There is something aspirational about investing in the stock market. You may choose to believe it or not, but when you see those stock prices flashing across the bottom of the television screen and hear people discussing how much money they have made in the market, even those who claim to be totally uninterested often have a temporary desire to be a part of this group.
So they open a demat account, ask a couple of friends for stock suggestions and simply put some available money into shares. But when the markets take a dip and the possibility of loosing money looms, they exit the markets with less money than they initially entered.
In fact, it is this ad-hoc attitude to investing that has caused the downfall of many a first time investor in the market. Irrespective of whether you are twenty-five or fifty-five when you first begin to invest; there are a set of thumb rules that you need to keep in mind while investing. With markets sentiments improving and many young investors showing the desire to take the ride down the investment highway, SundayET outlines these rules of the game.
Teething rings
There are two fundamental decisions that you need to make before you begin the actual formalities of investing, the first of which is an assessment of how long you propose to stay invested in the market.
Be realistic at this stage, as your investment strategy is fundamentally driven by whether you are a short-term, medium-term or long-term investor.
However, experts recommend that to reap the benefits of investing in equity, it is better for an individual to remain invested long-term.
"Post-returns on equities are likely to beat inflation and are better than most other asset classes (on a risk adjusted basis). So individuals must have a long term view and commit funds that will not be required for at least five years,” says Veer Sardesai, CEO of Sardesai Finance.
Another critical element to making successful investment is your ability to take risks or to catch a good night of sleep irrespective of volatility in the markets, especially after what we have seen happening in the markets last year. According to Rajiv Deep Bajaj, vice chairman and managing director, Bajaj Capital, “The investor needs to analyse his ability and willingness to lose some or all of his/her original investment in exchange for greater returns.”
To a great extent, the classification of whether you are a conservative, moderate or aggressive investor is also dependant on how much you earn and what your liabilities are. So, if you have good capital surpluses to offset losses in the market, then you could afford to take the aggressive route to investment.
Building blocks
When it comes to deciding on the rules of asset allocation, the thumb rule is that you should subtract your age from the number 100 and invests only that much of your portfolio in equity. But with markets currently improving, you need to be wary of brokers who will try to instill the feeling that the only way for the markets to move is upward and urge to invest more on stock.
Experts, however, recommend that in the current situation, first time investors should follow a more diversified approach to investing and look at stocks of blue-chip companies such as those in the BSE Sensex or the NSE Nifty, which are considered safer than the mid-cap stocks.
“In these current volatile situations, if the investor wishes to invest in equity, it is best if the investor sticks to investing in diversified equity funds/large cap funds, which have a proven track record,” says Bajaj. He adds that investors should further look at investing through SIP as it allows them to take advantage of the principle of compounding and also allows them to average out the cost of other investments.
But if you want to do it your own way, there here’s another adage that will help you pick right: It is better to buy great stock at a good price than fair stock at a cheap price.
According to Sardesai, people often have the tendency to buy a stock quoting at a price less than Rs.10. But he warns that there is a generally a reason for the low price and there is the possibility of it sliding down even further. Also keep an eye on the quality of the management.
Its always better to put your money behind a management which has a high level of transparency and looks after its shareholders, in contrast to simply going after cheap stock. "However, if they choose to invest in an IPO, then they should analyse the IPOs and strive to invest in the IPOs of PSUs,” says Bajaj.
Never succumb to investing in an IPO on the basis of promises that good returns are always assured.
Don't play with fire
Another battle that you will have to fight is the urge to book profits by buying when prices are low and selling when they are at their peak and re-entering the market when prices dip again. However, timing the markets rarely works and you run the risk of loosing fundamentally good stock in the process. Also remember that risk and return go hand in hand.
“Taking excessive risks may give superlative returns but you stand to loose all your capital but it is better to be safe than sorry,” says Sardesai. You should also resist the urge to follow the investment practices of your friends and to compare the returns on your portfolio with that of your friends. If in doubt, make it point to seek professional help from a financial advisor rather than from your peers.
Source: economictimes.com
Sunday, June 21, 2009
Sunday, June 7, 2009
How to make a hassle-free health insurance claim!
We often read or hear about health claims being rejected by insurers on flimsy grounds. Sometimes, however, the insured is also to be blamed simply because he/she is found to have made false declarations while taking the policy or failed to go through the fine print before buying one.
True, health covers are bought with a view to taking cover against any financial constraint that may arise because of a medical emergency, and insurance companies are bound to honour legitimate claims within policy limits. At the same time, however, it must be understood that insurance companies are not charitable organisations. Therefore, they can’t be expected to honour a claim if the claim is not made in accordance with agreed terms or if a particular disease is listed under the policy exclusions.
“The repudiation of a claim may be due to many reasons such as loss falling beyond the scope of policy coverage, exclusions under policy, or breach of conditions or warranties, among others,” says Shreeraj Deshpande, head – health insurance, Bajaj Allianz General Insurance.
Generally, however, “the primary reason for an insurer rejecting a claim is that a particular disease is listed under the policy exclusions and consequently cannot be covered,” says Ajay Bimbhet, managing director, Royal Sundaram Alliance Insurance Company Ltd.
Therefore, only getting a health cover is not enough. It is equally important to read and understand the terms and conditions of a policy well and be clear about the policy you plan to take in order to avoid any hassle or heartburn in the future. It would also help if one knows how to make a claim and what to do in case something goes wrong.
DIFFERENT MODES OF SETTLEMENT
While buying a health policy, the customer is required to opt for either cashless or reimbursement mode of settlement. In both the cases, however, it is important to understand the claim procedure laid down by the insurers. Simply because at the time of emergency, the understanding of the right procedure can help reduce unwarranted panic.
CASHLESS CLAIMS
Insurers have tie-ups with a network of hospitals across the country. If the customer opts for cashless claims, he/she has the facility of cashless treatment at the networked hospitals. This list of the network is generally available in the policy kit and also on the website of the insurers.
“In case of emergency hospitalisation and admission, the TPA (third party administrator) needs to be intimated through a toll-free number within 24 hours. In case of a planned admission, however, the TPA is to be informed three days in advance. Also, the insured must remember to quote his/her health card membership number and/or policy number,” says Bimbhet.
While getting admission, the cashless request form available with the hospital insurance help desk is to be filled and certified by the doctor. Having done that the form with supporting medical records is to be faxed by the hospital to the TPA’s fax number.
On scrutinizing the documents, the TPA conveys the decision to the hospital, the sanction of the cashless request or calls for additional documents if required.
On approval of the cashless facility by the TPA, the hospital bills are settled directly by the insurer (subject to policy limits). However, inadmissible amounts such as telephone, food and attendant charges are to be borne by the customer.
If the customer chooses to go to a hospital which is not part of the network, he/she can still get a reimbursement directly from the insurer.
REIMBURSEMENT OF CLAIMS
This facility is available at network hospitals as well as non-network hospitals. Under this facility, the insured can avail of treatment and settle all the bills with the hospital and file a claim for reimbursement. The insurer, however, has to be intimated immediately on admission not later than seven days from the date of discharge. The policy certificate number should be quoted and the claim can also be intimated online through the website of the company.
Generally the following claim documents (originals only) are to be submitted to the insurer within 30 days from the date of discharge:
1. Duly-filled claim form along with the doctor’s certificate (forming part of claim form)
2. Discharge summary
3. Bills and receipts (including advance and final receipts)
4. Prescriptions for medicines and doctor’s advice for lab tests
5. Diagnostic Test Reports, X Ray, scan and ECG and other films
Claims are processed on receipt of all required documents and additional documents. Information, if any, required is called for after the scrutiny of the claim. “The cheque is despatched to the customer if the claim is admissible. If not, a repudiation letter explaining the reasons for denial is sent,” says Bimbhet.
PRECAUTIONS/DOS & DON’TS WHILE BUYING A COVER
You need to exercise precaution not only while making a claim, but also while planning to buy a health cover, because here you start with choosing the right product for yourself, and opting for any unsuitable one may land you in trouble later on.
First, you need to understand whether the health insurance coverage fulfils your requirement or not. Then decide on which members of your family should be part of the health insurance policy. Ideally everyone should be covered including children.
The third step would be to settle on the total amount of health coverage needed – either on an individual basis or on a family floater basis. Besides, you also need to scrutinise the list of exclusions of the policy – both permanent and period-based.
Also check the network coverage of the Third Party Administrator (TPA) engaged by the insurance company.
