Prajna Capital

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• Checklist for equity investors to safeguard equity portfolio
• What happens to your home loan protection plan when rates rise?
• Long-term Income Funds likely to gain as rates may peak soon
• Core and Satellite Investment Method
• All about Form 16
• How gifts can help in Tax savings?

Checklist for equity investors to safeguard equity portfolio Posted: 14 Oct 2011 05:14 AM PDT      The first quarter's results for the financial year 2011-12 released so far have left many investors jittery. This is exemplified by their reactions to the results. Bad results are punished quickly. The sudden decline in performance of some the blue-chip companies have indeed been unsettling. After the results, some of them have lost nearly a third of their market value.    For the first time, there are cracks in the confidence levels reposed by investors in domestic companies. The opinion that they are good in managing the macroeconomic challenges has lost some sheen. The sudden drop in the price of a share can cause substantial damage to a portfolio. A question that then arises is what is the remedy for such a catastrophic impact on a portfolio after the results, and whom should an investor trust for a stock recommendation.    The ideal answer would be nobody. Self analysis is the best strategy for picking stocks, that will help a portfolio grow. But today's investors do not have time to research a stock to invest in. Further, research is a continuous process that requires time and effort. On the other hand, a portfolio's exposure to stocks either directly or through mutual funds is necessary to achieve higher returns. One way of solving this dilemma would be to invest in companies that are well-researched.    Usually, company research reports are generated by three segments of analysts. In-house research teams of mutual funds generate research reports for their exclusive use, brokerages issue reports on companies free of cost for their clients and independent research companies provide research reports for a fee.    The reports of mutual funds are technically called buy-side reports and are expected to be more accurate as the analyst's earnings are pegged to the performance of the stocks they recommended. Reports generated by brokerages are called sell-side reports and are expected to be bullish with the aim of inducing investors to buy. Independent research reports are expected to be unbiased. As most individual investors have access only to the second and third categories of reports, they can use them to construct their investment portfolios. However, a preliminary check on the given recommendations is imperative to remove any bias that may have crept into the report. Some checks that can go a long way in protecting a portfolio: Browse to check if there are any adverse news reports on the company. Check whether the recommendation is for trading or investing. Trading stocks are recommended for an upside of a few percentage points and come with a strict stop-loss trigger. They may not be suitable for investing. The costs of frequent trading can be a huge drag on performance over time. It makes sense to buy stocks as an investment and hold on to them for the long term. Read the report closely to check if the projections are too optimistic. Check the P/E ratio of the company to ensure it is at reasonable levels. Unusually high P/E companies may correct sharply when the tide turns against them. Ask two questions before investing - is this a high-quality company, and is its stock priced attractively. Check if there are any immediate triggers that can make the stock attractive. This checklist can give you reasonable protection from sharp falls in security prices. But there could still be a surprise or two where despite taking all the precautions the stock price tanks due to unsavoury acts by the management.     -----------------------------------------------------------------   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 UTI Mutual Funds Online    Invest in SBI Mutual Funds Online   Invest in Edelweiss Mutual Funds Online   Invest in IDFC Mutual Funds Online

What happens to your home loan protection plan when rates rise? Posted: 14 Oct 2011 03:44 AM PDT   When rates rise, a home loan protection plan may not entirely cover a house loan liability. A term plan makes better sense    You always know that the equated monthly installment (EMI) on your housing loan with floating interest rate would go up every time you hear that the Reserve Bank of India (RBI) has raised its policy rate. Last week was no different, when the banking regulator again raised its policy rates — for the 11th time since March 2010 — by half a percent. Now, it is the turn of the banks and housing finance companies to raise their benchmark rates. This would push your equated monthly installments (EMIs) up. Those who can afford to pay the extra EMI would settle for a higher EMI. Others would have to settle for an increased repayment term for loan. Matter settled? Not really. Did you figure out what would happen to your home loan protection plan (HLPP)? For those who came late, HLPP, also known as mortgage reducing term insurance plan, ensures that the insured amount would be made available towards the repayment of your loan on your death or on loss of income due to disability. This makes sure that your family or dependants do not have to worry about the loan's repayment and your home will not be taken away by the bank. So far so good. However, the trouble begins when the EMI or the tenure of the loan goes up because of the rising interest rates. Let's look at it with an example. Say Raju has taken a home loan of . 