The annual results season is here and the results from large companies will start coming in from next week. The results reason is crucial as the economic conditions have improved, and the government and Reserve Bank of India (RBI) have started getting out of the economic stimulus schemes. The foreign institutional investors (FIIs) have invested close to 20 billion dollars during the last one year and their confidence in the domestic economy and companies have grown with time.
These are some of the major factors investors should track during the coming results season:
Inflation
The inflation rate has gone to alarming levels during the last couple of months. The RBI has started tightening the monetary policy to control the situation. However, the changes in the monetary policy show an effect with a time lag of a few quarters and therefore it is important to analyse the performance of interest rate sensitive sectors and companies with extra care.
Currency appreciation
The currency has appreciated sharply against the major foreign currencies - dollar, euro, British pound etc. Analysts believe that further appreciation cannot be ruled out as FII inflows are quite robust, and the RBI is not planning to intervene in the Forex markets. Investors should evaluate companies that have exposure to Forex transactions.
Recovery
Most of the developed global economies have come out of recession but the recovery is still quite slow and not convincing. It would take a few more quarters before a clear picture emerges on the global economic front and investors are bound to get some negative news. Therefore, it is important to keep this fact in mind while analysing the results and making buy or sell decisions in the markets. These are some of the significant factors investors should analyse:
Compare performance
The first and most basic strategy is to compare a company's performance with its previous year's performance as well as with its previous quarter's performance. This gives a quick overview of the company's performance and generates questions to help further investigate the results. Investors can compare the results of a company with those of its peers and competitors. This helps in getting a quick feel of the general sector performance, apart from a comparative performance analysis. If the results are unusually good or bad, investors should try to find out the reasons. Investors should discount any one-time issues factored in the company's results that are reflected in its overall results.
Check ratios and parameters
Investors can also look at various parameters and ratios to analyse a company's financial health. For example , the order book, inventory levels, sales numbers etc. Some general information on various ratios and parameters is easily available. Also, follow the quotes of the company's top officials. This helps in getting a sense of what is happening inside the company.
Analyse macroeconomic conditions
Investors with a deeper understanding of economics can look at analysing the impact of various macroeconomic events and the current economic conditions on a company's performance. This will help in identifying and understanding the business-specific and sector-specific challenges.
Markets poised delicately
The domestic markets are at a crucial junction at the moment. They are trading almost near a 24-month high. The expectations from the coming results are very high, fueled by the improvements in the general economic conditions globally. But on the other hand, there is some apprehension on the inflation rate and the way the RBI will handle the current alarming situation. The valuations in the markets are no longer cheap and further upside movements will depend on a company's performance, global economic developments and flows from FIIs.
Source:economictimes.com
Sunday, April 18, 2010
Saturday, April 10, 2010
Rebalance your portfolio occasionally for better gains
You may find that I correlate investments to driving often, but I do seek simple ways of explaining financial concepts. Portfolio rebalancing can sound complicated, but needs to be done regularly to ensure that one’s investments do not carry risks which are not proportional — neither too high, nor too low — to what one can bear.
So, imagine that while driving a car on the highway at 80 km per hour, you see a red traffic light 200 metres away. You can continue speeding with the slender hope that the traffic light will turn green by the time you reach, and risk a sharp brake if it does not.
Alternatively, you can move to a lower gear, reduce speed and come to a gradual halt as you approach the traffic light.
Rebalancing is the process of restoring your portfolio back to its asset allocation targets. This may become necessary since some of the allocations may fall out of alignment with the original target percentage allocations for various reasons.
By following a disciplined approach to rebalancing, you will find that your portfolio does not overemphasise or de-emphasise one or more asset categories of your portfolio.
When is rebalancing required?
Rebalancing may be required when:
a) positions have become too large or too small;
b) your financial goal(s) have been achieved;
c) your financial objective(s) have changed;
d) your time horizon has changed.
Is there a marked difference?
Let us study an example of a portfolio where you have decided to invest 50% in equities, 40% in debt, 5% in gold and 5% in real estate. You have also decided to rebalance the portfolio at the end of every year. In the past 10 years starting January 2000, your portfolio would have earned you 14.1% pa compounded annually (see table).
It was possible to book some profits in December 2007 and also take the plunge into equity in January 2009 when most others dreaded to tread. Instead of rebalancing, had you invested Rs 100 in January 2000 and stayed put, your portfolio would have grown to Rs 295, or a cool 20% lower than the rebalanced portfolio.
We are not saying that an annual rebalancing is essential: we are highlighting the benefits of this process. So, as you approach the traffic light at a slower pace, and the light turns green, you get the advantage of revving up your car from second gear itself instead.