PRECAUTIONS/DOS & DON’TS WHILE MAKING A CLAIM
You need to take precautions while filing a claim too. For instance, in case of a cashless claim, always carry the health card which gives you the unique membership number that is used by the TPA to identify you and provide the cashless benefit.
In the case of reimbursement of claims, however, always insist on getting the original discharge summary and reports from the hospital.
Also keep copies of all lab reports for future medical follow-ups, and retain copies of all claim documents before submission to the insurance company (This will help in case of an unfortunate event of the documents getting lost in transit).
Besides, insist on getting a properly-numbered, stamped, signed and sealed receipts from the hospital/ physician / surgeon for any payments made. Preserve the prescriptions given by the doctors for medicines and lab tests as these are to be submitted along with other claim documents.
For all traffic accidents, however, ensure that a complaint is lodged with the police and get a copy of the FIR.
WHAT IF AN INSURER REFUSES TO HONOUR A CLAIM?
Despite choosing a heath cover carefully and filing the claim as per the agreed terms, sometimes claiming insurance compensation becomes a hard nut to crack, particularly in cases when insurance companies are able to find some loopholes to repudiate a claim. In such cases, you need to approach higher authorities to seek compensation.
“If an insurer repudiates a claim, insist on a repudiation letter which explains the basis on which the claim is repudiated. If the customer is not happy with the contents, he may represent the claim again as per the escalation matrix in the grievance redressal machinery. If the customer is still not satisfied, he/she may approach the insurance Ombudsman, whose decision is binding on the insurer,” says Deshpande.
Thus, if a customer is not satisfied with the response of the insurer, he/she can always approach the Ombudsman who is specially appointed by the regulator to redress the grievances of the customer. The complaint by an aggrieved person has to be made in writing, and addressed to the insurance Ombudsman of the jurisdiction under which the office of the insurer falls.
“The governing body has appointed 12 Ombudsmen across the country allotting them different geographical areas as their areas of jurisdiction. The Ombudsman may hold sitting at various places within their area of jurisdiction in order to expedite disposal of complaints. The Ombudsman shall pass an award within a period of three months from the receipt of the complaint. The awards are binding upon the insurance companies,” says Bimbhet, adding, “the policy holder also has the option of approaching consumer forums and courts of law for redressal of his/her grievances.”
However, if you are still unable to get justice, then just blame your luck! And what else can you do?
Source:www.economictimes.com
True, health covers are bought with a view to taking cover against any financial constraint that may arise because of a medical emergency, and insurance companies are bound to honour legitimate claims within policy limits. At the same time, however, it must be understood that insurance companies are not charitable organisations. Therefore, they can’t be expected to honour a claim if the claim is not made in accordance with agreed terms or if a particular disease is listed under the policy exclusions.
“The repudiation of a claim may be due to many reasons such as loss falling beyond the scope of policy coverage, exclusions under policy, or breach of conditions or warranties, among others,” says Shreeraj Deshpande, head – health insurance, Bajaj Allianz General Insurance.
Generally, however, “the primary reason for an insurer rejecting a claim is that a particular disease is listed under the policy exclusions and consequently cannot be covered,” says Ajay Bimbhet, managing director, Royal Sundaram Alliance Insurance Company Ltd.
Therefore, only getting a health cover is not enough. It is equally important to read and understand the terms and conditions of a policy well and be clear about the policy you plan to take in order to avoid any hassle or heartburn in the future. It would also help if one knows how to make a claim and what to do in case something goes wrong.
DIFFERENT MODES OF SETTLEMENT
While buying a health policy, the customer is required to opt for either cashless or reimbursement mode of settlement. In both the cases, however, it is important to understand the claim procedure laid down by the insurers. Simply because at the time of emergency, the understanding of the right procedure can help reduce unwarranted panic.
CASHLESS CLAIMS
Insurers have tie-ups with a network of hospitals across the country. If the customer opts for cashless claims, he/she has the facility of cashless treatment at the networked hospitals. This list of the network is generally available in the policy kit and also on the website of the insurers.
“In case of emergency hospitalisation and admission, the TPA (third party administrator) needs to be intimated through a toll-free number within 24 hours. In case of a planned admission, however, the TPA is to be informed three days in advance. Also, the insured must remember to quote his/her health card membership number and/or policy number,” says Bimbhet.
While getting admission, the cashless request form available with the hospital insurance help desk is to be filled and certified by the doctor. Having done that the form with supporting medical records is to be faxed by the hospital to the TPA’s fax number.
On scrutinizing the documents, the TPA conveys the decision to the hospital, the sanction of the cashless request or calls for additional documents if required.
On approval of the cashless facility by the TPA, the hospital bills are settled directly by the insurer (subject to policy limits). However, inadmissible amounts such as telephone, food and attendant charges are to be borne by the customer.
If the customer chooses to go to a hospital which is not part of the network, he/she can still get a reimbursement directly from the insurer.
REIMBURSEMENT OF CLAIMS
This facility is available at network hospitals as well as non-network hospitals. Under this facility, the insured can avail of treatment and settle all the bills with the hospital and file a claim for reimbursement. The insurer, however, has to be intimated immediately on admission not later than seven days from the date of discharge. The policy certificate number should be quoted and the claim can also be intimated online through the website of the company.
Generally the following claim documents (originals only) are to be submitted to the insurer within 30 days from the date of discharge:
1. Duly-filled claim form along with the doctor’s certificate (forming part of claim form)
2. Discharge summary
3. Bills and receipts (including advance and final receipts)
4. Prescriptions for medicines and doctor’s advice for lab tests
5. Diagnostic Test Reports, X Ray, scan and ECG and other films
Claims are processed on receipt of all required documents and additional documents. Information, if any, required is called for after the scrutiny of the claim. “The cheque is despatched to the customer if the claim is admissible. If not, a repudiation letter explaining the reasons for denial is sent,” says Bimbhet.
PRECAUTIONS/DOS & DON’TS WHILE BUYING A COVER
You need to exercise precaution not only while making a claim, but also while planning to buy a health cover, because here you start with choosing the right product for yourself, and opting for any unsuitable one may land you in trouble later on.
First, you need to understand whether the health insurance coverage fulfils your requirement or not. Then decide on which members of your family should be part of the health insurance policy. Ideally everyone should be covered including children.
The third step would be to settle on the total amount of health coverage needed – either on an individual basis or on a family floater basis. Besides, you also need to scrutinise the list of exclusions of the policy – both permanent and period-based.
Also check the network coverage of the Third Party Administrator (TPA) engaged by the insurance company.
PRECAUTIONS/DOS & DON’TS WHILE MAKING A CLAIM
You need to take precautions while filing a claim too. For instance, in case of a cashless claim, always carry the health card which gives you the unique membership number that is used by the TPA to identify you and provide the cashless benefit.
In the case of reimbursement of claims, however, always insist on getting the original discharge summary and reports from the hospital.
Also keep copies of all lab reports for future medical follow-ups, and retain copies of all claim documents before submission to the insurance company (This will help in case of an unfortunate event of the documents getting lost in transit).
Besides, insist on getting a properly-numbered, stamped, signed and sealed receipts from the hospital/ physician / surgeon for any payments made. Preserve the prescriptions given by the doctors for medicines and lab tests as these are to be submitted along with other claim documents.
For all traffic accidents, however, ensure that a complaint is lodged with the police and get a copy of the FIR.
WHAT IF AN INSURER REFUSES TO HONOUR A CLAIM?
Despite choosing a heath cover carefully and filing the claim as per the agreed terms, sometimes claiming insurance compensation becomes a hard nut to crack, particularly in cases when insurance companies are able to find some loopholes to repudiate a claim. In such cases, you need to approach higher authorities to seek compensation.
“If an insurer repudiates a claim, insist on a repudiation letter which explains the basis on which the claim is repudiated. If the customer is not happy with the contents, he may represent the claim again as per the escalation matrix in the grievance redressal machinery. If the customer is still not satisfied, he/she may approach the insurance Ombudsman, whose decision is binding on the insurer,” says Deshpande.
Thus, if a customer is not satisfied with the response of the insurer, he/she can always approach the Ombudsman who is specially appointed by the regulator to redress the grievances of the customer. The complaint by an aggrieved person has to be made in writing, and addressed to the insurance Ombudsman of the jurisdiction under which the office of the insurer falls.
