Investment School: 2008-08-17

How to plan tax early?

Most of the tax payers prepare tax planning only at the eleventh hour when the taxman blows his whistle,but it can be easily avoided by starting your tax planning early.The following steps are involved for planning your tax early

1. Estimate your tax after deducting all tax exemptions from your gross salary.

2. Declare your 80(c) and 80(d) tax exemptions details with your employer during the start of the financial year.

3. Collect all bills for medical bill reimbursement upto 15000 and get it remibursed as n when you get bills.

4. Pay yours n your dependent's medical insurance premium and get exempted upto 20,000 under section 80(d).

5. Get all the bills/receipts for investments under 80(c).

6. Get your rental agreement and rent receipts ready.

7.If you had opted for ELSS, go for SIP and have your SIP statements ready.

8. For home loan borrowers, get the interest and principal breakdown of your EMI payment from your bank.

9. Figure your if there are any capital losses for the financial year and it can be deducted from tax.

10. Include all interest gained from bank fixed deposits in the taxable income.

11. In May, when you get form 16, file the tax by e-filing or with your auditor.

Subscribe in a reader

Warren Buffett's Investment Style

The world's richest person applies the following criteria before he invests in a company.Check out what are they

1. The company should have a good ROE for the past 5-10 years.

2. The debt/equity ratio should be very minimal.

3. The profit margins should be high and increasing over the past 5 years.

4. The company should be a listed entity for last 5+ years.

5. The company should not rely on any singly commodity as its main stream of revenue.

6. Stock price should be 25+% lower than its real value.

The most trickiest part is that how to find the real intrinsic value of a stock and Buffett is the undisputed King in finding out the real value of the company.

Subscribe in a reader

Diversfied funds Vs Sectoral Funds

In mutual funds, there are two common types of equity funds - diversified and sectoral funds. Let us go through the comparison of two funds.

Choice of Stocks

1. Diversified funds invests in stocks of different sectors and industries.
2. Sectoral funds invests only in stocks of the sector where the fund has the mandate to invest. (eg tech sector funds invest only in tech companies)


1. Diversified funds has a low risk compared to sectoral funds due to investment in various sectors.If a sector performs badly,it can exit from the sector and invest the funds in a better performing sector.
2. Sectoral funds carry a high risk since their investment is concentrated on a set of stocks of a single industry.If the industry performs bad, then the fund will be beaten down heavily. (eg dot com burst in 2000 and recent IT crash)

Who should invest where?

1. A person with thorough knowledge in a sector only should invest in that sector fund.
2. A person with not much of knowledge should opt for a diversified fund and let the fund manager choose the investment sectors.

Time Duration

For all equity investments, regular SIP over a long period of time will bear its own fruit.

Happy Investing!!

Subscribe in a reader

What is balanced fund?

Balanced fund are a type of funds which does not take full exposure either in equity or in debt. It invests in both equity and debt in a well defined ratio as per the fund's mandate.These funds are also called as hybrid funds.

Equity Oriented Hybrid Funds

These funds usually invest in the ratio 60:40(equity : debt) or 75:25 (equity : debt). This is suitable for investors who wants to get benefited from the equity market but at the same time would not like to risk his entire money with equites. These funds perform better than equity funds during the downturn in markets and have a better shield in terms of debt component.

In case of downturn, these funds increase their debt component to reduce the impact of falling market in the fund's NAV.Similarly during a bull run, these fund will increase their equity exposure to get benefited from the bull run. So a moderate risk investor can choose this fund to have a balanced return.

Debt Oriented balanced Mutual Funds

The pension funds are typical example of debt oriented balanced mutual funds. These have a big chunk(>70%) of their portfolio in debt instruments. These funds are designed to get returns from debt instruments but have a small portion invested in equities to get that additional kicker return to outpace typical fixed income instruments like bank FDs.In order to get an edge over typical debt instruments and also provide investor an extra bit of return, they have a limited exposure to equities.

So an investor in the age range of >30 who has dependents and who can't take high level of risk, can opt for balanced fund to bring in stability to his portfolio.

Subscribe in a reader

What is Fixed Maturity Plan?

