Prajna Capital

What Are Futures And Options (F&O) Contracts?
Motor insurance
What Is Electronic Clearing Service (ECS)?
Tax benefits on Home Loans / Housing Loans
Commodity-focused funds put up a poor performance
Commodity-focused funds put up a poor performance
Tax treatment on a fund of fund (FoF) Mutual Funds

What Are Futures And Options (F&O) Contracts?

Posted: 05 Oct 2011 05:22 AM PDT

These are derivative instruments traded on the stock exchange. The instrument has no independent value, with the same being 'derived' from the value of the underlying asset. The asset could be securities, commodities or currencies. Its value varies with the value of the underlying asset. The contract or the lot size is fixed. For example, a Nifty futures contract has 50 stocks.

What is a futures contract?

This means you agree to buy or sell the underlying security at a future date. If you buy the contract, you promise to pay the price at a specified time. If you sell it, you must transfer it to the buyer at a specified price in the future.

How can the contract be settled?

The contract will expire on a pre-specified expiry date (for example, it is the last Thursday of the month for equity futures contracts). Upon expiry, the contract must be settled by delivering the underlying asset or cash. You can also roll over the contract to the next month. If you do not wish to hold it till expiry, you can close it mid-way.

What is an options contract?

This gives the buyer the right to buy/sell the underlying asset at a predetermined price, within, or at end of a specified period. He is, however, not obligated to do so. The seller of an option is obligated to settle it when the buyer exercises his right.

What are the types of options?

These are two types of options — call and put. Call is the right but not the obligation to purchase the underlying asset at the specified price by paying a premium. The seller of a call option is obligated to sell the underlying asset at the specified strike price. Put is the right but not the obligation to sell the underlying asset at the specified price by paying a premium. However, the seller is obligated to buy the underlying asset at the specified strike price. Thus, in any options contract, the right to exercise the option is vested with the buyer of the contract. The seller only has the obligation. As the seller bears the obligation, he is paid a price known as the premium.

Should you invest in F&O contracts?

Investing in F&O needs less capital as you are required to pay only a margin money (5-20 per cent of the contract) and take a larger exposure. However, it is meant for high networth individuals.

How are F&O contracts different from each other?

In futures contracts, the buyer and the seller have an unlimited loss or profit potential. The buyer of an option can make unlimited profit and faces limited downside risk. The seller, on the other hand, can make limited profit but faces unlimited downside.

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Motor insurance

Posted: 05 Oct 2011 04:02 AM PDT

TRANSFER formalities at the regional transport office on purchase/sale of vehicles can take time. While the process is pending, the insurance policy continues in the name of the seller. What happens if the vehicle meets with an accident or is stolen during this period? If the buyer lodges a claim, the insurer refuses to indemnify him as the policy is not in his name. If the seller lodges the claim on behalf of the buyer, the insurer contends once the vehicle is sold, he ceases to have an insurable interest, and, hence, is not entitled to lodge aclaim. Thus, though the premium has been collected, the claim is paid neither to the seller nor the buyer. Is this permissible? Narayan Singh purchased asecond-hand Maruti van, insured for `1,40,000 by the original owner. Within five days, it met with an accident while Singh and his family were travelling from Varanasi to Muzaffarpur. The vehicle was totally damaged. As the claim was not settled, Singh filed a complaint before the Muzaffarpur District Forum, which ruled in his favour and directed the company to reimburse 1,40,000 with an eight-per cent interest per annum, plus `5,000 as compensation and cost.

The insurer appealed to the Bihar State Commission, which set aside the forum's order and dismissed the complaint, stating the Muzaffarpur District Forum did not have the territorial jurisdiction and, also, because the policy had not been transferred in Singh's favour.

Singh then approached the National Commission. With regard to policy transfer, the commission said the view taken by the State Commission was erroneous and could not be justified in view of Section 157 of the Motor Vehicles Act, which provides that an application for transfer has to be made within 14 days of the vehicle's purchase. In this case, the accident had occurred within five days, much before the expiry of this period. Also, India Motor Tariff Regulations say that upon a vehicle's transfer, the benefits under the policy would automatically accrue to the new owner. So, the rejection was unjustified.

Regarding the objection to the territorial jurisdiction of the Muzaffarpur District Forum, the commission observed that Singh resided at Muzaffarpur and was using the vehicle there. Even as the accident took place in Patna district, the insurance company had a branch at Muzaffarpur. Hence, the commission ruled the Muzaffarpur District Forum could entertain the dispute.

