to pay for merchandise using mobile phones.

2. EURO (€) is the official currency of the eurozone, which consists of 16 of the 27 Member States of the European Union (EU). It is also the currency used by the EU institutions. Surprisingly, Euro is not the currency of one of the most powerful nations of Europe i.e. The United Kingdom.

3. BRIC (or"the BRIC countries") is a grouping acronym that refers to 4 countries - Brazil, Russia, India, and China. They are deemed to be at a similar stage of newly advanced economic development. These are also known as the "Big Four" of the world.

4. From January 2008 onwards, 283 Banks have failed in the United States of America. But still, USA managed to survive

5. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India.

6. 14 largest commercial banks were nationalized with effect from 19th July, 1969. A second dose of nationalization of 6 more commercial banks followed in 1980. The reason stated behind the nationalization of banks was to give the government more control over credit delivery.

7. Finland has become the first country in the world to make broadband a legal right for every citizen. From 1 July 2010, every Finn has the right to access to a 1Mbps (megabit per second) broadband connection. Finland has vowed to connect everyone to a 100Mbps connection by 2015. I wonder if we will ever be able to effectively use a 100mbps connection in India.

If you also have something interesting to share, please feel free.

Looking forward to your valuable comments

Sensex at 20K : What should a retail investor do ?

2010-09-20T23:56:00.000-07:00

Back are the days when newspapers will be full of images of brokers cutting cakes and burning crackers celebrating the bull run. But images of investors looking at the trading screen with disappointment fail to fade away. After 2008, Sensex and Nifty have breached the 20,000 and 6,000 levels respectively for the first time. Reports show that the bull run is mainly due to extensive buying by the FIIs. Retail participation is not as high as it was when the markets touched these levels for the very first time. The reason behind this strategy of retail investors who are sitting on the fence and adopting a wait and watch policy may be that they have already burnt their hands when the markets tumbled after the Satyam debacle and the Reliance Power IPO. Also, there are two sets of advices emerging out of the experts for the investors.

The first one says that as the markets are rallying, one should book some profit and exit. It is this strategy which does not allow the markets to sustain new highs as there is tremendous selling pressure as soon as the indices touch a new landmark.

The second set of experts say that it is never too late to enter the market. You can still build your position and buy stocks at some dips, banking on the viewpoint that the bull run this time is going to sustain for a long time.

For more than a week now, markets have been going green. But, this hyper optimism with a pinch of fear creates a very difficult situation for the retail investor. In such rallying markets, a small retail investor should not get carried away by the expectation of super normal returns. He should look at his portfolio, his bunch of assets first and then decide whether to stay invested, sell or buy, looking at his risk appetite. Suppose, your portfolio of investments consists of 70% stocks, 15% debt instruments and 15% gold and you want to stick to this mix of assets only, then during such a bull run, your stocks may have soared and may even consist of 80 or 90 percent of your total portfolio’s value. In this case, you should sell some stocks and rebalance your portfolio so that the mix of assets at the current market price stays intact at 70-15-15 . Following this strategy will further allow you to buy stocks whenever there is a correction in the market.

By the time this article is posted, Sensex may have fallen below 19,500 or may even cross 20,500, but the thumb rule remains the same, that you should keep your eyes open towards the returns as well as the risks of investing in stock markets. Avoid being blind to the risk factors when the markets are bullish, after all, your hard earned money matters a lot.

Let the markets rise . . .

Please feel free to leave your comment on this article

Welcome to a country where candies are replacing coins

2010-09-15T05:41:00.000-07:00

This post has won the H.U.M. contest conducted by the Blogger's Park Magazine (World's first blogazine) at scratchmysoul.com under the category "THE NEW INDIAN CURRENCY - CANDY"

Last month, when I was travelling from Indore to Bhopal and as my cab crossed the first toll booth on the highway, the cabbie handed me a ten rupees note and 3 eclairs (Cadbury was not written on those fake éclairs). As i was doing a post mortem of those counterfeit eclairs, which is my habit, the driver adviced not to gulp them as the same could be handed over at the very next toll booth. I resisted the temptation and utilized those eclairs. This cycle continued until we crossed all the four toll booths. The éclairs received at one toll booth were readily acceptable at the other in place of coins. I had been receiving such chocolates instead of coins at the provision stores, but never knew that the same would be even acceptable to them. Even swanky hyper markets spread over thousands of square feet, have a separate box at their cash counters for these 1 rupee candies along with the coins. Welcome to a country where candy is replacing coins.

This, “a candy for a coin” trend reminds me of a lesson from my school days where I was taught the concept of barter system. Certain commodities where assigned a specific value and were traded in exchange of certain other commodities : Goats for a sack of rice, horses for a sack of wheat. Due to the difficulties faced in carrying and valuing the goats and the horses, metallic coins were introduced even before Christ was born. Some wise man said that history repeats itself, and now because of the shortage of metallic coins, we have found a new substitute for it in the form of candy. Looking at the ease at which these candies are getting acceptable at all places, I wonder if the RBI or the Government of India is having some secret plans to introduce an official 1 rupee chocolate candy promising to provide the bearer a sum equivalent to rupee one. Who knows, it can even introduce 10 rupees official chocolate bars in place of currency notes. In case the chocolate bar is ina melted state, it may be treated at par with a soiled note. Welcome to a country where currency is wrapped up in a shining wrapper.

Jokes apart, this phenomenon of giving “a candy for a coin” is not as simple as it prima facie appears to be. Its roots are deeper than they appear. The prices of steel, which is the raw material for coins in India, have been zooming northwards for quite some time now. As a result of which, the intrinsic value of an Indian coin far exceeds the legal or face value of such coin. The coins which are in circulation in the market are being collected from the market at a premium, melted and then supplied for manufacturing razor blades and other petty steel articles. It has actually become a lucrative business in some parts of the country. This has lead to a shortage of coins in the Indian market. But a person’s bane may be another person’s boon. Shortage of coins has led to the flooding of markets with 1 rupee candies, which the shopkeepers are using instead of coins. I am sure that one day some political party will take this issue to the Parliament that blah blah MNC is sucking the Indian coins to boost the sales of its candies.