“The governing body has appointed 12 Ombudsmen across the country allotting them different geographical areas as their areas of jurisdiction. The Ombudsman may hold sitting at various places within their area of jurisdiction in order to expedite disposal of complaints. The Ombudsman shall pass an award within a period of three months from the receipt of the complaint. The awards are binding upon the insurance companies,” says Bimbhet, adding, “the policy holder also has the option of approaching consumer forums and courts of law for redressal of his/her grievances.”
However, if you are still unable to get justice, then just blame your luck! And what else can you do?
Source:www.economictimes.com
Saturday, June 6, 2009
Post Office MIS: Blessing for investors in times of falling deposit rate
Tough times stare at investors looking for fixed income instruments. The deposit rates offered by banks have fallen to five-year lows. Bank FDs
were the favourites till some months back as public and private sector banks offered upto 9% interest on deposits with maturity of 3 years and above. This has now declined to around 7%. The future looks bleaker, with the deposit rates expected to decline further by 50-100 basis points. What should the fixed income lovers do in such a scenario? Is there an alternative to bank FDs?
The Post Office Monthly Income Scheme, commonly known as MIS, is the answer. MIS was quite popular some years back. Its appeal, however, declined in the face of a rise in interest rates on FDs and aggressive marketing strategies unleashed by banks to woo new depositors. MIS could come into limelight once again in the backdrop of declining interest rates. Moreover, the post office deposits come with unique features such as a government guarantee on the deposit amount and fixed rate of interest.
Like any fixed deposit, a lump sum amount deposited with the post office under the aegis of MIS will earn an interest at a fixed rate of 8% per annum. And, unlike bank FDs, the interest is paid out every month. The tenure is fixed at 6 years. Apart from monthly interest-payout , MIS offers 5% bonus on maturity. The effective annual yield therefore works out to 8.9%, which is much higher than the bank deposit. The value add-on is that the monthly MIS proceeds could be invested directly in Post Office’s Recurring deposit (RD), which gives annual returns of almost 10.5% per annum.
How does it work?
Suppose Mr A invests Rs 90,000 in Bank FD for six years. With the rate of deposit hovering around 7%, Mr A will receive almost Rs 46,500 as interest at maturity and an option of compounded interest. On the other hand, if Mr B put Rs 90,000 into MIS today, he will receive Rs 600 every month for 72 months. He is entitled to Rs 43,200 in the form of monthly interest till maturity and Rs 4500 as bonus at the time of maturity. Mr B’s returns total Rs 47,700 in six years, which is higher than interest earned on the bank FD of the same tenure.
Suppose that Mr B did not require the monthly interest. So he opts for automatic transfer of MIS interest to Recurring Deposit. A sum of Rs 600 is deposited in his RD account every month, offering 7.5% per annum compounded quarterly. At the end of the sixth year, Mr B will receive almost Rs 51,400 from his RD account. The receivables from RD and the bonus on MIS total Rs 56,000 in six years. As a result, Mr B, who invested in MIS and monthly proceeds in RD, will accumulate Rs 9500 more than Mr A, who opted to invest in Bank FD of the same tenure.
The same features of MIS make it unattractive. The interest income is fully taxable as in the case of bank FDs. MIS do have an edge over bank FDs as there is no tax deduction at source (TDS). However, the bank FDs maturing above 5 years are subject to tax benefits under Sec 80C.
It will be definitely a better bet if one neglects the tax implications of the scheme. The rate of return is not interest rate sensitive. Though the general interest rates may fall further, the scheme will continue to fetch 8% fixed rate of interest. Further, a combination with RD will even earn an effective yield of 10.5%, which is attractive in times of uncertainty and falling interest rates.
Source: economicTimes.com
were the favourites till some months back as public and private sector banks offered upto 9% interest on deposits with maturity of 3 years and above. This has now declined to around 7%. The future looks bleaker, with the deposit rates expected to decline further by 50-100 basis points. What should the fixed income lovers do in such a scenario? Is there an alternative to bank FDs?
The Post Office Monthly Income Scheme, commonly known as MIS, is the answer. MIS was quite popular some years back. Its appeal, however, declined in the face of a rise in interest rates on FDs and aggressive marketing strategies unleashed by banks to woo new depositors. MIS could come into limelight once again in the backdrop of declining interest rates. Moreover, the post office deposits come with unique features such as a government guarantee on the deposit amount and fixed rate of interest.
Like any fixed deposit, a lump sum amount deposited with the post office under the aegis of MIS will earn an interest at a fixed rate of 8% per annum. And, unlike bank FDs, the interest is paid out every month. The tenure is fixed at 6 years. Apart from monthly interest-payout , MIS offers 5% bonus on maturity. The effective annual yield therefore works out to 8.9%, which is much higher than the bank deposit. The value add-on is that the monthly MIS proceeds could be invested directly in Post Office’s Recurring deposit (RD), which gives annual returns of almost 10.5% per annum.
How does it work?
Suppose Mr A invests Rs 90,000 in Bank FD for six years. With the rate of deposit hovering around 7%, Mr A will receive almost Rs 46,500 as interest at maturity and an option of compounded interest. On the other hand, if Mr B put Rs 90,000 into MIS today, he will receive Rs 600 every month for 72 months. He is entitled to Rs 43,200 in the form of monthly interest till maturity and Rs 4500 as bonus at the time of maturity. Mr B’s returns total Rs 47,700 in six years, which is higher than interest earned on the bank FD of the same tenure.
Suppose that Mr B did not require the monthly interest. So he opts for automatic transfer of MIS interest to Recurring Deposit. A sum of Rs 600 is deposited in his RD account every month, offering 7.5% per annum compounded quarterly. At the end of the sixth year, Mr B will receive almost Rs 51,400 from his RD account. The receivables from RD and the bonus on MIS total Rs 56,000 in six years. As a result, Mr B, who invested in MIS and monthly proceeds in RD, will accumulate Rs 9500 more than Mr A, who opted to invest in Bank FD of the same tenure.
The same features of MIS make it unattractive. The interest income is fully taxable as in the case of bank FDs. MIS do have an edge over bank FDs as there is no tax deduction at source (TDS). However, the bank FDs maturing above 5 years are subject to tax benefits under Sec 80C.
It will be definitely a better bet if one neglects the tax implications of the scheme. The rate of return is not interest rate sensitive. Though the general interest rates may fall further, the scheme will continue to fetch 8% fixed rate of interest. Further, a combination with RD will even earn an effective yield of 10.5%, which is attractive in times of uncertainty and falling interest rates.
Source: economicTimes.com
Sunday, May 24, 2009
The Right Information For The Right Stocks
Without knowing companies you cannot make the most of this opportunity to pick up quality stocks. Here’s where you should go for information you can trust.
There are many lessons to learn from the 2008 market crash. One of the most important is: understand a company before investing in it. If you do, the market is offering a good chance to pick quality stocks at reasonable prices. The problem is that without sound information, any investment decision would be based on weak reasoning and is unlikely to support your overall portfolio performance. But how do you know that the information you have is accurate? For that, you need to do your research well and look at the right place for the right information. Here are seven parameters you should look at and the places you can find information on them.
Market Capitalisation
What is it?
Market capitalisation (cap) is calculated by multiplying a company’s outstanding shares (paid-up equity capital divided by the face value) with the current market price (CMP). This indicates the worth of the company in terms of its shares. To calculate the market cap of, say, GlaxoSmithKline (GSK) Consumer Health-care, multiply the CMP—Rs 815 as on 13 May—with the 4.20 crore outstanding shares, which comes to Rs 3423 crore.
Where to look
- The financial results section or the company related page on stock exchange websites (www.nseindia.com or www.bseindia.com) give details of outstanding shares
- The quotes page on these sites give CMP
- Financial dailies publish market cap data of select companies
Trading Volumes
What is it?
It is the total number of stocks of a company traded at an exchange. It is a measure of the liquidity and also shows the level of market participation in the stock. This figure is especially important in the case of low-volume stocks (below 2,000 shares). During tough market conditions, liquidating low-volume stocks becomes difficult. The 2-week average quantity of Dabur India shares is around 2.2 lakh, which is a comfortable number. On the other hand, the number for MMTC is only 500-600 shares for the same period.
Where to look
- Stock exchange sites
- Financial dailies
Historical Price Data
What is it?
This information helps understand how a stock’s price has behaved over a period of time. Information on whether a stock is at a new peak or a new low helps evaluate the quality of the stock. For instance, if a stock has breached its yearly low, you should get into the reason behind it.
