This article was originally published in Postnoon on January 4th, 2013: Co-Author- Purvee Hetamsaria

http://postnoon.com/2013/01/04/role-of-stock-markets/100171

The Udupi restaurant owner at the corner of the street where Prof. Nicky lived, came and sat across the table in front of her, while she was enjoying the delicious meal. With an eye on the cash counter, which he had handed over to his aide for the time being, he asked her if he could chat with her for a while.

Prof. Nicky (with a wink): Sure Raju, if you make my meal free!

Raju: It’s you shop only madam.

Nicky: I was just joking. Tell me what do you want to talk about?

Raju: My son is doing MBA. He has been telling me to invest my spare money in the stock markets instead of keeping it in Fixed Deposit. I have so many doubts. If I ask him, he gets angry. He says that I think too much. He wants me to go and give my money to a broker, who will take care of everything. Tell me madam, how can I put my hard earned money in something I don’t understand?

Nicky: You are right Raju. You should never put your money into something you don’t understand. While you can take the professional help of a broker or an advisor, you should still know what you are doing. You can ask me all your doubts.

Raju: What is the need of stock markets? Can’t we buy and sell shares from/to the company directly?

Nicky: When a company offers its shares to the Public for the first time, through the exchange, and you buy them, then you are buying directly from the company. This is known as an Initial Public Offering (IPO) and the market is categorized as the Primary Market.

Raju: Oh…so those who bought shares of Bharti Infratel recently, bought it from the company directly?

Nicky: Exactly. Similarly, you can also buy directly from the company during Follow On Public Offering (FPO). A company which is already listed on the exchange but needs more money, can raise more money by selling more shares through a FPO. You can sell your shares directly to the company, if the company comes with a buy back scheme or gets delisted from the exchange.

Raju: But after buying a stock, what if I need the money back? I cannot wait till the company decides to buy back or delist. Can I sell my shares back to the company?

Nicky: No, you cannot do that. You must know that a company is not liable to return the capital that it has raised by way of stock. But, you can sell it to someone else. And that’s why we need the stock exchanges, to facilitate the buying and selling of stocks, to provide liquidity. The market where shares are traded, after getting listed, is known as the secondary market. You can sell your stocks easily in this market. All you need is a demat account.

Raju: A demat account?

Nicky: Yes. But I need to leave now. More on it the next time I come here to eat…

This article was originally published in Postnoon on December 28, 2012. Co-author: Purvee Hetamsaria

http://postnoon.com/2012/12/28/rbi-keeps-us-guessing/98181

Prof. Nicky was strolling in the park when she heard a familiar voice calling out her name. She turned around to face a gasping Mr. Mukherjee. The face had a question mark.

Prof: Hello Mr. Mukherjee. What’s troubling you?

Mukherjee (trying to regain his breath): You got me! I was wondering if the Reserve Bank of India (RBI) will lower the interest rates in their upcoming policy review. The general view is that there is a strong possibility of a 75 basis points cut next year. With 50 bps being cut during the last quarter of the current fiscal year.

Prof. Nicky: Well. I cannot predict what RBI is going to do. But yes, it might be welcome by many sections of the industries and the common man.

Mukherjee: That is what I am not able to understand. How does it help the common man? Why should he worry about the matters of monetary policy? I am personally indifferent to it.

Nicky: So you feel! But it’s not true. Remember the time when you took a loan to buy that car of yours and you were complaining to me about the high interest rates?

Mukherjee: Yes. But what does that have to do with RBI and rate cuts?

Nicky: How do banks determine at what rate to lend? How are auto loan, home loan, personal loan, etc, their interest rates determined? It depends on the interest rates set by the RBI. The rate at which banks can borrow funds from the RBI is known as the Repo rate. When the repo rate goes down, banks get funds at a lower rate, which they can pass on to their customers in the form of cheaper loans.

Mukherjee: Hmmm…but since I have already taken the loan, it’s not going to help me.

Nicky: Its not going to help you if your loan has a fixed interest rate. If the loan has a floating interest rate, that is, it changes with the changes in the Prime Lending Rate (PLR), then your Equated Monthly Instalments (EMIs) will come down.

Mukherjee: PLR?