Candy, the new Indian currency comes with unique features, thus covering up the shortcomings of the metallic Indian coins. Its intrinsic value is far less than its face value. A candy, worth a few paisas is actually worth a rupee in the market. Buying it at a premium and melting it would be of no use as it would again remain a candy only, though in a different shape. In case you feel hungry and even if u have a coin, you cannot eat it. But this new currency can immediately satisfy your hunger. Welcome to a country where cocoa is replacing metal.

The factors of Demand and Supply drive an economy. From cows to coins and then from coins to candies, these factors will keep evolving the exchange system. Paying the toll tax made me realize that its not only the state of highways which is changing in India, but also its currency. Candy has become India’s new legal tender, its new currency.

Please feel free to leave your comment on this article.

Power of Attorney - Convenience or Compulsion

2010-09-11T13:00:00.000-07:00

After reading my previous article INVESTOR BE AWARE, a friend of mine raised a very good question that whether it is compulsory for an investor to sign and give a Power of Attorney (PoA) to the broker or not. This problem is faced by many investors specially at the time of opening a demat and trading account. Generally brokers ask the client to sign the entire booklet of Account Opening Form including the PoA, and the investor is also least bothered to check the contents of the pages on which he is signing. But not all investors may be willing to provide the right to operate their account to the broker. A PoA is executed by a client in favour of a broker to authorise the broker to operate the client's demat account and bank account to facilitate the delivery of shares and payment of funds.

PoA s are generally required for Internet based trading facilities or where the client wants to avoid the hassles of submitting the Delivery Instruction Slips(DIS) after every sell order. But most of the brokers insist on providing the PoA even for non-internet trading facilities. Considering this situation and the possibility of brokers misusing the PoA, market watchdog Securities and Exchange Board of India (SEBI) has taken some stringent measures to protect the interest of the investors. It has barred the brokers from taking PoAs that are irrevocable or allow the broker to conduct any transaction without client’s consent. No broker can refuse to provide services to a client simply because he has refused to sign the PoA. Also, no PoA can prohibit the client from operating the account directly. These new guidelines for PoA are to be complied by each and every broker.

An investor, before signing a PoA, should read its clauses thoroughly. Power of Attorney is a facility introduced for the convenience of investors, however there is no such compulsion either by the Depository or by the Stock Exchanges to sign the same.

Please feel free to leave your comment on this article.

Related Articles
Shariah Compliant Mutual Funds in India
Golden Future with Gold

INVESTOR BE AWARE

2010-09-05T07:56:00.000-07:00

Thanks to the signal problem at my cable TV operators end, I switched on to DD National and DD News this afternoon. The very first thought which struck me was that I should better move to a DTH operator, but then I started enjoying the programs on both the channels. After all, beggars cannot be choosers. I felt that many programs and advertisements on both the channels were simply meant for spreading awareness , be it related to farmers or Common Wealth Games or dengue. There I came across a commercial “Jago Grahak Jago”, which reminded me of the principle of "Caveat Emptor", meaning Let the buyer beware. An investor is also a buyer, one who pays a certain amount to buy his peace of mind by securing his future. When at MONEY MATTERS, I have the liberty to replace buyer with investor. But let the investor beware gives a very negative impression. It seems as if the investor will have to look for a fresh apple among 100 rotten ones. Its better to BE AWARE than to BEWARE. So again I took the liberty and framed the maxim “ Investor Be Aware”. In this series of Investor Be Aware, first of all I will try to make those investors aware who are investing in the stock market. Here are a few do’s and dont’s for such investors :

1. Firstly, make up your mind whether you are into the market as an INVESTOR or a TRADER. Being an investor, you should not be worried about the short term market fluctuations.

2. Before selecting your broker, do some homework. You can ask your colleagues and friends about the quality of services provided by the broker. Listen to the opinions of both, who are satisfied and who are not.

3. Ask your broker for a copy of the brokerage rates and other service charges. This will help you to compare the same with the charges of other broking firms, thus allowing you to take better decisions.

4. Certain costs charged by the brokers are negotiable. Utilize your skills and get the best deal.

5. Do not sign the account opening form blindly. Generally, it consists of two sets of forms, one for the demat account and the other for the trading account. Take some time and read the clauses where you are signing.

6. Make sure that you have the correct bank details to avoid any delays in transactions and corporate actions.

7. Dont forget to provide the nomination details.

8. If you are opting for an online trading account, ask the broker to give you a live demo of their trading platform.

9. Passwords are like socks, keep changing them regularly, to avoid the possibilities of online frauds.

10. Make sure that all the contracts with the broker, DP and stock exchange (which are a part of the account opening form) are properly filled and a copy of the same is collected by you as soon as the account is opened.

11. Do not leave blank signed delivery instruction slips with your broker. Its as good as a blank cheque.

12. After every trade, do collect your contract note. It acts as a proof for your trade in a particular security.

13. If you are an investor, do not get carried away by the low brokerage charges offered on non-delivery trades. You will become the beneficial owner of the securities only when the same are in your demat account and not in the broker’s pool account.

14. Check whether the scrips have been credited to your account within 48 hours of the exchange pay-out.

15. Keep a track of your transactions by verifying your account statements at regular intervals.

16. Keep the broker informed about any change in your address, contact numbers and email ids, so that he can keep you informed.

17. Stay away from market rumours. The classic mistake which an investor makes is that when the markets are bullish, he turns blind to the risks and in case of bearish markets, he turns blind to the returns. So invest on the basis of fundamentals of a company.

18. In case you are not satisfied by the services or you have be defrauded, utilize the grievance redressal mechanism provided by the Stock Exchanges and SEBI

Be aware of where and how your hard earned savings are being invested , because MONEY MATTERS a lot.

Please feel free to leave your comment on this article.

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14 Must Know Public Issue (IPO) Terms
IPO Review : Punjab and Sind Bank
Shariah Compliant Mutual Funds in India

DID YOU KNOW !!!

2010-08-26T05:17:00.000-07:00

Here a few interesting facts compiled from the fan page of MONEY MATTERS on Facebook, enjoy reading :

1. Indian Rupee has joined the elite club of currencies which have their own unique symbol. It is the fifth currency in the world after US Dollar, Great Britain (UK) Pound, Japenese Yen and Euro to have its own symbol.

2. In India, One Rupee currency notes bear the signature of the Secretary, Ministry of Finance, whereas currency notes of all other denominations are signed by the Governor of Reserve Bank of India.

3. Rising prices of steel have made Rupee coins worth less than their metal value. This has led to noticeable shortages of coins in parts of India due to individuals illegally melting them and using the steel to manufacture razor blades. The blades are then smuggled out of the country.