Where to look
- The quotes page or the stock reach page on the NSE and BSE sites share the yearly high and low data
- Use the ‘charting function’ of exchange sites for graphical representation. This will help you find whether the stock is trading at a new low or a new high. The co-movement option helps compare the performance of the stock with the index
- On www.nseindia.com, go to the equity, market information, historical data section. Click on the security-wise data section, get the security symbol and choose the dates for which you want information. On www.bseindia.com, go to the archives section
Company Developments
What is it?
Developments in a company such as a new product, capacity expansion or a new clientele can affect the stock’s performance. Find out what impact these developments can have on the stock. Also, find out about the company’s competitors, government regulations related to it, and their impact on its operations.
Where to look
- Financial dailies
- Corporate announcements on exchange sites have information about developments in a company
- Analyst meets or conference call updates on company sites throw light on the company’s future plans
- To understand the operations of a company, read its latest annual report. The director’s report and management discussion and analysis will give you a detailed perspective on the company’s current performance and outlook
- Follow the notes published at the end of the statutory advertisements that companies release to gather information on disclosures
- Investors can also become a member of online investment clubs. You will derive a lot of information which can, subsequently, be validated from a reliable source
Financial Data
What is it?
Before buying a stock, it is important to know about the company’s financial performance. Growth in sales and profit over the last four to five quarters will help you understand its performance in the light of the recent market scenario. Its growth rate in the last 4-5 years will give an insight into the pace of growth in the past. Look at the operating margin growth as well, especially so in the current tough operating environment.
Remember to look at the consolidated, and not the standalone performance. Consolidated performance includes the results of all subsidiaries, joint ventures and investments in associate companies. Its importance is evident from the impact it has on the performance of some companies.
Where to look
- Company website. Results and annual reports need to be read carefully. For example, in case of Dabur India, go to www.dabur.com, click on investor relations and get into financial presentations. You will get quarterly results, annual report, investor communications and analyst conference call transcripts there
- The financial results section on stock exchange websites
Balancesheet
What is it?
Many companies, especially those from the pharmaceutical and IT sectors, are under stress due to high debt and losses on foreign currency borrowings. Many investors ignored the foreign currency convertible bond (FCCB) details before the 2008 stockmarket crash.
FCCB is a type of convertible bond issued in a currency different from the issuer’s domestic currency. The mix of debt and equity instruments it has gives the bondholder an option to convert the bond into a stock.
Due to the sharp stockmarket dip, the companies are unable to offer the bondholders the option of converting the bonds into equity at a premium. Instead, bondholders had to exercise the debt option. Companies would now have to decide on how to service their FCCBs.
The balancesheet will also help you understand the financial leveraging capacity of the company. Calculate the debt-equity ratio to get this. It is arrived at by dividing the total liabilities by the stockholders’ equity.
Take the case of Aurobindo Pharma. It has outstanding FCCB of $260 million. A part of it will come up for redemption in the beginning of 2010. This stock got butchered when the FCCB issue became a major concern and is currently trading at more than 80 per cent discount to its FCCB conversion price.
Recent updates on the NSE website suggest that the company has plans to buy back its outstanding FCCBs in small lots. The company’s debt-equity ratio is 1.5. This should be considered before investing because high debt-equity (normally above one) suggests that the company has been aggressive in financing its growth through debt. If the company’s operation is under stress due to the economic environment and its balancesheet is debt-burdened, then it would be better to stay away from its stock.
Where to look
- Annual report and news releases on the company website
- Corporate announcements available on stock exchange sites
Basic Calculations
Deduct any preferred stock dividends from the net profit after tax and divide the balance by the number of outstanding shares. This will give you the earnings per share (EPS) of a company.
To assess a stock, calculate the trailing 12 months’ EPS (for the last four quarters). Then, calculate the price earning ratio (PE)—CMP divided by EPS.
For example, GSK Consumer’s EPS grew steadily from Rs 30 in December 2006 to Rs 51.30 in March 2009. The company follows the calendar year
and this data can be sourced from the exchange sites and also the company’s website, www.gsk-ch.in. The latest EPS and CMP (Rs 815) translate into a PE ratio of 15.9.
To evaluate whether a PE is high or low, compare it with the industry PE and index PE. This data is also available on exchange sites. Go to the industry index information to get the PE details of a particular industry. The BSE FMCG Index’s PE, for instance, as on 13 May is 23.54 while GSK Consumer’s PE is 15.9. This suggests a comparatively low PE for the company.
Where to look
- Profit & loss account on exchange sites or company website
- Quarterly or annual results published by the company also carry EPS information;
Source: money.outlook.com
There are many lessons to learn from the 2008 market crash. One of the most important is: understand a company before investing in it. If you do, the market is offering a good chance to pick quality stocks at reasonable prices. The problem is that without sound information, any investment decision would be based on weak reasoning and is unlikely to support your overall portfolio performance. But how do you know that the information you have is accurate? For that, you need to do your research well and look at the right place for the right information. Here are seven parameters you should look at and the places you can find information on them.
Market Capitalisation
What is it?
Market capitalisation (cap) is calculated by multiplying a company’s outstanding shares (paid-up equity capital divided by the face value) with the current market price (CMP). This indicates the worth of the company in terms of its shares. To calculate the market cap of, say, GlaxoSmithKline (GSK) Consumer Health-care, multiply the CMP—Rs 815 as on 13 May—with the 4.20 crore outstanding shares, which comes to Rs 3423 crore.
Where to look
- The financial results section or the company related page on stock exchange websites (www.nseindia.com or www.bseindia.com) give details of outstanding shares
- The quotes page on these sites give CMP
- Financial dailies publish market cap data of select companies
Trading Volumes
What is it?
It is the total number of stocks of a company traded at an exchange. It is a measure of the liquidity and also shows the level of market participation in the stock. This figure is especially important in the case of low-volume stocks (below 2,000 shares). During tough market conditions, liquidating low-volume stocks becomes difficult. The 2-week average quantity of Dabur India shares is around 2.2 lakh, which is a comfortable number. On the other hand, the number for MMTC is only 500-600 shares for the same period.
Where to look
- Stock exchange sites
- Financial dailies
Historical Price Data
What is it?
This information helps understand how a stock’s price has behaved over a period of time. Information on whether a stock is at a new peak or a new low helps evaluate the quality of the stock. For instance, if a stock has breached its yearly low, you should get into the reason behind it.
Where to look
- The quotes page or the stock reach page on the NSE and BSE sites share the yearly high and low data
- Use the ‘charting function’ of exchange sites for graphical representation. This will help you find whether the stock is trading at a new low or a new high. The co-movement option helps compare the performance of the stock with the index
- On www.nseindia.com, go to the equity, market information, historical data section. Click on the security-wise data section, get the security symbol and choose the dates for which you want information. On www.bseindia.com, go to the archives section
Company Developments
What is it?
Developments in a company such as a new product, capacity expansion or a new clientele can affect the stock’s performance. Find out what impact these developments can have on the stock. Also, find out about the company’s competitors, government regulations related to it, and their impact on its operations.
Where to look
- Financial dailies
- Corporate announcements on exchange sites have information about developments in a company
- Analyst meets or conference call updates on company sites throw light on the company’s future plans
- To understand the operations of a company, read its latest annual report. The director’s report and management discussion and analysis will give you a detailed perspective on the company’s current performance and outlook
- Follow the notes published at the end of the statutory advertisements that companies release to gather information on disclosures
- Investors can also become a member of online investment clubs. You will derive a lot of information which can, subsequently, be validated from a reliable source
Financial Data
What is it?
Before buying a stock, it is important to know about the company’s financial performance. Growth in sales and profit over the last four to five quarters will help you understand its performance in the light of the recent market scenario. Its growth rate in the last 4-5 years will give an insight into the pace of growth in the past. Look at the operating margin growth as well, especially so in the current tough operating environment.
Remember to look at the consolidated, and not the standalone performance. Consolidated performance includes the results of all subsidiaries, joint ventures and investments in associate companies. Its importance is evident from the impact it has on the performance of some companies.
Where to look
- Company website. Results and annual reports need to be read carefully. For example, in case of Dabur India, go to www.dabur.com, click on investor relations and get into financial presentations. You will get quarterly results, annual report, investor communications and analyst conference call transcripts there
- The financial results section on stock exchange websites
Balancesheet
What is it?
Many companies, especially those from the pharmaceutical and IT sectors, are under stress due to high debt and losses on foreign currency borrowings. Many investors ignored the foreign currency convertible bond (FCCB) details before the 2008 stockmarket crash.