Nicky: It’s the rate at which banks lend to their most credit worthy customers. So for most of us, after taking our credit worthiness into account, the banks decide on an x percent to be added to the PLR, to determine the interest rate. For those who have floating rate loans, the banks generally quote the interest rate as PLR plus x percent. So when PLR comes down, EMI also comes down.

Mukherjee: Got it. But what about my deposits? Will the banks continue to pay me the same interest rates on them?

Nicky: For your existing Fixed Deposits, the answer is yes. For new fixed deposits, the banks may reduce the rates.

Mukherjee: Understood. Thank you.

This article was originally published in Postnoon on December 14, 2012. Co-author: Purvee Hetamsaria

http://postnoon.com/2012/12/14/deeper-pf-cut-will-help-in-long-term/94547

There was urgency in Abhi’s voice when he called to ask me if he could see me. I immediately agreed. He was in my office before I could get myself a cup of coffee from the Cafe. What is it Abhi?, I asked. “You look disturbed”.

Abhi: Yes. I am disturbed. And who wouldn’t be? My salary just went down because of the Government’s action.

Nicky: Really? What did the Government do now?

Abhi: The Employees Provident Fund Organisation (EPFO) of India has come out with a notification which says that now we will have to contribute towards the provident fund on the basis of allowances as well. This will reduce my take home salary.

Nicky: Ah that! You should be happy. Don’t think short term. Think long term. You are forced to save more.

Abhi: What do you mean?

Nicky: See, earlier, you and your employer, both contributed 12% each, on your Basic plus Dearness Allowance (DA) only, towards the EPF. Now, suppose your Basic plus DA is ₹4,000. The contribution will amount to ₹480 from you and ₹480 from your employer. There is no contribution on the allowances that you receive. If your allowances total up to ₹2,000, your take home salary will be ₹4,000 minus ₹480 plus ₹2,000. That is ₹5,520. And your total contribution to EPFO is ₹960.

Abhi: Yes, this is exactly what happens in my case right now.

Nicky: But with the new circular, contribution will need to be made on Basic plus DA plus Allowances. This means, your contribution will be on ₹6,000. Hence, the total contribution to the EPFO by your employer (₹720) and you (₹720) will be ₹1440. This way, you take home only ₹5,280 but you save ₹480 more and your total income goes up by ₹240, the extra contribution made by the employer! So you should be happy.

Abhi: Hmmm…you are right, but I am still not happy about the lower take home salary. You know that I recently got married and have bought a flat too, which comes with a fat EMI.

Nicky (laughing): True Abhi. But saving for your old age is important too. And many employees structure their salary to increase allowances and decrease PF contributions. This means that they are not saving enough. Also, because of higher contributions to the PF account, you will be able to claim a higher amount as section 80c deductions in income tax.

Abhi: But the limit for section 80c is ₹1 lakh right?

Nicky: Yes. So it will be beneficial to you only if you are not able to meet the ₹1 lakh through your life insurance and existing PF contributions.

Abhi: So overall, you are saying, the government may not have done such a bad thing! Well, I am not happy, but I do understand the government’s point of view now. I’ll have to think of rationing certain expenditures though!

This article was originally published in Postnoon on November 30, 2012

http://postnoon.com/2012/11/30/debit-cards-credit-convenience/91262

Laxmiamma was a happy soul. Instead of keeping her savings under the mattress, she had opened up a bank account and had started a recurring deposit on my insistence. The obligation of putting aside the money for the deposit every month, made her save more. Also, she had no choice when tempted to buy unnecessary food or household articles as there was no money lying around at home to do so. Now she had accumulated enough money to buy back her jewellery from the jeweller, which she had sold way back in 2002, when her husband died and she needed some money to tide over the bad times.

She invited me home to celebrate the liberation of her jewellery, over a cup of Irani chai and biscuits. While chit chatting with her about the weather, she told me that she needs to go to the bank to withdraw some cash the next day. I was surprised. In this day and age, who goes to the bank to withdraw cash, unless the amount is very large?

On being asked, she said, “then how else does one withdraw cash?”

Nicky: Haven’t you seen ATMs around?

Laxmiamma: I have heard about them, but I thought that those are not for people like us. I thought those are for the rich.

Nicky: Nonsense. It’s for everyone who has an account with the bank.

Laxmiamma: How? And what is an ATM? I have seen the large box like things around, but don’t know how that shells out cash!