4. India's highest individual taxpayer for the financial year 2009-10 is Analjit Singh, the founder and chairman of Max India, a diversified business group with interests in healthcare, IT services, and financial services. He paid advance tax of Rs 99.7 crore (Rs 997 million).

5. The Bombay Stock Exchange (BSE) is the oldest stock exchange in Asia and with 4900 listings, it has the third largest number of listed companies in the world. Its first name was 'The Native Share & Stock Brokers Association'.

6. PIIGS is an acronym used to refer to the five Eurozone nations, which were considered economically weaker following the financial crisis: Portugal, Italy, Ireland, Greece and Spain. Since the nations use the euro as their currency, they were unable to employ independent monetary policy in order to help battle the economic downturn. The economic troubles of the PIIGS nations reignited debate about the efficacy of a single currency employed among the Eurozone nations.

7. Hyperinflation in Zimbabwe began in the early 2000s . Figures from November 2008 estimated Zimbabwe's annual inflation rate at 89.7 sextillion or 1021 percent. By December 2008, inflation was estimated at 6.5 quindecillion novemdecillion percent (6.5 x 10108%, or 65 followed by 107 zeros). In April 2009, Zimbabwe abandoned printing of the Zimbabwean dollar.

If you also have some interesting facts to share, please post them on MONEY MATTERS fan page on Facebook. The same shall be featured here.

All about IFCI Infrastructure Bonds

2010-08-19T07:32:00.000-07:00

Another avenue to save tax was introduced in the Budget 2010 in the form of section 80CCF. This section allows a deduction of Rs. 20,000 for investments made in Infrastructure Bonds. Recently, IFCI has come up with an issue of Long Term Infrastructure Bonds which are eligible for claiming deduction under section 80CCF. Here are a few facts which you must know to benefit from this newly introduced option of saving tax :

1. The deduction of Rs. 20,000 under section 80CCF is over and above the deduction of Rs. 1,00,000 available under section 80C, 80CCC and 80 CCD.

2. Investment in Infrastructure Bonds is specially beneficial for those who have already exhausted the Rs. 1,00,000 limit.

3. The benefit of saving tax through Infrastructure Bonds is available for Individuals and Hindu undivided families(HUF).

4. The face value of each bond is Rs. 5,000 and it is being issued at par value.

5. A minimum investment of Rs. 5,000 is required i.e. 1 bond and further investment can be made in multiples of 1 bond.

6. There is no upper limit on the amount of investment, however, a maximum of Rs. 20,000 only can be claimed as deduction as under section 80CCF

7. The tenure of the bond is 10 years

8. There is a lock in period of 5 years if you want to avail the tax benefits under section 80CCF.

9. The bond issue can be broadly classified into 2 categories

a. With a Buy back option

b. Without a Buy Back option

10. The Buy Back option will be available from 5th year onwards i.e. from 2015.

11. The Rate of Interest on bonds with a Buy Back option is 7.85% and for other then Buy Back option is 7.95%

12. Interest shall be taxable but there shall be no TDS.

13. These bonds are also available in Cumulative and Non-Cumulative options.

14. In case of Non-Cumulative bonds, the interest shall be paid annually and the bonds shall be redeemed at par

15. In case of Cumulative bonds, the maturity value shall be at par, along with the accumulated interest.

16. In order in invest in these bonds, you must have a demat account, as the allotment will be made in demat mode only.

17. Details provided in the application form should match with those of the demat account e.g. Name, PAN, DP name , DP id etc.

18. The application money should be paid through ECS,at par cheque or demand draft only, and not in cash.

19. 31st August, 2010 is the date on which the issue is closing i.e. the last date for investing in these bonds.

20. 15th September is the deemed date of allotment.

Investment in these Infrastructure bonds will not only provide you an extra tax saving avenue where you can claim deduction upto Rs. 20,000 and save tax amounting to Rs. 2,000-6,000, but will also earn an interest @ 7.85%-7.95% .

For obtaining a copy of the Application Form and Information memorandum visit www.ifciltd.com and for more updates related to tax planning , keep following MONEY MATTERS.

Please feel free to leave your comment on this article.

Mutual Funds : Jargon Buster

2010-08-13T04:38:00.000-07:00

Imagine driving a car without knowing what an accelerator or a brake is. Imagine using a computer without knowing what a keyboard or a monitor is. Similarly, imagine investing in Mutual Funds without knowing some key terms. You may have invested in mutual funds on the basis of your friend’s or financial planner’s advice, but understanding a few jargons will assist you in taking better decisions next time. Here is a simplified explanation of the most common terms you must know before investing in Mutual Funds, starting with the term ‘mutual fund’ itself :

1. Mutual Fund : A mutual fund is a “common pool” of money. “n” number of investors contribute towards this pool of money. The money collected from investors is used to buy various categories of assets. These assets can be equity shares, debentures, bonds, gold etc. All the assets are owned by the investors in the same proportion as their contribution bears to the total contributions of all the investors put together.

2. Units : Just like an investor by paying money to a company subscribes to its shares, similarly, by contributing towards the Mutual Funds, the investor subscribes to the units of a scheme launched by the fund. A unit holder of a mutual fund is a part owner of the fund’s assets. These units held by an investor are the evidence of ownership of the fund’s assets.

3. Net Asset Value (NAV) : NAV is the price of a unit of a fund. It is calculated by dividing the value of the total assets of the fund by the total number of units issued by the mutual fund. Let us take a set of numbers to develop a better understanding. Suppose the value of a fund’s assets(shares, bonds, gold etc.) stands at Rs. 1 crore and it had earlier issued 50,000 units. Then the NAV of a single unit at a given date shall be Rs. 200 (1 crore/50,000) . If you, as an investor hold 100 units of this fund, then on the basis of an NAV of Rs. 200, the value of your portfolio shall be Rs. 20,000. Now if the value of the fund’s assets increases, the NAV will also rise, thus moving up the value of your portfolio of 100 units.

4. Corpus : The face value of the units when multiplied by the total number of units issued, gives us the corpus of the fund. If the fund issues 50,000 units at a face value of Rs. 10 each, the corpus of the fund stands at Rs. 5,00,000, irrespective of its NAV. This corpus will rise if the fund further issues some more units.