FCCB is a type of convertible bond issued in a currency different from the issuer’s domestic currency. The mix of debt and equity instruments it has gives the bondholder an option to convert the bond into a stock.
Due to the sharp stockmarket dip, the companies are unable to offer the bondholders the option of converting the bonds into equity at a premium. Instead, bondholders had to exercise the debt option. Companies would now have to decide on how to service their FCCBs.
The balancesheet will also help you understand the financial leveraging capacity of the company. Calculate the debt-equity ratio to get this. It is arrived at by dividing the total liabilities by the stockholders’ equity.
Take the case of Aurobindo Pharma. It has outstanding FCCB of $260 million. A part of it will come up for redemption in the beginning of 2010. This stock got butchered when the FCCB issue became a major concern and is currently trading at more than 80 per cent discount to its FCCB conversion price.
Recent updates on the NSE website suggest that the company has plans to buy back its outstanding FCCBs in small lots. The company’s debt-equity ratio is 1.5. This should be considered before investing because high debt-equity (normally above one) suggests that the company has been aggressive in financing its growth through debt. If the company’s operation is under stress due to the economic environment and its balancesheet is debt-burdened, then it would be better to stay away from its stock.
Where to look
- Annual report and news releases on the company website
- Corporate announcements available on stock exchange sites
Basic Calculations
Deduct any preferred stock dividends from the net profit after tax and divide the balance by the number of outstanding shares. This will give you the earnings per share (EPS) of a company.
To assess a stock, calculate the trailing 12 months’ EPS (for the last four quarters). Then, calculate the price earning ratio (PE)—CMP divided by EPS.
For example, GSK Consumer’s EPS grew steadily from Rs 30 in December 2006 to Rs 51.30 in March 2009. The company follows the calendar year
and this data can be sourced from the exchange sites and also the company’s website, www.gsk-ch.in. The latest EPS and CMP (Rs 815) translate into a PE ratio of 15.9.
To evaluate whether a PE is high or low, compare it with the industry PE and index PE. This data is also available on exchange sites. Go to the industry index information to get the PE details of a particular industry. The BSE FMCG Index’s PE, for instance, as on 13 May is 23.54 while GSK Consumer’s PE is 15.9. This suggests a comparatively low PE for the company.
Where to look
- Profit & loss account on exchange sites or company website
- Quarterly or annual results published by the company also carry EPS information;
Source: money.outlook.com
Get The Best Of Both Worlds
Hybrid accounts offer liquidity, high returns and capital protection. In these troubled times, they are a flexible in-out instrument for your funds
How To Get More
Maintain the minimum balance in respective accounts while opting for sweep-in or auto sweep facilities. This way you will not have to pay any service charges for them
In an auto sweep facility, keep a reasonable threshold limit. This will prevent frequent breaking of fds and you will get a higher rate of return from them
In a sweep-in facility, try not to link an FD that’s nearing maturity
***
While the equity markets are passing though a volatile period, banks look attractive as places to park surplus funds
"Smart use of facilities offered by hybrid accounts can make them flexible instruments for meeting longer-term as well as immediate needs"
Savings acc-ounts offer unparalleled liquidity, but returns of just 3.5 per cent a year. Fixed deposits (FDs) give higher returns and capital security, but are not as liquid as savings accounts. And, any premature withdrawal means losing out on interest. So what do you do?
Enter hybrid accounts. They offer liquidity, high returns and capital protection. Most banks offer them under different names (see Revolving Doors).
The use
Says Pune-based certified financial planner Veer Sardesai: "Hybrid accounts have been around for a while. They have gained prominence now because many banks have started offering such facilities."
Hybrid accounts can be used for long-term as well as immediate needs. For long-term goals, such as a child’s education or buying a house, you should move away from riskier asset classes 2-3 years before you need the money. If you know exactly when that need would be, it is better to invest in a bank FD of the same duration. But this rarely happens. In reality, one never knows when money would be required. Usually, if there is an unplanned money requirement, an FD is broken, especially if there is no other source.
Such a situation can be avoided with hybrid accounts with sweep-in or auto sweep facilities. These facilities can also be used to create an emergency fund. "We frequently advise people that everyone must keep aside 6-8 months’ living expenses as an emergency fund," says Sardesai. With a sweep-in facility, excess funds above a threshold limit in a savings account can be automatically transferred into an FD and earn a higher interest rate.
Mother of invention
Earlier, a person had a savings account for liquid money and FDs for investment. In such a situation, every time he had to issue a cheque in excess of the balance in the savings account, he had to visit the bank branch to give instructions to break his FD. Says Seshan Ramakrishnan, head, liabilities products, HDFC Bank: "This was an inconvenience that customers could do without. At the same time, the bank had to manually process all such requests within the agreed turnaround time."
Thus, a hybrid product was created that helped the customer earn higher interest and issue cheques of amounts more than in the account without any manual intervention from the bank.
The working
These accounts work in two broad ways. One is the sweep-in facility, where a savings or current account is linked with multiple FDs in the same bank. HDFC Bank’s facility is a typical example. You would need a savings or current account and FDs that are to be linked, in the same bank. Any deficit in your savings or current account will be met by a withdrawal of an exact value from your FD. Since deposits are broken down in units of Re 1, you will lose interest only on the actual amount withdrawn from the FD.
The second way is the auto sweep facility. ICICI Bank’s Auto Invest Account facility is an example. All you need to do is mention a threshold limit. Any amount above the limit will be converted into an FD in multiples of Rs 5,000. The linked FDs are by default of one-year period or you can go for a period of your choice. Interest rates are as revised by the bank from time to time. Maturing deposits are renewed for a year or for a period of your choice at the interest rate prevailing on the date of renewal.
Your choice. "Each individual needs to choose a hybrid product depending upon his need and cash flows," says Ramakrishnan. For example, try not to use the sweep-in facility for an FD that is nearing maturity since the loss of interest on breaking it would be higher.
In the auto sweep facility, if more than one FD is linked, the last deposit made under the scheme will be used first to meet the shortfall. If this isn’t adequate, then the deposit made prior to the last deposit will be used, and so on.
Costs. These facilities do not cost extra under certain conditions. For example, to availyourself of HDFC Bank’s sweep-in facility without charges, you will have to maintain Rs 50,000 or more in your FD. If the level goes below Rs 50,000, service charges applicable on a savings or current account are levied. ICICI Bank’s auto sweep facility requires you to maintain Rs 10,000 in the linked savings bank account. With Bank of Rajasthan’s Flexi Fixed Deposits, you will need to maintain a minimum of Rs 10,000 in the FD, failing which you would need to pay Rs 100per quarter.
Getting the most. Use these tricks to get the most out of these facilities.
With an auto sweep facility, make sure you keep a reasonable threshold limit in the savings account so that your FDs are not broken regularly and you continue to earn higher returns on them.
Also, as Sardesai points out, "it becomes a bit difficult for a lay person to understand the bank statement if there are excessive transactions between the multiple accounts". Another thing to remember is that interest earned on these accounts is fully taxable in your hands. So, plan in such a way that the FDs earn more interest than the savings bank account.
Other options
In an emergency, you can take an overdraft against your FD. However, make sure the overdraft is not more expensive than breaking the FD. Also, getting the overdraft takes more time due to the increased paperwork involved. Look for banks that provide an instant overdraft facility against the FD.
People with higher risk appetites can move towards liquid mutual funds for shoring up emergency fund requirements.
Source:money.outlook.com
How To Get More
Maintain the minimum balance in respective accounts while opting for sweep-in or auto sweep facilities. This way you will not have to pay any service charges for them
In an auto sweep facility, keep a reasonable threshold limit. This will prevent frequent breaking of fds and you will get a higher rate of return from them
In a sweep-in facility, try not to link an FD that’s nearing maturity
***
While the equity markets are passing though a volatile period, banks look attractive as places to park surplus funds
"Smart use of facilities offered by hybrid accounts can make them flexible instruments for meeting longer-term as well as immediate needs"
Savings acc-ounts offer unparalleled liquidity, but returns of just 3.5 per cent a year. Fixed deposits (FDs) give higher returns and capital security, but are not as liquid as savings accounts. And, any premature withdrawal means losing out on interest. So what do you do?
Enter hybrid accounts. They offer liquidity, high returns and capital protection. Most banks offer them under different names (see Revolving Doors).
The use
Says Pune-based certified financial planner Veer Sardesai: "Hybrid accounts have been around for a while. They have gained prominence now because many banks have started offering such facilities."