20 lakh for a tenure of 20 years. At an interest rate of 9%, his EMI will work out to . 17,995. Now after six months, the interest rate goes up by say 50 basis points to 9.5%. Raju wants to keep the EMI unchanged, so his outstanding loan tenure will increase to 261 months instead of the original 234 months. And the outstanding loan amount will be . 19.81 lakh. Two more such rate hikes at an interval of six months each will take the interest rate to 10.5%. Again, to keep the EMI constant, the outstanding tenure has to be increased to 348 months. Now, if the borrower were to die after paying six instalments at 10.5%, the loan outstanding would be . 19.52 lakh. If Raju had taken an HLPP, his dependants will have to fork out . 31,000 to keep the house. This is because, the HLPP insurance, based on the original loan repayment schedule at 9%, would cover only . 19.21 lakh — the outstanding loan amount as per the original schedule. In case the extended loan tenure goes beyond your retirement age, the bank asks you to pay a lumpsum amount, since the EMI amount cannot be increased beyond a point. If the tenure of the loan increases due to an increase in interest rates, you would have to apply again to the insurance company for an additional coverage. The Solution Now, when the rates went up, Raju could have bought an additional HLPP to save his dependants the headache of having to close the loan from their own pockets. However, this is easier said than done. First, it is difficult for an individual to forecast for how long interest rates will rise and by how much. Second, it is not practical to apply for an additional insurance every time the interest rates rise. Raju had another option to cover his housing loan. He could have bought a term insurance cover of . 20 lakh, which would have helped his dependants repay the entire outstanding loan amount. In fact, in a rising interest rates scenario, you may choose to buy a term life insurance plan for a term longer than the loan tenure to ensure that the coverage remains even if the loan term is extended by the bank. Term Advantage Borrowers often foreclose home loans, especially if they receive surplus money. Many Indians take a loan for 15-20 years, but prepay it in 8-10 years,. Once the loan is closed, the HLPP becomes void. An HLPP may be void even if you try to switch from one home loan lender to another. A borrower usually changes lender to get a better deal on home loan rates. If you switch the loan, then you need to buy an HLPP from the new lender. Of course, this generally happens during a falling interest rate scenario. But, given the longterm nature of a home loan, such a possibility cannot be ruled out even when the rates are high. Customisation Lastly, since an HLPP is offered on the group platform, the group administrator decides on the insurance cover and the terms of the cover. An HLPP may offer life cover and accident disability cover, but may not offer a critical illness cover. A borrower with a family history of critical illness will look for a critical illness cover. The possibility of customisation is minimum on a group insurance platform. Term life insurance policies are meant to pay the nominee of the life assured. Hence, even if you move from one borrower to another, you can continue with one plan and that takes care of the problem. You may choose to buy critical illness cover along with a term life insurance product. The Other Side However, it may not be easy for everyone to buy a term plan. There are stringent medical tests, which one has to go through before one gets a long-tenure term life insurance. Lifestyle issues such as tobacco habit, adverse family history, occupation hazards make term plans less accessible. That is where one can consider HLPP, as it is more customer friendly given the ease with which it can be purchased, the relaxed underwriting rules and expert assistance for claim settlement. As you can, see it is better to buy a term life insurance – preferably for a longer term than your housing loan. If you cannot buy a term insurance for some reasons, HLPP is a good option.   -----------------------------------------------------------------   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 UTI Mutual Funds Online    Invest in SBI Mutual Funds Online   Invest in Edelweiss Mutual Funds Online   Invest in IDFC Mutual Funds Online