Nicky: An ATM or an Automated Teller Machine is a machine which counts and gives out the amount of cash that you want, after ensuring that your bank account has the desired amount. Did you get a small card when you opened an account?

Laxmiamma: Yes I did. But I just kept it away safely.

Nicky: That is a Debit Card. The card carries a unique number, which is linked to your savings account. You can use this card to withdraw and deposit cash, transfer money to other accounts, pay your bills, look at your account balance and statement for the last few transactions, all through the ATM. You can even use this card at shops to pay. The money will be directly debited to your account, provided you have enough money in the account. So, you do not need to carry cash with you when you go shopping. But of course, you can’t use it when you shop at smaller establishments like kirana shops or vegetable carts.

Laxmiamma: Ah see, its of no use to me then! I don’t go to the malls like you.

Nicky: You miss the point. Apart from shopping, there are so many other uses of debit cards and ATM. You conveniently ignored that!

Laxmiamma (sheepishly): Uh…hmmm…I heard. I’ll use this card to withdraw cash from now on. But what about safety? Can anyone with my card withdraw money from my account?

Nicky: No. There will be a 4 digit password given to you from the bank. You need to key in that password for authenticating the transaction. Also, you can change this password if you want. Don’t share the password with anyone.

Laxmiamma: Ah…I forgot to tell you about this new recipe for karela burji…you might want to try it out!

This article was originally published in Postnoon on November 23, 2012

http://postnoon.com/2012/11/23/tax-implications-of-buying-versus-renting/89643

Nicky: Oh hello Abhi! When did you come?

Abhi complained: I have been waiting for you since the past half an hour.

Nicky: You should have called before coming. I would have told you that I would be in a meeting. Anyways, tell me how is your new house? I am sorry, I could not come for the house warming ceremony.

Abhi: The house is good, comfortable. Actually I am here to discuss the tax implications of buying the house.

Nicky: What about it?

Abhi: Till last year, I was claiming Housing Rent Allowance (HRA) deduction under section 10(13A) of the income tax act. Am I still eligible to claim those?

Nicky: How can you? Since you are living in your own house, you are not paying any rent. So you cannot claim HRA as a deduction. It is treated as an income for you. But you can claim deductions for your Equated Monthly Installments (EMIs) on your home loan.

Abhi: How?

Nicky: The EMI is divided into the principal component and the interest component. The bank must have sent a statement to you with this break up. Or they will send it to you, if they haven’t done it yet. The principal component of up to Rs1 Lakh can be claimed under section 80c and the interest component of up to Rs1.5 Lakhs can be claimed under section 24b of the income tax act.

Abhi: But isn’t section 80c the same section where we claim our life insurance premium and provident fund (EPF) contributions?

Nicky: Yes, you are right. Hence the benefit of claiming the principal under section 80c is limited. In the initial years of the EMI payment, the principal component is very small. In the later years, when the principal component is larger, assuming that your salary goes up with time, the entire 80c limit may be reached with EPF contributions and insurance premiums alone.

The interest deductions do help in saving significant amounts of tax though. If you fall under the 30% tax bracket and pay more than Rs1.5 lakhs as interest, you end up saving Rs45,000 in taxes.

Abhi: So even if I am not able to claim the HRA, a home loan still helps me reduce my tax burden.

Nicky: Absolutely. Infact you did a very good job of buying a house in Hyderabad. A recent research done by www.arthayantra.com has shown that Hyderabad is one of the most affordable places to buy a house for a professional.

Abhi: Oh really? I am glad I made the right decision.

This article was originally published in Postnoon on November 16, 2012

http://postnoon.com/2012/11/16/plan-your-retirement/88192

Why should we plan for our retirement?, asked an indignant Mr. Mukherjee. “Professor, you don’t understand our Indian culture and values. My son will take care of me when my wife and I grow old. We are giving him the best possible education, so that when he starts earning, I can retire in peace. He is a good son. And, I too save some money every month. My wife runs the household very efficiently”.

Prof. Nicky: I agree Mr. Mukherjee. I am not denying that your son is a good son and your wife is very efficient. All I am saying is that, why do you want to depend on your son in your old age? What if he gets a job in another city or another country? Are you willing to move with him? Do you want to leave all your friends and family behind, so that your son can take care of you?

Mukherjee: Not at all. I will not leave Hyderabad. I have lived here all my life. But my son will not take a job anywhere else. He will take up a job in Hyderabad only.