You do realise that this gives you a headstart to reach your destination faster, with less tension and definitely better fuel efficiency.
So, imagine that while driving a car on the highway at 80 km per hour, you see a red traffic light 200 metres away. You can continue speeding with the slender hope that the traffic light will turn green by the time you reach, and risk a sharp brake if it does not.
Alternatively, you can move to a lower gear, reduce speed and come to a gradual halt as you approach the traffic light.
Rebalancing is the process of restoring your portfolio back to its asset allocation targets. This may become necessary since some of the allocations may fall out of alignment with the original target percentage allocations for various reasons.
By following a disciplined approach to rebalancing, you will find that your portfolio does not overemphasise or de-emphasise one or more asset categories of your portfolio.
When is rebalancing required?
Rebalancing may be required when:
a) positions have become too large or too small;
b) your financial goal(s) have been achieved;
c) your financial objective(s) have changed;
d) your time horizon has changed.
Is there a marked difference?
Let us study an example of a portfolio where you have decided to invest 50% in equities, 40% in debt, 5% in gold and 5% in real estate. You have also decided to rebalance the portfolio at the end of every year. In the past 10 years starting January 2000, your portfolio would have earned you 14.1% pa compounded annually (see table).
It was possible to book some profits in December 2007 and also take the plunge into equity in January 2009 when most others dreaded to tread. Instead of rebalancing, had you invested Rs 100 in January 2000 and stayed put, your portfolio would have grown to Rs 295, or a cool 20% lower than the rebalanced portfolio.
We are not saying that an annual rebalancing is essential: we are highlighting the benefits of this process. So, as you approach the traffic light at a slower pace, and the light turns green, you get the advantage of revving up your car from second gear itself instead.
You do realise that this gives you a headstart to reach your destination faster, with less tension and definitely better fuel efficiency.
Infrastructure bonds: To invest or not to invest?
One of the fresh tax reliefs that have come as an outcome of the budget 2010 is the deduction allowed for investing up to Rs 20,000 in infrastructure bonds. While the FM is stressing on the advantage of the same, the benefits are not neutral for all individuals. Here is a take on the pros and cons of investing in infrastructure bonds for tax saving purposes.
Tax groups post budget 2010.
Tax group 1: Taxable income Rs. 1.6-5 lakhs
Tax group 2: Taxable income Rs. 5-8 Lakhs
Tax group 3: Taxable income above Rs. 8 lakhs.
To understand the pros and cons of tax saving investments we need to look at 4 major parameters:
Parameter 1 : Actual tax saving (let’s take the highest saving possible)
Parameter 2 : Returns from the investment (during the lock in period)
Parameter 3: Opportunity cost (what if you had invested the same money elsewhere?)
Parameter 4: Effect of inflation on the returns on investment (what would the worth of your investment when you redeem/encash it?)
Assumptions
For the sake of parameter two we will have to take an assumption on the lock-in period (as nothing has so far been announced by the Finance Minister). As is generally the case with most tax saving instruments we can assume two scenarios—3 year and 5 year lock-in
Let’s assume the rate of return on infrastructure bonds is 5.5 per cent per annum and overall rate of inflation is 8 per cent.
For people in the 1.6- 5 lakh taxable income group:
As per the new norms the income will be taxed at a rate of 10 per cent for this group.
Parameter 1:
Actual tax saving: 10 per cent of Rs 20,000 = Rs 2000
(If you invest Rs 20,000 in the instrument you get to reduce your taxable income by 20,000 thus giving a 10 per cent benefit)
Parameter 2:
What will be the returns at the end of the lock in period? For a lock in period of 3 years an investment of 20,000 would fetch an income of Rs. 3484. When added to the tax saved you'll get an effective return of Rs 25485 (Rs 20000+3484+2000) on your investment
Parameter 3:
If this same amount were to be invested in a market instrument that fetched a return of 15 per cent, you would get an effective return of Rs 27, 376 (Rs 20000-2000=Rs 18000 invested @15 per cent per annum for 3 years)
Parameter 4:
What would be the minimum amount required to counter inflation at 8 per cent? The amount would be Rs 25, 194.
Thus for a person in the slab of 1.6-5 lakh the benefits of investing in an infrastructure bond as a tax saving instrument will be only Rs 291 (Rs 25485-25194) whereas the benefit out of paying the tax and investing the balance in any decent instrument would be Rs 2182.
Similarly we can calculate the benefits for each segment as well as for a scenario where the lock in period is 5 years as given in the table below.