Long-term Income Funds likely to gain as rates may peak soon Posted: 14 Oct 2011 12:44 AM PDT      Investment advisors have, for over the past one-and-a-half years, been asking their clients to invest in short-term funds with a maturity of around six months to a year. Long-term income funds and gilt funds have been a strict no in their scheme of things. As the central bank readies to meet on September 16 to review its monetary policy, the expectation is that it will hike the rates again. There is also the hope that this will be the last of the rate hikes in the current cycle. If that is the case, investors should be asking if they should start investing in medium- and long-term income funds — the main beneficiaries of a pause or cut in interest rates — with a maturity of three years and above. Typically, a pause or cut in interest rates would benefit longer-duration bond funds since they are more sensitive to interest rate movements. They benefit most from the softening of bond yields. However, it is not easy to predict the interest rate cycle or take a call on RBI policies. The RBI can change its policy stance quite swiftly. For example, up to October 2008, the RBI was hiking rates to combat inflation, which was in double digit territory then. However, the financial crisis set in, and the central bank slashed key policy rates by as much as 4% within a matter of few months. The central bank will most likely hike interest rates by 25 basis points, before deciding its next course of action. Most fund managers believe that the banking regulator is likely to pause after that. Rising interest rates lower growth, which the central bank does not want. The GDP grew 7.7% for the first quarter of FY12, compared with 7.8% in the fourth quarter of FY11. In short, there is consensus that the central bank may hike rates by 25 basis points at least once more, either in September when it meets or in October. And that could be the last hike for some time. Interest rates may not fall immediately. That is likely to happen over the next one year. Fund managers have already started making their moves in anticipation of a pause in rate hikes. Some debt fund managers have started adjusting their portfolios and have increased the average maturity period of their portfolios from the March 2011 levels. Will Interest Rates Fall? The answer will depend on two factors: the rate of inflation and the level of fiscal deficit. Inflation figures have eased marginally to 9.22% in July from 9.44% in June. It is, however, not a comfortable level for the government, which is targeting to bring it down to 7% by March 2012. And it is still not clear which way it will blow. Sure, there is good news on the global front. Brent crude oil prices have moderated to about $110 per barrel after touching a high of $125 per barrel in the recent past. With QE2 coming to an end, and an imminent slowdown in the US likely, commodity prices, too, have started showing signs of cooling off. However, there is bad news at home. More than the global factors, local factors are more of a worry now. High food and vegetable prices are a concern as food inflation has crossed the 10% mark again to stand at 10.05% for the week ended August 20. However, a good monsoon may soften the blow. Global uncertainty will not let commodity prices to spike, while a good monsoon will help contain inflation. Another cause of concern is the country's fiscal deficit. Simply put, fiscal deficit is the gap between the government's earnings and expenditure. As per a report by IDFC Securities, the food security bill will increase the subsidy burden by . 30,000 crore, while the excess fuel subsidy on account of the higher oil prices would account for another . 40,000 crore. With the capital markets in the doldrums, it is not clear how the government will meet its disinvestment target of . 40,000 crore this year. The economy is likely to grow at a slower pace as compared to the previous year. This could raise the possibility of higher borrowings on account of lower tax revenues, thereby putting pressure on interest rates. Interest rates may go up if the government chooses to borrow by issuing bonds. How Much To Invest In Long-Term Funds? We recommend aggressive investors to allocate 40-50% of their portfolio in income funds and gilt funds with a 3-4 year maturity. However, the advice comes with a rider. If your time frame is less than a year, short term funds and FMPs should still dominate your portfolio. Short-term funds come first in the pecking order, followed by FMPs and then income funds. As per Value Research, an independent mutual fund tracking firm, the short-term fund universe has given around 7.45% in the last one year, compared with 6.93% of the income fund category.   -----------------------------------------------------------------   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 UTI Mutual Funds Online    Invest in SBI Mutual Funds Online   Invest in Edelweiss Mutual Funds Online   Invest in IDFC Mutual Funds Online

