Sunday, September 6, 2009

When to sell?

Investors in the equity market, have always had this question when to sell-off a stock. The investors want some kind of indicator to say whether the stock has reached its ( almost ) maximum and the only movement in its price henceforth will be downwards.

I'm not talking about Technical analysis here and I can't give you a formula to analyse an individual stock but this graph on Sanjay Bakshi's blog could give you an indication whether the equity market as a whole has become over-heated and it is time to sell-off.

( Image Copyright owned by Sanjay Bakshi )

The above graph has been created by plotting the Nifty dividend yield against the returns generated by Nifty over the next 3 years.
Thus, all an investor has to do is monitor the Nifty dividend yield and sell-off if it falls below 1.2% ( or whatever threshold you would like to set based on the above graph ).
However, there are few thing you need to keep in mind:
1. The above graph was based on historical values of Nifty and individual stocks may not follow a similar pattern. Thus this graph is more helpful to those who invest in index funds but can also be used as a reference by other investors.

2. The above graph considers returns generated over the subsequent 3 years, but the graph for investors with a different time horizon may look slightly different.

Please read this complete article by Sanjay Bakshi to know why he has made use of Dividend yield instead of P/E or P/B to plot this graph and also his view on the current market run-up.

Monday, August 31, 2009

PAN no longer mandatory for SIP transactions in Mutual Fund

From August 1, 2009 providing a copy of your PAN ( Permanent Account Number ) Card is not mandatory for investing in Mutual Funds ( MF ) if you are investing via the SIP ( Systematic Investment Plan ) route ( and do not invest more than Rs. 50,000 in a year ).

Instead of the PAN card you will have to provide another identity proof like Driving License, Voter's Id or any other government-issued id card. Complete details can be found in this guideline issued by SBI Mutual Fund.

An investment limit of Rs. 50,000 per year means a maximum of Rs. 4000/- monthly SIP ( or Rs. 12000/- quarterly SIP ) which you can invest via the Micro SIP in a rolling 12-month period or in a financial year.

So whats the catch? Although PAN card is not required for investment via Micro SIP but if you plan to do one-time transaction in the same mutual fund folio/account you would be required to supply a PAN card. This means that you cannot do one-time transactions in a Micro SIP folio.

Overall, a very positive move, as I always recommend SIP as the preferred mode of investment.

To understand SIP, read this.

You can now get your Credit Report from CIBIL - An important step in empowering borrowers

CIBIL, the only operational Credit Bureau in India, has rolled out a mechanism wherein a borrower can request his/her credit report from CIBIL and dispute any incorrect entries made.

In this article on, the author has detailed the procedure to be followed to obtain one's credit report. I will summarize it below for the benefit of the readers:

1. Fill out this form and send to CIBIL along with (self-attested) Id & address proof and a DD of Rs. 142/- as non-refundable charges. The address to send the forms is:
Credit Information Bureau (India) Limted
P.O. Box 17
Millennium Business Park
Navi Mumbai - 400 710

2. If you find any errors in the report, complaint to CIBIL. The CIBIL will inform the concerned bank and the bank will have to respond within 30 days, otherwise the disputed entry in the borrower's credit report will be deleted.

How the borrowers benefit from this:
1. You can monitor your credit report for any erroneous entries, which up till now wasn't an easy task. Now there is a mechanism also to address the borrowers' concerns regarding erroneous entries.

2. If you plan to apply for a loan and have a very good credit report/rating you can negotiate a lower interest rate.

Link via
Form downloaded from here.
I had previously written about credit reports & CIBIL here.

Friday, August 21, 2009

How to keep your accounts operative?