5. Assets Under Management (AUM) : Moving further with the above example, the fund had issued 50,000 at Rs. 10 each, but as the value of the assets of the fund increases, its NAV starts increasing. Supposes the NAV reaches a level of Rs. 200, then the figure of 1 crore (50,000 units* Rs. 200) is referred to as AUM.

6. Entry Load and Exit Load : The charges which are imposed on the investor to cover the marketing and administrative expenses of the fund are known as loads. The amount which is deducted at the time of investor’s entry (i.e. at the time of buying) into a scheme is known as entry load and the amount which is deducted from the redemption or sale proceeds payable to the investor at the time of exit from the scheme is known as exit load. Lets say, that if you are investing Rs. 10,000 in a scheme and the entry load is 1%, then out of Rs. 10,000, only Rs. 9,900 will be invested in the scheme and remaining Rs. 100 will go towards fund expenses. Similarly, if the exit load is 1%, and you plan to redeem or sell units worth Rs. 10,000, then you will receive an amount of Rs. 9,900 after deducting Rs. 100 as exit load. Recently, SEBI has abolished Entry Load on all mutual fund schemes in India.

7. New Fund Offer (NFO) : NFO is just like an IPO of shares. A new fund offer occurs when a new scheme is launched and it allows the investors to purchase the units of a close-ended scheme.

8. Open-end Fund : An open ended mutual fund is one that sells and repurchases units at all times. In an open ended fund, the purchase and sale of units takes place between an investor and the mutual fund. Here, as new investors can enter and exit from the fund at any time, the corpus of the fund keeps changing daily.

9. Close-end Fund : Unlike an open-end fund, the corpus of a close-end fund remains fixed. It allows the investors to purchase its units through a New Fund Offer (NFO). After the NFO closes, it does not allow the investors to buy or redeem the units directly from the funds. However, to provide the much needed liquidity, it gets listed on a stock exchange thus enabling the investors to buy or sell the units just like buying or selling the shares of a company.

10. Equity Linked Savings Scheme (ELSS) : ELSS is a diversified mutual funds scheme that invests in shares of various companies across various sectors. Investment in ELSS allows the investor to claim tax benefits under section 80C of the Income Tax Act. Investments in this scheme have a lock-in period of three years.

11. Systematic Investment Plan (SIP) : In a systematic investment plan, an investor makes regular payments on a monthly or quarterly basis towards a mutual fund. Investing in a regular manner through an SIP allows the investor to take the advantages of rupee-cost averaging. For example, if you start an SIP of Rs. 1000 and the fund’s NAV in that month is Rs. 100, you will get 10 units. In the next month, if the NAV rises to Rs. 120, you will get 8.33 units. Further in the third month if the NAV falls to Rs. 80, then you will get 12.5 units.At the end of the third month, you will be able to accumulate 30.83 units by investing Rs. 3000 at an average price of Rs. 97.31 per unit. This always represents a win-win situation as the cost of acquisition is averaged out by purchasing the units regularly at different NAVs.

12. Offer Document : It is an operating document which describes a mutual fund scheme. It is the most important source of information from the perspective of prospective investors. It acts a legal document which protects and governs the rights of an investor.

13. Key Information Memorandum (KIM) : An offer document runs into pages and it may not be possible for a small investor to go through each and every line. Thus, an abridged version of the offer document is distributed with the application form which is known as the Key Information Memorandum. It briefly sets forth the information, which a prospective investor ought to know before investing.

Keep following MONEY MATTERS for more updates on using mutual funds as a tool for wealth management.

15 Tips for managing your expenses

2010-08-05T23:37:00.000-07:00

Just a few days back, while chatting on google talk, I was sharing my experience of student life or rather hostel life with an old friend. I was recollecting those days when I used to stay in a hostel at Indore and apart from studying, spent a lot of time on managing my finances. At that time, finance was just about managing the monthly expenses, because other aspects of personal finance were hardly in my control. My income was in the form of remittances in the savings bank account, and as the monthly expenditure was almost equal to, or sometimes even greater than the monthly income (thanks to my ‘AAA’ Credit Rating, as a result of which I was able to secure funding from external sources), no question of saving and investment was there. But one day I realized that just by making a few efforts, I was not only able to limit my expenses upto the level of my income (the monthly remittances) but also managed to save. So here are a few tips on how to manage the expenses which I would like to share with all those who are either the source of expenditure( the students) or the source of income(their parents).

For the sources of expenditure :

1. Start with preparing a monthly budget. Segregate your expenses budget into different sections like books, travelling, entertainment, cell phone recharge, apparels & accessories, etc. . Keep aside some fund to meet contingencies like buying a birthday present for a day old friend.

2. Never keep too much cash. More the cash you have, more difficult it is to resist the temptation of spending it.

3. If you have moved to a different state, try to buy a local SIM card as soon as possible, as it will save you from paying the roaming call charges on your home state’s cell number.

4. Look for a tariff plan according to your use. If possible, call people at night as many cell phone operators have low night calling charges.

5. Avoid going to a multiplex on weekends, but if you are too busy with work or studies during the week, go for the morning shows on weekends as they are still cheaper than the night ones.

6. If the reviews for a movie are not good, you can even avoid the multiplex and save a few hundred rupees. Go for a DVD and enjoy on your laptop.

7. If you are staying far from your place of work/study, use as much public transport facilities as possible – bus, local, metro.

8. If you are using a vehicle to commute, never hesitate in sharing it with your friends. Whether you go alone or with your friends, its going to consume the same amount of fuel. This way you can easily share the cost of fuel with them, and if you are not the kind of person who would ask for a 50:50 share, you can still get the tag of a helpful friend.

9. In case you are a brand conscious person, try to take complete advantage of the seasonal sale where you can get decent discounts, even if it requires buying sweaters in summers. After all, brand matters.

10. Look for friends who are willing to shop in the near future. Compel them to shop with you and go for a single bill. You may earn some extra discount or goodies on such bulk purchases.

11. Avoid having roadside panipuris and chaat, specially during the rainy season. This will not only help you to stay healthy and but also limit your medical bills.

12. If you are planning to go home during the vacations, plan well in advance and you can easily save the tatkal charges of Indian railways.

13. Develop a habit of writing your expenses. This will help you to analyze your expenditure pattern and avoid overspending.