Prof. Nicky: How can you be so sure? He may get transferred, he may get a better opportunity somewhere else. Would you want him to sacrifice all the opportunities for you?

Mukherjee: No I would not like that. But even if he lives somewhere else, he can still send money for us.

Prof. Nicky: Yes he can. But what if he finds it difficult? He will have his own family to fend for. Everything is so expensive now a days. Maintaining two different households may be difficult for him. Since you are already saving some money every month, all that I am asking you to do is invest it in a way which will help you lead a better life during your retirement.

Mukherjee: But even the money that I am putting aside every month, in a recurring deposit, will be available to me when I retire. What is the difference between saving and retirement planning?

Prof. Nicky: Finally you have asked a relevant question. Saving is good. It gives you returns close to the prevailing interest rates, whether you put your money in fixed deposits or recurring deposit. You save what you have left after all your monthly expenses.

On the other hand, retirement planning determines how much you must invest every month, so that you don’t have to change your lifestyle much after your retire. The planning includes planning your investments in different asset classes like mutual funds, insurance, equities, real estate etc., so that you achieve your financial goals.

Mukherjee: But who will do it for me? Will you do it?

Prof. Nicky: No, I will not do it. There are certified financial planners, who will do the planning for you for a fee. You only need to ensure that you find a good financial planner who is qualified and experienced.

Mukherjee: There seems to be merit in what you are saying. Let me think about it!

Nicky: Whatever…

This article was originally published in Postnoon on November 9, 2012

http://postnoon.com/2012/11/09/gold-on-my-mind/86843

Diwali is round the corner and the retailers are trying everything from discounts to promotions to free gifts, to lure the customers into buying. Gold has a special place in the hearts of the Indian customers. Buying gold on ‘Dhanteras’ is considered auspicious and is a part of our culture. But, apart from heart, the mind also has a role to play in buying gold. Historically, gold is seen as a hedge against inflation and less risky than the other asset classes.

In recent times, gold is also being seen as The Performer! In the past 10 years, gold has given a return of approximately 18% per annum, and close to 25% per annum over the last five year period, on a compounded basis. That is much higher than the returns on the other popular classes of investments, be it equities, debt or mutual funds. So buying gold not just gratifies the heart, but also the mind.

To tap on this opportunity, Gold Exchange Traded Funds (ETFs) was introduced on the Indian stock exchanges in 2007. Since then, it has become a very popular product with the current Assets Under Management (AUM) in Gold ETFs being more than Rs10,000 crores.

Buying gold for investment purposes, in its physical forms, comes with associated costs like making charges (jewellery), storage and insurance costs (jewellery, coins, bars) or risks of theft. These are reduced to zero in the case of gold ETFs, while giving returns that are very close to the returns of the physical asset, as each unit of the ETF is equivalent to 1 gram of 99.5% pure Gold. There are transaction costs but they are very small.

The attractiveness of the fund is also due to the fact that they are tax efficient. They are not subject to sales tax, value added tax, securities transactions tax or the wealth tax, which the physical gold is subject to. The ETFs can also be exchanged for 99.5% pure Gold when needed, in multiples of 1 kg. The prices at which the transactions take place are transparent and real time, just like stocks on the stock exchange.

Both NSE and BSE have announced that they will hold special trading sessions for gold ETFs alone on Sunday, Dhanteras, November 11th, from 11.00am to 3.30pm. BSE has also announced to waive off any transaction costs as well on that day. So this Diwali, make a new beginning, by investing in Gold ETFs. Even if it is only for 1gm of Gold. It’s just a better way of investing in gold.

Here’s wishing all the readers a very happy and prosperous Diwali!

Disclaimer: The author is not associated with any fund house or the exchanges offering Gold ETFs. The author has not yet invested in Gold through ETFs but plans to do it this Diwali.

This article was originally published in Postnoon on November 2, 2012

http://postnoon.com/2012/11/02/sebi-to-the-rescue/85039

Srikanth was clearly in a bad mood, when I met him outside my office. He was pacing up and down the corridor with a scowl and fists clenched. On seeing me, he smiled faintly. I led him into my office and asked, “what happened? Did you lose a lot of money in the stock market?”, for Srikanth was an active investor!

Srikanth: Yes I did. But I would not feel so bad if I had made a wrong call and invested in the wrong stock. I am feeling bad and I am upset because I lost money due to my broker’s mistake.