Accordingly, it set aside the State Commission's order and upheld the decision given by the District Forum in Singh's favour. It also increased the rate of interest from 8 to 12 per cent a year.

The commission came down heavily on the insurance company for adopting an unjustified stand and suppressing the relevant India Motor Tariff Regulation in several cases. As a deterrent and penal measure, it levied a punitive cost of `1lakh on the insurer, payable to the Consumer Legal Aid Account. The commission warned insurers to be careful about not taking a stand contrary to the regulations framed by the India Motor Tariff and the Insurance Regulatory Development Authority. The order copy was also sent to the latter's chairman . [Shri Narayan Singh v/s New India Assurance – IV (2007) CPJ 289 (NC)].

Some companies continue rejecting similar claims. Recently, a consumer complaint was filed against Bajaj Allianz General Insurance for ignoring such a claim, despite the judgement having been brought to its notice

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What Is Electronic Clearing Service (ECS)?

Posted: 05 Oct 2011 02:24 AM PDT

ECS is an electronic mode of funds transfer from one bank account to another. It can be used by institutions for making payments such as distribution of dividend interest, salary, pension, among others. It can also be used to pay bills and other charges such as telephone, electricity, water or for making equated monthly installments payments on loans as well as SIP investments. ECS can be used for both credit and debit purposes.

How do you avail of an ECS scheme?

You need to inform your bank and provide a mandate that authorises the institution, who can then debit or credit the payments through the bank. The mandate contains details of your bank branch and account particulars. It is the responsibility of the institution to communicate the details of the amount being credited or debited to their account, indicating the date of credit and other relative particulars of the payment. You will know the money has been debited from your account through mobile alerts or messages from the bank.The ECS user can set the maximum amount one can debit from the account, specify the purpose of debit, as well as set a validity period for every mandate given.

What are the processing or service charges levied on the customer?

The Reserve Bank of India has deregulated the charges to be levied by sponsor banks from institutions. Destination bank branches have been directed to afford ECS credit free of charge to the beneficiary account holders. So, it costs you nothing.

How do you discontinue an ECS scheme?

There are two steps you have to follow to ensure appropriate closure. Firstly, the service provider, which is the beneficiary of the payment, will have to be given a written communication in the way stipulated by them, in order to discontinue the services. And next, the bank, which is the channel of payment, will also have to be given a written application stating you would like to discontinue.

Tax benefits on Home Loans / Housing Loans

Posted: 05 Oct 2011 12:47 AM PDT

Home loan is the biggest liability for most of us. It takes away anywhere between 25-50% of our income in EMI. Fortunately, Government has provided some relief in the form of tax rebates. We will discuss, the tax rebates, some scenarios, and the nitty-gritty of tax calculations for the current year.

Tax Rebates and Extent of Tax Deduction

Home loan payment consists of two parts, principal component and interest component. Tax rebate is possible on both of them currently. The tax rebate is possible on 1.5 lakhs of interest as per section 24(b). The principal gets tax rebate on maximum of 1 lakh under section 80C. Most of us claim PPF, PF, insurance, ELSS and few more (as applicable to individual cases) under 80C. If the total amount claimed is less than 1L, we can add only that part of principal for tax rebate which caps the claim at 1L.

So for example, if X claims 70,000 under 80C with PF and insurance, X can only claim another 30,000 for the principal that he pays on home loan.

There are a few conditions to be satisfied in order to claim this rebate:

1. The loan should have been taken after 1st April, 1999.

2. The possession must be within 3 years from the year in which loan was borrowed.

If any of the above conditions are not met, the claim is only Rs. 30,000.

Let's discuss some scenarios and to see how much rebate is possible to make this clear.

Example 1: Loan and home in the same financial year

You took the loan and got the possession of home in the same financial year. A financial year is 1st Apr to 31st Mar. Your loan profile is as follows:

Home Loan	30,00,000
Tenure	20 years
EMI	25,000
Year of beginning of EMI	Apr, 2010
Year when the possession took place	Jan, 2011
EMI paid in a year (till March, 2011)	3,00,000
Principal paid	60,000
Interest Paid	2,40,000

Deduction under 80C (100000 limit)

If you have 60,000 claimable deductions under 80C from PF, PPF, ELSS, and insurance, you can claim maximum of 40,000 of your principal.

Deduction under 24(b)

You can claim maximum of 150,000. Hence you will only claim 150,000 out of 240,000 of interest paid.