14. By the end of the month, try to save some amount, which can be used for three purposes –

a. Lend it to a friend and make him feel indebted to you

b. Go out and party, or

c. Take something special for your parents, brother or sister, whenever you go back.

15. You are your best judge, analyze your habits and way of living, and look for better ways to limit your expenses.

For the sources of income : Ask your ‘sources of expenditure’ to follow all the above points.

This is not a strictly technical or financial advice as was given in my earlier articles. But I think that as along as anything deals with money, it deserves a place at MONEY MATTERS. After all, a penny saved is a penny earned.

Missed the deadline of filing income tax return? What Next !!

2010-07-31T14:36:00.000-07:00

Whenever I think of the word ‘Income Tax’, a television commercial comes flashing into my mind, where the waiter used to take his share from every dish before serving it. Tax paid on our income is like that slice of a pizza which has to be mandatorily shared with the waiter. Its better to share that slice as soon as possible and enjoy the remaining pizza. One such deadline for sharing a slice of your income was 31st July, 2010. This was the last date for filing income tax returns for the financial year 2009-10, for all those persons whose accounts are not subject to any kind of audit. If you have missed the deadline, don’t worry, you still have the luxury of extra time. But every luxury comes at an extra cost and with an expiry date. The expiry date is 31st March 2011 and the extra cost may be interest, penalty or certain disallowances. Let us dig deeper to explore the cost of this luxury.

Payment of interest : If your entire income of a financial year was subject to tax deducted at source (TDS), then the liability to pay tax may not arise. Also, if tax has been deducted at a higher rate or before providing for deductions like interest on housing loan, Chapter VI-A deductions (e.g. deductions under section 80C, 80D etc.), then you may be eligible for tax refund. But, if tax has neither been deducted at source nor paid by you, then missing the 31st July deadline will attract two types of interest.

1.Interest for not furnishing the tax return : If the return is filed after the due date i.e. 31st July, then under section 234A of the Income Tax Act, simple interest shall be payable at the rate of 1% for every month from the date immediately following the due date i.e. 1st August, to the date of furnishing of return or if no return is furnished, then upto the date of completion of assessment. This interest shall be calculated on the amount of tax on total income, after adjusting TDS. For example, if your tax liability for the FY 2009-10 was Rs. 20,000 and you file your return on 31st December 2010, then interest shall be calculated from 1st August to 31st December @ 1% per month on Rs. 20,000, which comes out be Rs.1,000.

2. Interest for not paying the advance tax : Further, where the tax payable during the year is Rs. 10,000 or more, then the liability to pay advance tax on 15th September, 15th December and 15th March also arises. If you have failed to pay the advance tax or the amount of advance tax paid by you is less than 90% of the assessed tax, then according to section 234B, you will have to pay simple interest at the rate of 1% for every month, beginning from 1st April to the date of completion of regular assessment. This interest is calculated on the entire amount of advance tax or on the amount by which the advance tax paid falls short of assessed tax. For example, if the amount of assessed tax is Rs. 20,000 and the amount of advance tax paid is Rs. 5,000, then interest @ 1% shall be calculated on Rs. 15,000. Further, under section 234C, simple interest at the rate of 1% shall be payable if the amount of advance tax paid in any of the three instalments falls short of the prescribed percentages

However, even if you have not filed the return by 31st July, no interest shall be payable if your net income is below the basic exemption limit of 2,40,000 , 1,90,000 and 1,60,000 in case of a senior citizen, female assessee and male assessee respectively.

Penalty : If the luxury provided by the Income Tax Department also expires, i.e. if you fail to furnish the return of income for the FY 2009-10 by 31st March 2011, then a penalty of Rs. 5,000, in addition to the above mentioned interests, may also be levied. Such a return filed after the end of the relevant assessment year but before the expiry of one year from the end of the relevant assessment year is called a belated return. For Example, the return of income for the FY 2009-10 should have been filed by 31st July 2010, and if not, then after paying the above mentioned interests, by 31st March 2011. Even if the return is not filed by 31st March 2011, then it can still be filed before 31st March 2012, but along with the interest and the penalty. Such a return filed after 31st March 2011 but 31st March 2012 shall be called a belated return. A belated return can never be revised.

Disallowance of carry forward of losses: If your total income consists of any business income, not subject to audit under any law, and during the relevant financial year your business has suffered a loss, then the provisions of Income Tax Act allow you to carry forward such business loss and adjust it in future years with your profits. But, business loss can be carried forward only if the return of income, is filed by the due date i.e. 31st July. If there is a default in filing the return by the due date, then such business loss shall not be allowed to be carried forward. However unabsorbed depreciation and loss under the head house property can be carried forward even if the return is filed after the due date. Loss under the head house property can arise on account of interest payable on loans borrowed for the purpose of acquisition, construction or renovation of the house. In case of a self occupied house property, amount of loss from house property cannot exceed Rs. 1,50,000 which is in the form of interest paid on housing loan.

There is an old saying ‘a stitch in time saves nine’, here, a return in time, could have saved some outgo of interest. Even if you have missed the 31st July deadline, you still have time, remember the next deadline to furnish your returns of income is 31st March 2011.Don’t miss it.

PS : Just a few hours after i published this post, i came to know that CBDT has extended the due date of filing income tax returns to 4th August for assessees for whom the due date was 31st July, 2010. This decision was taken in view of some technical snags in the e-filing server and also due to harsh weather which prevented some taxpayers from e-filing.

Note : The above article has been written assuming that the assessee is an individual whose books of accounts are not subject to audit under any law.

(Source : My Facebook fan Mikail Naqvi)

God knows "KAUN BANEGA CROREPATI"

2010-07-26T07:03:00.000-07:00

Last night while enjoying 3 idiots at Sony Entertainment Channel, I came across the promo of the next season of one of the most successful TV shows, KAUN BANEGA CROREPATI. Once again Mr. Amitabh Bachhan is back with his ‘Lock kiya jae’ to host the fourth season of KBC. I like KBC for 3 things, not just because that it has completed 3 seasons or I was watching 3 idiots, but because there are actually 3 reasons. First, the knowledge part. The game really helps you to check and enhance your knowledge. Second, watching Mr. Amitabh Bachhan is always a delight. Third, of course, the prize money. And it is this third thing, the prize money, the desire to become a crorepati, which compelled me to ask a question from myself – Is this the best way to become a crorepati ? ? ? And then I started looking for answers.