Slab - 30%
Tax savings - Rs.6,000
Effective Returns(3 yrs/5 yrs) - Rs. 29,485/ Rs.32,139
Investment returns from market after tax ( 3 Yrs/5 Yrs) - Rs. 21,292/Rs. 28,159
Slab - 20%
Tax savings - Rs.4,000
Effective Returns(3 yrs/5 yrs) - Rs. 27,485/Rs. 30,139
Investment returns from market after tax ( 3 Yrs/5 Yrs) - Rs. 24,334/Rs. 32,182
Slab - 10%
Tax savings - Rs.2,000
Effective Returns(3 yrs/5 yrs) - Rs. 25,485/ Rs. 28,139
Investment returns from market after tax ( 3 Yrs/5 Yrs) - Rs. 27,376/Rs. 36,204
Required returns to counter inflation effect - Rs. 25,194/ Rs. 29,387
Bottom-line
If you fall under the Rs 8 lakh taxable income slab, it makes sense to opt for the infrastructure bonds as a tax saving instrument.
If you are under the 5-8 lakh bracket it is advisable to invest in infrastructure bonds only if the period of investment is 3 years, not five years.
If you come under the 1.6-5 lakh bracket it is an absolute no-no to invest in infrastructure bonds for tax saving purpose.
Tax groups post budget 2010.
Tax group 1: Taxable income Rs. 1.6-5 lakhs
Tax group 2: Taxable income Rs. 5-8 Lakhs
Tax group 3: Taxable income above Rs. 8 lakhs.
To understand the pros and cons of tax saving investments we need to look at 4 major parameters:
Parameter 1 : Actual tax saving (let’s take the highest saving possible)
Parameter 2 : Returns from the investment (during the lock in period)
Parameter 3: Opportunity cost (what if you had invested the same money elsewhere?)
Parameter 4: Effect of inflation on the returns on investment (what would the worth of your investment when you redeem/encash it?)
Assumptions
For the sake of parameter two we will have to take an assumption on the lock-in period (as nothing has so far been announced by the Finance Minister). As is generally the case with most tax saving instruments we can assume two scenarios—3 year and 5 year lock-in
Let’s assume the rate of return on infrastructure bonds is 5.5 per cent per annum and overall rate of inflation is 8 per cent.
For people in the 1.6- 5 lakh taxable income group:
As per the new norms the income will be taxed at a rate of 10 per cent for this group.
Parameter 1:
Actual tax saving: 10 per cent of Rs 20,000 = Rs 2000
(If you invest Rs 20,000 in the instrument you get to reduce your taxable income by 20,000 thus giving a 10 per cent benefit)
Parameter 2:
What will be the returns at the end of the lock in period? For a lock in period of 3 years an investment of 20,000 would fetch an income of Rs. 3484. When added to the tax saved you'll get an effective return of Rs 25485 (Rs 20000+3484+2000) on your investment
Parameter 3:
If this same amount were to be invested in a market instrument that fetched a return of 15 per cent, you would get an effective return of Rs 27, 376 (Rs 20000-2000=Rs 18000 invested @15 per cent per annum for 3 years)
Parameter 4:
What would be the minimum amount required to counter inflation at 8 per cent? The amount would be Rs 25, 194.
Thus for a person in the slab of 1.6-5 lakh the benefits of investing in an infrastructure bond as a tax saving instrument will be only Rs 291 (Rs 25485-25194) whereas the benefit out of paying the tax and investing the balance in any decent instrument would be Rs 2182.
Similarly we can calculate the benefits for each segment as well as for a scenario where the lock in period is 5 years as given in the table below.
Slab - 30%
Tax savings - Rs.6,000
Effective Returns(3 yrs/5 yrs) - Rs. 29,485/ Rs.32,139
Investment returns from market after tax ( 3 Yrs/5 Yrs) - Rs. 21,292/Rs. 28,159
Slab - 20%
Tax savings - Rs.4,000
Effective Returns(3 yrs/5 yrs) - Rs. 27,485/Rs. 30,139
Investment returns from market after tax ( 3 Yrs/5 Yrs) - Rs. 24,334/Rs. 32,182
Slab - 10%
Tax savings - Rs.2,000
Effective Returns(3 yrs/5 yrs) - Rs. 25,485/ Rs. 28,139
Investment returns from market after tax ( 3 Yrs/5 Yrs) - Rs. 27,376/Rs. 36,204
Required returns to counter inflation effect - Rs. 25,194/ Rs. 29,387
Bottom-line
If you fall under the Rs 8 lakh taxable income slab, it makes sense to opt for the infrastructure bonds as a tax saving instrument.
If you are under the 5-8 lakh bracket it is advisable to invest in infrastructure bonds only if the period of investment is 3 years, not five years.
If you come under the 1.6-5 lakh bracket it is an absolute no-no to invest in infrastructure bonds for tax saving purpose.
Subscribe to:
Posts (Atom)