Core and Satellite Investment Method Posted: 13 Oct 2011 11:41 PM PDT How It Works? The core and satellite portfolio management is a popular form of investment strategy with money managers and their clients.   The core component of your financial portfolio, which is the larger portion of your portfolio, comprises investments that are in line with you long-term financial goals. The goals could include retirement savings, child's education, marriage, etc.   The satellite part, or the smaller portion, is invested in risky assets to boost the overall returns of your portfolio. If the economy encounters a rough weather, the core portfolio acts like an anchor to your portfolio. And when the good times start kicking in again, the satellite portion adds zing to your overall portfolio. Asset Allocation Asset-allocation in the core portfolio depends upon various factors like the investor's risk appetite, age, financial goals, time horizon for each goal and liquidity needs. But, broadly-speaking, here's how it works.   If you are a low-risk investor, you can look at a debt-equity ratio of 80:20.   If the size of your core portfolio is less than . 10 lakh, then the equity component of your core portfolio can comprise equity-linked debentures. For a moderate-risk investor, the equity component can be increased to 60% and the balance 40% can be put in debt. In the debt component, you can look at PPF, debt mutual funds, arbitrage funds and monthly income plans (MIPs). If the size of your core portfolio is around . 30-40 lakh, you can look at a small property, which can be lease to earn some money from the rentals. Real estate could be coupled with debt equity split of 40:60.   If the size of your portfolio is around . 80 lakh to a crore, you can even look at leasing out a commercial property over and above the routine debt-equity exposure. The satellite portion can accommodate small-cap/mid-cap funds, sectoral funds or global funds, which are highly risky in nature. Hence, you should not hold onto these investments beyond a year. The idea is to earn impressive returns and exit with profits.

All about Form 16 Posted: 13 Oct 2011 08:44 PM PDT All salaried employees have to file their income-tax returns by July 31. For tax calculations, it is necessary to have form 16, issued by your employer. Form 16 has details of the tax deducted and the branch of the bank where it is deposited into the central government account. For example, if a TDS of . 2,000 was deduced from your April salary, form 16 will have its gives. Form 16 is the final certificate issued by your employer giving details of the salary you have earned and the tax deducted on your behalf and paid to the government. It is given at the end of the financial year, generally by April 30. If there has been no TDS on your salary, you just get a salary certificate and not the Form 16. Form 16a And Form 16: If you are not a salaried employee and work as a professional for an organisation earning fees, then the certificate that shows TDS details deducted while making payments to you is called Form 16A. What If You Have Changed Jobs? At the end of the year, you need to collect the Form 16 from both your employers as that is the basis on which you would file your returns. When you join a new organisation, you should furnish your TDS details from the previous employer to your current employer. This will help your current employer in deducting tax accordingly. If you do not mention your previous organization details to your new employer, then you are liable to show the total income from both employees and calculate your tax liability accordingly. What If You Cannot Get Form 16 From My Previous Employer? Your best option then is to fill Form 12B and submit it to your new employer. The employer will take into account the previous salary you earned while deducting tax. Do You Have To Attach Form 16 With It Returns? As per the IT department, it is not necessary to attach the original form 16 with your income-tax returns. However, in your interest, you could attach a photo copy of form 16, while retaining the original with you. What Other Particulars Should Be Checked In Form 16? The first thing you need to confirm in Form 16 is the PAN number. If it is wrong, you have to ask your employer to rectify it and give you a new Form 16. Besides this, the employer needs to make correction at their end by filing revised return of TDS to credit the TDS proceeds to the correct PAN number. What If There Is An Error In Figures In Form 16? You need to tally the figures in Form 16 with the tax declaration statement provided by you to your organisation at the beginning of the year. It's possible that the figures mentioned are either wrong, or not considered at all. The result would be that fewer deductions would have been shown, resulting in higher tax liability. You might not have submitted the proofs of all investments, or could have forgotten to submit some bills. If there is an error by the employer, you could request them to rectify it and issue a revised Form 16. If a higher tax has been deducted, you can claim a tax refund while filing your returns.   -----------------------------------------------------------------   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 UTI Mutual Funds Online    Invest in SBI Mutual Funds Online   Invest in Edelweiss Mutual Funds Online   Invest in IDFC Mutual Funds Online