When I compared this to other ‘instant recipes of becoming a crorepati’, I realized that this is the most respectable and lawful way of making 10 millions in a such a short span of time. Whatever may be the rate of inflation in India, at any day and for anyone, 10 millions or 1 crore is really something big, something which can actually fulfil their dreams. Now there are two things which stand between you and your dreams – your knowledge and your destiny. You can work on facts and figures, and enhance your knowledge, but what about your destiny? As soon as the first round of registrations for KBC 4 will start from 2nd August, there will be lakhs of people trying their fate and you need to be very lucky for being randomly selected by the computers and reach the next level of the game. But I believe that it is worth giving a chance, after all when we were in our schools and colleges, we used to pay for giving answers and here we will be paid for giving answers. Great, isn’t it.

Further , KBC also gives us enormous returns on investment. You can’t think of investing less than lakhs of rupees for earning 1 crore in such a short span of time. Now compare this to those few rupees which you need to spend or say invest each day for dialling the KBC numbers and giving the correct answer. In the first situation the probability of making a crore is very high and in the second, extremely low . But is there any harm in testing your destiny? We all have been reading for years ‘fortune favours the brave’. So, this time, be brave and try your luck,who knows, you may be the next crorepati. If you win, boast about your intellect and if you don’t, simply put the blame on your destiny, as everyone does. And even if you don’t win(read earn) 1 crore , enjoy Mr. Bachhan , his questions and the commercial breaks.

This may be fastest way of becoming a crorepati in a lawful manner, but not the only way. So, if luck is not on your side this season, don’t be disheartened because you always have the option of making planned and disciplined investments, reaping the benefits and fulfilling your dreams. For us, the key question should be “KAISE BANENGE CROREPATI” and not “KAUN BANEGA CROREPATI”, and for answers to this question, keep following MONEY MATTERS.

Disclaimer : I am neither the brand ambassador nor an agent of Kaun Banega Crorepati.

PLANNING FOR THE UNPLANNED

2010-07-22T20:19:00.000-07:00

Last week, when a friend of mine reached the parking bay of a multiplex after spending 3 hours watching a not so entertaining bollywood flick, he was shocked to see his 14 months old hatchback’s bumper crushed and tail lights broken into bits and pieces. It was apparent that some other vehicle must have crashed into it while trying to park. That movie actually costed him a ten thousand rupees as his vehicle insurance had expired just 2 months back as he forgot to pay the renewal premium. Another, friend of mine after withdrawing cash from an ATM counter, left his Debit Card near the ATM machine. After an hour, when he realized that he has lost his debit card, he spent another hour looking for the bank’s helpline number so that he can get the card blocked for any further transactions. But, by the time he managed to block the card, it was too late, there wasn’t any cash left in his account. And this was the result of my dear friend’s habit of writing the Debit Card’s PIN at the back of the card with a permanent marker. Is it so that such things happen with my friends only? NO. This could have been your friend’s story or even your story. Such incidents or accidents not only disturb us monetarily but also mentally. However, if we take a few steps, such disturbances arising out of unplanned situations can be minimized.

Situation #1 : Loss of job, business losses

Plan : Create a Contingency fund : Before executing your investment plan, set aside an amount equal to 6 months’ expenses in case you are a salaried individual or 12 months’ expenses if you are self employed. This will provide you with a buffer amount in case you lose your job, plan to change your existing job, the cash flows from your business suddenly dry up or any other contingency. The best way to create such a fund is by opening a sweep-in account and amalgamating your savings and fixed deposit accounts, thus enabling you to withdraw your fixed deposit amounts using your savings account debit card. Also, whenever you withdraw from your contingency funds, try to replenish it whenever the situation improves.

Situation #2 : Tumbling stock markets

Plan : Portfolio diversification : A classic mistake which every investor makes is that when the markets are bullish he becomes blind to the risk and in bearish markets, he becomes blind to the opportunities. Looking at one’s risk appetite, a balanced portfolio should be designed consisting of equity and debt instruments. Investments made in traditional instruments like Public Provident Fund(PPF), Fixed Deposits, recurring deposits may not give exorbitant returns like equities, but in case of falling markets, even returns from such traditional products can look attractive.

Situation #3 : Theft or Damage to vehicle

Plan : Motor Insurance : The only insurance which is compulsory in India is Motor Insurance (Vehicle Insurance). As per the provisions of the Motor Vehicles Act, all the vehicles should be insured to cover atleast third party liability. However, one should prefer a comprehensive policy which, along with the third party liability covers the damages to the vehicle and the person inside it. Generally when we a buy a new vehicle, an insurance cover is compulsorily provided by the dealer for first 12 months. But, sometimes we simply forget to pay the renewal premium and then end up paying huge amounts for damages. Best way is to set an entry in your cell phone’s calendar or scheduler to remind you 3 days in advance that your motor insurance premium is due. By paying motor insurance premiums and keeping a copy of the insurance in your vehicle, you will also be able to save a few hundred rupees paid as bribe (read challan) to traffic police personnel.

Situation #4 : Accident or illness

Plan : Health Insurance : Life Insurance, be it a traditional plan, ULIP or term insurance, is there for your dependants, but for yourself, go for a health insurance policy (mediclaim). The purpose of taking a health insurance cover is to enable you to meet the expenses related with unexpected illness or accident. The annual premium is generally in the range of Rs. 3000 to Rs. 5000. Always prefer a cash-less policy where the insurance company directly settles the medical bills with their network hospital. Also keep the Smart Card (in case of cash-less policy) and Insurance Company’s Helpline number handy, because generally, you are required to intimate the Insurance Company within 24 hours of hospitalization.

Situation #5 : Loss or misuse of Credit or Debit Card

Plan : Don’t be like my friend who wrote the PIN at the back of the card. Simply memorize the four digit PIN, and if there are many sets of four digit numbers in your mind, atleast don’t write the PIN on the card. Issuer bank’s helpline number is always written on the card but we are talking of a situation where the card itself is no more in our possession, so save the bank’s helpline number in your cell phone so that you can immediately report the loss of card and get it blocked. In case of Credit Cards, memorize the three digit CVV number written at the back of your card just beneath the magnetic strp and then either scratch or darken it. This will minimize the possibility of your credit card being misused by some other person for making payments over the internet without your knowledge, even when that other person is in possession of your card, as the CVV number will not be visible, which acts as security check while making online payments. And last but not the least, do not write on your credit card the ‘Verified by Visa’(VbV) or ‘MasterCard Secure Code’ password, in case of Visa or MasterCard credit cards respectively, that are required to authenticate a payment on the internet.