Hybrid accounts can be used for long-term as well as immediate needs. For long-term goals, such as a child’s education or buying a house, you should move away from riskier asset classes 2-3 years before you need the money. If you know exactly when that need would be, it is better to invest in a bank FD of the same duration. But this rarely happens. In reality, one never knows when money would be required. Usually, if there is an unplanned money requirement, an FD is broken, especially if there is no other source.
Such a situation can be avoided with hybrid accounts with sweep-in or auto sweep facilities. These facilities can also be used to create an emergency fund. "We frequently advise people that everyone must keep aside 6-8 months’ living expenses as an emergency fund," says Sardesai. With a sweep-in facility, excess funds above a threshold limit in a savings account can be automatically transferred into an FD and earn a higher interest rate.
Mother of invention
Earlier, a person had a savings account for liquid money and FDs for investment. In such a situation, every time he had to issue a cheque in excess of the balance in the savings account, he had to visit the bank branch to give instructions to break his FD. Says Seshan Ramakrishnan, head, liabilities products, HDFC Bank: "This was an inconvenience that customers could do without. At the same time, the bank had to manually process all such requests within the agreed turnaround time."
Thus, a hybrid product was created that helped the customer earn higher interest and issue cheques of amounts more than in the account without any manual intervention from the bank.
The working
These accounts work in two broad ways. One is the sweep-in facility, where a savings or current account is linked with multiple FDs in the same bank. HDFC Bank’s facility is a typical example. You would need a savings or current account and FDs that are to be linked, in the same bank. Any deficit in your savings or current account will be met by a withdrawal of an exact value from your FD. Since deposits are broken down in units of Re 1, you will lose interest only on the actual amount withdrawn from the FD.
The second way is the auto sweep facility. ICICI Bank’s Auto Invest Account facility is an example. All you need to do is mention a threshold limit. Any amount above the limit will be converted into an FD in multiples of Rs 5,000. The linked FDs are by default of one-year period or you can go for a period of your choice. Interest rates are as revised by the bank from time to time. Maturing deposits are renewed for a year or for a period of your choice at the interest rate prevailing on the date of renewal.
Your choice. "Each individual needs to choose a hybrid product depending upon his need and cash flows," says Ramakrishnan. For example, try not to use the sweep-in facility for an FD that is nearing maturity since the loss of interest on breaking it would be higher.
In the auto sweep facility, if more than one FD is linked, the last deposit made under the scheme will be used first to meet the shortfall. If this isn’t adequate, then the deposit made prior to the last deposit will be used, and so on.
Costs. These facilities do not cost extra under certain conditions. For example, to availyourself of HDFC Bank’s sweep-in facility without charges, you will have to maintain Rs 50,000 or more in your FD. If the level goes below Rs 50,000, service charges applicable on a savings or current account are levied. ICICI Bank’s auto sweep facility requires you to maintain Rs 10,000 in the linked savings bank account. With Bank of Rajasthan’s Flexi Fixed Deposits, you will need to maintain a minimum of Rs 10,000 in the FD, failing which you would need to pay Rs 100per quarter.
Getting the most. Use these tricks to get the most out of these facilities.
With an auto sweep facility, make sure you keep a reasonable threshold limit in the savings account so that your FDs are not broken regularly and you continue to earn higher returns on them.
Also, as Sardesai points out, "it becomes a bit difficult for a lay person to understand the bank statement if there are excessive transactions between the multiple accounts". Another thing to remember is that interest earned on these accounts is fully taxable in your hands. So, plan in such a way that the FDs earn more interest than the savings bank account.
Other options
In an emergency, you can take an overdraft against your FD. However, make sure the overdraft is not more expensive than breaking the FD. Also, getting the overdraft takes more time due to the increased paperwork involved. Look for banks that provide an instant overdraft facility against the FD.
People with higher risk appetites can move towards liquid mutual funds for shoring up emergency fund requirements.
Source:money.outlook.com
Saturday, May 23, 2009
Make The New Pension System Work For You
NPS scores over several other retirement products in many ways, check out how and why
After much delay and several near misses, we finally have a pension plan; a social security scheme for 89 per cent of India’s workforce that doesn’t have a formal retirement solution. The New Pension System (NPS), as it is now referred to, was fittingly launched on Labour Day, 1 May. Though there are some concerns, such as its taxability, NPS is superbly designed to help you save for your retirement. We feel it merits a place in your portfolio. The only question that remains is: just when should you sign up for NPS?
ABOUT NPS
It is a pure defined-contribution product. You can choose the fund option as well as the fund manager. You get a retirement corpus when you turn 60. Of this, you get 60 per cent in your hands, while the remaining goes into buying you an annuity plan (to ensure pension money) from an insurer. The system discourages early withdrawal by giving just 20 per cent in your hands and annuitising 80 per cent of the corpus.
Structure
NPS begins with a mandatory Tier I account and an annual contribution of at least Rs 6,000. A Tier II account, which would offer a withdrawal facility, is expected to be launched in another six months. You can invest in NPS in two ways.
Active choice. You can allocate your funds across three fund options: equity (E), in which a maximum of 50 per cent of the portfolio is allowed; fixed income instruments other than government securities (C); and government securities (G).
Auto choice. Under this, your funds automatically begin with a maximum equity exposure of 50 per cent till the age of 35 years, which tapers off to 10 per cent by age 55. This gives stability to your investment as you near the maturity line.
You can choose from the six designated pension fund managers (see 10 Common Questions Answered). Says Kartik Varma, financial planner and co-founder, iTrust Financial Advisors: “With time, fund performance could be a yardstick, but it is unlikely that fund performance would vary hugely since the funds would be invested in similar products.”
MechanismWhat makes NPS an excellent pension vehicle is its low cost and the ease with which an individual can invest for retirement. It hinges on a Central Recordkeeping Agency (CRA), which captures your data when you open your Tier I account and issues you a Permanent Retirement Account Number (PRAN). This number remains the same even if you change jobs or location. You would also be given Internet passwords for online transactions
NPS is the cheapest among retirement products, after the Public Provident Fund (PPF) and the Employees’ Provident Fund (EPF), both of which are charge-free. NPS has two sets of charges—flat and variable.
You would need to pay about Rs 470 as flat charges every year, but this is expected to come down as volumes go up. The variable charges are custodian charge of 0.0075-0.05 per cent of the fund value per annum and fund management charge of 0.0009 per cent of the fund value per annum. These are the lowest in the industry.
Challenges
Tax treatment. Though NPS scores in terms of cost and ease of handling, it loses out in terms of taxability. At present, the contributions get tax benefit under Section 80C. However, at the time of withdrawal, the lumpsum would be taxable as per your tax slab. Says Tarun Chugh, director, ICICI Prudential Pensions: “The currency of NPS is its low-cost structure. But what will pull the masses to this scheme is tax benefit. NPS needs a tax treatment similar to that enjoyed by EPF and PPF.”
Both EPF and PPF enjoy the EEE tax benefit, under which contribution, accumulation and withdrawal are all tax-free.
Volumes. For NPS to remain low cost, it is imperative for the volume of investment money to go up. Says Manish Sabharwal, chairman and co-founder, Teamlease, a staffing company: “Costs come down with large scales and not with regulatory intervention. At the current fund management cost, the crying need is for the volumes to go up. This can happen by bringing funds from PPF, EPF and other superannuation funds under the Pension Fund Regulatory and Development Authority (PFRDA), the interim regulator for NPS. The distinction of government NPS and non-government NPS needs to go, too.”
Distribution. The Points of Presence (PoP) or distribution agents of NPS will charge up to Rs 20 for every transaction. With four mandatory transactions every year, it comes to Rs 80. Compare this with what an insurer gives to its agents—7.5 per cent of the annual premium. Clearly, the incentive for distribution in case of NPS is much lower. Says Gautam Bharadwaj, director, Invest India Economic Foundation, a think tank involved in financial and pension policy analysis: “Low costs are great for customers, but NPS will struggle with distributor interest since banks and others will prefer to sell you an insurance or mutual fund product that pays much higher commissions. The solution, of course, is to bring down the high cost of buying financial services.”
HOW DOES IT COMPARE...
The numbers show that NPS is right at the bottom of the pyramid despite the low cost, and this is purely because it is taxable on maturity. However, we are confident that eventually NPS would have tax benefits in sync with EPF and PPF. Once that happens, NPS would become an attractive investment vehicle.
