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.

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.

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.

Savings Tip: Quartelry Income Scheme

Post Office Monthly Income Scheme ( MIS ) is very popular among the masses, especially those retired.

Its features are:
1. Monthly income at the rate of 8% per annum + 5% bonus on maturity (which works out to be an effective yield of 8.9% )
2. Income is taxable, but no TDS.

Some of its disadvantages are:
1. Interest rates are not in-line with the market rates. As recently as October-November 2008 when banks were offering more than 10% on fixed deposits, the MIS interest rate was still 8%
2. There is a ceiling on maximum investment.It is rupees 3 lakhs for a single account.
3. Cumbersome visits to the post office and sometimes you have to face long queues ( although this can be resolved by following one of my previous post )
4. Restrictions on pre-mature withdrawal. You cannnot close an MIS account before 1 year.

All the above disadvantages can be overcome by employing the Quarterly Interest option offered by Bank FDs. Usually when customers open a fixed deposit ( FD ) with a bank they go for the cumulative option where interest keeps on accumulating and is paid out only on maturity. Instead they can go for a quarterly interest option FD where the interest is calculated and paid out quarterly. Most banks ( public & private ) offer this option of quarterly interest payout, which can also be credited to your bank account.

With a litte bit of self-discipline you can use this Quarterly interest option as a replacement for MIS. Some banks also offer the monthly interest payout FDs but the interest rate on such FDs is usually lower ( by around 0.5% ).

Let's see how we have overcome the above disadvantages of PO MIS by replacing them with Bank FDs:
1. The interest rates are in line with the market rates. If the interest rates in Banks are higher than POMIS, it makes sense to go for Bank FDs.
2. No upper limit on investment.
3. Interest can be credited to your bank account directly.
4. No restrictions on pre-mature withdrawal. You can break an FD whenever you wish to.

Tax-treatment is same as MIS, except for the fact that TDS is applicable.

Savings Tip: Save on service charges

With airfares becoming unaffordable once again and new airports under development in different cities charging UDF ( in addition to the already high fares ), we middle-class people will have to rely on our "garib rath" the Indian Railways.
Thankfully, now IRCTC offers online booking facility for train tickets and you don't have to stand in queue for hours to get a reservation ticket. But this facility comes with some additional charges ( obviously! )

When you buy a ticket from IRCTC, there are 3 costs that you incur:
1. The ticket fare and reservation cost ( this goes to the Indian Railways )
2. The IRCTC commision ( depends on the class for which ticket is booked, for Sleeper it is Rs. 10 and for Third AC is it Rs. 20 and so on. IRCTC also pays some service tax out of this, but that is not relevant here )
3. The service charges payable to the payment gateway/bank.

We cannot do anything about the first two costs, but the third one depends on the bank you use to make the payment.
Let's have a look at the service charges of different booking for train ticket booking. Go to IRCTC Terms & Conditions and scroll down to section 2.1

This section is divided into two parts:
- Payment by Credit Cards
In this section you will notice that almost all payment gateways charge around 1.8%, but the Axis Bank payment gateway charges only 1.65%
So when paying by Credit Card, you can choose Axis Bank payment gateway for lower charges.
Update 1: A reader has faced problem with Axis Bank with respect to refunds, and he advises not to use Axis Bank payment gateway.

Update 2: Chinmay Shah has suggested to use Kotak Credit Cards for railway ticket booking. Kotak Credit Cards have the facility of railway surcharge waiver which means no payment gateway charges for Kotak Credit Cards. I'm not sure about the annual fees and other charges of Kotak Credit Card, so do check them out before getting yourself a Kotak Credit Card.

- Payment by Direct Debit
Most of the banks, charge a constant amount ( 10-11 rupees ) but there are some who don't levy any charges. These banks which don't levy any charge are much better than any credit card payment gateway, as the third cost ( in the list above ) is zero now. The list of banks which don't charge any amount for payment by Direct Debit are:

• Bank of Punjab
• Punjab National Bank
• ABN-Amro Bank
• Federal Bank
• Syndicate Bank
• IndusInd Bank
• Karnataka Bank
• Bank of India
• Bank of Baroda

So, if any of these Banks are near to your house, do consider having an account in them with Internet banking facility. Then you can book railway tickets through internet without paying any service charges to the Bank. I personally use Punjab National Bank and till now I haven't faced any issues with its Internet Banking site.

Savings Tip: Flexi RD

Everyone must be aware of RD ( Recurring Deposit ) wherein you deposit a fixed amount of money every month which accumulates into a large sum ( along with interest earned ) over long term ( usually 3-5 years ).

I would like to tell you about another innovative product offered by some PSU Banks which, although known by different names in different banks, I would call as Flexi RD (FRD). I am not aware of any private bank ( like ICICI, HDFC, Kotak Mahindra etc. ) offering such a product. Let me know if any private bank offers it.

Let's have a look at its features:
1. Period of deposit can be chosen at will. But some banks have fixed tenures ( of say 3 years ) for such flexi RD schemes.
2. Rate of interest is the same as that offered for a fixed deposit of the same duration.
3. The monthly deposit can be upto 10 times the initial deposit. Let me try and explain this with an example, say your first installment was Rs. 500/-
Subsequent deposits in the FRD have to be a minimum of Rs. 500/- and maximum of Rs. 5000/- i.e. you may choose to vary the deposit amount provided it remains within the maximum and minimum limits for such deposits
Eg. 1st month - Rs. 500/-
2nd month - Rs. 2500/-
3rd month - Rs. 1000/-
4th month - Rs. 3000/-
5th month - Rs. 5000/-
6th month - Rs. 4500/- and so on.

4. Each of your deposits will continue to earn the same rate of interest, which was decided at the time of account opening.

Now let me explain how you can use FRD to your benefit:
- Open a FRD account in the bank paying a small amount as the first installment. This first deposit must be an amount that you can comfortably pay every month without putting any strain on your finances. For somebody earning a salary of 20,000/- to 30,000/- , an amount of Rs.500/- would be decent enough to start an FRD.
- Open the account somewhere around the end of month ( preferably after 25th ) so that the deposit due date falls near the end of the month. I will tell you the reason for this later.
- Since your initial deposit was Rs. 500/- your limits are as follows:
Minimum : Rs. 500/-
Maximum: Rs. 5000/-
Towards the end of the month, you may have some amount left in your salary account which you can deposit in this FRD account ( only subject to the limits above ). Months during which your expenses are higher, you just contribute the minimum of Rs. 500/- , but during months when your expenses were lower you could deposit a higher amount to FRD account.
Thus, by depositing a flexible amount every month over a period of 3-5 years you will amass a substantial amount on maturity.

Above were listed all its advantages, but I would advise you to keep the following also in mind:
1. The interest earned in FRD is taxed as part of your income (similar to a fixed deposit )
2. Liquidity may be a concern, some banks may not allow pre-mature withdrawal from FRD accounts before maturity ( or may place some other restrictions ). So don't keep your emergency funds in a FRD account.
3. If you happen to be out of town for some time, please make sure that some arrangements are in place to pay the FRD installments in time. Otherwise the bank may levy some fine. This isn't a major concern with PSU Banks, since charges levied by PSU banks still aren't that high.

I would list list below the names by which it is known in some banks:
1. In Corporation Bank it is known as Corp Recur which has a fixed tenure of 3 years.
2. In UCO Bank, it is known as Lakshmi Yojana
3. In Punjab National Bank it is known as Swecha Jama Yojna

Please comment below, if you were already aware of this scheme and the different names by which it is known in different banks.