This was just a set of five situations which many of us may have to encounter in future. There may be many such unexpected and unplanned events, but the key lies in planning well and being prepared for such contingencies. A journey of a thousand miles starts with the first step. Even if you haven’t started, start now. Plan well and be prepared because MONEY MATTERS.

GOLDEN FUTURE WITH GOLD

2010-07-17T13:34:00.000-07:00

In the year 2000, no one would have imagined that the yellow metal would appreciate by more than 4 times in a decade. Gold has always looked expensive, be it Rs. 4000 for 10 grams in 2000 or Rs. 19,000 for 10 grams in 2010. But the demand for gold has never fallen. According to the World Gold Council, in the recent times, demand for gold has increased by 44 percent, whereas the supply has almost remained static. It is the lust for the yellow metal which has led to the accumulation of 16000 tonnes of gold by the Indian household. In India, demand for gold is mainly driven by two factors :

1. Social events (like festivals, marriages etc.)

2. Investment needs

Gold has emerged as a very important asset class specially in the last 2 years which were marked by recessionary trends, falling banks , bailout packages and countries defaulting on debt. Many new ways of holding gold as an investment are now available. But in order to maximize the gains in the gold rush, it is very important to understand the relationship between gold prices, inflation and currencies.

Inflation and Gold Prices : Two years back when the economy started to slow down, the government came out with various bailout packages to control the worsening situation. This lead to an increased circulation of paper money(currency notes) in the market, which in turn fuelled inflation. This lead to a fall in purchasing power. As the economy was slowing down, returns on many asset classes specially equities were falling drastically. Gold thus emerged as a perfect hedge against the inflationary trends and also a better option for investments. Historical data reveals that gold generally appreciates faster than the inflation index.

Currencies and Gold Prices : In the international markets, gold is a dollar denominated commodity. The rupee-dollar exchange rate also affects the gold prices. Indian prices of gold in terms of rupee/10gm. are based on the international prices of dollar/ounce (1 ounce = 31.1 grams). However, an increase in gold prices in the overseas market may not always lead to an increase in gold prices in India in the same proportion. To understand this, let us take a set of numbers. If the price of gold overseas is $1200 per ounce and at the same time in India a dollar is worth Rs.49, then the price of gold in India would be Rs.18,906 per 10 grams. Now, if the price of gold overseas rises to $1300 after a month and dollar falls to Rs. 45, then the price of gold in India would be Rs. 18,810 per 10 grams. Even when the prices of gold appreciated by a hundred dollars, due to a fall in dollar’s value, the prices in India could not increase in line with the overseas prices . Thus, it gives us an indication that in case of an appreciating rupee (or a falling dollar), there is always an opportunity to invest in gold as one can buy more gold for the same amount of rupee.

Now, as an investor, let us see the number of ways in which you can hold gold :

1. JEWELLERY : One of the most traditional ways of holding gold is in the form jewellery. We all know very well about the Indian woman’s desire to buy gold jewellery. It is because of this reason that every year, around 300 tonnes of gold find their way into the country, mostly as jewellery. This mode of investment fulfils both the needs of an Indian investor, social as well as investment needs. But jewellery is made of diluted gold, thus diluting the returns in the name of impurities, designing charges and making charges.

2. BARS AND COINS : You can buy gold bars and coins if you like the touch of your gold and want to feel rich. Gold bars and coins are usually pure forms of gold. They can be bought from jewellers, banks and NBFCs. They are available in different denominations from 1 gram to 100 grams. If you are buying bars and coins in very small denominations then you may end up shelling out more as making charges/premium. While buying bars and coins, make sure that the seller is a reputed person/entity with proper certifications.

3. GOLD ETF(Exchange Traded Fund) : Instead of holding gold in physical form, it can also be held in paper or electronic form through Gold ETF. Gold Exchange Traded Funds (ETFs) are issued by fund houses and are backed by physical gold held in your name. When you buy a gold ETF, the fund house creates units that reflect the gold holding in your name. When you sell the ETF, the units get extinguished accordingly. For buying Gold ETF, you first need to have a demat account . Craze for Gold ETFs is increasing as it avoids the hassles of storage and safe keeping. It also provides the necessary liquidity as its units can be easily traded on the stock exchange.

4. FUTURES MARKET : Gold can also be bought in the futures market through the various commodity exchanges. In futures market, people enter into contracts to buy and sell gold at a predetermined price that are settled on the expiry date. However, this mode is used more for the purpose of speculation.

With the introduction of Gold ETFs, volatility in gold is also rising. More and more people are now rushing towards Gold ETFs. Following are the pros and cons of holding gold in physical (Jewellery, Bars and Coins)and electronic form (Gold ETF):

Convenience to hold - Bulky to hold in physical form but can be easily held in demat account
Convenience to sell - Must be physically brought and checked for purity but units of gold ETF can be redeemed/traded freely in the Stock Exchange
Safety - Storage and safekeeping is a big concern for physical gold
Charges - Designing charges and making charges/premium are charged when gold is physically bought whereas the fund houses charges fund management and brokerage costs.

Following points should be kept in mind while you are accumulating gold in your portfolio :

Looking at the financial goals, needs and the pros & cons, you should decide the mode of investment in gold.
Ideally gold should comprise of 10 to 15 percent of your portfolio. It acts as an insurance of our portfolio and limits the downfall.
Investments in gold should be made systematically over a period of time. If you are taking the electronic route of holding gold, this can be easily done by giving standing instructions to your broker to buy a certain quantity of gold ETFs every month.
Investments in gold should always be made with long term perspective.
Gold should be bought from reputed vendors so that you are assured about the purity.

The purpose of buying gold in physical form must be clear from the very beginning. If it is for the purpose of financial security and not as a part of family jewellery, then you should look for exit opportunities. Whenever there is a sharp run, sell your gold and encash your gains. But what will be right price to sell your gold? Some experts believe that gold prices may cross the Rs.30,000 mark in the years to come. Some believe that it may even go higher. No one knows when will the gold bubble burst, but it seems that the day is still not near. As it is said that "make hay while the sun shines" similarly, "make money while the gold shines" , because MONEY MATTERS.