...with EPF. Contribution in the EPF enjoys tax benefit under Section 80C. Withdrawals, too, are tax-free. While your money grows at 8.5 per cent per annum, your employer matches your contribution to your fund. However, to rely on your EPF alone may be foolhardy—you may not stick around in a salaried job, you may withdraw your funds periodically, or the rate on the EPF may be reduced. Your EPF corpus may not be sufficient for meeting your retirement needs. NPS is linked to you rather than your employer. So, any change in your job won’t affect your investments. Also, NPS is completely portable and even allows you to invest in equity, which is a must for young investors.
...with PPF. PPF is also an excellent long-term vehicle to plan for retirement. It is government-backed and gives a guaranteed tax-free return of 8 per cent per annum. Says Maneesh Kumar, head (wealth management solutions), ASK Wealth Advisors: “For young individuals, NPS could be the best alternative after EPF and PPF. NPS lets you invest up to 50 per cent in equities, which outperform bonds over the long term.”
...with a mutual fund (MF). Here the comparison is at two levels: costs and fund management. On costs, NPS beats MFs, including the cheaper index funds, hands down. However, for those who wish to kick start their retirement portfolio with equity investment, index funds are a good bet. They are cheap, are not saddled with a fund manager and their maturity amount is tax-free. NPS is still awaiting that tax edge. On fund management, Pune-based financial planner Veer Sardesai says: “The best feature of NPS is that the equity component will be invested in index funds. This eliminates the uncertainty of who the fund manager will be, how long will he be there, will he really be able to outperform the benchmark indices. Being a pension product, consistency of management over the long term is very important.”
...with pension plans offered by insurers. These plans most closely resemble NPS’ structure. They have withdrawal penalties and ensure you get pension as they mandate annuitising 66.6 per cent of the fund value at the time of maturity. Also, they are much cheaper than unit-linked pension plans. Despite the low charge structure in pension plans, NPS scores on cost.
HOW DOES IT FIT
NPS is definitely the need of the hour and it scores over other products either in cost or in flexibility. But it needs the tax edge to make it comparable. There is merit in waiting. But if you wish to invest in NPS early, we would advise you keep it your third or fourth priority, after you have exhausted EPF and PPF limits.
You could adopt the age-old strategy. Invest more in equity in the beginning and temper down the exposure as you reach maturity. Adds Hrishi Parendekar, CEO, Karvy Wealth Management: “For a person under 35 years of age who has 20 years to go before retirement, equities would be a far superior product in terms of returns.”
Financial planners advise caution because of the tax treatment, while experts are skeptical of the sustainability of low costs. The stepping stone to dealing with this would be the EEE regime that the PFRDA is most certain to get. Once the tax benefits come through, volumes would certainly increase. Watch this space as the product evolves. It is very likely that this is where you would be parking a big chunk of your retirement funds.
Source: money.outlook.com
After much delay and several near misses, we finally have a pension plan; a social security scheme for 89 per cent of India’s workforce that doesn’t have a formal retirement solution. The New Pension System (NPS), as it is now referred to, was fittingly launched on Labour Day, 1 May. Though there are some concerns, such as its taxability, NPS is superbly designed to help you save for your retirement. We feel it merits a place in your portfolio. The only question that remains is: just when should you sign up for NPS?
ABOUT NPS
It is a pure defined-contribution product. You can choose the fund option as well as the fund manager. You get a retirement corpus when you turn 60. Of this, you get 60 per cent in your hands, while the remaining goes into buying you an annuity plan (to ensure pension money) from an insurer. The system discourages early withdrawal by giving just 20 per cent in your hands and annuitising 80 per cent of the corpus.
Structure
NPS begins with a mandatory Tier I account and an annual contribution of at least Rs 6,000. A Tier II account, which would offer a withdrawal facility, is expected to be launched in another six months. You can invest in NPS in two ways.
Active choice. You can allocate your funds across three fund options: equity (E), in which a maximum of 50 per cent of the portfolio is allowed; fixed income instruments other than government securities (C); and government securities (G).
Auto choice. Under this, your funds automatically begin with a maximum equity exposure of 50 per cent till the age of 35 years, which tapers off to 10 per cent by age 55. This gives stability to your investment as you near the maturity line.
You can choose from the six designated pension fund managers (see 10 Common Questions Answered). Says Kartik Varma, financial planner and co-founder, iTrust Financial Advisors: “With time, fund performance could be a yardstick, but it is unlikely that fund performance would vary hugely since the funds would be invested in similar products.”
MechanismWhat makes NPS an excellent pension vehicle is its low cost and the ease with which an individual can invest for retirement. It hinges on a Central Recordkeeping Agency (CRA), which captures your data when you open your Tier I account and issues you a Permanent Retirement Account Number (PRAN). This number remains the same even if you change jobs or location. You would also be given Internet passwords for online transactions
NPS is the cheapest among retirement products, after the Public Provident Fund (PPF) and the Employees’ Provident Fund (EPF), both of which are charge-free. NPS has two sets of charges—flat and variable.
You would need to pay about Rs 470 as flat charges every year, but this is expected to come down as volumes go up. The variable charges are custodian charge of 0.0075-0.05 per cent of the fund value per annum and fund management charge of 0.0009 per cent of the fund value per annum. These are the lowest in the industry.
Challenges
Tax treatment. Though NPS scores in terms of cost and ease of handling, it loses out in terms of taxability. At present, the contributions get tax benefit under Section 80C. However, at the time of withdrawal, the lumpsum would be taxable as per your tax slab. Says Tarun Chugh, director, ICICI Prudential Pensions: “The currency of NPS is its low-cost structure. But what will pull the masses to this scheme is tax benefit. NPS needs a tax treatment similar to that enjoyed by EPF and PPF.”
Both EPF and PPF enjoy the EEE tax benefit, under which contribution, accumulation and withdrawal are all tax-free.
Volumes. For NPS to remain low cost, it is imperative for the volume of investment money to go up. Says Manish Sabharwal, chairman and co-founder, Teamlease, a staffing company: “Costs come down with large scales and not with regulatory intervention. At the current fund management cost, the crying need is for the volumes to go up. This can happen by bringing funds from PPF, EPF and other superannuation funds under the Pension Fund Regulatory and Development Authority (PFRDA), the interim regulator for NPS. The distinction of government NPS and non-government NPS needs to go, too.”
Distribution. The Points of Presence (PoP) or distribution agents of NPS will charge up to Rs 20 for every transaction. With four mandatory transactions every year, it comes to Rs 80. Compare this with what an insurer gives to its agents—7.5 per cent of the annual premium. Clearly, the incentive for distribution in case of NPS is much lower. Says Gautam Bharadwaj, director, Invest India Economic Foundation, a think tank involved in financial and pension policy analysis: “Low costs are great for customers, but NPS will struggle with distributor interest since banks and others will prefer to sell you an insurance or mutual fund product that pays much higher commissions. The solution, of course, is to bring down the high cost of buying financial services.”
HOW DOES IT COMPARE...
The numbers show that NPS is right at the bottom of the pyramid despite the low cost, and this is purely because it is taxable on maturity. However, we are confident that eventually NPS would have tax benefits in sync with EPF and PPF. Once that happens, NPS would become an attractive investment vehicle.
...with EPF. Contribution in the EPF enjoys tax benefit under Section 80C. Withdrawals, too, are tax-free. While your money grows at 8.5 per cent per annum, your employer matches your contribution to your fund. However, to rely on your EPF alone may be foolhardy—you may not stick around in a salaried job, you may withdraw your funds periodically, or the rate on the EPF may be reduced. Your EPF corpus may not be sufficient for meeting your retirement needs. NPS is linked to you rather than your employer. So, any change in your job won’t affect your investments. Also, NPS is completely portable and even allows you to invest in equity, which is a must for young investors.
...with PPF. PPF is also an excellent long-term vehicle to plan for retirement. It is government-backed and gives a guaranteed tax-free return of 8 per cent per annum. Says Maneesh Kumar, head (wealth management solutions), ASK Wealth Advisors: “For young individuals, NPS could be the best alternative after EPF and PPF. NPS lets you invest up to 50 per cent in equities, which outperform bonds over the long term.”
...with a mutual fund (MF). Here the comparison is at two levels: costs and fund management. On costs, NPS beats MFs, including the cheaper index funds, hands down. However, for those who wish to kick start their retirement portfolio with equity investment, index funds are a good bet. They are cheap, are not saddled with a fund manager and their maturity amount is tax-free. NPS is still awaiting that tax edge. On fund management, Pune-based financial planner Veer Sardesai says: “The best feature of NPS is that the equity component will be invested in index funds. This eliminates the uncertainty of who the fund manager will be, how long will he be there, will he really be able to outperform the benchmark indices. Being a pension product, consistency of management over the long term is very important.”
