Prajna Capital

Investing in Penny Stocks
Subvention Schemes
Kotak Equity Savings Fund Monthly Dividend

Posted: 17 Sep 2015 06:18 AM PDT

Despite the risks, small investors are putting big money in low-priced penny stocks. They are lured by the fantastic returns that some stocks have delivered in the past few months. If you also want to invest in this risky segment of the market, keep a few rules in mind

1 DON'T INVEST LARGE AMOUNTS

Don't lean too much on these risky investments.Penny stocks should not account for more than 10% of your total equity portfolio. This means if your total investment portfolio is `20 lakh and 30% (or `6 lakh) is in stocks, then the maximum you should put in these high-risk stocks is `60,000. Invest only what you can afford to lose.

2 INVEST ONLY IN 2-3 STOCKS

The principle of diversification does not work here. Instead of picking up a large number of penny stocks, invest in only a handful of scrips. Spreading your money across a basket of low-priced stocks will not let you earn meaningful returns from them. If you have `3,000 invested in a stock and it gives a return of 25% in a month, the gain will be an insignificant `750. Besides, it is easier to monitor 2-3 stocks rather than a portfolio of 10-15 lowpriced stocks.

3 DON'T INVEST AND FORGET

Investing in penny stocks should be seen as a short-term gambit, not a long-term strategy. If the stock witnesses a sharp rise, it may be time to exit or at least book partial profits. Some investors might think that if they wait for a year, the gains will be tax free. But the stock may have fallen by then. Set a target and exit when it is achieved. Don't hold penny stocks forever.

4 DON'T BELIEVE ANYONE

The online forums of financial portals are awash with advice and information on penny stocks. Don't believe a word of what other investors have to offer.In this segment, everybody is in search of the greater fool who will pay a higher price for the junk in their portfolio. Also, take the claims of the management with a pinch of salt. They usually paint a rosy picture.

5 BUY STOCKS WITH HIGH VOLUMES

Some penny stocks are very thinly traded. For instance, the average daily volume of Titan Securities for the past 1 month has been only 3 shares. So if you have 5,000 shares of the company, it will be quite difficult to offload them when you want to exit the stock. Buy stocks that have reasonably high trading volumes so that there is ample liquidity. Don't look only at one day's trading but consider the monthly average.

6 DON'T TRY TO AVERAGE YOUR PURCHASES

If you bought a share at `6 and it is now trading at `3, don't try to average out your purchase by buying more of it. You may end up digging a bigger hole for yourself and lose more money. Don't get anchored to a price and be ready to book losses if an investment goes wrong. You should improve the average by selling some shares when the price starts moving up, rather than buying more when it goes down.

7 NEVER LET SUCCESS CHANGE YOUR STRATEGY

They say the four most dangerous words in the market are "It's different this time". Investors who make early gains tend to get carried away by overconfidence and start making mistakes. Do not forget the six rules of investing given above if you don't want to lose your shirt in this market.

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Subvention Schemes

Posted: 17 Sep 2015 05:34 AM PDT

Subvention Schemes Offer Benefits Indeed, but Know Your ABCs

Developers are offering subvention schemes & deferred payment plans. Guard yourself against pitfalls while making use of schemes

Patna-based doctor Pramod Kumar has been trying to buy an apartment in the National Capital Region for some time now. Recently , while scanning ads placed by developers in newspapers, Kumar came across offers of subvention schemes and deferred payment plans. He wants to know if these are indeed as advantageous as these ads make them out to be.

WHAT IS ON OFFER?

Developers are offering three types of plans.

The first is a subvention scheme in which the homebuyer pays 10-20% of the price of the apartment at the time of purchase. The balance is paid by a bank to the developer as a loan un der a three-way agreement between the developer, the buyer and the bank.While the project is under construction, the developer pays the interest on the loan. The bank disburses money to the developer as construction progresses. The buyer's EMIs begin only after he gets possession.

The second scheme is a deferred payment agreement between the buyer and the developer. The buyer pays 5-25% of the total cost at the time of purchase and the balance at the time of possession. Deferred payment plans come in various permutations: 30:30:40, 10:70:20, etc which involve payments at different stages of construction.

A recent innovation is smart subvention. If the payment from the bank has to be paid in 10 instalments to the developer, then the 20% or so that the buyer has to pay is also paid in small instalments.

ADVANTAGES OF THESE SCHEMES

The biggest advantage is that buyers can make a purchase by putting down only a limited sum upfront. After the initial payment, no payment has to be made till the time of possession. In subvention schemes, with the developer paying the interest on the loan till the time of possession, the buyer effectively saves money on the cost of the property. He also gets time to accumulate money while the project is being developed.Even if he has to take a loan at the time of possession, it will then be for a lower amount. Also, Since the buyer's EMIs begin only after possession, he is able to avoid a situation where he has to pay both rent and EMI simultaneously.

Development risk too gets transferred entirely to the developer.

RISKS AND DISADVANTAGES

In a subvention scheme, your contract with the developer should say that the latter will pay interest on the home loan till possession. In a deferred pay ment plan, your final payment should be made at the time of possession. A couple of years ago, developers had offered subvention schemes where they offered to pay the interest cost for a fixed period, say , 24 or 36 months. When the project got delayed, the buyer had to start paying the EMI even before he had got possession of his apartment. He thus ended up bearing the burden of both rent and EMI simultaneously.

Don't jump headlong into deferred payment plans where no bank is involved and the developer bears the entire cost of development by himself. Such schemes highlight the developer's desperate financial situation. Another risk is that if the developer defaults on interest payment, the buyer's credit record is hit.