Please feel free to leave your comment on this article.

5 questions to be asked before investing

2010-07-09T14:28:00.000-07:00

There are two types of persons, first, who don’t have money and second, who have money. Now those who have money, want to make further money out of it, just like a person who has an egg and expects that one day the egg will hatch and very soon the hen will lay more eggs and then there will be more hens and more eggs and so on. Money can be made out of money, provided there is a proper investment plan and the same is implemented well. But, even before designing an investment strategy, one should look for answers to these five questions ;
Q 1. What are my Financial Goals?
Ans : Goal is something which we desire to achieve or complete, sometime in the future. A financial goal is a goal which has a monetary value. Every person has his set of financial goals which can be classified as ;
Short Term Goals : like going for a vacation
Medium Term Goals : like purchasing a house, buying a new car
Long Term Goals : like Child’s education, retirement planning
Every investment should be made with a financial goal in mind. These goals should be realistic. Before investing your hard earned money, you should have a very clear idea as to what are your financial goals and what shall be their monetary value in future considering the general inflationary trends. For example, if you are saving for your retirement, then you should have a long term investment strategy and opt for such schemes where the money is locked in compulsory for a substantially long period in order to build a sizeable corpus at the time of retirement. On the other hand if you are saving for a vacation then you should look for short term investments options without any lock in period . Financial Goals can be said to have been achieved if you have the right amount of money at the right time.
Q 2. What are my current resources?
Ans. Financial planning and investment decisions should be made after assessing the current disposable income. As a matter of fact, a person cannot save whatever he has earned, however he can spend his entire earnings very easily. If a person is earning Rs. 50,000 a month then neither he should plan his investments in such a way that he is compelled to save the entire amount of his earnings nor should he spend the entire amount of Rs. 50,000. A proper assessment of monthly expenses and other liabilities should be done and then the disposable income should be invested to achieve the financial goals.
Q 3. What is my future income potential?
Ans. An estimation of future cash flows also assists in taking wise investment decisions. If you are in an employment where your job is quite secured and you have fair chances of promotion in the years to come, then you should plan towards increasing your savings gradually and at the same time maintaining a decent standard of living. But in any case, uncertainties cannot be ruled out completely. Therefore a liquid fund of 2 to 4 months expenses should be made to provide for any contingencies arising due to loss of job.
Q 4. What is my risk appetite?
Ans. Before investing, ask yourself
- How long can i wait for the returns to materialize?
- How much loss can i bear on my investments in case of a downfall?
Higher the risk tolerance level of an investor, greater is the potential for him to earn higher returns. But risk tolerance levels also keep fluctuating with the market conditions and then the classic mistake which the investor makes is that when the markets are bullish, he becomes blind to the risk and in bearish markets, he becomes blind to the opportunities. Risk appetite also keeps changing with age . A 60 year old person may not be willing to invest in equities which is considered to be a risky investment option. On the other hand a 30 year old investor may even route half of his investments towards equities due to higher risk tolerance levels.
Q 5. What is the tax situation?
Ans. Last but not the least, an investor must identify the impact of various tax laws which may have an effect on his investment income. For example, if you sell your equity shares within a period of 12 months at a profit then you will have to pay 15% of the profit as tax on short term capital gain, but if the same shares are sold after 12 months, then any profit earned on it is totally exempt from tax. Also investment in certain schemes of Mutual Funds may give you an added advantage of deduction under section 80C of the Income Tax Act. At the same time, you should also be aware of the tax slabs applicable on you, so that your investments can be properly planned and your post tax returns can be maximized

It is said that “Failing to plan is planning to fail”. So, assess your situation first, plan accordingly and then invest, because MONEY MATTERS.

How to calculate your Risk Appetite ?

2010-07-05T11:36:00.000-07:00

A friend of mine while reading a handbook on "How to make money by investing in Stock Markets", came across a formula for calculating the quantum of money which should be invested in equities. The formula was - "Percentage of asset allocation in equities = 100 - your age". As soon as he read this formula, he called me up and asked "suppose, if my age is 30, i should invest 70% (100-30) of my investable surplus in equities, but if my age is 70, should i still invest 30% in equities?" If we consider the given formula, his question was mathematically perfect. but if we think practically, will a person who has already retired at the age of , say 60 years, invest 30% of his hard earned savings into equities at the age of 70? In most of the cases, the answer will be NO. So, is the formula wrong? Partially YES. I personally feel that the formula should be slightly modified to suit our needs. So here is a new revised formula " Percentage of asset allocation in equities = (Your retiring age - Your present age)/Your retiring age". Let us again take up my friends problem and try to find a solution by putting the values in the revised formula. Now, if your age is 30 years and you are expecting to retire at the age of 60, then, the allocation of assets towards equities should be 50% [(60-30)/60]. Moving further, if you are 50 years old, your allocation should be around 20% and if you are at60, then in that case you should avoid investing in equities, until and unless you have been bitten by the dalal street bug.This is simply because of the fact that after retirement, your in flows of cash will almost remain constant over years, but your outflows will continue to soar due to rising living expenses and medical costs. Investments by persons in that age bracket should be focused to minimize the risks, maximize the returns and at the same time, preserve the capital. However, the younger you are, higher is the ability and willingness to take risks. It is very essential to identify the risk appetite at the earliest and then take a call on investment decisions.This risk appetite should be calculated on the basis of a person's working age. One should design a proper investment strategy and asset allocation plan only after considering his ability and willingness to take risks. the exact allocation towards equities may vary from person to person due differences in risk appetite and availability of investable surplus, but the above mentioned formula gives us a funda that "Risk appetite is inversely proportionate to our age". So friends, start investing wisely at the earliest, because, MONEY MATTERS

Calculate Online:when you become Crorepati !!!!!

2010-07-02T01:18:00.000-07:00

Calculate Online:when you become Crorepati

http://www.simpletaxindia.org/2010/06/calculator-monthly-saving-goal.html

2010-07-01T04:54:00.000-07:00

Hi. . i am Nandan Narula 'N square' and you are reading my first post on MONEY MATTERS. "Money is not a big thing in life, but earn enough money before you talk such non sense". these lines are not said by me, but by the founder of Microsoft Inc., Mr. Bill Gates. In the days to come, i will give you some fundas as to how to manage your wealth, how to maximize it and all that you must know about money and wealth . . . because MONEY MATTERS