Example 2; Loan now, Home later

You took the loan and got the possession of home after 1 financial year. Your loan profile is as follows:

Home Loan Amount	20,00,000
Tenure	20 years
Year of beginning of EMI	Apr, 2010
Year when the possession took place	Jan, 2012
No of financial years in Pre-possession	1
EMI in pre-possession phase	15,000
EMI for 1 year in pre-possession	1,80,000
Principal part of EMI in pre-possession	50,000
Interest part of EMI in pre-possession	1,30,000
1/5th of Interest part of EMI in pre-possession	26,000

EMI after possession	15,000
EMI in a year after possession	1,80,000
Principal part of EMI after possession	50,000
Interest part of EMI after possession	1,30,000

In the pre-possession period, you can claim tax rebate on principal only under 80C. Hence when you file taxes in March, 2011, you can claim Rs.50,000 deduction under 80C (if it doesn't exceed the total permissible amount of 1 lakh).

Once you take the possession of the house, you can claim the rebate of pre-possession period in 5 equal instalment (in 5 years) subjected to the condition that the pre-possession claim and current year claim do not exceed 1.5 lakhs under 24(b) and 1 lakh under 80C. Let's do the math.

Deduction under 80C (100000 limit)

You can claim principal of 50,000 for the current year and another 10,000 for the pre-possession year, i.e. 60,000 in total. If you have 50,000 claimable deductions under 80C from PF, PPF, ELSS, and insurance, you can claim maximum of 50,000 of your principal.

Deduction under 24(b)

You can claim the interest of 1,30,000 for the current year and another 26,000 of the pre-possession year, i.e. 1,56,000 subject to the condition of 1.5 L limit. Hence you maximum claimable amount is 1.5 L.

Example 3: Loan is in my name but homeowner is someone else

You can get a home loan for a relative. If the home is in your relative's name, you cannot claim the tax benefit even if you pay the EMI. However, to avail the tax benefit, you can sign yourself as co-owner of the property.

Example 4: Possess the home but it is given out on rent:

This is a typical concern for many people who cannot live in their home because of personal or professional reasons and instead rent it out. They themselves live in a rented apartment. Here the benefits can be availed as follows:

- You can still claim the tax benefit of 1.5 lakhs on interest under 24(b) and on principal under 80C subject to a limit of 1 lakh.

- You can claim HRA because you are living in rented apartment.

- The rent you are earning from your apartment will be taken as your income and taxed accordingly.

If you have not rented your apartment, it will still be taxed on a notional amount.

Example 5: Joint home loan

It is always better to go for joint loan to save more tax. Remember that the limit of 1.5 lakhs on interest and 1 lakh on principal under section 80C is applicable to individuals. Let's take an example:

Home Loan Amount		40,00,000
Tenure		20 years
ITEMS	You	Your Partner
Portion of loan	20,00,000	20,00,000
EMI	2,40,000	2,40,000
Principal	70,000	70,000
Interest	1,70,000	1,70,000

Assume that you both have about 50,000 claimable under 80C in the form of PF and insurance. Now, let's see how much you can claim under tax rebate.

Each one of you can claim 1,50,000 on interest under section 24(b). This means you can claim 3,00,000 on interest collectively. Similarly, since you already have 50,000 under 80C, you both individually can claim another 50,000 from your principal payment which is 70,000 in your case. This means you can further claim 1,00,000 on principal under 80C.

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Commodity-focused funds put up a poor performance

Posted: 04 Oct 2011 10:43 PM PDT

Schemes gave maximum returns of 20% and minimum of -4%

WITH inflation rising all round the globe and commodities on fire, advisers have been cajoling investors to buy into mutual funds that invest in shares of commodity companies. But you should look deeper, before you step in.

With surging inflation estimated to have cost Indian households an additional Rs 5,80,000 crore during 200809 to 2010-11, investors are inclined to put money to ride on inflation themes. Right from agriculture raw materials, fuel, food and metals, most commodities — as reflected by major indices — have gone up by 20-40 per cent in the last one year.

But how have the niche group of eight commodity focused funds done in the last 12 months? If we take Sensex 4.8 per cent return in last 12 months as benchmark, then there is a wide variance in the performance of schemes with the maximum being 20 per cent and the minimum being -4 per cent. This means the performance of commodity-focused funds has been patchy.

Out of eight commodity focused funds, four have clocked more than 12 per cent gain while the balance four have not managed to even beat food inflation's nearly 9 per cent rise in May 2011. On the other hand, normal stock MFs have not done bad either too.

Nearly 50 per cent of the 230 plain vanilla diversified stock funds has beaten Sensex in the last one year. Fund managers point out that while some commodity MFs may do well during commodity price boom affecting a set of commodities, they should be treated on par with thematic funds, that means a small allocation could be for them.