Some of my friends have faced this problem and you might also have experienced it. When you are away from your home-town say been abroad for a long duration or due to work you shift to a different city but still want to keep your bank account at your home town, the banks may classify your account as inoperative or dormant if there have been no withdrawals/deposits into your account for a specified period.
Sunil has pointed out this RBI Notification which clearly specifies the criteria for classifying an account as inoperative or dormant. I am reproducing the list here for the reader's benefit:
  1. Issue of cheque against available balance in the account.
  2. Deposit of cheques / demand drafts into the account for clearing.
  3. Deposit or withdrawal of cash from the account.
  4. Issue of demand drafts by debit to the account.
  5. Credits by ECS into the account. Account holder may receive credits from sources like dividend from shares, interest from bonds, deposits, debentures or other securities that may be credited directly to his account by the payer.
  6. Credit of interest from any other deposits in force with the same bank or branch.
  7. Debits against standing instructions.

Please visit Sunil's blog to read this complete blog post where he gives a little background and also suggests ways in which you can prevent your account from becoming dormant.

There is just one more point that I would like to add here in addition to debit to recurring deposits, SIP ( Systematic Investment Plan ) by ECS/Direct Debit in a mutual fund is also one of the ways in which you can keep your account active.

Thursday, August 20, 2009

New tax code means bad news for the mutual fund industry

The new tax code proposed by the Finance Ministry would lead to withdrawal of several tax-benefits currently on offer to mutual fund investors. This may mean bad news for the asset management companies, since fewer people may be interested to invest in mutual funds now.

1. No more tax-savings through ELSS: The new tax code does not list Equity-linked savings scheme ( commonly known as tax-savings mutual funds ) in section 66 ( the replacement of section 80c ). This means that ELSS would no longer be tax-savings instruments under the new tax regime.

2. Pay tax on dividends: The dividends paid by mutual funds ( even, equity mutual funds ) would be taxable in the hands of the investors under the proposed law.

3. Capital gains are taxed: Previously investors in equity mutual funds used to benefit from tax-free long term capital gains ( holding period more than a year ). Debt fund investors also used to pay long-term capital gains tax at a lower rate than the personal income tax rate. Now capital gains will be clubbed to your income and taxed as per the applicable tax rates of income tax. For holding period greater than a year the capital gains can be adjusted for the cost of inflation.

4. Pay tax even on Switch: Previously, investors in equity schemes could easily switch over to other schemes after one year without any tax-liability. This was widely recommended by financial advisors as part of portfolio re-allocation or when the investor is nearing his goals like "buying a house". But the new tax code proposes to tax all gains hence any switch between mutual funds will also be taxed since a mutual fund switch is technically nothing but a redemption followed by a purchase into the fund you wish to enter.

Tuesday, August 18, 2009

The new tax code - what goes and what remains?

As you may be already aware the government has released a new tax code which it proposes to bring into effect from April 1st, 2011. Its stated goal is to reduce complexity and simplify the tax-process.

If they really wanted to simplify the process, then one of my suggestions to them would be to make the financial year same as the calendar year. I fail to understand why do we need to have FY 2008-09, why it can't be just FY 2008 , FY 2009 and so on like in few other countries. This was established by the British, and we have kept on following the same.

Let me first start with what has been taken away from you:
1. No more tax-free allowances like HRA ( house rent allowance ) , LTA ( leave travel allowance ) and medical allowance. All allowances and perks will be considered as part of your salary income. Gratuity is also taxable. Transport Allowance and travel allowance continue to be tax-free upto the limits prescribed.

2. Section 66 replaces section 80C. Only four kinds of tax-saving instruments are allowed:
- Pension fund
- Provident fund
- Life Insurance
- Superannuation fund
All withdrawals from the above funds are taxed even at retirement.
The only silver lining is that the accumulated balance in provident fund accounts upto March 31st, 2011 would continue to be tax-free.

ELSS mutual funds, NSC and 5-year fixed deposits would no longer be tax-savings instruments if the new tax code comes into effect.

3. Capital gains are fully-taxed. Gains can be indexed to the cost of inflation if the holding period is more than one year. This means that the tax-free long term capital gains offered by equity mutual would be history.