FMP or Fixed Maturity Plan is closed ended mutual fund with the following features.

1.It is a fixed tenure fund.

2. It is a debt fund.

3. Generates income while protecting the capital by investing in money market instruements and debt instruments.

4.Tenure ranges from one month to 5 years.

5.It invest in debt instruments which has maturity linked to the fund's tenure.

6.Not sensitive to interest rate volatility when held till maturity.

7. Lower Tax rate than banke fixed deposits.For bank FD, the income tax slab rate is applied.

Who can invest in FMP?

If you are not a risk-free investor and look for an assured income, this is the right option for you.

Subscribe in a reader

Investment Rules

Investment is a simple concept which is often complicate too much by investors. Always "keep it simple" and be "disciplined" in investments. There are certain rules that needs to be followed while investing for a longer term.

1.Identify your short,medium and long term goals.

2. For Short and medium term goals(2-5), park your money in fixed income instruments and avoid going the equity route.

3. For long term goals (>5 years), go for equity investing.

4. Keep it simple in equity investing. Go for good diversified mutual funds with good track record.

5.Ignore hot sectors or stocks which are being most talked about in televisions and newspapers.

6.Invest Regularly. Start a SIP(Systematic Investment Plan) in mutual funds to bring in discipline in your investments.

7.Execute "Buy and Hold" policy. Do not churn your investments often.

8. Last but not least, "Start Early".

Happy Investing!

Subscribe in a reader

How does SIP operate?

You would have seen recently a lot of ads regarding SIP(s) in your television sets and in websites while browsing. So what is an SIP and how does it work?. SIP is a tool to bring in more discipline to your investments. SIP is a method of investing in mutual funds.

Via SIP you can invest in a regular intervals of either weeks,months or quarters. However mostly SIP are synonymous with monthly investments. Suppose you invest every month say 5k in a mutual fund SIP, how this money is been handled by the Mutual fund. For every 5000 you pay them, they will buy units of the fund in which you are investing.

Units are similar to shares, but it doesn't represent a single company. So now you know that you are alloted units , but how many units will be alloted is based on NAV(Net Asset Value). Suppose if a net asset value of a fund X is 50 rs today, and if u pay 5000 rs , you will get 100 units of that mutual fund.

These NAV are similar to share prices and they are calculated every day. Don bother much about the NAV calculation. So these NAV(s) keep changing every day. So while going for a SIP, you have to specify the date of the month, so that on every 10th (or some other date) the fund will buy units for you for the SIP amount.

Since timing the market is totally not possible, SIP is a more efficient way of participating in the markets. "Buy low sell high" may be feasible for some intra day traders but not for investors, who builds his wealth slow and steady over the long term.

A use case of SIP for franklin bluechip fund from June 2006 to Dec 2006. A SIP of 5,000 on 10th of every month.

Read it as Month---NAV---Units bought
October ---118.38 ---42.24

Amount invested = 5000*7 = Rs 35000
Total Units = 318. 044
Nav = 127.95(as on 14th Dec)
Market Value = 318.044 * 127.95 = Rs 40693

So get started and achieve cost averaging by investing via SIP.

Subscribe in a reader

How to pick a stock?

While choosing a stock, following criteria's need to be analysed for choosing the correct pick

ROCE(Return on Capital Employed)

ROCE = profit after tax + interest earned on investment in long term funds by the company

Higher the ROCE , better is the company.

ROE(Return on Equity)

ROE = Profit After Tax/Shareholder funds.

Higher the ROE, better.

Last 10 years sales growth

Compare the growth percentage with the industry average to figure out if the company is a underperformer or outperformer

Free Cash Flow:

Free Cash Flow = Operational profit - capital expenditure.

Higher the free cash flow, better is the company.

Debt/Equity Ratio

Debt/Equity Ratio = Debt used for business/equity capital used for business

Ratio of > 2 is risky.

Working Capital

Working capital = Cash needed to run daily business.

Higher (Sales/Working capital) is a good sign.

Profit Margins

Net profit Margin = Net Profit/Sales.

Higher margin, better prospect.

Subscribe in a reader

Recent Comments