Thematic funds surely deserve a space in one's portfolio. But, the exposure should not be more than 1015 per cent. Funds that invest in companies that are a commodity play are also a theme.

Birla Sun Life Commodity Equities (Global Agri) scheme heads the 12-month performance list with 20.02 per cent gains, followed by ING OptiMix Global Commodities with 18.14 per cent, Mirae Asset Global Commodity Stocks (15.84 per cent), Birla Sun Life Commodity Equities (Global Multi Comm.) with 13.66 per cent.

On the other hand, Reliance Natural Resources with 8.32 per cent, DSP BlackRock Natural Resources & New Energy's 6.76 per cent and SBI Mag num COMMA's (-0.13) re turns are not impressive.

Radhika Gupta, director, Forefront Capital Manage ment feels that the best way to take exposure is to directly invest in commodities.

When you are looking for more than just basic passive exposure, commodity MFs are not available in India.

What you have are funds that invest in stocks of com modity companies. All stocks have specific issues, which may not help to log returns.

Advisors say that though funds investing in commodity companies are a good idea, there are some caveats.

The mutual funds that in vest directly into the equity of related companies will Pinaki Paul have to pay greater attention to each company's strategy instead of the price movements of the underlying commodity.

Also, commodities may not enjoy the bull-run for an extended period of time.

CLSA strategist Russell Napier in a recent report says that the structural distortion in the US treasury market is about to unwind and will result in increase in emerging market interest rate and exchange rates. If the scenario, as envisaged by Russell, unfolds in the near term then commodity prices will likely correct sharply.

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Invest in DSP BlackRock Mutual Funds Online

Invest in Reliance Mutual Funds Online

Invest in HDFC Mutual Funds Online

Invest in Sundaram Mutual Funds Online

Invest in Birla Sunlife Mutual Funds Online

Invest in IDFC Mutual Funds Online

Invest in UTI Mutual Funds Online

Invest in SBI Mutual Funds Online

Invest in L&T Mutual Funds Online

Invest in Edelweiss Mutual Funds Online

Commodity-focused funds put up a poor performance

Posted: 04 Oct 2011 10:17 PM PDT

Schemes gave maximum returns of 20% and minimum of -4%

Thematic funds surely deserve a space in one's portfolio. But, the exposure should not be more than 1015 per cent. Funds that invest in companies that are a commodity play are also a theme.

On the other hand, Reliance Natural Resources with 8.32 per cent, DSP BlackRock Natural Resources & New Energy's 6.76 per cent and SBI Mag num COMMA's (-0.13) re turns are not impressive.

Radhika Gupta, director, Forefront Capital Manage ment feels that the best way to take exposure is to directly invest in commodities.

When you are looking for more than just basic passive exposure, commodity MFs are not available in India.

What you have are funds that invest in stocks of com modity companies. All stocks have specific issues, which may not help to log returns.

Advisors say that though funds investing in commodity companies are a good idea, there are some caveats.

Also, commodities may not enjoy the bull-run for an extended period of time.

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Also, know how to buy mutual funds online:

Invest in DSP BlackRock Mutual Funds Online

Invest in Reliance Mutual Funds Online

Invest in HDFC Mutual Funds Online

Invest in Sundaram Mutual Funds Online

Invest in Birla Sunlife Mutual Funds Online

Invest in IDFC Mutual Funds Online

Invest in UTI Mutual Funds Online

Invest in SBI Mutual Funds Online

Invest in L&T Mutual Funds Online

Invest in Edelweiss Mutual Funds Online

Tax treatment on a fund of fund (FoF) Mutual Funds

Posted: 04 Oct 2011 07:41 PM PDT

The tax treatment on a fund of fund (FoF) scheme is similar to those of debt funds, because all FoFs are treated as debt funds as far as tax treatment is concerned. The short-term capital gain on debt funds is added to the taxable income of an individual and is taxed as per the applicable tax slab. The long-term capital gain is taxed at 11.33 per cent without indexation or 22.66 per cent with indexation.

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Also, know how to buy mutual funds online:

Invest in DSP BlackRock Mutual Funds Online

Invest in Reliance Mutual Funds Online

Invest in HDFC Mutual Funds Online

Invest in Sundaram Mutual Funds Online

Invest in Birla Sunlife Mutual Funds Online

Invest in IDFC Mutual Funds Online

Invest in UTI Mutual Funds Online

Invest in SBI Mutual Funds Online

Invest in L&T Mutual Funds Online

Invest in Edelweiss Mutual Funds Online