How gifts can help in Tax savings? Posted: 13 Oct 2011 07:35 AM PDT Do you have some excess cash that you want to invest? Maybe you can think of an indirect method of investing (that is not in your own name), and save some tax on the income. Investing in assets or financial instruments directly in your own name will increase your tax liability and could also push you into a higher tax bracket. You can take a slightly circuitous route on investments for better mileage. One way of saving on taxes is to gift your children and parents assets and cash for investments. As per the current laws, any gift received in cash or kind exceeding Rs 50,000 is taxed in the hands of the recipient as "income from other sources". However, this rule does not apply to gifts received from relatives. Additionally, any gift received on the occasion of your marriage, under a will or inheritance is not taxed in your hands. So who is a relative and what is a gift for the purpose of claiming tax benefits? Relatives, for the purpose of taxation, include spouse of the individual, siblings, brothers and sisters of the spouse, brothers and sisters of the parents, and any lineal ascendant or descendant of the individual or the spouse. As for gifts, the income-tax (IT) laws say any transfer of money in cash or through a cheque as well as transfer of movable or immovable assets, such as property, shares and securities, jewellry, paintings and sculptures, is considered as a gift. When you transfer a property, you may have to get the transfer registered, which attracts stamp duty and registration charge. The Indian tax laws do not contain mandatory provisions to have a gift deed (a registered legal document with appropriate witnesses) in case of transfer by way of gifts. However, it is always preferred to have a gift deed so as to avoid any gift being considered as taxable or being considered as unexplained cash, investments or asset. Though there is no tax on gifts, all gifts in excess of Rs 50,000 (other than those from relatives) and income generated through them get clubbed with the recipient's taxable income. However, income earned by assets gifted to minor children, spouse and son's spouse are included in the income of the donor for taxation. If you want the money earned to be treated as independent income of your minor children, spouse or son's spouse, you will have to prove that the recipients had used their own acumen for making money from the gifted assets. It might not be easy to satisfy the taxman that the income through the asset you gifted is not a passive investment income and has been earned independently by your spouse or minor children. So the easiest way of saving tax is by gifting money or assets to your major children and parents who don't have any income of their own. Let's assume that your parents are senior citizens (above 60) and have no income. You can gift them any amount of cash for investing in high- return instruments such as senior citizen's savings scheme. As senior citizens do not have to pay any tax for annual income up to Rs 2.5 lakh, the interest income does not become taxable unless it exceeds this exemption limit. This means you can invest up to Rs 25 lakh through each of your senior parents without any source of income if the annual interest or return is 10 per cent. You can invest up to Rs 50 lakh through your senior parents and have a tax-free annual income of Rs 5 lakh. If your parents are above 80, they are entitled to tax- free income up to Rs 5 lakh per year for "very senior citizen" category introduced in the 2011-12 Union Budget. You can invest up to Rs 50 lakh through each of your "very senior citizen" parents in instruments that give 10 per cent annual return and avoid the taxman for interest income up to Rs 10 lakh earned by both of your parents together. You can save a total of Rs 3 lakh (30 per cent of Rs 10 lakh earned as interest income) in tax each if you are in the highest tax bracket. So you can invest a total of Rs 1 crore through your parents and save up to Rs 6 lakh in taxes on the interest income of Rs 10 lakh. If you gift the money to your major daughter for investment, the interest earned from the amount will be taxable only after it crosses the exemption limit of Rs 1.9 lakh annual income. The income from money invested through your son above 18 will become taxable when it exceeds Rs 1.8 lakh annually. Even when the interest income brings the recipient into the tax net, you still have the advantage of paying less tax then what you would have paid on investing directly. If you have both parents above 80 and two major daughters, you can invest up to Rs 1.88 crore and have a tax-free income of up to Rs 18.8 lakh. Even if you don't have major children, you can still save taxes by creating a trust for benefiting your minor children. Now, when you start planning your taxes for the current financial year, make use of this provision to save big on taxes. Make use of the gifting provisions to optimise taxes while making your family financially secure. As you will be giving money on the basis of mutual trust, be sure that the recipient won't take undue advantage of your trust.

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