...with pension plans offered by insurers. These plans most closely resemble NPS’ structure. They have withdrawal penalties and ensure you get pension as they mandate annuitising 66.6 per cent of the fund value at the time of maturity. Also, they are much cheaper than unit-linked pension plans. Despite the low charge structure in pension plans, NPS scores on cost.
HOW DOES IT FIT
NPS is definitely the need of the hour and it scores over other products either in cost or in flexibility. But it needs the tax edge to make it comparable. There is merit in waiting. But if you wish to invest in NPS early, we would advise you keep it your third or fourth priority, after you have exhausted EPF and PPF limits.
You could adopt the age-old strategy. Invest more in equity in the beginning and temper down the exposure as you reach maturity. Adds Hrishi Parendekar, CEO, Karvy Wealth Management: “For a person under 35 years of age who has 20 years to go before retirement, equities would be a far superior product in terms of returns.”
Financial planners advise caution because of the tax treatment, while experts are skeptical of the sustainability of low costs. The stepping stone to dealing with this would be the EEE regime that the PFRDA is most certain to get. Once the tax benefits come through, volumes would certainly increase. Watch this space as the product evolves. It is very likely that this is where you would be parking a big chunk of your retirement funds.
Source: money.outlook.com
Get the most out of fixed deposits
High volatility in stock markets combined with the easing inflation has again made fixed deposits an attractive avenue for investors, particularly those seeking assured returns. For, FD schemes of banks not only give assured returns but risk-free returns as well, and all one has to do is park one’s money in such a scheme and forget about it till maturity.
The best part of FD schemes are that they are one of the safe investment avenues and there is very little chance of losing you money as banks are closely regulated and monitored by the Reserve Bank of India. In the current turbulent times, investors are increasingly banking on such age-old investment tools.
Another advantage of FD schemes are that they can get you loans of up to 75-90% of the amount deposited with the bank.
Here are some tips to get the most out of FD schemes:
Do your research well
Take a look at the interest rates offered by different banks before going in for a scheme. You also need to decide the tenure of your deposit. The interest rates offered by different banks could vary. Also, the interest rates for different tenures are different.
Interests offered by banks are either calculated quarterly, half-yearly, yearly or at maturity. So, calculate which bank is going to get you the highest interest.
Suppose there are two banks -- 'A' & 'B'. Bank 'A' gives an interest rate of 10% p.a on a fixed deposit of five years and the interest is calculated on a quarterly basis.
Bank 'B' gives the same interest rate for the same period, but the interest is calculated on a yearly basis. In this case, Bank 'A' will get you more interest than Bank 'B'. The more frequently interests are calculated, the more interest you will get.
Split your FD investments
TDS (tax deductable as source) at 10% is applicable on fixed deposits if the interest earned exceeds Rs 10,000 in a financial year. The tax liability of TDS is determined at the branch level.
To avoid TDS, you can split your fixed deposits, that is, open fixed deposits in different branches of the bank, so that the interest earned does not exceed Rs 10,000 in a particular branch. You could also open fixed deposits in different banks to avoid TDS.
Splitting you fixed deposits has another benefit as well. If you are in need of urgent cash and need to withdraw money, you won't have to break all your fixed deposits.
You could get the money by breaking either one or two FD accounts while the remaining accounts would continue to earn you the predetermined interest.
Re-investing the interest earned
You have the option of either withdrawing the interest earned or reinvesting the same. If you opt for the withdrawal option, the interest earned will be credited to the savings account specified by you on a regular basis.
The interest you earn every year will be higher compared to the previous year if you keep reinvesting the interest. On the other hand, if you withdraw the interest, you will earn the same interest every year until maturity.
Let’s assume that you are planning to invest Rs 50,000 in a FD scheme for 5 years at the rate of 9.5% p.a. and the interest is calculated on a quarterly basis. If you reinvest the interest, your total interest earned will amount to Rs 29,955.49 in 5 years.
If you withdraw the interest, your total interest earned will amount to Rs 24,609.55. That is a difference of Rs 5,345.94. The greater the fixed deposit, the greater the difference will be.
Tax-saver FDs for better returns
Tax saver fixed deposits give you dual benefits. Apart from giving you an assured return, they are also eligible for exemption under Section 80C of the Income Tax Act 1961. However, TDS is applicable.
These fixed deposits have a lock-in period of five years and premature withdrawal is not allowed. You can’t use this deposit as a means to secure loan from the bank and the maximum amount you can invest in this instrument is Rs 1 lakh.
HDFC Bank at present offers 9.50% interest (calculated quarterly) on tax-saving FDs as well as on regular FDs for 5 years. ICICI Bank, on the other hand, gives 8.5% interest (calculated quarterly) on tax-saving FDs and 9.5% (calculated quarterly) interest on regular FDs for 5 years.
If you fall in the higher tax-slab, investing in tax-saver FDs will fetch you more return than a regular FD as tax-saving FDs are exempted under Section 80C.
Source:Economictimes.com
The best part of FD schemes are that they are one of the safe investment avenues and there is very little chance of losing you money as banks are closely regulated and monitored by the Reserve Bank of India. In the current turbulent times, investors are increasingly banking on such age-old investment tools.
Another advantage of FD schemes are that they can get you loans of up to 75-90% of the amount deposited with the bank.
Here are some tips to get the most out of FD schemes:
Do your research well
Take a look at the interest rates offered by different banks before going in for a scheme. You also need to decide the tenure of your deposit. The interest rates offered by different banks could vary. Also, the interest rates for different tenures are different.
Interests offered by banks are either calculated quarterly, half-yearly, yearly or at maturity. So, calculate which bank is going to get you the highest interest.
Suppose there are two banks -- 'A' & 'B'. Bank 'A' gives an interest rate of 10% p.a on a fixed deposit of five years and the interest is calculated on a quarterly basis.
Bank 'B' gives the same interest rate for the same period, but the interest is calculated on a yearly basis. In this case, Bank 'A' will get you more interest than Bank 'B'. The more frequently interests are calculated, the more interest you will get.
Split your FD investments
TDS (tax deductable as source) at 10% is applicable on fixed deposits if the interest earned exceeds Rs 10,000 in a financial year. The tax liability of TDS is determined at the branch level.
To avoid TDS, you can split your fixed deposits, that is, open fixed deposits in different branches of the bank, so that the interest earned does not exceed Rs 10,000 in a particular branch. You could also open fixed deposits in different banks to avoid TDS.
Splitting you fixed deposits has another benefit as well. If you are in need of urgent cash and need to withdraw money, you won't have to break all your fixed deposits.
You could get the money by breaking either one or two FD accounts while the remaining accounts would continue to earn you the predetermined interest.
Re-investing the interest earned
You have the option of either withdrawing the interest earned or reinvesting the same. If you opt for the withdrawal option, the interest earned will be credited to the savings account specified by you on a regular basis.
The interest you earn every year will be higher compared to the previous year if you keep reinvesting the interest. On the other hand, if you withdraw the interest, you will earn the same interest every year until maturity.
Let’s assume that you are planning to invest Rs 50,000 in a FD scheme for 5 years at the rate of 9.5% p.a. and the interest is calculated on a quarterly basis. If you reinvest the interest, your total interest earned will amount to Rs 29,955.49 in 5 years.
If you withdraw the interest, your total interest earned will amount to Rs 24,609.55. That is a difference of Rs 5,345.94. The greater the fixed deposit, the greater the difference will be.
Tax-saver FDs for better returns
Tax saver fixed deposits give you dual benefits. Apart from giving you an assured return, they are also eligible for exemption under Section 80C of the Income Tax Act 1961. However, TDS is applicable.
These fixed deposits have a lock-in period of five years and premature withdrawal is not allowed. You can’t use this deposit as a means to secure loan from the bank and the maximum amount you can invest in this instrument is Rs 1 lakh.
HDFC Bank at present offers 9.50% interest (calculated quarterly) on tax-saving FDs as well as on regular FDs for 5 years. ICICI Bank, on the other hand, gives 8.5% interest (calculated quarterly) on tax-saving FDs and 9.5% (calculated quarterly) interest on regular FDs for 5 years.
If you fall in the higher tax-slab, investing in tax-saver FDs will fetch you more return than a regular FD as tax-saving FDs are exempted under Section 80C.
Source:Economictimes.com
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