4. Dividends from equity mutual funds would also be taxable in the hands of the investors. Although DNA reports that the mutual fund dividends will continue to be tax-free under the new tax code, but as per my understanding the dividend received from mutual fund will be taxable because:
- Dividend is tax-free only if dividend distribution tax (DDT) has been paid.
- Equity mutual funds are not required to pay DDT ( only companies are required as per section 99 ), hence mutual fund dividends would be taxable.

5. No tax-benefit for interest on home-loan

Although, the govt has taken away so many benefits from you, they have also increased the tax slabs which means that for an income upto Rs. 10 Lacs you may pay a tax of 10% only ( will this also have education cess? ). The tax-savings limit has also been increased to Rs. 3 lakhs from the present Rs. 1 lakh, but where will you invest so much money since so many tax-savings instruments have been withdrawn. The only option is to spend it on health insurance or on your child's education. But if you are not married then how do you save tax? lock up your money in a EET plan?
The limit for wealth tax has also been increased to Rs. 50 crore but this will also include mutual fund & equity investments ( this means that Gold ETFs would also be counted as wealth ).

Overall, I feel the new tax code will not increase/decrease your annual tax outflow but it will affect the way in which you save. With many tax-savings instruments (like NSC) being withdrawn and the remaining ones being made EET ( exempt-exempt-tax ), the focus is reallly on building long term savings.

Some tips which I believe would be useful in the new tax-regime:
1. Since long-term capital gains are being removed, book all your long-term gains on March 31st, 2011. Then re-purchase the same on or after April 1, 2011. This way you can book tax-free profits if you have been holding a stock/equity mutual fund for long time.

2. The amounts deposited upto March 31st, 2011 in PPF are tax-free ( as also the interest earned on such amount ) and you still have two financial years, hence accumulate as much as you can in your PPF ( maximum deposit in a single year can be Rs. 70,000/- ). The interest earned on any such amount will continue to be tax-free. But this strategy may back-fire as the interest rates for PPF are controlled by the govt. and it may decide to set the PPF interest rate very low in order to discourage deposits in PPF.

3. In case you are afraid that the insurance companies do not offer good enough interest rates on annuity plans, you can decide to invest in a pension fund which is run by a mutual fund like UTI Retirement Benefit Pension Fund. In such a pension fund the amount is accumulated upto the retirement age and then you can start a SWP ( systematic withdrawal plan ) in order to receive your pension. Hence you are no longer dependent on the annuity rates offered by the insurance companies. Tax-benefits as applicable to other pension funds also apply here.

Tuesday, July 28, 2009

Off-topic Post: War on terrorism

Warning: This post is off-topic and not related to Personal Finance and Investment. Its contains my personal opinion, not facts.

I was reading this wikipedia article: War on Terrorism

If you go to India section of this article, it lists down the terrorist attacks that have happened in India after 9/11. I am reproducing the list here:

* The 2001 Indian Parliament attack.
* Akshardham Temple attack.
* 29 October 2005 Delhi bombings.
* 2005 Ram Janmabhoomi attack in Ayodhya.
* 2005 Jaunpur train bombing.
* 11 July 2006 Mumbai train bombings.
* 2006 Varanasi bombings.
* The 2007 Samjhauta Express bombings.
* Hyderabad bombings.
* Jaipur bombings.
* Bangalore bombings.
* 2008 Ahemdabad bombings.
* 13 September 2008 Delhi bombings.
* 2008 Assam bombings.
* And the 2008 Mumbai attacks.

If you happen you visit the USA section of this article, one line is sufficient to describe what happened in USA after 9/11
"To date, no attacks by Islamic terrorists on the US homeland have been successful since September 11, 2001."

Okay, I'm not discussing the moral or political aspects of this issue, but in my opinion USA has achieved what it had set out to do very effectively.

Meanwhile for us here in India the clock is ticking. The last attack was on Mumbai and we can't do anything but wait for the next one.