Nicky: Really? How? What happened?

Srikanth: I had placed a sell order for my holdings in a company, through my broker. But the shares were not sold on the same day. In fact they were sold two days later. In those two days, the stock price went down by about 6% and I ended up losing close to Rs20,000/-.

Nicky: Did you ask the broker for a clarification?

Srikanth (annoyed at the question): Of course I did. They said that there were some technical issues.

Nicky: Do you have a record or any documentation relating to when you placed the order?

Srikanth: You are not really helping me by asking these obvious questions. But, to answer you, of course I do. The records will be available in the ‘order history’ of my account.

Nicky: I am asking you these questions because I have a solution for you. Why don’t you complain to the Securities Exchange Board of India (SEBI)? SEBI has a cell dedicated for Investor Assistance and Education (OIAE), which also handles investor grievances. But before you go to them, you must file a complaint with the stock exchange against the broker. If the exchange’s response is not satisfactory to you, then you can go to SEBI.

Srikanth: Why should I unnecessarily get into litigation? My money is not going to come back.

Nicky: Well, it might! The stock exchange might pay you from their investor protection fund, or they might instruct the broker to pay you the amount of loss incurred by you. In case the exchange is not able to settle the case and you lodge a complaint with SEBI, then SEBI might get the exchange or the broker to pay to you.

Srikanth (finally getting what I was talking about): But how do I lodge my complain?

Nicky: Now you are asking obvious questions…Complain by writing to them through post, mail, hand deliver your written complaint or talk to them on their toll free number. All these details are available on the SEBI website.

Srikanth: Thank you professor. Yet again, your inputs were very helpful.

This article was originally published in Postnoon on October 26th, 2012, Co-Author: Anuj Hetamsaria

http://postnoon.com/2012/10/26/make-best-of-deft-neft/82944

A few days back, I had counseled Mr. Mukherjee about mobile banking, in the context of transferring funds from one account to the other. Today he came to me with further questions with regards to funds transfer.

Mukherjee: Professor, the relationship manager at the bank told me that funds could be transferred via NEFT. What is this NEFT?

Nicky: NEFT stands for National Electronic Funds Transfer and it facilitates the transfer of funds across different branches of the same bank or different banks. It is easy, cheap, safe and fast.

Mukherjee: I am sure it comes with its own set of requirements!

Nicky (smiling at the cynicism): Oh yeah! You will need to provide to your bank, the Account Number and name of the beneficiary, the name, address and IFSC (Indian Financial System Code) of the beneficiary’s branch.

Mukherjee: Where do I get all these details from?

Nicky: The person to whom you want to transfer the money to, that is, the beneficiary, should be able to help you with this. All these details will be found on the cheque book of the beneficiary. IFSC code can also be found out on RBI website and from the bank branch. Care must be taken to ensure that these details are provided to your bank correctly, to avoid transaction errors.

Mukherjee: What is this IFSC? I have never heard of it before?

Nicky: According to wikipedia.com, IFSC is an alphanumeric code that uniquely identifies a bank branch for participating in NEFT system. It is an 11-character code with the first 4 alphabetic characters representing the bank and the last 6 characters (usually numeric, but can be alphabetic) representing the branch. The 5th character is 0 (zero). IFSC is used by the NEFT system to route the messages to the destination banks / branches.

Mukherjee: So I can transfer funds using NEFT at any time of the day or night and any day of the week?

Nicky: Not really. You cannot transfer funds on bank holidays, like public holidays and Sundays. From Monday to Friday, the facility is available between 9 AM and 7 PM and on Saturdays, between 9 AM and 1 PM. There are eleven hourly settlements between 9 AM and 7 PM on all weekdays and five hourly settlements between 9 AM and 1 PM on Saturdays. The money will be credited to the beneficiary’s account on the same day or at the most next day in case the message is sent during the last batch of settlement. If the amount is not credited within the specified time then the same must be reported to the banking authorities and proper follow up of the same to be done.

Mukherjee: You did tell me that it is cheap. But can you offer some specifics on charges?

Nicky: Well…My bank changes Rs5/- per transaction if the amount is less that Rs 1 lakh and Rs 25/- if the transaction amount is more than Rs. 1 lakh.

Mukherjee: Hmmm, that’s really not much. Thank you Prof.